Basic Bitcoin Explanation
- Bitcoin is an open source project that was launched 3 January 2009, and is now used by more than a million people world wide
- Bitcoins are a revolutionary digital commodity, that is traded and exchanged all over the world for goods, services, and traditional fiat currencies
- Every day people are trading over million dollars worth of Bitcoins on the open market
- Bitcoin is an open-source peer-to-peer network that is not subject to the control of any single company, individual, organisation, or government
- Bitcoin is the first digital commodity that is completely distributed and the network is made up of and run by users just like you
- Bitcoin is an idea, an idea whose time has finally come
Advanced Bitcoin Explanation
Bitcoin is a digital peer-to-peer commodity that was created by Satoshi Nakamoto (pseudonym). One Bitcoin Can be divided into 100-million smaller units that are called satoshis.
Bitcoins can be sent, received and managed through a number of different independent websites, desktop clients and mobile device software. Physical notes and coin forms can also be traded. Internationally, Bitcoin can be exchanged for goods, services, and other traditional fiat currencies.
Bitcoin is administered through a decentralized peer-to-peer network. Nakamoto sidestepped the requirement of a central authority for Bitcoin by employing a proof-of-work approach in a peer-to-peer network to reach consensus in the Bitcoin network.
Bitcoins are issued according to rules agreed to by the majority of the computing power within the Bitcoin network. The core rules describing the predictable issuance of Bitcoins to its verifying servers, a voluntary and competitive transaction fee system and the hard limit of no more than 21 million Bitcoins issued in total.
Bitcoins do not have the backing of and do not represent any government-issued currency. The value of Bitcoins depends on the interpretation of the actions and software the Bitcoin network is based on. It is the first in a new line of cryptocurrencies that do not require a central bank, state, or corporate-backer. In response, The Economist has described Bitcoin as “Monetarists Anonymous”
Bitcoins are sent and received through clients and websites called wallets. They send and confirm transactions to the network through Bitcoin addresses, the identifiers for users’ Bitcoin wallets within the network. Various wallets are available in the form of desktop client, e-wallets and mobile wallets.
Bitcoin uses public-key cryptography using Elliptic Curve DSA. Every user in the Bitcoin network has a digital wallet containing a number of cryptographic keypairs. Payments are made to Bitcoin “addresses”: human-readable strings of numbers and letters around 33 characters in length, always beginning with the digit 1 or 3, as in the example of 175tWpb8K1S7NmH4Zx6rewF9WQrcZv245W. These represent an ECDSA public key or combination thereof. The wallet’s private keys are used to authorize transactions from that user’s wallet.
Users obtain new Bitcoin addresses from any Bitcoin client software, including web-based Bitcoin wallets. Creating a new address is a completely offline process and requires no communication with the Bitcoin peer-to-peer network.
Transaction fees may be included with any transfer of Bitcoins. As of 2012 many transactions are processed in a way which makes no charge for the transaction. For transactions which draw coins from many Bitcoin addresses and therefore have a large data size, a small transaction fee is usually expected.
To prevent double-spending, the network implements what Nakamoto describes as a peer-to-peer distributed timestamp server, which assigns sequential identifiers to each transaction, which are then hardened against modification using the idea of chained proofs of work (shown in the Bitcoin client as confirmations). In his white paper, Nakamoto wrote: “we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.”
Whenever a node broadcasts a transaction, the network immediately labels it as unconfirmed. The confirmation status reflects the likelihood that an attempt to reverse the transaction could succeed. Any transaction broadcast to other nodes does not become confirmed until the network acknowledges it in a collectively maintained timestamped-list of all known transactions, the blockchain.
In 2008, Satoshi Nakamoto self-published a paper outlining his work on The Cryptography Mailing list at metzdowd.com and then on 3 January 2009 released the open source project called Bitcoin and created the first block, called the “Genesis Block”.
The Bitcoin network came into existence on 3 January 2009 with the release of the first open-source Bitcoin client, Bitcoind, and the issuance of the first Bitcoins. Prior to the invention of Bitcoin, electronic commerce could not securely operate without relying on a central authority to prevent double-spending.
In 2010, the initial exchange rates for Bitcoin were set by individuals on the bitcointalk forums. Today, the majority of Bitcoin exchanges occur on the Mt. Gox Bitcoin exchange.
In 2011, Wikileaks, Freenet, Singularity Institute, Internet Archive, Free Software Foundation and others, accept donations in Bitcoin. The Electronic Frontier Foundation did so for a while but has since stopped, citing concerns about a lack of legal precedent about new currency systems, and because they “generally don’t endorse any type of product or service.”
By mid-2011, some small businesses had started to adopt Bitcoin. LaCie, a public company, accepts Bitcoin for its Wuala service.
Unlike fiat currency, Bitcoin has no centralized issuing authority. The network is programmed to increase the money supply as a geometric series until the total number of bitcoins reaches 21 million BTC. As of October 2012 slightly over 10 million of the total 21 million BTC had been created; the current total number created is available online. By 2013 half of the total supply will have been generated, and by 2017, three-quarters will have been generated. To ensure sufficient granularity of the money supply, clients can divide each BTC unit down to eight decimal places (a total of 2.1 × 1015 or 2.1 quadrillion units).
The network as of 2012 required over one million times more work for confirming a block and receiving an award (50 BTC as of February 2012) than when the first blocks were confirmed. The network adjusts the difficulty every 2016 blocks based on the time taken to find the previous 2016 blocks such that one block is created roughly every 10 minutes. Thus the more computing power that is directed toward mining, the more computing power the network requires to complete a block confirmation and to receive the award. The network will also halve the award every 210,000 blocks, designed to occur about every four years.
Those who chose to put computational and electrical resources toward mining early on had a greater chance at receiving awards for block generations. This served to make available enough processing power to process blocks. Indeed, without miners there are no transactions and the Bitcoin economy comes to a halt.
Prices fluctuate relative to goods and services more than more widely accepted currencies; the price of a Bitcoin is not sticky.
In August 2012, 1 BTC traded at around $10.00 USD. Taking into account the total number of Bitcoins mined, the monetary base of the Bitcoin network stands at over 97 million USD,
Bitcoin as quasi-commodity money
Bitcoin shares characteristics of both commodity money and fiat money, but does not fit properly in either category. Bitcoin supersedes commodity money in value density, recognizability and divisibility. It also resembles commodity money in that, at least during the expansion of the Bitcoin base, its value, assuming competing suppliers, is equal to its marginal cost of production. However, unlike commodity money, bitcoins, which exist only as numbers in a computer, have zero value as a commodity in the real world. On the other hand, fiat money commands a value far higher than its costs of production, which raises the risk of mismanagement by their monopolistic suppliers.
For some of the reasons above, and due to commodities being “naturally” scarce while Bitcoin is only scarce in a contrived way and not subject to supply shocks in the usually understood sense, economist George Selgin classifies Bitcoin as quasi-commodity money.
Because transactions are broadcast to the entire network, they are inherently public. Unlike regular banking, which preserves customer privacy by keeping transaction records private, loose transactional privacy is accomplished in Bitcoin by using many unique addresses for every wallet, while at the same time publishing all transactions. As an example, if Alice sends 123.45 BTC to Bob, the network creates a public record that allows anyone to see that 123.45 has been sent from one address to another. However, unless Alice or Bob make their ownership of these addresses known, it is difficult for anyone else to connect the transaction with them. However, if someone connects an address to a user at any point they could follow back a series of transactions as each participant likely knows who paid them and may disclose that information on request or under duress.
It can be difficult to associate Bitcoin identities with real-life identities. This property makes Bitcoin transactions attractive to sellers of illegal products.
Jeff Garzik, one of the Bitcoin developers, explained as much in an interview and concluded that “attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb.” He also said “We are working with the government to make sure indeed the long arm of the government can reach Bitcoin… the only way Bitcoins are gonna be successful is working with regulation and with the government.
High volatility & hoarding
A frequent problem faced by retailers willing to accept Bitcoin is the high volatility of its exchange rate to conventional currencies, and the lack of futures contracts to hedge this volatility (although options—financial derivatives—are available). In a review of the virtual currency, James Surowiecki opined that hoarding by speculators represented one of the largest hindrances to accelerating its adoption. Gavin Andresen, the lead developer of Bitcoind, explicitly advised people “not to make heavy investments in Bitcoins”, calling it “kind of like a high risk investment”. Jered Kenna, CEO of TradeHill, formerly a major Bitcoin Exchange, also cautions potential investors, saying to the The New York Observer that Bitcoin was an experiment, “don’t bet the house”.
The hacking organization “LulzSec” accepted donations in Bitcoin, having said that the group “needs bitcoin donations to continue their hacking efforts”.
Following the banking blockade instituted against Wikileaks by mainstream payment processors such as Visa, MasterCard and Paypal, the website accepts donations in Bitcoin.
The Silk Road is an anonymous black market that uses only Bitcoins as their method of payment.
In a 2011 letter to Attorney General Eric Holder and the Drug Enforcement Administration, senators Charles Schumer of New York and Joe Manchin of West Virginia called for an investigation into Silk Road and the Bitcoin. Schumer described the use of Bitcoins at Silk Road as a form of money laundering. Consequently, Amir Taaki of Intersango, a UK-based Bitcoin exchange, put out a statement clarifying that their Bitcoin exchanges follow proper regulations.
Some content on this page was taken from en.wikipedia.org/wiki/Bitcoin