Bitcoin is a digital currency that was created by an individual or group under the pseudonym Satoshi Nakamoto. Like physical currency, it can be used to purchase various goods and services.
Transactions are recorded on a ledger called a blockchain; all transactions are recorded in files called blocks and can be publicly viewed on the blockchain. The Bitcoin network is also maintained via a network of nodes. Each node has its own copy of the blockchain, this allows transactions to be validated in accordance with core consensus rules and then added to the blockchain. The use of nodes is intended to make the network more secure by preventing issues such as that of double-spending. The network is also decentralized, meaning that supply cannot be controlled by a central authority. Instead, coins, and all transactions on the blockchain, are produced and processed via the process of mining. The amount of coins capable of being produced is currently limited to 21 million units.
Due to its decentralized nature, no central authority exists on the network that will produce more of the digital coin at will. Instead, coins are produced via the process of mining. Thus, the role of miners is to maintain the network by adding more blocks (transactions) to the blockchain.
In order to mine Bitcoin, miners use special computer software to solve mathematical problems on the network. In exchange for solving these problems, miners are rewarded, this is called a block reward. This incentive system encourages individuals to mine more coins, which subsequently introduces more into circulation. The network will automatically adjust the difficulty of mining depending on how quickly the digital currency is being mined. As more people mine, the more difficult the mathematical problems become. Due to the increasing difficulty of mining, miners often share resources and participate in mining pools in order to mine the coin.
Anyone that possesses an internet connection and suitable hardware is able to mine the coins. In the past, computers with an average graphics card were capable of mining coins. However, specially designed hardware, known as Application-Specific Integrated Circuit chips (ASICs) have been specifically manufactured to make the mining process an easier one.
The scalability of Bitcoin is dependent on the network’s ability to handle increasing transaction volumes as its user base grows. As previously mentioned, transactions on the network are grouped in blocks, with each block having a size limit of 1 MB. Satoshi Nakamoto’s rationale behind 1 MB block sizes was that of security, a 1 MB block size prevents the possibility of DoS attacks. However, This decision is now negatively affecting the efficacy with which the network can process transactions. As the user base grows, and transaction volumes rise accordingly, issues of higher transaction times and fees materialize, as not all transactions can fit into a 1 MB block, and block sizes greater than 1 MB are automatically rejected by the network. This scalability issue facing has been met by various factions within the Bitcoin community proposing competing solutions to resolve the problem. These divisions have resulted in the hard fork of Bitcoin, producing a digital coin known as Bitcoin Cash.