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Bitcoin Technology

Huangshan_China_2
(Huangshan, Anhui Province, China - Hsi-Pin Ma)
 
 
 

Bitcoin and Cryptocurrency

Bitcoin is a digital asset and a payment system. It is an innovative payment network and a new kind of money. It is designed to enable users to send money over the Internet in a very simple and efficient way. Bitcoin made digital transactions possible without a trusted intermediary. The technology allowed this to happen at scale, globally, with cryptography doing what institutions like commercial banks, financial regulators, and central banks used to do: verify the legitimacy of transactions and safeguard the integrity of the underlying asset.

Like paper money and gold before it, bitcoin is a paperless, bank-less, state-less currency that allows people to exchange value, to pay directly for goods and services. It is a system which allows you to do anonymous currency transactions and no one will come to know about the payment or about all other info related to the payment, including who sent it, who received it, etc. Unlike its predecessors, bitcoin is digital and decentralized. The bitcoin generation algorithm defines, in advance, how currency will be created and at what rate. Any currency that is generated by a malicious user that does not follow the rules will be rejected by the network and thus is worthless. Since the system works without a central repository or single administrator, the U.S. Treasury categorizes bitcoin as a decentralized virtual currency. Bitcoin is often called the first cryptocurrency. 

The success of bitcoin has led to the development of many alternative cryptocurrencies (or altcoins). Most of these altcoins offer their own take on the bitcoin protocol, and are interesting in their own right. Currently, there are hundreds of alcoins out in the wild being traded every single day. But, most altcoins don’t last very long. In addition, just like the unfounded fear of many governments in the world that bitcoin and other virtual currencies are a conduit for money laundering, smuggling, terrorism and tax evasion, they believe that the only means of curbing these harmful elements is through acceptance and regulation.

Bitcoin Network and Bitcoin Clients

Bitcoin is not a fiat currency controlled by a nation-state. It uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network where each terminal or node is equal in terms of hierarchy. The bitcoin network is a peer-to-peer payment network that operates on a cryptographic protocol. Users send and receive bitcoins, the units of currency, by broadcasting digitally signed messages to the network using bitcoin cryptocurrency wallet software. Transactions are recorded into a distributed, replicated public database known as the blockchain, with consensus achieved by a proof-of-work system called "mining". 

Bitcoin is open-source; its design is public, nobody owns or controls bitcoin and everyone can take part. Bitcoin is run collectively by the users who uses the bitcoin client, and any changes to the bitcoin system have to be approved by the majority of users before they are implemented. Bitcoin clients are the base level of technology for conducting bitcoin transactions. 

Bitcoin is a peer-to-peer network. Any computer that connects to the bitcoin network is called a node. Each node runs a specialized piece of software called a bitcoin client. This client downloads the entire network (i.e history of all transaction blocks) at once on the node and takes care of all the communication with the bitcoin network. The client connects with the user’s ‘wallet’ and updates it with incoming and outgoing funds and uses the keys generated by the ‘wallet’ to sign the transactions. The protocol is designed in such a way that a bitcoin client cannot enforce its own rules and all other nodes running the bitcoin client ensure that every other node is following the rules (in short not trying to hack or corrupt the network). Bitcoin client has to continuously synchronize itself with the entire network. 

The different types of bitcoin client are: full clients, thin clients, web clients, and mobile clients.

Bitcoin Transactions

Bitcoin uses public-key cryptography, peer-to-peer networking, and proof-of-work to process and verify payments. Transactions take place between users directly, without an intermediary. Assets - digital assets like money to music and everything in between - are not stored in a central place, but they're distributed across a global ledger, using the highest level of cryptography. There is no trusted third party controlling the ledger. When transactions are conducted, they are posted globally, across millions and millions of computers. These transactions are verified by the network nodes and recorded in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account. 

Bitcoin transactions are not reversible! Any transaction issued with bitcoin cannot be reversed, they can only be refunded by the person receiving the funds. Bitcoins are sent (or signed over) from one address to another with each user potentially having many, many addresses. Addresses are identifiers which you use to send bitcoins to another person. Transactions sent and received from bitcoin address. Every bitcoin address has a matching private key, which is saved in the wallet file of the person who owns the balance. Please keep your private keys safe, and make periodic backups to prevent the loss of bitcoins. Anyone with your private keys can spend your bitcoins. 

With PayPal you send funds to an email address, and similarly with bitcoin you send funds to a bitcoin address. You can send bitcoins to anyone once you know their bitcoin address. Each payment transaction is broadcast to the network and included in the blockchain so that the included bitcoins cannot be spent twice. This way, no one can copy the currency and use it for more than one time. It’s a simple but effective idea to stop double spending of the same bitcoin. After an hour or two, each transaction is locked in time by the massive amount of processing power that continues to extend the blockchain. Using these techniques, bitcoin provides a fast and extremely reliable payment network that anyone can use.

Bitcoin's Golden Future?

Bitcoin, Ethereum and other blockchain assets are a new way for investors to gain exposure to a high-growth industry. Bitcoin and blockchain technology is a disruptive force in financial services and will likely be the foundation of the next-generation Internet also called Web 3.0. The current market price for a bitcoin is always changing due to the supply and demand for it. It goes up and down. Bitcoins are traded at bitcoin exchanges. A historical bitcoin price chart can be found at: https://blockchain.info/charts/market-price. How can we buy some bitcoin? If you are an individual investor and want to buy bitcoin the easiest way is through a digital asset exchange like Coinbase. Coinbase is one of the largest U.S.-based bitcoin companies that facilitates not only buying bitcoin, but also the storage of bitcoin. Open an account with Coinbase, and once you link your bank account you can buy and sell bitcoin. In addition, Coinbase also offers a "vault" that can be used to store your bitcoin. Since bitcoin is a new financial system that can operate without traditional banks, you control your finances. However, this financial freedom means that you are responsible for the safekeeping of bitcoin.

What does the future hold for bitcoin? As outlined previously, it has many advantages and for this reason it will remain relevant as a currency. We see the biggest risk to bitcoin being its substitution and/or parallel use by other cryptocurrencies. One of bitcoin's primary uses is being a store of value and for this reason other cryptocurrencies can always step in and enjoy similar status if aggregate demand requires it. Is bitcoin simply a 21st century version of gold, only without the storage issues? Or is it just a short-lived popular fad that may soon evolve into something quite different? Only time will tell. The only certainty is that its price will remain very volatile in the future.

 

 

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