ZETECH UNIVERSITY

UNIT NAME: BLOCK CHAIN TECHNOLOGY

UNIT CODE: BCE 413

LESSON 3 Introduction to Bit Coin Block Chain

 What is Bitcoin?
 What gives Bitcoin value?
 How do I create a Bitcoin wallet?
 How to buy and sell bitcoin?
 How to send bitcoin?
 How to receive bitcoin?
 How does a bitcoin exchange work?
 Bitcoin debit cards
 What are the tax implications of using Bitcoin?
 What is Bitcoin mining?
 What's a self-custodial Bitcoin wallet?
 How does Bitcoin governance work?
What is Bitcoin?

Bitcoin is a decentralized digital currency that can be transferred on the peer-to-peer

bitcoin network. Bitcoin transactions are verified by network nodes through
cryptography and recorded in a public distributed ledger called a block chain.

 Code: BTC, XBT The abbreviation "XBT" comes from the International Standards
Organization (ISO) that maintains a list of internationally recognized currencies.

 Exchange rate: Floating -A floating exchange rate is one that is determined by

supply and demand on the open market.
 White paper: "Bitcoin: A Peer-to-Peer Electronic Cash System"
 Block reward: ₿6.25
 Circulating supply: ₿18,925,000
 Hash function: SHA-256 (two rounds)
 Symbols: BTC, ฿, ₿
Bitcoin (BTC) is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the
name given to its unknown creator (or creators).
Transactions are recorded in a blockchain, which shows the transaction history
for each unit and proves ownership.

1|P ag e
What is Bitcoin & Cryptocurrency? We explain Video Link.
https://www.youtube.com/watch?v=0QrAdF0eE_0

How To Invest In Crypto Full Beginners Guide in 2022

https://www.youtube.com/watch?v=Yb6825iv0Vk&t=526s

2|P ag e
2. What gives Bitcoin value?
A Bitcoin's main source of value is its restricted supply and increasing demand. Its
supply is programmed to be limited.
FAST Fast.

3|P ag e
  The rate at which Bitcoin is created is reduced about every four years. This is
called a halving, where the number of coins given as a reward for successfully
mining a block is cut in half, the last of which was in May 2020.

Bitcoin is often compared to gold because it has similar characteristics. Namely:

1. It has a limited supply. There will only ever be 21 million bitcoins.
2. It's easily divisible. You can divide one bitcoin into 100 million pieces.
3. It's durable. A huge globally distributed network of independently operated computers
tracks Bitcoin ownership. This ensures that no bitcoin is lost.

How do I create a Bitcoin wallet?

A Bitcoin wallet is a tool for interacting with the Bitcoin network. Use it to buy, sell,
send, receive, and trade bitcoin. Making a Bitcoin wallet is as easy as downloading
an app.

4|P ag e
 How to buy and sell bitcoin?
Apps like the Bitcoin.com Wallet.
Websites like the buy/sell section at Bitcoin.com.
Peer-to-peer services like Bitcoin.com Local.
Centralized crypto exchanges. Caution: this option is custodial.

Here's a quick video demonstrating how to send Bitcoin in the Bitcoin.com

Wallet:
https://www.youtube.com/watch?v=6O7nS5-AY3Y&t=42s

IMPORTANT: Bitcoin transactions are irreversible, so if you send to the wrong

address, you'll most likely never see that bitcoin again.

5|P ag e
How to Buy & Sell Bitcoin/Crypto via P2P on Binance for Beginners
https://www.youtube.com/watch?v=Ktd0ywEYk44

How to send bitcoin securely?

 Sending bitcoin is as easy as choosing the amount to send and deciding where it
goes.
 The exact procedure for doing so will depend on the type of Bitcoin wallet you're
using, but the main thing you need to know is the 'address' of the recipient.
o 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy
 One way to send bitcoin, then, is to simply copy the recipient's address to your
clipboard, then paste it in the send field of the Bitcoin wallet app you're using

 Bitcoin addresses can also be displayed in QR code format. If you're sending bitcoin
from a mobile wallet like the Bitcoin.com Wallet, you can use your phone's
camera to scan the QR code of the address you want to send to. This will
automatically fill in the address.

Bitcoin.com Wallet: How to send Bitcoin

https://www.youtube.com/watch?v=6O7nS5-AY3Y&t=1s

How does a bitcoin exchange work?

 Bitcoin exchange is the process of trading bitcoin for local currencies, goods or
services, or other cryptocurrencies.
 Your options range from peer-to-peer exchange to giant centralized exchange
services that resemble a stock trading account.
 Bitcoin is the most liquid of all cryptocurrencies as it combines the highest
number of market participants with the greatest volume of exchange. The
daily exchange of bitcoin is measured in the tens of billions of dollars! Still,
compared to cash, it's not liquid, particularly when it comes to using it to buy
something in the real world.
o For this reason, there's a need for bitcoin exchanges.
there's a need for bitcoin exchanges.

 When most people speak of bitcoin exchanges, they're referring to centralized

'custodial' platforms like Coinbase, Kraken, and Binance.
o These platforms facilitate the trade of bitcoin and many other
cryptocurrencies. Similar to platforms for trading stocks like

6|P ag e
 Robinhood and Charles Schwab, cryptocurrency exchanges match
buyers and sellers.
o Critically, by definition, a centralized cryptocurrency exchange takes
custody of your bitcoin.
 This has a number of implications relating to security, but also
relating to the freedom you have to use your bitcoin as you
wish.
 Read more on: Custodial versus non-custodial Bitcoin wallets.
What's a banked exchange?

 Cryptocurrency exchanges that allow you to transfer local currency to and from
them are known as 'banked exchanges.' Some exchanges allow you to transfer
local currency to start buying (typically in the form of credit card or payment
app like PayPal), but don't allow you to withdraw local currency back to your
credit card or payment app. These are known as 'partially banked'
exchanges. A fully-banked exchange will allow to you fund your account via
bank transfer and send local currency back to your bank account.
How do centralized bitcoin exchanges make money?

In a word: fees. These may include some or all of the following:

1. Withdrawal fees

Most exchanges charge a fee to withdraw bitcoin, other cryptocurrencies, and

local currencies. In most cases, the fee is on a per withdrawal basis (not a
percentage of the withdrawal amount). The withdrawal fees charged by
exchanges tend to change frequently, often without notice.

NB: Bitcoin transactions incur a small fee which is paid to the miners that
confirm them. Transactions with higher fees attached to them are picked up
sooner by miners (who optimize for profitability)

Fees are measured in satoshis/byte. A satoshi is the smallest divisible unit

of bitcoin, which is 0.00000001 BTC (a hundred millionth of a bitcoin).

Each transaction is made up of data, which is measured in bytes. More

complicated transactions involve more data and so are more expensive.
Generally speaking, this means higher value transactions (involving more
bitcoin) consume more data, and so require higher transaction fees. However, it's
not exactly that simple.

7|P ag e
 In fact, it's entirely possible for a 1 BTC transaction to involve more data (and
therefore require higher fees) than a 0.5 BTC transaction. To understand why, we
need to look in some detail at how the Bitcoin blockchain actually works.

The system runs on what's known as the Unspent Transaction Output (UTXO)
model, which is an efficient and privacy-enhancing way to manage the Bitcoin
ledger. It works like this:

At first, coins are minted through the mining process.

These new coins form what's known as the 'coinbase.' Now imagine a miner,
who has received the current 6.25 BTC block reward, sends 1 BTC to Alice. On
the ledger, this actually appears as 6.25 BTC sent to Alice and 5.25 BTC sent back
to the miner, leaving Alice with a balance of 1 BTC and the miner with a balance
of 5.25 BTC (the miner has an unspent transaction output of 5.25 BTC). The
system is analogous to paying for something using a cash note: if the cost of the
item is $2.50, you don't cut a five-dollar note in half. Instead, you hand over the
whole five-dollar note and receive $2.50 in change.

In our example, the miner has sent over a 6.25 BTC 'note' and received 5.25 BTC
in change. As it relates to fees, even though the amount of Bitcoin involved is
significant, the fee for completing the transaction will be relatively small because
the transaction is relatively simple. That's because there's only one output (1 BTC
to Alice) and it comes from only one input or 'note' (the 6.25 BTC coinbase
transaction). If we think of notes as taking up space on the Bitcoin ledger, we can
see that this transaction takes up the least amount of space (bytes) possible.

2. Trading fees

These are typically calculated as a percentage of the trade value and often
depend on whether you're the maker or the taker (see above for an explanation
of makers and takers). In most cases, makers pay lower fees than takers. The
rationale for the discrepancy is that makers provide liquidity (and should,
therefore, receive a discount), while takers remove liquidity (and should,
therefore, be charged extra).
3. Interest/Borrowing/Liquidation Fees

Some exchanges offer margin trading. This is where you borrow to increase your
position, creating what's known as leverage. Exchanges that offer margin trading
typically charge additional fees based on the amount borrowed and an interest

8|P ag e
 rate determined by the total supply of funds available to all traders. You'll also
likely be charged an additional fee if your position is liquidated.
Isn't Bitcoin supposed to be peer-to-peer cash? Why would I need a credit card?

Bitcoin debit cards are like prepaid credit cards.

 While Bitcoin enables people to transact peer-to-peer, this feature can only be
taken advantage of within the network itself. If your local furniture store
doesn't accept bitcoin, you'll have to pay via another method! Further, Bitcoin
(at least in its current state on 'layer one') isn't particularly useful as a
medium of exchange for small-value items like your morning coffee or daily
groceries. Why?

(1) Transaction fees - are often significantly higher than with status
quo payment networks like Visa and Mastercard.

(2) Transaction times are significantly longer than with status

quo payment networks. Depending on the fees paid and the
current level of network congestion, it takes anywhere from a few
minutes to an hour for most Bitcoin transactions to confirm 'on
chain' - and only when a transaction is confirmed on chain,
meaning it's included in at least one block, can final settlement be
considered to have occurred.
What is Bitcoin mining?
Bitcoin mining - is the process of creating new bitcoins/to record current bitcoin
transactions in blocks, by solving extremely complicated math problems that
verify transactions in the currency.
o Bitcoin miners use software to solve transaction-related algorithms that
check bitcoin transactions. In return, miners are awarded a certain
number of bitcoin per block.
 The process of bitcoin mining involves the verification of new
transactions against the Bitcoin network, which results in the
production of new bitcoins.
 Bitcoin mining is the process by which Bitcoin transactions are
validated digitally on the Bitcoin network and added to the blockchain
ledger.
 It is done by solving complex cryptographic hash puzzles to verify
blocks of transactions that are updated on the decentralized blockchain
ledger.

9|P ag e
 How long does it take to mine 1 bitcoin? about 10 minutes

 In general, it takes about 10 minutes to mine a block, and a block will award a
number of coins to whoever mines it. Unfortunately, because of the sheer
number of people mining coins solo miners are a rarity because the odds of
being the one to discover a block are very low.
Bitcoin vs. Traditional Currencies

While both Bitcoin and traditional currency are similar in that both are a store of value,
they differ in many ways.
Some differences between Bitcoin and traditional currencies are illustrated in the table
below.

Bitcoin Traditional Currency

It is a physical currency in the form of

It is a virtual currency and can
Tangibility notes and coins. However, we can use it
only be used in its digital form
in both physical and digital forms

10 | P a g e
 Issued and controlled by central
Issued through mining and
government authorities, i.e., central
controlled by a decentralized
Regulation banks. Owing to this, the traditional
distributed network of
currency is the legal tender in the country
computers
governed by the issuing authority.

Governed by a consensus
Governance mechanism in which the Purely governed by the central bank
majority rules

Value is backed by the trust of

Value is determined by forces of supply
its users. The more users are
Value and demand and is thus vulnerable to
willing to transact with Bitcoin,
inflation
the more stable it becomes.

Supply Capped at 21 million bitcoin Fiat currency has no supply limit

Bitcoin transactions are

validated using blockchain
Validation of Transactions involve an intermediary such
technology and so do not
transactions as a bank or a payment provider
require an intermediary for
validation

Minimal or no associated fees

Transaction Transactions attract considerable
as intermediaries have been
fees charges
eliminated

11 | P a g e
 Transaction The transaction is almost Transactions may take time before
time and always instantaneous or greatly verification or before they reflect on the
speed depends on the network speed system

The concepts of
decentralization, cryptography, Less secure as it can be negatively
Security and consensus guarantee a affected by fluctuations in government
secure network and security of policies
bitcoin transactions

Bitcoin transactions cannot be Chargebacks, reversals, and

Reversals charged back, reversed, or cancellations are commonplace with
canceled traditional currency transactions

Here is a breakdown of what happens during bitcoin mining

 The Mining Requirements

A bitcoin miner will first select their tools of the trade and set them up. These
include:

 Hardware GPU (graphics processing unit), SSD for crypto mining, or ASIC
(application-specific integrated circuit)

 Mining software

 A wallet a software program that (keeps your private keys – the passwords that
give you access to your cryptocurrencies – safe and accessible, allowing you to
send and receive)

 Preferred mining pool (if one chooses pool mining option instead of solo
mining)

12 | P a g e
For every transaction input, a bitcoin mining software generates a unique cryptographic
hash puzzle that is difficult to decode. The software then groups the number of
transactions required to form a block into a Merkle tree.

The Merkle tree enables the efficient verification of transactions in the bitcoin
network.
The Merkle Tree and the SHA-256 Algorithm

 A Merkle tree is a data structure of the hashes in a block and acts as a

summary of all the transactions in the block.
 In the Merkle tree, hashes of individual transactions known as transaction
IDs are paired repeatedly using the SHA-256 algorithm until only one hash
identifies the entire tree. This hash is known as the Merkle root or root hash.

Class Assignment 1
1. What is Merkle Tree data structure? And its relevance in BLOCK CHAIN
TECNOLOGY. How its computed and applied. (10 marks)

13 | P a g e