What is bitcoin and how does it work?

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Bitcoin is a digital currency that operates without any central control or oversight from banks or governments. Instead, it relies on peer-to-peer software and cryptography.

A public ledger records all bitcoin transactions and copies are kept on servers around the world. Anyone with a spare computer can set up one of these servers, called a node. Consensus on who owns which coins is achieved cryptographically through these nodes rather than relying on a central trusted source like a bank.

Each transaction is publicly broadcast on the network and shared from node to node. Every ten minutes or so, these transactions are gathered by miners into a group called a block and permanently added to the blockchain. This is the definitive account book for bitcoin.

In the same way that you would hold traditional coins in a physical wallet, virtual currencies are held in digital wallets and can be accessed from client software or a range of online and hardware tools.

Bitcoins can currently be subdivided by seven decimal places: one thousandth of a bitcoin is called milli and a hundred millionth of a bitcoin is called satoshi.

In truth, there is no bitcoin or wallet, just an agreement within the network about ownership of a coin. A private key is used to prove ownership of funds to the network during a transaction. A person could simply memorize their private key and not need anything else to retrieve or spend their virtual money, a concept known as a “brain wallet”.

Can bitcoin be converted into cash?

Bitcoin can be exchanged for cash like any other asset. There are many online cryptocurrency exchanges where people can do this, but transactions can also be done in person or on any communication platform, allowing even small businesses to accept bitcoin. There is no official mechanism built into bitcoin to convert to another currency.

Nothing inherently valuable underpins the bitcoin network. But this is true for many of the most stable national currencies in the world since leave the gold standardsuch as the US dollar and the British pound.

What is the purpose of bitcoin?

Bitcoin was created to allow people to send money over the internet. The digital currency was intended to provide an alternative payment system that would operate without central control but would otherwise be used like traditional currencies.

Are bitcoins safe?

The cryptography behind bitcoin is based on the SHA-256 algorithm designed by the United States National Security Agency. Cracking is, for all intents and purposes, impossible because there are more possible private keys that would need to be tested (2256) that there are atoms in the universe (estimated at somewhere between 1078 at 1082).

There have been several high-profile cases of hacked bitcoin exchanges and stolen funds, but these services have invariably stored digital currency on behalf of customers. What was hacked in these cases is the website and not the bitcoin network.

In theory, if an attacker could control more than half of all bitcoin nodes in existence, they could create a consensus that they owned all bitcoin and embed it into the blockchain. But as the number of nodes increases, it becomes less convenient.

A realistic problem is that bitcoin operates without any central authority. For this reason, anyone making a mistake with a transaction on their wallet has no recourse. If you accidentally send bitcoins to the wrong person or lose your password, there’s no one to turn to.

Of course, the eventual arrival of practical quantum computing could break everything. Much of cryptography relies on mathematical calculations that are extremely difficult for today’s computers to do, but quantum computers work very differently and may be able to perform them in a fraction of a second.

What is bitcoin mining?

Mining is the process that maintains the bitcoin network and also how new coins are created.

All transactions are broadcast publicly on the network and miners aggregate large collections of transactions into blocks by performing a cryptographic calculation that is extremely difficult to generate but very easy to verify. The first miner to solve the next block broadcasts it to the network and if found correct, it is added to the blockchain. This miner is then rewarded with an amount of newly minted bitcoins.

Inherent to bitcoin software is a hard limit of 21 million coins. There will never be more than that in existence. The total number of coins will be in circulation by 2140. Approximately every four years, the software makes it twice as difficult to mine bitcoins by reducing the size of the rewards.

When bitcoin was first launched, it was possible to mine a coin almost instantly using even a basic computer. Now that requires rooms full of powerful equipment, often high-end graphics cards that are adept at doing the math, which, combined with bitcoin’s volatile price, can sometimes make mining more expensive than it is. not worth.

Miners also choose which transactions to group together in a block, so a fee of varying amount is added by the sender as an incentive. Once all the coins have been mined, these fees will continue to provide an incentive to continue mining. This is necessary because it provides the infrastructure for the Bitcoin network.

Who invented bitcoin?

In 2008, the .org domain name was purchased and an academic white paper titled Bitcoin: a peer-to-peer electronic payment system has been downloaded. It lays out the theory and design of a digital currency system free from the control of any organization or government.

The author, by the name of Satoshi Nakamoto, wrote: “The fundamental problem with conventional currencies is all the trust needed to make it work. You have to trust the central bank not to depreciate the currency, but the history of fiat currencies is full of breaches of that trust.

The following year, the software described in the article was completed and released to the public, launching the bitcoin network on January 9, 2009.

Nakamoto continued to work on the project with various developers until 2010 when he retired from the project and left it to his own devices. Nakamoto’s true identity has never been revealed and they haven’t made any public statement for years.

Now the software is open source, which means anyone can view, use, or contribute the code for free. Many companies and organizations are working to improve the software, including MIT.

What are the problems with bitcoin?

Bitcoin has been the subject of several criticisms, including that the mining system is extremely energy-intensive. The University of Cambridge has an online calculator that tracks energy consumption and as of early 2021, it was estimated to be using over 100 terawatt hours per year. For perspective, in 2016 the UK used 304 terawatt hours in total.

Cryptocurrency has also been linked to crime, with critics pointing out that it is an ideal way to transact on the black market. In fact, cash has served this function for centuries, and the public bitcoin ledger can actually be a tool for law enforcement.

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