Bitcoin is collection of concepts and technologies that form the basis of a digital money ecosystem. It includes a currency, with units called bitcoins, that are used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol, primarily via the Internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible to many people. By transmitting bitcoins between the digital wallets in which they’re stored, people and organizations can use them to do just about anything that can be done with conventional currencies, such as buy and sell goods, send money to people or organizations, extend credit, and exchange them for other currencies. Because bitcoin technology represents and transmits money, it includes significant features to ensure the security of the bitcoin network. Bitcoins can be purchased and sold, exchanged for other currencies at a floating exchange rate, at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the Internet: fast, secure, borderless.
Bitcoin is collection of concepts and technologies that form the basis of a digital money ecosystem. It includes a currency, with units called bitcoins, that are used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol, primarily via the Internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible. Users can transfer bitcoin over the network to do just about anything that can be done with conventional currencies, such as buy and sell goods, send money to people or organizations, or extend credit. Bitcoin technology includes features, based on encryption and digital signatures, to ensure the security of the bitcoin network. Bitcoins can be purchased and sold, exchanged for other currencies at a floating exchange rate, at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the Internet: fast, secure, borderless.
Unlike traditional currencies, bitcoins are entirely virtual. There are no physical coins, or even digital coins per se. The coins are implied in transactions which transfer value from sender to recipient. Users of bitcoin own keys which allow them to prove ownership of transactions in the bitcoin network, unlocking the value to spend it and transfer it to a new recipient. Those keys are stored in a digital wallet on each user’s computer. Possession of the key that unlocks a transaction is the only prerequisite to spending bitcoins, putting the control entirely in the hands of each user.
@ -19,16 +19,14 @@ In this chapter we'll get started with bitcoin by explaining some of the main co
The emergence of viable digital money is closely linked to developments in cryptography. This is not surprising when one considers the fundamental challenges involved with using bits to represent value that can be exchanged for goods and services. There are two fundamental questions for anyone accepting digital money:
1. Can I trust that money authentic and not counterfeit?
1. Can I trust the money is authentic and not counterfeit?
2. Can I be sure that no one else can claim that this money belongs to them and not me? (aka the “double-spend” problem)
Issuers of paper money are constantly battling the counterfeiting problem, by using increasingly sophisticated papers and printing technology. Physical money addresses the double-spend issue easily because the same paper note cannot be in two places at once. Of course, conventional money is stored and transmitted digitally. In this case the counterfeiting and double-spend issues are handled by clearing all electronic transactions through central authorities that have a global view of the currency in circulation.
For digital money, which cannot take advantage of esoteric inks or holographic strips, cryptography provides the basis for trusting the legitimacy of a user’s claim to value. Specifically, cryptographic digital signatures enable a user to sign a digital asset or transaction and securely prove the ownership of that asset. And with the appropriate architecture, digital signatures also can be used to address the double-spend issue as well.
Issuers of paper money are constantly battling the counterfeiting problem, by using increasingly sophisticated papers and printing technology. Physical money addresses the double-spend issue easily because the same paper note cannot be in two places at once. Of course, conventional money is also often stored and transmitted digitally. In this case the counterfeiting and double-spend issues are handled by clearing all electronic transactions through central authorities that have a global view of the currency in circulation. For digital money, which cannot take advantage of esoteric inks or holographic strips, cryptography provides the basis for trusting the legitimacy of a user’s claim to value. Specifically, cryptographic digital signatures enable a user to sign a digital asset or transaction proving the ownership of that asset. With the appropriate architecture, digital signatures also can be used to address the double-spend issue.
In the late 1980s, when cryptography started becoming more broadly available and understood, many researchers began trying to use cryptography to build digital currencies. These early digital currency projects issued digital money, usually backed by a national currency or precious metal such as gold.
While these earlier digital currencies worked, they were centralized and as a result they were easy to attack by governments and hackers. Early digital currencies used a central clearinghouse to settle all transactions at regular intervals, just like a traditional banking system. These central clearinghouses and the organizations issuing the digital currency were highly centralized organizations, usually corporations. Unfortunately, in most cases these nascent digital currencies were targetted by worried governments and eventually litigated out of existence. Some failed in spectacular crashes when the parent company liquidated abruptly. Based on the issues discussed above, the creator of bitcoin recognized that, in order to be robust against intervention by antagonists - be they legitimate governments or criminal elements - a successful digital currency needed to avoid the use of a central currency issuing or transaction clearing authority that could be a single point of attack. Bitcoin is such a system, completely de-centralized by design, lacking any central authority or point of control that can be attacked or corrupted.
While these earlier digital currencies worked, they were centralized and as a result they were easy to attack by governments and hackers. Early digital currencies used a central clearinghouse to settle all transactions at regular intervals, just like a traditional banking system. These central clearinghouses and the organizations issuing the digital currency were highly centralized organizations, usually corporations. Unfortunately, in most cases these nascent digital currencies were targeted by worried governments and eventually litigated out of existence. Some failed in spectacular crashes when the parent company liquidated abruptly. Based on the issues discussed above, the creator of bitcoin recognized that, in order to be robust against intervention by antagonists - be they legitimate governments or criminal elements - a successful digital currency needed to avoid the use of a central currency issuing or transaction clearing authority that could be a single point of attack. Bitcoin is such a system, completely de-centralized by design, lacking any central authority or point of control that can be attacked or corrupted.
Bitcoin represents the culmination of decades of research in cryptography and distributed systems and includes four key innovations brought together in a unique and powerful combination. Bitcoin consists of:
@ -37,18 +35,16 @@ Bitcoin represents the culmination of decades of research in cryptography and di
* A de-centralized mathematical and deterministic currency issuance (distributed mining), and;
* A de-centralized transaction verification system (transaction script)
As with many inventions, bitcoin was not novel in its entirety, but combined several prior inventions. A key bitcoin innovation was to use a Proof-Of-Work algorithm to conduct a global "election" every 10 minutes, allowing the de-centralized network to arrive at consensus about the state of transactions. This elegantly solves the double-spend problem while maintaining a fully de-centralized system.
Bitcoin was invented in 2008 by Satoshi Nakamoto with the publication of a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". Satoshi Nakamoto combined several prior inventions such as b-money and HashCash to create a completely de-centralized electronic cash system that does not rely on a central authority for settlement and validation of transactions. The key innovation was to use a Proof-Of-Work algorithm to conduct a global "election" every 10 minutes, allowing the de-centralized network to arrive at _consensus_ about the state of transactions. This elegantly solves the issue of double-spend, a weakness of digital money, where a single currency unit can be spent twice. Previously, the double-spend problem was solved by clearing all transactions through a central clearinghouse.
The bitcoin network started in 2009, based on a reference implementation published by Nakamoto and since revised by many other programmers. During the first four years of operation, the network has grown to include an enormous amount of Proof-Of-Work computation, thereby increasing its security and resillience. In 2013, the total market value of bitcoin's primary monetary supply measure (M0) is estimated at more than 10 billion US dollars. The largest transaction processed by the network was $150 million US dollars, transmitted instantly and processed without any fees.
The bitcoin network started in 2009, based on a reference implementation published by Nakamoto and since revised by many other programmers. During the first four years of operation, the network has grown to include an enormous amount of Proof-Of-Work computation, thereby increasing its security and resilience. In 2013, the total market value of bitcoin's primary monetary supply measure (M0) is estimated at more than 10 billion US dollars. The largest transaction processed by the network was $150 million US dollars, transmitted instantly and processed without any fees.
Satoshi Nakamoto withdrew from the public in April of 2011, leaving the responsibility of developing the code and network to a thriving group of volunteers. The name Satoshi Nakamoto is an alias and the identity of the person or people behind this invention is currently unknown. However, neither Satoshi Nakamoto nor anyone else exerts control over the bitcoin system, which operates based on mathematical principles. The invention itself is groundbreaking and has already spawned new science in the fields of distributed computing, economics and econometrics.
.A solution to a distributed computing problem
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Satoshi Nakamoto's invention is also a practical solution to a previously unsolved problem in distributed computing, known as the Byzantine Generals problem. Briefly, the problem consists of trying to agree on a course of action by exchanging information over an unreliable and potentially compromised network. Satoshi Nakamoto's solution, which uses the concept of proof-of-work to achieve consensus without a central trusted authority represents a breakthrough in distributed computing science and has wide applicability beyond currency. It can be used to achieve consensus on decentralized networks for provably-fair elections, lotteries, asset registries, digital notarization and more.
Satoshi Nakamoto's invention is also a practical solution to a previously unsolved problem in distributed computing, known as the Byzantine Generals problem. Briefly, the problem consists of trying to agree on a course of action by exchanging information over an unreliable and potentially compromised network. Satoshi Nakamoto's solution, which uses the concept of Proof-of-Work to achieve consensus without a central trusted authority represents a breakthrough in distributed computing science and has wide applicability beyond currency. It can be used to achieve consensus on decentralized networks for provably-fair elections, lotteries, asset registries, digital notarization and more.
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@ -66,7 +62,7 @@ Bob, the cafe owner in Palo Alto is building a new website. He has contracted wi
Charitable Donations::
Eugenia is the director of a children's charity in the Philippines. Recently she has discovered bitcoin and wants to use it to reach a whole new group of foreign and domestic donors to fundraise for her charity. She's also investigating ways to use bitcoin to distribute funds quickly to areas of need. This story will show the use of bitcoin for global fundraising across currencies and borders and the use of an open ledger for transparency in charitable organization.
Remitances and Reverse Remitances::
Remittances and Reverse Remittances::
Gopesh, the Indian web developer, is supporting his daughter Radhika who is a student in Essex, England. Gopesh is now considering sending Radhika bitcoin, eliminating the fees he used to pay for remittances. This story will demonstrate the use of local exchange and peer-to-peer exchanges for international remittances with bitcoin.
Using one of the applications or websites above, Joe determines the price of bitcoin to be approximately $100 US dollars per bitcoin. At that rate, he should give Alice 0.10 bitcoin, also known as 100 milli-bits, in return for the $10 US dollars she gave him.
Once establishing a fare exchange price, Joe opens his mobile wallet application and selects to "send" bitcoin. He is presented with a screen requesting two inputs:
Once Joe has established a fair exchange price, he opens his mobile wallet application and selects to "send" bitcoin. He is presented with a screen requesting two inputs:
* The destination bitcoin address for the transaction
* The amount of bitcoin to send
@ -179,7 +175,7 @@ Once establishing a fare exchange price, Joe opens his mobile wallet application
.Bitcoin mobile wallet - Send bitcoin screen
image::images/blockchain-mobile-send.png["blockchain mobile send screen"]
In the input field for the bitcoin address, there is a small icon that looks like a QR code. This allows Joe to scan the barcode with his smartphone camera so that he doesn't have to type in Alice's bitcoin address (+1Cdid9KFAaatwczBwBttQcwXYCpvK8h7FK+), which is quite long and difficult to type. Joe taps on the QR code icon and acivates the smartphone camera, scanning the QR code from Alice's wallet, from the printed page she brought with her. The mobile wallet application fills in the bitcoin address and Joe can check that it scanned correctly by comparing a few digits from the address with the address printed by Alice.
In the input field for the bitcoin address, there is a small icon that looks like a QR code. This allows Joe to scan the barcode with his smartphone camera so that he doesn't have to type in Alice's bitcoin address (+1Cdid9KFAaatwczBwBttQcwXYCpvK8h7FK+), which is quite long and difficult to type. Joe taps on the QR code icon and activates the smartphone camera, scanning the QR code from Alice's wallet, from the printed page she brought with her. The mobile wallet application fills in the bitcoin address and Joe can check that it scanned correctly by comparing a few digits from the address with the address printed by Alice.
Joe then enters the bitcoin value for the transaction, 0.10 bitcoin. He carefully checks to make sure he has entered the correct amount, as he is about to transmit money and any mistake could be costly. Finally, he presses "Send" to transmit the transaction. Joe's mobile bitcoin wallet constructs a transaction that assigns 0.10 bitcoin to the address provided by Alice, sourcing the funds from Joe's wallet and signing the transaction with Joe's private keys. This tells the bitcoin network that Joe has authorized a transfer of value from one of his addresses to Alice's new address. As the transaction is transmitted via the peer-to-peer protocol, it quickly propagates across the bitcoin network. In less than a second, most of the well-connected nodes in the network receive the transaction and see Alice's address for the first time.
Andreas M. Antonopoulos
11 years ago