What is the relationship between Bitcoin and Blockchain?

When it comes to Blockchain, what everyone thinks of first is: Bitcoin; the vast majority of people enter the blockchain industry to invest in coins. This digital currency seems completely different from blockchain. So what is blockchain and what is its relationship with Bitcoin?

The relationship between Bitcoin and Blockchain can be summarized in one sentence: Blockchain is the underlying technology of Bitcoin; Bitcoin is the first successful application of Blockchain. However, this one sentence seems insufficient to clarify everyone's confusion about these two concepts. Today, let's discuss this in detail.

01 How was Bitcoin born?

In 2008, the global financial crisis caused social financial institutions to collapse like a house of cards, plunging the economy into a great depression. To turn the tide, the Federal Reserve unleashed massive “quantitative easing,” printing large amounts of US dollars to smooth out debts and stimulate the economy. On January 3, 2009, Satoshi Nakamoto wrote on the first Block he mined: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This sentence translates to: The Times, January 3, 2009, the Chancellor is on the brink of implementing a second round of emergency aid for banks. The implication is to satirize the government's and banks' loss of credibility. Financial and economic policy errors have always been resolved only by means like printing money that rob the wealth of the people. This deeply disappointed Satoshi Nakamoto. So why was Bitcoin created? Its motivation is to hedge against this government-backed currency and the excessive issuance of currency, in order to maintain the preservation and control of personal wealth.

In order to achieve this hedging effect, Bitcoin must realize:

1. Trust in transactions without endorsement. That is, trust in currency without centralized, government endorsement and asset backing, and trust in the authenticity of transactions.

2. Complete privatization of assets. This means that no one can plunder personal wealth in any way.

3. Consensus reached, data symmetry. That is, consensus can be achieved without centralized decision-making, and everyone can participate, with informed information being public and transparent and data being synchronized.

4. The total amount of currency is constant. That is to solve the problem of excessive currency issuance;

Current Bitcoin indeed encompasses these excellent features, but how is it achieved?

This must rely on its underlying technology - Blockchain. A Block is essentially a ledger; a Blockchain is a database made up of interconnected ledgers. To facilitate verification, each page of the ledger is timestamped during recording, summarizing the content of the previous ledger and recording the transaction information that occurs on this page.

02 Blockchain technology

How does blockchain technology enable the creation of Bitcoin and help Bitcoin achieve these characteristics?

1. Replace centralized endorsement trust with algorithmic trust.

What is centralized endorsement trust? It is: currency issued by the state, with banks keeping accounts. Why can we recognize a 100 yuan banknote to purchase goods worth 100 yuan? It is based on the trust in the state. Why are we willing to put money in the bank and have our salaries directly deposited into our bank accounts, and then use mobile payments for consumption? It is because we trust the accuracy of the bank's accounting. But how can a currency system without government endorsement and asset backing gain trust? In this regard, the approach of Blockchain is: to replace centralized endorsement trust with distributed storage algorithm trust. With computers introducing algorithmic trust, everyone participates in bookkeeping. That is, everyone participates in bookkeeping through computer systems, and everyone has a ledger. Therefore, errors, alterations, or destruction of individual entries will not affect the accuracy of the entire ledger for that transaction record. Unless more than 51% of the ledgers are altered, a single entry can be changed. But the cost of this is so high that it does not motivate anyone to tamper with it. Therefore, this achieves decentralized trust without the need for third-party endorsement.

2. Asymmetric encryption completely solves asset privatization.

In fact, institutions like the state and banks, as centralized endorsing entities, have a very low probability of making accounting errors, or one could even say there is no possibility of making mistakes. But why do people still feel it is untrustworthy? It is because once extreme situations occur, such as the Cyprus debt crisis, when Cyprus cannot repay its loans, it taxes the depositors of the banks. The wealth recorded in the bank system backed by the state, even if accurately recorded, is like a fat sheep waiting to be slaughtered. The cryptographic principles of Blockchain use asymmetric encryption methods, and the transfer, payment, and transaction of personal assets must be signed with a private key to proceed. Otherwise, no one can access them. Moreover, Bitcoin is not paid to individuals but to a specific address, and no one knows who the owner behind those private keys and addresses is. This storage of private keys and transaction anonymity can grant individuals absolute control over their assets, which can completely solve the problem of asset privatization.

3. Competitive accounting to reach a consensus;

Algorithmic trust allows everyone to participate in bookkeeping. This design is good, but how can everyone be motivated to participate in bookkeeping? After all, people are less inclined to keep records of accounts that do not concern them. Hey, blockchain has invented a brilliant method, which is to reward those who participate in bookkeeping. This reward is: Bitcoin. The first block packed and recorded by Satoshi Nakamoto received a Bitcoin reward of 50. However, since there is a reward, if everyone participates in bookkeeping, whose records should be recognized? The blockchain has another clever setup: it uses competitive bookkeeping to reach a consensus. That is, to obtain the right to record a certain account, one must solve a cryptographic math problem. This math problem is difficult: it must be computed using the SHA256 algorithm, and this computation is irreversible. Whoever ultimately derives the hash value and can successfully verify it will have the right to record. The rules for competing for the bookkeeping right are referred to as the blockchain's “proof of work” mechanism. The essential meaning is: the reason you can calculate the hash value proves that you have done a lot of computations. After the bookkeeping right is contested, the transaction accounts are recorded and broadcasted. The remaining participants in bookkeeping will then follow the recorded entries.

This process, which uses the proof-of-work mechanism, is the process of reaching consensus. It allows everyone to participate in bookkeeping and makes the accounts known to all. Not only does it reach consensus, but it also forms characteristics of openness and transparency. This bookkeeping process and the rewards for bookkeeping are the process of issuing Bitcoin using Blockchain technology. If bookkeeping can earn Bitcoin rewards, how can the total supply of Bitcoin remain constant?

4. The halving mechanism achieves a constant total supply.

This brings us to another mechanism designed by Bitcoin using Blockchain, namely the halving mechanism. That is, everyone participates in bookkeeping, and gains rewards by packaging blocks for bookkeeping. If the reward for packaging a block remains at 50 coins, then the issuance of Bitcoin would continue to grow indefinitely. How is a constant quantity achieved? Bitcoin utilizes Blockchain design: packaging a block every 10 minutes, with the reward for packaging blocks halving every 4 years. That is: initially in 2009, the reward for packaging a block on the Blockchain was 50 coins; by 2013, the reward changed to 25 coins; in 2017 it became 12.5 coins; in 2021 it became 6.25 coins… and it continues until 2140 when the packaging reward approaches 0, meaning Bitcoin will be fully issued, achieving a total quantity of 21 million. Here, many of you might wonder why Bitcoin's Blockchain technology can maintain packaging a block every 10 minutes? After all, the more people participate in bookkeeping, the more intense the competition for bookkeeping, and the stronger the computing power of computers, it should quickly seize the bookkeeping rights and gain rewards, right? That's because Bitcoin's Blockchain technology is designed to balance block production efficiency using a difficulty coefficient. In addition, the digital signatures of Blockchain are used for anti-counterfeiting, traceability, and also solve the double spending problem of Bitcoin. In summary, if Bitcoin is an ideal payment and electronic currency system solution, then Blockchain is the practical technology that realizes this ideal solution.

03 Conclusion

The ideal set for Bitcoin in Blockchain 1.0 is to hedge against the government and bank-centered accounting and the excessive issuance of fiat currency systems, becoming a global, accessible, decentralized credit, and constant total supply electronic currency system. However, due to the limitations of Bitcoin's characteristics: a block is generated every 10 minutes, and the block size is limited to 1MB, it can only process a maximum of 7 transactions per second (Alipay's peak can handle 90,000 transactions/second), which far does not meet the demand for immediate payment in modern consumer transactions. Therefore, it cannot achieve the ideal of being a globally circulating electronic currency for payment.

Of course, Bitcoin has not become a globally liquid payment method, but due to its scarcity, secure storage, and extremely high consensus, it has become an investment for global value storage. Moreover, blockchain technology is not limited to Bitcoin as an application. It has been extended and developed into infrastructure for economic, market, and financial applications, such as Blockchain 2.0 - Ethereum, which can hedge against the current centralized financial system, as well as Blockchain 3.0 and 4.0, which can solve more economic, financial, consumption, and payment issues. In this trend, a brand new currency, payment, and financial system may emerge in the future. **$RVV **$AVAX