Cryptocurrency – What is Bitcoin ?
You might get confused, bitcoin is not exactly coin, nor it is physical money in the other sense. Yes, it is used for buying property or assets. It is also used as a unit of property, one who owns bitcoins in some numbers. But then what exactly is Bitcoin?
Bitcoin is a form of electronic cash, a form of cryptocurrency which is used instead of actual physical money. It can and is used for buying of property and assets without any kind of verification of a central system like a bank which might process the data for the parties. This is one of the crucial points of owning bitcoin is that the owner is free from opening any detail regarding the assets to the in-between party (as in this case, it might have been a bank) which might be a node of data leak. Thus Bitcoin can be said as a cryptocurrency decentralized from any third party interaction and the transfer of property can be done from one client to another client from an encrypted bitcoin network know as a block.
Bitcoins are essential in handling wealth, as it can be used to keep money in a virtual form which is much less effected on increment. When it comes to security for keeping money safe, bitcoin is the best option one can think of. As high-grade essential systems and highly encrypted unalterable networks are used for keeping the bitcoin units safe, secure and out of the hands of bad for manipulation. This type of safety is very less found in central banks, thus being much more prone to a data leak.
Bitcoin History: A programming leap
Who created bitcoin, the information is still unclear. As it first came out, a name of Satoshi Nakamoto was much common, but it was not clear at all whether it was a single person or a group of people that also by the same name (the later seemed valid). Although bitcoin was released as an open source software, particularly in the year 2009. This was released as a form of electronic money transfer system which required no central party for data processing. It utilized blocks in a very clever way for the working of the whole system.
Hal Finney was the first person who actually created the proof of work (reusable) system in 2004. There were lots of other creators who created electronic cash system like b-money, bit gold which had the same purpose as that of bitcoin.
How bitcoin actually works?
Bitcoin is an electronic cash system, means it cant be used as a sort of physical money. Bitcoins are created or they get mined after several miners (competitive network computers in the blockchain which is explained later) solve a really complex problem, and the first one to do it gets a reward. A reward of bitcoins, which then gets into the circulation and be used as property or ownership identity.
After these are released into the circulation, there are several processes which are needed to be completed in order to be gain ownership of bitcoins. You are required to have a public key and a private key which will be used in transactions and user verifications when you transfer property or assets to another client.
The public key is more of like a bank account number which can be used to verify the user when a transaction is made. When it occurs, the public key associated with the owner is also noted down and the rest of the details along with the public key. This is too stored in the blocks, which can be used later if needed. You might be prone to lose the public key, but that might be recoverable afterwards since a user verification system does exist in the bitcoin software to protect the users from theft. It requires the owner to verify the public key with a private key, which is to keep safe with the owner (just like a password).
The private key should not be confused with a simple password, as it is not. This is supplied to the user or owner of a particular bitcoin wallet with the units (like an account with the money). This is to be kept safe with the user as losing it can cost the user the whole and all the cash in it. This might also land a threat to data leak via password duplication or random generation, but it is completely omitted in the bitcoin system. This is due to the fact that there are tons of passwords which are in use so it will take a long time for generation of a 100% matching one and then using it. Also, private keys are not just some bunch of letters together, these are generated using a complex function and then provided to the users. Loss of this private key will result in the complete loss of bitcoin wallet which is not at all recoverable.
Bitcoins in the system, have a high amount of value fluctuations which results in decrement an increment of the value of a bitcoin, which overall determines the amount of wealth owned. This might sound quite unrealistic but it happened. When bitcoin was first used, it had way less value than dollars. This was known once when software programmer Laszlo Hanyecz using bitcoins purchased 2 pizzas for 10,000 bitcoins. This was the first ever transaction that was commercially happened. At the time of the year of 2012, the Bitcoin Foundation was founded to promote the development of Bitcoin and its efficient use of the electronic money system.
Bitcoins had a high amount of value fluctuations in the early years. It was mostly used in the black market business, accepting around $214 million in bitcoins ($9.9 million in total coins use). One of the most crucial bitcoin value downfalls happened during the years 2011-2012. The highest value attained per bitcoin was around $31.50 which had several declines. It fell to $11.00 in a month, then to $7.80, $4.77 to the continuing months.
On the next year, the price for bitcoin rose up to $13.30, in which the first rise was up to $7.38, but a downfall to $3.80, but had a rise up to $16.41. By the year 2013, the value of bitcoins had a severe rise up from $13.30 to a whopping $770 until 2014. After such big rise ups, the bitcoin system got split into two independent chains (blockchains) which worked separately. Bitcoins had continued value fluctuations continued after huge changes in the software run, which got initially restored to the base 0.7 version.
Price fluctuation in bitcoins is much more of a continued thing in order to protect several aspects, one of them being data leak and theft of the units in circulation. This is done in the way, that when a data leak occurs, prices of the all the bitcoins come down to a low value temporarily. After analyzing the theft and the owner whose units have been stolen, the prices of the bitcoins get back to their original value. The stolen units will be discarded from the records and will be regarded as invalid.
Bitcoin units. Like real money
Bitcoin has several smaller units just like real money. Bitcoin has a smaller unit including a millibitcoin which is equal to one-thousandth of a bitcoin. Smaller units like Satoshi (or said as a sat) is equal to one hundred millionth of a bitcoin, being the smallest of the units. Bitcoins also have representations (symbols too) like BTC (Bitcoin), mBTC (milliBiTCoin) and Satoshi (sat). Al these conventions are mostly used in the system.
Blockchain. The system that makes bitcoin.
Blockchain might be more complicated than just bitcoins themselves since this is what makes bitcoins. Blockchains as the name say, it is regarded as a chain of blocks, in which records of transactions data and related information is stored in it. After the block is created, a copy of it with the original data is sent to all the nodes (or computers in the blockchain network) which stores it. Blocks in the chain are interconnected with each other via a hash code of the previous block which acts as an address that can be used to navigate the blocks when needed by the nodes.
Blocks have been developed keeping in mind the prevention of data on it, which is not at all possible. A block is designed to be completely unalterable which might become a data leak point since it contains all the data of transactions which occurred in a particular period of time. Creation of blocks is more of a time priority or a transaction dependent. As blocks have to be created when a transaction occurs, thus automatically saving all the relevant data in it and sending it to the network nodes. The maximum time for a block creation is around to be 10 minutes after which a block gets created.
How the blocks work in the chain?
Blocks in the chain have a very unusual system of performance and working. When a transaction is to be made, all the verifications of the account, public key, private key (not between clients at all) and ownership of the units. This is done by the system, where at first, the client IDs are verified along with their wallet’s public key, which is to make sure that these are not the same which will trap into making the bitcoins to be doubly used. This is a good practice as it also prevents bad boys from doing anything stupid and getting away. Also, a lot happens behind the blockchain system, which doesn’t get to the user, but it does happen. (Like the X no of units you will be transferring to your client’s account will be processed in such a way, that a log will be created in which it will be stated that your wallet credit will go by X units, and your client’s wallet will go up by X units, along with the usual codes of the units being noted down too. The public key verification is done because of this).
After the transfer is made, all of the information is kept in the runtime or a temporary memory. At the time of the creation of a block, this information goes in the block. A block is either created immediately (when too many transactions occur) or after a sufficient period of time (maximum allowed is 10 minutes). The previous block is connected to the current block by using a special crypto code which is generated using a typical hash function that has 16 bits of discrete characters (numbers, letter, symbols). This is the thing that connects the blocks.
One more thing about the blocks is that, when a block is created, a copy of it is sent to all the other nodes (network computers) from the original node. This is done in order to alert the other nodes of the addition of a new block, which will contain some transaction information. Storing this info is a part of the system’s safety as it can be used later against theft or coins being used double.
How? As discarding a transaction information would allow for the reuse of the units that were spent. Since there is no official record for those units being used. As bitcoin is an electronic money system, this type of fraud requires the least hassles to make it happen. When such a double transfer or reuse it to be made, the system verifies whether such units were used or not (along with the public key). If not, then the transfer takes place. If the system finds that these units are already spent, then the account from which the transfer is to be made is checked again. If suspicion grows, the account gets halted due to such practice.
Wait, how bitcoins do get into the blockchain system?
This is a very intriguing question, on how bitcoins enter the system or how they are mined. That is a highly complicated process and involves a lot of mathematical calculations and a whole lot of processor work, but let us not look into that. Let us be simple. The term mining here means a process in which the bitcoins are generated by the process of solving and winning. This is done by a group of computers (not people) who are constantly competing with each other for getting the right answer to a puzzle. A very complicated and complex puzzle is handed over to the computers (after a block gets generated and added to the blockchain). The computers have to solve the puzzle as fast as they can (in the right way of course) and the first one to do it gets the reward. This requires too a lot of CPU power for the miners to complete the puzzle. After solving, the result is sent to the nodes. After verification, if it is the right one, then the particular miner gets rewarded with a sum of bitcoins (exactly 12.5 bitcoins). Then again the whole process continues for the next successful mine.
Owning the bitcoins. Wealthy.
Bitcoins are owned by a user who has verified wallet along with a public key and a private key. The bitcoins belonging to a particular user will be addressed and marked with the user details, showing proof of the ownership of the units. This is made much more simple by using the private key which is used to identify the total amount of bitcoins belonging to a particular user. Rise and decline of the credit of a user’s wallet are determined by how much ownership the user has on the units. Every single unit is marked by the user’s private key to identify the no of units owned.
When a transaction is to be done, the ownership process passes to the other client to whom the units are sent. This is a much better practice in accordance with centralized banks which do not seem to keep the units (money) verified by proof of work (ownership passes to the person who has the units which don’t happen at all in the case of owning bitcoins). Again, when a transaction is to be done, the system verified both of the users with their public key and private key. After that, the donor’s account decreases by the number of units which to be sent to the receiver, whose account gets incremented by the same number of units. Here, the credit amount changes, not the exact number of verified bitcoins which happens in the next process. Then, the number of bitcoins which is to be sent to the receiver is erased of the donor’s original hash data (which proves the ownership) and then is re-written with the receiver’s hash data. And after the transaction is made, the whole process information is stored in a newly created block in the nodes of the blockchain. This makes the receiver gain ownership of the newly acquired bitcoins in a verified way. This is the process of transaction and ownership of the bitcoins.
Bitcoin : Security advancements
Bitcoin system has a high-grade encryption and employs great cryptography techniques to keep assets much safer than it will ever be. That is a truth. Using high-level systems, top-level linked encryption using more computer processes which makes bitcoin far better.
One of the most common security systems which are tough is the public and the private key involvement. Whether users are buying or selling or transferring property, the private key will be required to verify the amount of credit, past transactions which are mainly used to prevent double using bitcoins that have already been used. It works like that, when a transfer is to be done, the system checks both of the wallets, verifies whether the units to be transferred are valid or not, and then it proceeds. Else if a user is caught using already spent coins, his account is immediately halted.
Other security measures are like the involvement of the blocks which work together keeping all the important data in a secure unalterable system. YES, blocks are a technically unalterable plus, if you managed to crack one, it will take you tons of time to find out a specific transfer record, change it and then get the coins back, which normally sounds mostly impossible unless you have a sized supercomputer with parallel processing. Same goes for the miners, if you want to get direct minted coins, you have to race against the miners so as to solve the problem. This normally seems impossible.
Using bitcoins can provide you with a high level of security while you can keep your property much safer in the blockchain system. Keeping money in the bank can be the point of a data leak, which might cost your money (and almost everything). If that is ignored too, transactions that occur between clients need an intermediate party to do the processing which can be a source to a data leak(changing transaction data is easy now). Well, the Bitcoin system doesn’t employ an intermediate or public party since it does the processing itself by utilizing a peer to peer network between the two clients.
Bitcoin cash system is considered much more secure than a traditional money transfer system which is insecure and does not allow high-grade encryption. Not just with money, the system can also be employed to a lot of different things which require high-grade safety and is much valuable.
Disadvantages of Bitcoin
Bitcoin system utilizes a tremendous amount of energy, both in the form of electricity and processing power. This might not be valid to hear, but energy consumption does play a role in the working of a system that provides top-level encryption and security to valuable aspects.
Bitcoin network utilizes a high amount of Processing power for the mining purposes, keeping the nodes running, maintaining the blockchain. Most of the power goes after the miners, who solve different sorts of problems to continue the mining process, which ultimately maintains the bitcoin circulation. This might be for the greater good, but currently, it is not recommended at all, due to its high energy eat up. Bitcoin systems also normally get used for running an illegal business and money transfer which are not yet certified by the central, that can lead to a huge amount of loses to the country.
Also, these systems are not yet made officially public which can be used by a majority of users.