Bitcoin is a system of payment which was designed by Satoshi Nakamoto who published his design in 2008. He later made it an open-source software which meant that ‘Bitcoin’ was owned by nobody and could be used by anybody. It uses a one-to-one technology, which eliminates an intermediary source like banks and there is no central authority that monitors the transactions that take place.
How do Bitcoins work?
All transactions are recorded in a ‘public distributed ledger’ called a block chain. The block chain has its own unit of account called Bitcoin. The performance of these chains is maintained by a network of communicating nodes on which this software runs. Mining is a record keeping service where in miners keep the block chain complete, consistent and unalterable. They verify the transactions repeatedly and collect newly broadcast transactions into a new pool called the block. This new block has information that chains it to previous blocks, thus giving the name block chain.
The transactions are represented in the form: payer A sends M bitcoins to payee B.
Ownership with respect to bitcoins means that an individual can spend bitcoins associated with a particular address. In order to complete a transaction the payer needs to sign the operation with a private key. Loss of this key would mean that the individual will lose all the bitcoins they own and no other form of evidence will be recognized as ownership. In 2013, a user had lost 7,500 bitcoins worth $7.5 million (at the time) when he lost a hard drive that had his private key.
Every individual has a digital wallet. This wallet stores all the necessary information required to make a transaction. There are various types of wallets, for example, software wallets, physical wallets, online wallets and hardware wallets. Software wallets allow individuals to spend bitcoins and hold credentials to prove ownership. Online wallets are easier to use as the credentials are stored with the wallet provider online than with the user. Physical and hardware wallets keep credentials offline.
Though all the transaction data is made public; the identity of the owners of a particular bitcoin address is kept hidden. Individuals whose priority is privacy use the ‘mixing services’ that swap coins they own with coins that have different transaction histories.
The US treasury has called bitcoin virtual currency owing to its decentralized nature. Moreover, bitcoin became the first cryptocurrency in 2009. Since then it has been extensively used as a form of payment for goods and services. The use of bitcoin however, has many criminal links. Criminal activities are generally financed by black markets, theft and extortion. A Carnegie Mellon University (CMU) researcher estimated that in 2012, 4.5% to 9% of all transactions on all exchanges in the world were for drug trades on a single deep web drugs market, Silk Road. Child pornography, murder-for-hire services, and weapons are also available on black market sites that sell in bitcoin.
Despite this, several people see bitcoin as a platform for innovation. Since it is an open source software anyone can review the code, making it more efficient and advanced. It helps businesses minimize transaction fees, it has no cost of set up and there are no charge backs. The advantages seem to outweigh the disadvantages considering countries are ready to treat Bitcoin as regular currency.
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