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BITCOIN

cryptocurrency

cryptocurrency

Bitcoin is a cryptocurrency and a digital payment system invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto. It was released as open-source software in 2009.

 

The system is peer-to-peer, and transactions take place between users directly, without an intermediary.

These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain.

Since the system works without a central repository or single administrator, bitcoin is called the first decentralized digital currency. 

Besides being created as a reward for mining, bitcoin can be exchanged for other currencies,  products, and services in legal or black markets.

As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment.

According to a research produced by Cambridge University in 2017, there are 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.

Transactions and fee.

E-wallet.

Units

The unit of account of the bitcoin system is bitcoin. As of 2014, symbols used to represent bitcoin are BTC, XBT, and BitcoinSign.svg. Small amounts of bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC, sometimes referred to as bit), and satoshi.

Named in homage to bitcoin’s creator, a satoshi is the smallest amount within bitcoin representing 0.00000001 bitcoin, one hundred millionth of a bitcoin. A millibitcoin equals to 0.001 bitcoin, one thousandth of a bitcoin. One microbitcoin equals to 0.000001 bitcoin, one millionth of a bitcoin.

Supply

The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees. As of 9 July 2016, the reward amounted to 12.5 newly created bitcoins per block added to the blockchain.

To claim the reward, a special transaction called a coinbase is included with the processed payments.

All bitcoins in existence have been created in such coinbase transactions.

The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years). Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached 2140; the record keeping will then be rewarded by transaction fees solely.

In other words, bitcoin’s inventor Nakamoto set a monetary policy based on artificial scarcity at bitcoin’s inception that there would only ever be 21 million bitcoins in total.

Their numbers are being released roughly every ten minutes and the rate at which they are generated would drop by half every four years until all were in circulation.

Reference implementation

The first wallet program was released in 2009 by Satoshi Nakamoto as open-source code. Sometimes referred to as the “Satoshi client”, this is also known as the reference client because it serves to define the bitcoin protocol and acts as a standard for other implementations. In version 0.5 the client moved from the wxWidgets user interface toolkit to Qt, and the whole bundle was referred to as Bitcoin-Qt. 

After the release of version 0.9, the software bundle was renamed Bitcoin Core to distinguish itself from the network.  Today, other forks of Bitcoin Core exist such as Bitcoin XT, Bitcoin Classic, Bitcoin Unlimited,  and Parity Bitcoin.

Ownership

Ownership of bitcoins implies that a user can spend bitcoins associated with a specific address. To do so, a payer must digitally sign the transaction using the corresponding private key. Without knowledge of the private key, the transaction cannot be signed and bitcoins cannot be spent. The network verifies the signature using the public key.

If the private key is lost, the bitcoin network will not recognise any other evidence of ownership; the coins are then unusable, and thus effectively lost. For example, in 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key.

Decentralization

Bitcoin creator Satoshi Nakamoto designed bitcoin to not need a central authority. Per sources such as the academic Mercatus Center, U.S. Treasury, Reuters, The Washington Post, The Daily Herald, The New Yorker, and others, bitcoin is decentralized.

Privacy

Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin addresses.

Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public.

In addition, transactions can be linked to individuals and companies through “idioms of use” (e.g., transactions that spend coins from multiple inputs indicate that the inputs may have a common owner) and corroborating public transaction data with known information on owners of certain addresses.

Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, may be required by law to collect personal information.

To heighten financial privacy, a new bitcoin address can be generated for each transaction. For example, hierarchical deterministic wallets generate pseudorandom “rolling addresses” for every transaction from a single seed, while only requiring a single passphrase to be remembered to recover all corresponding private keys.

Additionally, “mixing” and CoinJoin services aggregate multiple users’ coins and output them to fresh addresses to increase privacy.

Researchers at Stanford University and Concordia University have also shown that bitcoin exchanges and other entities can prove assets, liabilities, and solvency without revealing their addresses using zero-knowledge proofs.

According to Dan Blystone, “Ultimately, bitcoin resembles cash as much as it does credit cards.”

Fungibility

Wallets and similar software technically handle all bitcoins as equivalent, establishing the basic level of fungibility.

Researchers have pointed out that the history of each bitcoin is registered and publicly available in the blockchain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm bitcoin’s fungibility.

Projects such as CryptoNote, Zerocoin, and Dark Wallet aim to address these privacy and fungibility issues.

Governance

Bitcoin was initially led by Satoshi Nakamoto. Nakamoto stepped back in 2010 and handed the network alert key to Gavin Andresen.

Andresen stated he subsequently sought to decentralize control stating: “As soon as Satoshi stepped back and threw the project onto my shoulders, one of the first things I did was try to decentralize that. So, if I get hit by a bus, it would be clear that the project would go on.”

This left opportunity for controversy to develop over the future development path of bitcoin.

The reference implementation of the bitcoin protocol called Bitcoin Core obtained competing versions that propose to solve various governance and blocksize debates; as of July 2016, the alternatives were called Bitcoin XT, Bitcoin Classic, and Bitcoin Unlimited.

Scalability problem

The blocks in the blockchain are limited to one megabyte in size.

The one megabyte limit has created problems for bitcoin transaction processing, such as increasing transaction fees and delayed processing of transactions that cannot be fit into a block.

Major contenders to solve the scalability problem are Bitcoin Classic and Bitcoin Unlimited.

cryptocurrency