What is bitcoin and how bitcoin works?

Bitcoin is a digital currency that operates complimentary of any central control or the management of banks or governments. Instead, it relies on peer-to-peer software and cryptography.

A shared ledger records all bitcoin marketings and copies are held on servers around the world. Anyone with a spare computer can set up one of these servers, known as a node. Concurrence on who owns which coins is reached cryptographically across these nodes instead of relying on a central source of trust like a bank.

Every transaction is publicly publicized to the network and shared from node to node. Every ten minutes or so these transactions are collected together by miners into a group called a block and added perpetually to the blockchain. This is the definitive account book of bitcoin.

In much the same way you would keep definitive coins in a physical wallet, virtual currencies are held in digital wallets and can be accessed from customer software or a range of online and hardware tools.

Bitcoins can currently be subdivided by seven decimal places: a thousandth of a bitcoin is known as a mill and a hundred millionth of a bitcoin is comprehended as a satoshi.

In truth, there is no such thing as a bitcoin or a wallet, just an agreement among the network about the privilege of a coin. A private key is used to prove ownership of funds to the network when making a transaction. A person could simply memorize their private key and need nothing else to retrieve or spend their virtual cash, a concept which is known as a “brain wallet”.

Can bitcoin be transformed into cash?

Bitcoin can be exchanged for cash just like any asset. There are numerous cryptocurrency exchanges online where people can do this but transactions can also be carried out in person or over any communications platform, allowing even small companies to acknowledge 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 world’s most stable nationwide currencies since escaping the gold benchmark, such as the US dollar and UK pound.

What is the purpose of bitcoin?

Bitcoin was created as a way for people to send cash on hand over the internet. The digital banknotes were intended to provide an alternative payment system that would operate free of paramount control but otherwise be used just like traditional currencies.

Are bitcoins safe?

The cryptography behind bitcoin is based on the SHA-256 algorithm designed by the US National Security Agency. Cracking this is, for all intents and purposes, impossible as there are more achievable private keys that would have to be tested (2256) than there are atoms in the universe (estimated to be someplace between 1078 to 1082).

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

In theory, if an attacker could control more than half of all the bitcoin nodes in their presence then they could create an agreement that they owned all bitcoin, and embed that into the blockchain. But as the number of nodes grows this evolves less practical.

A real problem is that bitcoin operates without any central authority. Because of this, anyone making an error in dealing with their wallet has no recourse. If you accidentally send bitcoins to the wrong person or lose your password there is a nonentity to turn to.

Of course, the eventual arrival of practical quantum computing could break it all. Much cryptography relies on mathematical calculations that are extremely hard for current computers to do, but quantum computers work very differently and may be able to execute 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 carried into the present.

All transactions are publicly broadcast on the network and miners bundle large collections of transactions together into blocks by completing a cryptographic calculation that’s extremely hard to generate but very easy to verify. The first miner to solve the next block broadcasts it to the network and if proven correct is added to the blockchain. That miner is then rewarded with an amount of newly created bitcoin.

Inherent in the 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. Roughly every four years the software makes it twice as hard to mine bitcoin by reducing the size of the rewards.

When bitcoin was first launched it was possible to almost instantaneously mine a coin using even a basic computer. Now it requires spaces full of powerful equipment, often high-end graphics cards that are trained at crunching through the estimates, which when combined with a volatile bitcoin price can sometimes make mining more expensive than it is worth.

Miners also choose which transactions to bundle into a block, so fees of varying amounts are added by the sender as an encouragement. Once all coins have been mined, these fees will continue as an incentive for mining to continue. This is needed as it provides the infrastructure of the Bitcoin network.

Who invented bitcoin?

In 2008 the domain name .org was bought and an academic white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was uploaded. It set out the theory and design of a system for a digital banknote free of control from any organization or government.

The author, going by the name Satoshi Nakamoto, wrote: “The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

The following year the software described in the paper was finished and released publicly, launching the bitcoin network on 9 January 2009.

Nakamoto continued working on the project with various developers until 2010 when he retreated from the project and left it to its own devices. The real identity of Nakamoto has never been revealed and they have not made any public statement in years.

Now the software is open-source, meaning that anyone can view, use or contribute to the code for free. Many corporations and organizations work to improve the software, including MIT.

What are the problems with bitcoin?

There have been several complaints about bitcoin, including that the mining system is enormously energy hungry. The University of Cambridge has an online calculator that tracks energy consumption and at the beginning of 2021, it was estimated to use over 100 terawatt-hours annually. For perspective, in 2016 the United Kingdom used 304 terawatt-hours in total.

Cryptocurrency has also been linked to criminality, with critics pointing out to it is a perfect pathway to make black market transactions. In reality, cash has provided this function for centuries, and the public ledger of bitcoin may be a tool for law enforcement.

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