Note – This topic is little technical in nature, concepts more related to computer science. But everyone should have a fair idea of it, as it’s very important development and especially the ‘Blockchain technology’ bitcoin has popularized, is going to be used in many areas in near future.
Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency, as the system works without a central bank or single administrator.
The network is peer-to-peer and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain.
Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009. Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services.
The price of bitcoin skyrocketed into the thousands in 2017. Bitcoins can be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation.
Small businesses may like them because there are no credit card fees. Some people just buy bitcoins as an investment, hoping that they’ll go up in value. Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The wallet is a kind of virtual bank account that allows users to send or receive bitcoins, pay for goods or save their money.
What makes Bitcoins different is that a decentralized network of computers keeps track of them, instead of a single person, company, or government. They can be sent to someone via a computer or a mobile device, with each transaction being recorded in what is called a blockchain.
Bitcoin Mining – People compete to “mine” bitcoins using computers to solve complex math puzzles. This is how bitcoins are created. Currently, a winner is rewarded with 12.5 bitcoins roughly every 10 minutes.
Many marketplaces called “bitcoin exchanges” allow people to buy or sell bitcoins using different currencies. Coinbase is a leading exchange, along with Bitstamp and Bitfinex. People can send bitcoins to each other using mobile apps or their computers. It’s similar to sending cash digitally.
Pros and Cons of Bitcoins and other Crypto currencies
Low transfer fees – A big advantage to using Bitcoins is the low transfer fees. You can send as well as receive payments at a very low cost — often for free. In any case, the fees are lower than what you would have to pay when doing business through a bank. Additionally, Bitcoins can’t be counterfeited, making it safer than paper money in this regard.
Anonymity – Another advantage is that although all transactions are visible to everyone, they are anonymous, as you don’t have to disclose your personal info such as your name, address, and so on. This is also a disadvantage in a way, as it allows for some shady business. There’s no way to connect the money back to them. That’s why it has become the currency of choice for people online buying drugs or other illicit activities.
Security – A big problem with Bitcoins is security. As already mentioned, your Bitcoin wallet can be stored in the cloud or offline, on your computer. The offline method is more secure due to the reduced risk of getting hacked, but can also mean that you can lose all of your Bitcoins if whatever device that houses the wallet stops working. Bitcoins worth tens of millions of dollars were stolen from Bitfinex when it was hacked in 2016.
Irreversible Nature – Bitcoin transactions are also irreversible unlike those made with a credit card, so there’s a bigger chance of losing your money when dealing with sketchy sellers online.
Unstable – They aren’t as stable as most currencies, as their value fluctuate too much very frequently.
Uncertain Future – No one knows what will become of bitcoin. It is mostly unregulated, but recently some countries like Japan, China and Australia have begun weighing regulations. Governments are concerned about taxation and their lack of control over the currency.
The blockchain is a public ledger that records bitcoin transactions. A novel solution accomplishes this without any trusted central authority: the maintenance of the blockchain is performed by a network of communicating nodes running bitcoin software.
Transactions of the form payer X sends Y bitcoins to payee Z are broadcast to this network using readily available software applications. Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. The blockchain is a distributed database – to achieve independent verification of the chain of ownership of any and every bitcoin amount, each network node stores its own copy of the blockchain.
Approximately six times per hour, a new group of accepted transactions, a block, is created, added to the blockchain, and quickly published to all nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent double-spending in an environment without central oversight. Whereas a conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, the blockchain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions.
Mining is a record-keeping service done through the use of computer processing power. Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes.
Each block contains a SHA-256 cryptographic hash of the previous block, thus linking it to the previous block and giving the blockchain its name.
To be accepted by the rest of the network, a new block must contain a so-called proof-of-work. The system used is based on Adam Back’s 1997 anti-spam scheme, Hashcash. The PoW requires miners to find a number called a nonce, such that when the block content is hashed along with the nonce, the result is numerically smaller than the network’s difficulty target.:ch. 8 This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try many different nonce values (usually the sequence of tested values is the ascending natural numbers: 0, 1, 2, 3, …) before meeting the difficulty target.
Every 2,016 blocks (approximately 14 days at roughly 10 min per block), the difficulty target is adjusted based on the network’s recent performance, with the aim of keeping the average time between new blocks at ten minutes. In this way the system automatically adapts to the total amount of mining power on the network. Between 1 March 2014 and 1 March 2015, the average number of nonces miners had to try before creating a new block increased from 16.4 quintillion to 200.5 quintillion.
The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely hard, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted. As new blocks are mined all the time, the difficulty of modifying a block increases as time passes and the number of subsequent blocks (also called confirmations of the given block) increases.