Bitcoin: what is it?

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    Nowadays, electronic money is widely spread. Even the traditional currencies are gradually going to digital, being saved inside a bank in form of zeros and ones. Bitcoin is the most famous cryptocurrency. It was born in 2009 and for this time got many fans and caused a lot of criticism. Although, many people have heard about bitcoin, not all of them are actually able to explain how it is works and why it become so popular.

    The Banks.eu has tried to figure out what bitcoin is.

    Who created bitcoin?

    bitcoin was born in November 2008, when someone under the pseudonym Satoshi Nakamoto published an article, named: “Bitcoin: A Peer-to-Peer Electronic Cash System” explaining the work of the new currency.

    The system started working in 2009. Later, in April 2011, Nakamoto had disappeared and it is still unknown who he is or they are. In his P2P Foundation profile is written that he is 37 y.o. and he lives in Japan.

    In December 2015, Craig Wright, Australia, announced that he is the creator of bitcoin. After a personal meeting with him, the lead maintainer for the original bitcoin client and Jon Matonis, the Founding Director of the Bitcoin Foundation said that they believe him. However, some people consider the evidence unconvincing. Half a year after the confession, Wright deleted his blog and left a note, where he writes that he does not “have the courage” to publish irrefutable evidence, apologizes to Andersen and Matonic, but continues to insist that he is Satoshi.

    Because Wright left without providing a satisfactory confirmation, the identity of Satoshi remains unknown.

    What are Bitcoin’s features?  

    The system is build with a cap of 21 million total number of currency units (BTC). The emission schedule is determined in advance (how new bitcoins are created, see “Mining”).

    Since the beginning, the cost of 1 BTC has increased 25296 times. If in July 2010 1 BTC cost $0,05, in August 2013 it  was already $105, and at the 3rd March 2017 it was equal to $ 1264,8.

    The strong sides of bitcoin:

    1. Transactions transparency. Each transaction can be tracked until the moment of generation. Such information always contained in the system. Knowing the bitcoin address, you can at any time view the history of incoming and outgoing transactions;
    2. No control over the network. Bitcoin does not have a controlling center that manages such operations as: freezing an account; changing the number of currency units in the system; blocking or canceling a payment;
    3. To open the bitcoin address, no documents are required. It is a line of 34 characters that looks, for example, like this: 2TE6ndim7pd1nDUyPLD12eTW2siArpt4ead.
    4. The computational power required to calculate a whole chain increases with each new generation of the block, so the longer the chain – the more difficult it is to hack the network. It is almost impossible to seize control over it (see “Attack 51%”).

    Mining

    A process of bitcoins’ production, called mining, implies fining answer to some complex crypto-task. It is impossible to generate more bitcoins than planned (21 millions). In order to get new “coins”, essential investments in equipment, facilities, cooling and electricity are needed. That’s why bitcoin is called “digital gold” and depicted in  the form of gold coins.

    Mining is the basis of integrity and reliability of the system. In addition to the creation of new BTCs, the miners provide some other functions, like:

    • Transactions’ confirmation;
    • Network’s protection from counterfeit transactionsand attack;
    • Network’s decentralization support.

    How do miners perform the work of the system?

    BTCs are created not by one, but by blocks. A miner who “digged” a block earns an award according to the algorithm. The block is a list of all completed transactions and an answer to the last task.

    So, a miner sorts through millions of combinations to find a right one, suitable for all transactions. By “closing” the block, miner confirms the transaction by recording information of used transfers. Some stores consider a transaction confirmed only after it has participated in the calculation of 2-6 blocks.

    At the beginning, the size of 1 block was 50 BTC. But, according to the algorithm, this number decreases exactly 2 times after every 210,000 of generated blocks. Nowadays, more than 250,000 blocks have been extracted, which means that one block costs 25 BTC.

    Every new block is mined approximately every 10 minutes. About 55% of all BTCs are already mined. Due to the maximum number of BTCs that may exist in the system, it is projected that in 2032 about 99% of all BTCs will be generated.

    Extraction complexity is adjusted after every 2016 mined block. The adjustment is based on the production rate during the last period. It is needed to maintain the average extraction interval at the point ok 10 minutes. Even if the total number of computers working on the bitcoins production increases, the daily reward remains unchanged, so every new computer gets smaller share.

    51% attack.

    Bitcoin is vulnerable to so called “51% attack”: who controls more power than the rest of the network (51%) is able not to block any transactions and get all new bitcoins (however, the attacker can not conduct transactions at his own discretion, for not having private keys for signing).

    Nowadays, one must have equipment that exceeds the total capacity of 500 the most powerful supercomputers to make the “51% attack”. The defense against the“51% attack” became even stronger  after the global miners’ switch to application-specific integrated circuits (ASIC), developed especially for mining.

    Bitcoin – is it legal?

    The crypto-currency status depends on the country’s legislative system. For example, in Germany Bitcoin is recognized as a monetary unit and in Japan as a legitimate means of payments. In Russia, Bitcoin’s status is questionable. Politicians have repeatedly spoken both against and in support of it. In the Russian legislation there in so official definition of the term “crypto-currency” and it is not forbidden to conduct operations with its participation. Although, in 2016 was proposed a bill that suggested creation of BTC illegal. Bitcon’s prospects in Russia are vague and it is impossible to predict how the situation could change in the near future.

    Investments in Bitcoin.

    Many people use Bitcoin as an investment. There are a number of reasons for this:

    • High market capitalization and liquidity;
    • Large user base;
    • The ability not only to buy BTC, but also to produce it independently;
    • Limited offer.

    But, Bitcoin may be a pretty risky investment. In addition to the unclear legal status, other factors repel investors are:

    • Absence of dividends;
    • Price fluctuations;
    • Great dependence on the information field;
    • Lack of guarantees.

     

    Made by Oleg Pakhomov, especially for Banks.eu