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What Is Bitcoin And How Does It Work?

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Overview

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Liberty Dollar Coins

Bitcoin is a decentralized electronic currency, conceived in 2009 by a person who has assumed the name of Satoshi Nakamoto (even though the true identity is unknown). The name Bitcoin also applies to the free software designed by Nakamoto for the management of the aforementioned currency, as well as to the P2P (peer to peer) network which supports it. In contrast to the majority of other currencies, the functioning of Bitcoin is not dependent on a centralized institution, but on a distributed database. The software designed by Nakamoto uses cryptography to provide basic security functions, such as the guarantee that bitcoins may only be spent by their owner, and never more than once.

Bitcoin is one of the first implementations of the concept of cryptocurrency, and without a doubt, the most successful to date. Satoshi Nakamoto’s major achievement is the solution of the problem of double spending in a decentralized system, which had been a major cause for concern for economists and programmers alike. To avoid that one bitcoin is spent more than once by the same person, (in other words, to avoid fraud), the net uses what Nakamoto describes as a distributed time server, which identifies and sequentially orders the transactions, preventing their modification.

Even though bitcoins are sent instantly, and any operation may be monitored in real time, the confirmations shown on screen when using the bitcoin software represent the clearing process. The greater the number of confirmations is, the more remote is the possibility of being a victim of double spending. When it exceeds five confirmations by the network, a transaction is considered technically irreversible.

It is worth noting that to date a case of double spending is as yet to be documented, whilst it is true that a computer attack of this sort is possible in theory whenever the hacker controls 51% of the computing power which protects the network. However, deceiving the network long enough so as to carry out one single double spend would imply such a colossal investment (the computing power of the Bitcoin network is several times greater than that of the combined power of the 100 fastest supercomputers in existence), and such complex organization, that from an economical point of view, it would be infinitely more profitable to put those resources to work under the rules of the Bitcoin protocol.

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The majority of those who accept bitcoins are satisfied with one single confirmation. For small amounts, it’s event the  information which allows users to control the bitcoins in their possession may be stored in any electronic medium (personal hard drive, memory cards and sticks, CD, web mail box, etc.), or in web sites which offer “Bitcoin accounts”. It’s also possible to keep this information in non electronic media (printed on paper, for example) and it can even be kept in your head. Bitcoin ownership may be transferred through internet to anyone with a “Bitcoin address”, similar to the way an e-mail is sent to an e-mail address. reasonable to accept transactions instantly, even before they are confirmed by the network.

According to experts, thanks to Bitcoin’s cryptographic architecture, a transfer between Bitcoin addresses is far more secure than a transfer between bank accounts (and that’s not counting the risk implied by the mandatory third party intrusion within the banking system).According to experts, thanks to Bitcoin’s cryptographic architecture, a transfer

The history of all bitcoin movements remains stored in the block chain, a distributed data base which maintains a record of all transactions in each of the multiple nodes which make up the network. These nodes are nothing more than computers executing the Bitcoin software worldwide, and connected to each other via the Internet.

Monetary characteristics

The nature of P2P of the Bitcoin network makes it impossible to establish a centralized control of the whole system. This prevents the arbitrary increase of the quantity of coins in circulation (which would cause inflation) and any other type of manipulation on their value on the part of the authorities.

The Bitcoin software, (also known as “Bitcoin Client”) which is installed in users’ computers transmits each transaction to nearby nodes, which in turn propagate it throughout the network. Invalid transactions are refused by honest clients (those who comply with the protocol). As yet, most transactions may be carried out free of charge, but it is possible to pay a transaction fee so that miners prioritize (speed up) their processing.

With time, the total number of bitcoins in circulation will reach 21 million. Their supply grows as a geometric series (at a constant rate); thus, by 2013 half of the total supply will have been generated, and in 2017 ¾ of the total supply will already be in circulation.

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Bitcoins are divisible down to eight decimal, and potentially more, which removes the practical limitations to price adjustment in a deflationary context.

The Bitcoin economy is still small when compared to other economies that are already well established. However, all types of goods and services are currently being exchanged for bitcoins, and there are many web sites offering the exchange of almost every currency for bitcoins through different funds transfer systems.

What is the Outlook?

One possible failure scenario for Bitcoin is that of a worldwide governmental campaign against the software and the sites which accept bitcoins. But, given the nature of the system, the total elimination of Bitcoin (as that of any other P2P network), does not seem either technologically or economically viable.

Nobody knows for certain what Bitcoin’s destiny will be; the only thing we know is that the idea of a decentralized crypto-currency is here to stay.

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The Original Bitcoin Client Software

Why we have problems understanding how Bitcoin works

Even the most qualified people need to have the concept of how Bitcoin works explained to them at least two or three times before they actually understand it. The reason for this is that Bitcoin challenges a series of concepts which have rarely ever been questioned before, and which we need to unlearn before adopting better ones.

The effort, therefore, is doubled. In the same way as the theory of the universality of the four elements (air, water, fire and earth) hindered scientific progress for many centuries, the quantitative theory of money – and its corresponding monetary system managed by “specialists”, with a bank of banks at its centre – has had a devastating mental effect on both laymen and scholars alike.

The problem is that even knowing that Bitcoin is superior to any other monetary system, many people tend to prefer that which they are familiar with, rather than venturing into unknown territory. The eternal battle between the conservative – who supports the theory of “better the evil you already know” – and the adventurer – who would rather go for the “good that is yet to be known” – takes place within each individual. But once the legacy of misconceptions has been rejected, and the inertia of habit has been overcome, the way is all downhill from there for the adventurer, who will also pave the way for the conservative.

Which are these habits that are so ingrained that make Bitcoin appear as something implausible?

• We are used to seeing the act of paying as separate from the act of recording the payment. In fact, through Bitcoin nobody pays (nobody sends or receives bitcoins); what people do is modify balances in a sort of decentralized ledger. Thus, the act of paying is indistinguishable from the act of recording the payment.

. • We are used to thinking that the monetary system needs to be guarded by a privileged caste. The Bitcoin protocol does not protect someone or some group in particular, but the tool itself, and therefore all those who use it.

We are used to our bank accounts being linked to our identity. Bitcoin addresses are anonymous if their owners so wish.

• We are used to transactions that are known in detail only by those directly involved in them (plus the third party payment processor). In Bitcoin, information about all transactions is public and easily accessible.

• We are used to money as a receipt with more or less backing. With Bitcoin, the unit and the receipt are the same “thing” that is impossible to duplicate or to falsify.

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