BITCOIN101
- 1. Bitcoin Wiki An Introduction to Bitcoin By Jeffrey Chen 1.What is Bitcoin? (Definition, history) 2. How is Bitcoin created? 3. Why use Bitcoin? Advantages: 4. Bitcoin Wallets (copied+pasted from coindesk.com) 1.Encrypt it 2.Back it up 3.Use multisig 4. Take it offline 5. How to buy Bitcoin? 6. How do Bitcoin transactions work? What does a transaction look like? How is it sent? Why must I sometimes wait for my transaction to clear? Are there any transaction fees?
- 2. 1.What is Bitcoin? (Definition and History) Bitcoin is a form of digital currency that is created and held electronically. It is a decentralized currency that is created by the computing power of nodes (users) connected to the blockchain network. The currency was first proposed in 2009 by a computer scientist by the name of Satoshi Nakamoto. One of the most important features of Bitcoin is that no single institution controls it and that it is not backed by any physical assets but rather mathematical proof. That means no single government can manipulate the currency rates by simply printing more cash or controlling the interest rates. Instead of printing currency, Bitcoin is created/mined when users use their GPUs/CPUs to solve a difficult mathematical puzzle. According to Satoshi’s programming, the blockchain will only allow 21 million Bitcoins to be produced in the lifetime of the currency, thereby creating a finite supply in the market. 2. How is Bitcoin created? Bitcoin is given to miners when they lend their computer power to extend the blockchain by hashing new transactions into a simpler computer format called SHA256. When a transaction is made, it is broadcasted to all nodes in the blockchain network. Each node then collects the new transactions and puts it into a block. The node then finds a proof of work for this block. The proof of work involves scanning for a value that when hashed with SHA256, the hash will begin with a number of zerobits. The average work required is exponential to the number of zero bits required and can be verified by executing a single hash. The hash is then packaged into the block and the block joins the long series of blockchains. Hashes have
- 3. some interesting properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. And while it is very easy to produce a hash from a large amount of data, each hash is unique. If you change just one character in a bitcoin block, its hash will change completely. In addition, miners also use the hash from the previous transaction stored in the blockchain to produce the new hash. Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block – and every block after it – is legitimate, because if you tampered with it, everyone would know. If you tried to fake a transaction by changing a block that had already been stored in the blockchain, that block’s hash would change. If someone checked the block’s authenticity by running the hashing function on it, they’d find that the hash was different from the one already stored along with that block in the blockchain. The block would be instantly spotted as a fake. The blockchain acts as a ledger of all transactions. All transactions details are recorded in the hash in the blocks. Once a transaction is made, it is non reversible and if anyone wanted to make any changes to the blockchain, he/she would need to undo all of the proof of work of all the blocks which would be physically unfeasible. 3. Why use Bitcoin? Advantages: ● Payment freedom - It is possible to send and receive any amount of money instantly anywhere in the world at any time. No bank holidays. No borders. No imposed limits. Bitcoin allows its users to be in full control of their money. ● Very low fees - Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. Additionally, merchant processors exist to assist merchants in processing transactions, converting bitcoins to fiat currency and depositing funds directly into merchants' bank accounts daily. As these services are based on Bitcoin, they can be offered for much lower fees than with PayPal or credit card networks. ● Fewer risks for merchants - Bitcoin transactions are secure, irreversible, and do not contain customers’ sensitive or personal information. This protects merchants from losses caused by fraud or fraudulent chargebacks, and there is no need for PCI compliance. Merchants can easily expand to new markets where either credit cards are not available or fraud rates are unacceptably high. The net results are lower fees, larger markets, and fewer administrative costs. For merchants using credit card charges, payments usually take up to a week or more to process. Whereas for ● *Security and control - Bitcoin users are in full control of their transactions; it is impossible for merchants to force unwanted or unnoticed charges as can happen with other payment methods.
- 4. Bitcoin payments can be made without personal information tied to the transaction. This offers strong protection against identity theft. Bitcoin users can also protect their money with backup and encryption. One of the most interesting implications of Bitcoin is the economic liberalizing of women in developing countries such as Afghanistan. Case in study: Social Justice in Afghanistan In Afghanistan, females are not treated as equal to Men and are watched closely by Men. It is fairly common for male family members to confiscate any money that girls earn out of the household as a sign of disapproval and for family use. In the book, Age of Cryptocurrency, there was a very interesting passage where the author depicted just how difficult it was for Afghan girls to have independent financial freedom. Even though Women are allowed to open bank accounts, but usually they were not allowed to leave the household without a male family member escorting them. Even if they made it out of the household alone, bank employees would inform other men that were around the bank facility that a lady had arrived to withdraw some money. The girls would then be robbed as soon as they left the bank building. The laws did not protect the rights and guaranteed safety for Women. That's why such acts of collusion were common and why it is so dangerous for a girl to go to the bank to retrieve her earnings. As the transactions and account numbers on the blockchain were anonymous, it is alot easier for girls working for online businesses and foreign companies to receive their payments in Bitcoin and liberalize them financially.
- 5. Excerpt from the Age of Cryptocurrency, Paul Vigna & Michael Casey. Questrom Library ● Transparent and neutral - All information concerning the Bitcoin money supply itself is readily available on the block chain for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent and predictable. ● *Decentralized and not directly controlled by government/economic factors. Opportunity for countries with weak and volatile currency. One of the countries where Bitcoin is growing popular because of its volatile currency. Case in study: Argentina currency, Pesos -’Trust is at the core of any system of money’. For any currency to be viable, be it a decentralized cryptocurrency issued by a computer program or a traditional “fiat” currency issued by a government, it must win the trust of the community using it. If citizens
- 6. don’t trust a government to represent their interests, they won’t trust its currency. So when given a chance, they will sell that currency and flee to another alternative (US dollar, gold,or some other safe haven). When this happens, such beliefs become self fulfilling. The loss of value in its currency depletes the government's financial resources, which leaves money-printing as the only means to pay its debts and ensure political survival. Pretty soon, the excess money in circulation further undermines trust, which can give way to a vicious cycle of spiraling inflation and plunging exchange rates. Argentina is a prime example of this broken relationship. A century of failure to resolve this issue meant that Argentina has been through many currency crisis and why it has fallen from the world’s seventh richest country at the start of the twentieth century to eighty in mid 2014. In Age of Cryptocurrency, the authors discussed in length about the failings of the Argentinian monetary system and how Bitcoin has started to become a popular alternative currency. In the book, we are introduced to Mike, who describes his experience of selling his house in Argentina through a ‘shady’
- 7. exchange house. When he lived in Argentina in 2009, inflation was pushing toward 30 percent a year but the government was openly lying about it, an act of bad faith that only made Argentines mistrust their currency more. People were slowly withdrawing Pesos, which forced the government to put restrictions on foreign currency purchases, which further undermined confidence in the national currency. Argentines increasingly relied on such ‘shady’ exchange houses called Casa de cambio because they offered more favorable exchange rates. The casa would take their newly obtained cash and credit their U.S. bank account. Heres an excerpt from the book. Its pretty interesting how much the confidence in Argentine Pesos has eroded that citizens have to rely on such illegal means to exchange currency. This is where Bitcoin is set to become a disruptor by becoming a replacement for weak and unstable currencies ; a trustworthy decentralized digital currency for use in developing countries. One of the most well known payment processors is BitPagos. They take dollars received by hotels and other tourism industry clients in Buenos Aires and deliver them bitcoins in return. Bitpagos is attractive to many businessmen in Argentina because it gives them a better exchange rate. Every dollar received from credit-card purchases has to be processed through the banking system where it
- 8. pays a rate of 8.15 pesos per dollar. Whereas with Bitcoin vendors, it was about 11.42 pesos per bitcoin after using the USD to purchase bitcoin, 40% better than the official rate. 4. Bitcoin Wallets ( From Coindesk.com) What can you buy with bitcoins: http://www.coindesk.com/information/what-can-you-buy-with-bitcoins/ Bitcoin wallets store the private keys that you need to access a bitcoin address and spend your funds. They come in different forms, designed for different types of device. You can even use paper storage to avoid having them on a computer at all. Of course, it is very important to secure and back up your bitcoin wallet. Well, to be absolutely accurate, you don't technically store bitcoins anywhere. What you store are the secure digital keys used to access your public bitcoin addresses and sign transactions. This information is stored in a bitcoin wallet. Bitcoin wallets come in a variety of forms. There are five main types of wallet: desktop, mobile, web, paper and hardware. You can read more about the different types of wallets here: http://www.coindesk.com/information/how-to-store-your-bitcoins/ Perhaps the question new users have are how do you secure your wallet and make sure no one steals your Bitcoin? 1.Encrypt it One way to protect your wallet from prying eyes is to encrypt it with a strong password. This makes it difficult to access your wallet, but not impossible. If your computer is compromised by malware, thieves could log your keystrokes to find your password. 2.Back it up If you have your private keys stored in one wallet, but you mislay that wallet or it gets corrupted, you will lose your keys. Backing up your wallet makes a copy of your private keys, but it's important to back up your whole wallet. Some addresses are used to store change from transactions, and may not be shown to you by default. Back up the whole wallet in several different places, and keep them safe from prying eyes. 3.Use multisig The number of services which support multi-signature transactions is increasing. Multi-signature addresses allow multiple parties to partially seed an address with a public key. When someone wants to spend some of the bitcoins, they need some of these people to sign their transaction in addition to themselves. The required number of signatures is agreed at the start when people create the address.
- 9. Since multiple signatures are needed before funds can be spent, the additional signatures could come from, say, a business partner, your significant other, or even from a second device which you own, to add a second factor to spending your coins. 4. Take it offline If you are too nervous to store your bitcoin keys digitally, for fear that they may be stolen by hackers, there is another option: ‘cold storage’. Cold storage wallets store private bitcoin keys offline, so that they can’t be stolen by someone else on the Internet. It’s a good idea to use cold storage for the bulk of your bitcoin fortune, and transfer just a little to separate bitcoin addresses in a ‘hot’ wallet with an Internet connection, making it easy to spend. That way, even if your mobile phone is lost, or the hot wallet on your notebook PC is erased during a hard drive crash, only a small amount of bitcoin cash is at risk. Many software bitcoin wallets feature a cold storage option. Or, you could go completely analogue, and simply use paper wallets for offline storage. 5. How to buy Bitcoin? http://www.coindesk.com/information/how-can-i-buy-bitcoins/ 6. How do Bitcoin transactions work? http://www.coindesk.com/information/how-do-bitcoin-transactions-work/ What does a transaction look like? If Alice sends some bitcoins to Bob, that transaction will have three pieces of information: ● An input. This is a record of which bitcoin address was used to send the bitcoins to Alice in the first place (she received them from her friend, Eve). ● An amount. This is the amount of bitcoins that Alice is sending to Bob. ● An output. This is Bob's bitcoin address. How is it sent?
- 10. 1. To send bitcoins, you need two things: a bitcoin address and a private key. A bitcoin address is generated randomly, and is simply a sequence of letters and numbers. The private key is another sequence of letters and numbers, but unlike your bitcoin address, this is kept secret. 2. Think of your bitcoin address as a safe deposit box with a glass front. Everyone knows what is in it, but only the private key can unlock it to take things out or put things in. 3. When Alice wants to send bitcoins to Bob, she uses her private key to sign a message with the input (the source transaction(s) of the coins), amount, and output (Bob’s address). 4. She then sends them from her bitcoin wallet out to the wider bitcoin network. From there, bitcoin miners verify the transaction, putting it into a transaction block and eventually solving it. Why must I sometimes wait for my transaction to clear? Because your transaction must be verified by miners, you are sometimes forced to wait until they have finished mining. The bitcoin protocol is set so that each block takes roughly 10 minutes to mine. Some merchants may make you wait until this block has been confirmed, meaning that you may have to make a cup of coffee and come back again in a short while before you can download the digital goods or take advantage of the paid service. On the other hand, some merchants won’t make you wait until the transaction has been confirmed. They effectively take a chance on you, assuming that you won’t try and spend the same bitcoins somewhere else before the transaction confirms. This often happens for low value transactions, where the risk of fraud isn’t as great. Are there any transaction fees? Sometimes, but not all the time. Transaction fees are calculated using various factors. Some wallets let you set transaction fees manually. Any portion of a transaction that isn’t picked up by the recipient or returned as change is considered a fee. This then goes to the miner lucky enough to solve the transaction block as an extra reward. Right now, many miners process transactions for no fees. As the block reward for bitcoins decreases, this will be less likely. One of the frustrating things about transaction fees in the past was that the calculation of those fees was complex and arcane. It has been the result of several updates to the protocol, and has developed organically.
- 11. Updates to the core software handling bitcoin transactions will see it change the way that it handles transaction fees, instead estimating the lowest fee that will be accepted.