What is Bitcoin?

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These comments can be misleading and can confuse. By the end of this you should understand enough to participate in a dinnertime conversation about bitcoin, and not be mystified by the topic. Although people refer to bitcoin as a decentralised digital currency, I prefer to think of it as an electronic assetto sidestep questions around which government backs it and who sets the interest rate, which are often a mental block in understanding bitcoin. As an electronic asset, you can buy bitcoins, own them, and send them to someone else.

Currently Sep there are around 14 million bitcoins that have been created, increasing by 25 bitcoins every 10 minutes or so, with an agreed limit of 21 million, the last of which should be created a little before the year Transactions of bitcoins from account to account are recognised globally in a matter of seconds, and can be considered securely settled within an hour, usually.

They have a price usually in USD, but can be against any currency, as with anything elseand the price is set by normal supply and demand market forces in marketplaces where traders come to trade, just like with oil or gold.

Payments bitcoin introduction to bitcoin payment system bitcoins can be made from one person to another, irrespective of geographical location or jurisdiction. In situations where the normal financial system is inadequate, it can be a useful way of transferring value to anyone who has access to the internet.

This necessarily has some friction and fees: For a primer on blockchain please see A gentle introduction to blockchain technology. A screenshot of The Bitcoin Blockchain files on my computer. This file contains data about all the bitcoin transactions, that is payments of bitcoins from one account to another, that have ever happened.

The computers which store this file also run software that connects them over the internet to the other computers running the same software.

This forms a network of computers that can talk to each other, relaying information about. When you make a bitcoin payment, a payment instruction is sent to the network. The computers on the network validate the instruction bitcoin introduction to bitcoin payment system relay it to the other computers. After some time has passed, the payment gets included in one of the block updates, and is added to The Bitcoin Blockchain file on all the computers across the network. The distribution of data works on a peer-to-peer basis, rather than client-server.

Peer-to-peer is like a gossip network where everyone tells a few other people the news about new transactions and new blocksand eventually the message gets to everyone in the network. This is as opposed to client-server is more like a conventional organisation where a boss tells subordinates the news, and the boss is a central point of reference, and potential failure.

In banking you have accounts which keep pots of money separate; in bitcoin you have addresses. A bitcoin address is similar to a bank account number, with a few differences.

Just like with bank accounts, if you want to receive a bitcoin payment, you need to tell someone your bitcoin address, so they know where to send bitcoins to.

Similarly, Bitcoin wallets are apps that display all of your bitcoin addresses, display balances and make it easy to send and receive payments. For a wallet to provide accurate information, it needs to be online or connected to a Bitcoin Blockchain file, which it uses as its source of information. The wallet will read the Bitcoin Blockchain file and calculate the balances in each address.

Bitcoin wallets let you create bitcoin addresses to receive incoming transactions and make outgoing payments, plus have other features that make them user friendly. Each bitcoin address has its own private key, which is needed to send payments from that address. Whoever knows this private key, including readers of this blog, can now make payments from the address. The private key is something you want to keep securely and never expose.

Because you can not change that private key to something more memorable, it can be a pain to remember. Most wallet apps will encrypt that key with a password that you choose. Later, when you want to make a payment, you just need to remember your password.

A payment is an instruction to unlink some bitcoins from an address you control, and move them to the control of another address your recipient. The instruction is then digitally signed with the private key of the address which currently holds the bitcoins. This digital signing demonstrates that you are owner of the address in question because only bitcoin introduction to bitcoin payment system know the private key.

When the first computer receives the instruction, it checks some technical details, and bitcoin introduction to bitcoin payment system business logic details eg, does my payment attempt to create bitcoins out of nothing?

Have the coins being sent already been sent elsewhere? If these tests pass, then the computer relays it to others on the network, who each run the same validation tests. As well as passing information about transactions between each other, specialised nodes computers who form part of the network work to add these transactions, in blocks, to the blockchain.

In fact there is nothing complex about this process, and you can do this by hand without a calculator; it just deliberately takes many computational steps without shortcuts. Each computer performs a quick validation of the block, and they agree that the block and transactions conform to the rules, bitcoin introduction to bitcoin payment system they add the block to their own blockchain.

This block-adding happens roughly every 10 minutes on the network. See a gentle introduction to bitcoin mining for further detail. Due to this reward, bitcoin mining has got very competitive, with companies developing specialised hardware, called ASICs, which are very quick at the guessing game and associated number-crunching.

This is the speed that transactions take to be confirmed onto the blockchain. There are two parts to this. This independence and mutual validation of transaction and blocks is supposed to prevent any one person or entity from adding rogue blocks and dominating the network with their influence.

If any of the participants wins, the spoils are shared with the pool. This smoothing of cashflow works well for paying back capital needed to buy mining equipment.

As a consequence, the mining pool owners have greater power over the bitcoin network in terms of creating blocks, voting on protocol changes, and potentially re-writing recent ledger entries.

If you can slip this transaction into your new blocks, then the old transaction bitcoin introduction to bitcoin payment system be invalid to the network. For more on the difficulties of changing the transaction list, read a gentle introduction to immutability of blockchains.

When they bitcoin introduction to bitcoin payment system the funds in their bank, they let you place orders to buy bitcoins from sellers. The exchange acts as escrow, holding onto cash and bitcoins and then releasing them once the trade has been made. It is unknown what happened at Gox, but rumours include having private keys stolen, poor accounting practices, letting people trade first before sending collateral, etc.

What about the decentralised bit? Centralised means one point or source of control, and decentralised is where control is shared among participants. In bitcoin, participants are the validators of the transactions and creators of blocks. If enough of them decide to play by different rules, then the others will need to follow suit.

Anyone can be validator, and bitcoin introduction to bitcoin payment system more votes, if they are prepared to pay bitcoin introduction to bitcoin payment system computing power, the costs of which are hardware, electricity, and support. So instead of one single authority who can change the rules, the rules can only be changed by consensus of those validators. The validation logic what does a valid transaction look like? This code is open source, meaning that validators can see exactly what code or logic they are running.

In theory, anyone can contribute to this reference implementation by uploading changes, though there are gatekeepers, people, who have the final say about what gets included. In theory, anyone can write versions of this software, so long as they conform to bitcoin introduction to bitcoin payment system technical and business protocols of bitcoin.

For example you could bitcoin introduction to bitcoin payment system you own version of the software, but with cooler graphics, or a more user-friendly interface. So the bitcoin introduction to bitcoin payment system can be changed, as long as you achieve majority consensus another myth is that the limit bitcoin introduction to bitcoin payment system 21 million bitcoins cannot be changed.

It can be changed, in one line of code, assuming you can get the majority of network participants to agree to run it. You will probably have guessed by now that there is a lot more to bitcoin than I have been able to set out here. In giving a gentle introduction I have had to present some concepts at a high level, which in practice are complex and highly nuanced. But as you read and learn more on this blog I hope to be able to take you into a more detailed understanding of bitcoin, miningdigital tokensand the underlying blockchain technologies ….

How come one transfers is instant but unconfirmed for 10 minutes until the miners approve it. Transactions are broadcast instantly, and detected all over the network within seconds. However it takes time for the transaction to be bundled into a block, and mined. Like Liked by 1 person. Is the transaction considered valid before it is bundled into a block and mined?

If not then transactions are not instant. Thanks for the article. Gradually I am putting this together in my head. But to me you glossed over several points. How does the bitcoin originally get created? Who gets it first? Who keeps track of what bitcoins I have, or is that determined by some unique bit coin key or identifier for each bitcoin?

Somebody got it first, then the ownership is traced through all the transactions? There must be two sets of addresses, one for people and one for the bitcoin.

I am not an expert in bitcoins, so what I am telling here might be wrong. If this is so, please would someone correct me!

The algorithm allows it that the miner adds a transaction which creates This is similar as if the person who maintains the ledger would be allowed to add 10 bucks to his own account for every page completely filled out — but only exactly this amount!

This new money comes from nowhere, bitcoin introduction to bitcoin payment system is just added to the complete worldwide amount of bitcoins. The validating nodes must go back checking every transaction up to the first incoming transaction of this bitcoin address. Otherwise, the validator would have to check at least part of the whole 50GB completely. This is in theory the same for ordinary bank accounts. Any person who has the access code to the bitcoin wallet or the bank account is able to spend the money.

The notable difference here is that a traditional bank is forced by regulations to verify the identity of a person opening a bank account, for bitcoins there is AFAIK no such regulation. So, noone knows who is the legitimate owner of bitcoins in an address. Yes there is the concept of a backlink — transactions refer to previous transactions.

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Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto [11] and released as open-source software in Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, [13] products, and services. As of February , over , merchants and vendors accepted bitcoin as payment.

The word bitcoin first occurred and was defined in the white paper [5] that was published on 31 October There is no uniform convention for bitcoin capitalization. Some sources use Bitcoin , capitalized, to refer to the technology and network and bitcoin , lowercase, to refer to the unit of account. The unit of account of the bitcoin system is a bitcoin. Named in homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin representing 0.

As with most new symbols, font support is very limited. Typefaces supporting it include Horta. On 18 August , the domain name "bitcoin. In January , the bitcoin network came into existence after Satoshi Nakamoto mined the first ever block on the chain, known as the genesis block.

This note has been interpreted as both a timestamp of the genesis date and a derisive comment on the instability caused by fractional-reserve banking. The receiver of the first bitcoin transaction was cypherpunk Hal Finney , who created the first reusable proof-of-work system RPOW in In the early days, Nakamoto is estimated to have mined 1 million bitcoins.

So, if I get hit by a bus, it would be clear that the project would go on. Over the history of Bitcoin there have been several spins offs and deliberate hard forks that have lived on as separate blockchains. These have come to be known as "altcoins", short for alternative coins, since Bitcoin was the first blockchain and these are derivative of it. These spin offs occur so that new ideas can be tested, when the scope of that idea is outside that of Bitcoin, or when the community is split about merging such changes.

Since then there have been numerous forks of Bitcoin. See list of bitcoin forks. The blockchain is a public ledger that records bitcoin transactions. A novel solution accomplishes this without any trusted central authority: 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.

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.

Transactions are defined using a Forth -like scripting language. When a user sends bitcoins, the user designates each address and the amount of bitcoin being sent to that address in an output. To prevent double spending, each input must refer to a previous unspent output in the blockchain.

Since transactions can have multiple outputs, users can send bitcoins to multiple recipients in one transaction. As in a cash transaction, the sum of inputs coins used to pay can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer.

Paying a transaction fee is optional. Because the size of mined blocks is capped by the network, miners choose transactions based on the fee paid relative to their storage size, not the absolute amount of money paid as a fee. The size of transactions is dependent on the number of inputs used to create the transaction, and the number of outputs.

In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address is nothing more than picking a random valid private key and computing the corresponding bitcoin address. This computation can be done in a split second. But the reverse computing the private key of a given bitcoin address is mathematically unfeasible and so users can tell others and make public a bitcoin address without compromising its corresponding private key.

Moreover, the number of valid private keys is so vast that it is extremely unlikely someone will compute a key-pair that is already in use and has funds.

The vast number of valid private keys makes it unfeasible that brute force could be used for that. To be able to spend the bitcoins, the owner must know the corresponding private key and digitally sign the transaction. The network verifies the signature using the public key. If the private key is lost, the bitcoin network will not recognize any other evidence of ownership; [9] the coins are then unusable, and effectively lost.

Mining is a record-keeping service done through the use of computer processing power. To be accepted by the rest of the network, a new block must contain a so-called proof-of-work PoW.

Every 2, 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. 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.

Computing power is often bundled together or "pooled" to reduce variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block. This payment depends on the amount of work an individual miner contributed to help find that block.

The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees. To claim the reward, a special transaction called a coinbase is included with the processed payments. The bitcoin protocol specifies that the reward for adding a block will be halved every , blocks approximately every four years. Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins [f] will be reached c. 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.

A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold [60] or store bitcoins, [61] due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger.

A better way to describe a wallet is something that "stores the digital credentials for your bitcoin holdings" [61] and allows one to access and spend them. Bitcoin uses public-key cryptography , in which two cryptographic keys, one public and one private, are generated.

There are three modes which wallets can operate in. They have an inverse relationship with regards to trustlessness and computational requirements. Third-party internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware. A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen.

An example of such a security breach occurred with Mt. Physical wallets store offline the credentials necessary to spend bitcoins. Another type of wallet called a hardware wallet keeps credentials offline while facilitating transactions. The first wallet program — simply named "Bitcoin" — was released in by Satoshi Nakamoto as open-source code. While a decentralized system cannot have an "official" implementation, Bitcoin Core is considered by some to be bitcoin's preferred implementation.

Bitcoin was designed not to need a central authority [5] and the bitcoin network is considered to be decentralized. In mining pool Ghash. The pool has voluntarily capped their hashing power at 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. To heighten financial privacy, a new bitcoin address can be generated for each transaction. 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.

The blocks in the blockchain were originally limited to 32 megabyte in size. The block size limit of one megabyte was introduced by Satoshi Nakamoto in , as an anti-spam measure. On 24 August at block , , Segregated Witness SegWit went live, introducing a new transaction format where signature data is separated and known as the witness. The upgrade replaced the block size limit with a limit on a new measure called block weight , which counts non-witness data four times as much as witness data, and allows a maximum weight of 4 megabytes.

Bitcoin is a digital asset designed by its inventor, Satoshi Nakamoto, to work as a currency. The question whether bitcoin is a currency or not is still disputed. According to research produced by Cambridge University , there were between 2.

The number of users has grown significantly since , when there were , to 1. In , the number of merchants accepting bitcoin exceeded , Reasons for this fall include high transaction fees due to bitcoin's scalability issues, long transaction times and a rise in value making consumers unwilling to spend it.

Merchants accepting bitcoin ordinarily use the services of bitcoin payment service providers such as BitPay or Coinbase. When a customer pays in bitcoin, the payment service provider accepts the bitcoin on behalf of the merchant, converts it to the local currency, and sends the obtained amount to merchant's bank account, charging a fee for the service. Bitcoins can be bought on digital currency exchanges.

According to Tony Gallippi , a co-founder of BitPay , "banks are scared to deal with bitcoin companies, even if they really want to".

In a report, Bank of America Merrill Lynch stated that "we believe bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers. Plans were announced to include a bitcoin futures option on the Chicago Mercantile Exchange in Some Argentinians have bought bitcoins to protect their savings against high inflation or the possibility that governments could confiscate savings accounts.