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These comments can be misleading and can confuse. By the end of this you should understand enough to participate in a dinnertime conversation about bitcoin, and not be mystified by the topic. Although people refer to bitcoin as a decentralised digital currency, I prefer to think of it as an electronic asset , to sidestep questions around which government backs it and who sets the interest rate, which are often a mental block in understanding bitcoin.
As an electronic asset, you can buy bitcoins, own them, and send them to someone else. Currently Sep there are around 14 million bitcoins that have been created, increasing by 25 bitcoins every 10 minutes or so, with an agreed limit of 21 million, the last of which should be created a little before the year Transactions of bitcoins from account to account are recognised globally in a matter of seconds, and can be considered securely settled within an hour, usually.
They have a price usually in USD, but can be against any currency, as with anything else , and the price is set by normal supply and demand market forces in marketplaces where traders come to trade, just like with oil or gold. Payments of bitcoins can be made from one person to another, irrespective of geographical location or jurisdiction. In situations where the normal financial system is inadequate, it can be a useful way of transferring value to anyone who has access to the internet.
This necessarily has some friction and fees: For a primer on blockchain please see A gentle introduction to blockchain technology. A screenshot of The Bitcoin Blockchain files on my computer. This file contains data about all the bitcoin transactions, that is payments of bitcoins from one account to another, that have ever happened.
The computers which store this file also run software that connects them over the internet to the other computers running the same software. This forms a network of computers that can talk to each other, relaying information about. When you make a bitcoin payment, a payment instruction is sent to the network. The computers on the network validate the instruction and relay it to the other computers.
After some time has passed, the payment gets included in one of the block updates, and is added to The Bitcoin Blockchain file on all the computers across the network. The distribution of data works on a peer-to-peer basis, rather than client-server. Peer-to-peer is like a gossip network where everyone tells a few other people the news about new transactions and new blocks , and eventually the message gets to everyone in the network. This is as opposed to client-server is more like a conventional organisation where a boss tells subordinates the news, and the boss is a central point of reference, and potential failure.
In banking you have accounts which keep pots of money separate; in bitcoin you have addresses. A bitcoin address is similar to a bank account number, with a few differences. Just like with bank accounts, if you want to receive a bitcoin payment, you need to tell someone your bitcoin address, so they know where to send bitcoins to. Similarly, Bitcoin wallets are apps that display all of your bitcoin addresses, display balances and make it easy to send and receive payments.
For a wallet to provide accurate information, it needs to be online or connected to a Bitcoin Blockchain file, which it uses as its source of information. The wallet will read the Bitcoin Blockchain file and calculate the balances in each address.
Bitcoin wallets let you create bitcoin addresses to receive incoming transactions and make outgoing payments, plus have other features that make them user friendly. Each bitcoin address has its own private key, which is needed to send payments from that address. Whoever knows this private key, including readers of this blog, can now make payments from the address. The private key is something you want to keep securely and never expose.
Because you can not change that private key to something more memorable, it can be a pain to remember. Most wallet apps will encrypt that key with a password that you choose.
Later, when you want to make a payment, you just need to remember your password. A payment is an instruction to unlink some bitcoins from an address you control, and move them to the control of another address your recipient. The instruction is then digitally signed with the private key of the address which currently holds the bitcoins. This digital signing demonstrates that you are owner of the address in question because only you know the private key. When the first computer receives the instruction, it checks some technical details, and some business logic details eg, does my payment attempt to create bitcoins out of nothing?
Have the coins being sent already been sent elsewhere? If these tests pass, then the computer relays it to others on the network, who each run the same validation tests. As well as passing information about transactions between each other, specialised nodes computers who form part of the network work to add these transactions, in blocks, to the blockchain.
In fact there is nothing complex about this process, and you can do this by hand without a calculator; it just deliberately takes many computational steps without shortcuts. Each computer performs a quick validation of the block, and they agree that the block and transactions conform to the rules, then they add the block to their own blockchain.
This block-adding happens roughly every 10 minutes on the network. See a gentle introduction to bitcoin mining for further detail. Due to this reward, bitcoin mining has got very competitive, with companies developing specialised hardware, called ASICs, which are very quick at the guessing game and associated number-crunching.
This is the speed that transactions take to be confirmed onto the blockchain. There are two parts to this. This independence and mutual validation of transaction and blocks is supposed to prevent any one person or entity from adding rogue blocks and dominating the network with their influence.
If any of the participants wins, the spoils are shared with the pool. This smoothing of cashflow works well for paying back capital needed to buy mining equipment.
As a consequence, the mining pool owners have greater power over the bitcoin network in terms of creating blocks, voting on protocol changes, and potentially re-writing recent ledger entries. If you can slip this transaction into your new blocks, then the old transaction will be invalid to the network. For more on the difficulties of changing the transaction list, read a gentle introduction to immutability of blockchains. When they sight the funds in their bank, they let you place orders to buy bitcoins from sellers.
The exchange acts as escrow, holding onto cash and bitcoins and then releasing them once the trade has been made. It is unknown what happened at Gox, but rumours include having private keys stolen, poor accounting practices, letting people trade first before sending collateral, etc.
What about the decentralised bit? Centralised means one point or source of control, and decentralised is where control is shared among participants. In bitcoin, participants are the validators of the transactions and creators of blocks. If enough of them decide to play by different rules, then the others will need to follow suit. Anyone can be validator, and get more votes, if they are prepared to pay for computing power, the costs of which are hardware, electricity, and support.
So instead of one single authority who can change the rules, the rules can only be changed by consensus of those validators. The validation logic what does a valid transaction look like? This code is open source, meaning that validators can see exactly what code or logic they are running. In theory, anyone can contribute to this reference implementation by uploading changes, though there are gatekeepers, people, who have the final say about what gets included.
In theory, anyone can write versions of this software, so long as they conform to the technical and business protocols of bitcoin. For example you could write you own version of the software, but with cooler graphics, or a more user-friendly interface. So the rules can be changed, as long as you achieve majority consensus another myth is that the limit of 21 million bitcoins cannot be changed.
It can be changed, in one line of code, assuming you can get the majority of network participants to agree to run it. You will probably have guessed by now that there is a lot more to bitcoin than I have been able to set out here. In giving a gentle introduction I have had to present some concepts at a high level, which in practice are complex and highly nuanced.
But as you read and learn more on this blog I hope to be able to take you into a more detailed understanding of bitcoin, mining , digital tokens , and the underlying blockchain technologies …. How come one transfers is instant but unconfirmed for 10 minutes until the miners approve it.
Transactions are broadcast instantly, and detected all over the network within seconds. However it takes time for the transaction to be bundled into a block, and mined. Like Liked by 1 person. Is the transaction considered valid before it is bundled into a block and mined? If not then transactions are not instant. Thanks for the article. Gradually I am putting this together in my head.
But to me you glossed over several points. How does the bitcoin originally get created? Who gets it first? Who keeps track of what bitcoins I have, or is that determined by some unique bit coin key or identifier for each bitcoin? Somebody got it first, then the ownership is traced through all the transactions?
There must be two sets of addresses, one for people and one for the bitcoin. I am not an expert in bitcoins, so what I am telling here might be wrong. If this is so, please would someone correct me! The algorithm allows it that the miner adds a transaction which creates This is similar as if the person who maintains the ledger would be allowed to add 10 bucks to his own account for every page completely filled out — but only exactly this amount!
This new money comes from nowhere, and is just added to the complete worldwide amount of bitcoins. The validating nodes must go back checking every transaction up to the first incoming transaction of this bitcoin address.
Otherwise, the validator would have to check at least part of the whole 50GB completely. This is in theory the same for ordinary bank accounts. Any person who has the access code to the bitcoin wallet or the bank account is able to spend the money.
The notable difference here is that a traditional bank is forced by regulations to verify the identity of a person opening a bank account, for bitcoins there is AFAIK no such regulation. So, noone knows who is the legitimate owner of bitcoins in an address. Yes there is the concept of a backlink — transactions refer to previous transactions.