Bitcoin is a system of transferring bitcoins in the same manner as online banking transfers virtual dollars. The difference is that Bitcoin does not rely on a central authority to hold all accounts and account balances. Now bear in mind this currency is based on sha1 cryptography for security purposes. This was designed by the NSA—the same NSA that purposefully created backdoors into everything they designed. Now bearing in mind that potential for security breaches the value of bitcoins is that they are in limited supply and they are useful.
The creation of these virtual coins needs to be limited in order to give the currency value. The coins have to be mined into life, as it were, adhering to mutually agreed upon rules. A user runs software which searches for a solution to a math problem that is quite difficult. The difficulty of the math problem is precisely known. The difficultly is regularly adjusted in an automatic fashion so that there are a constant number of solutions found each hour: 6 solutions per hour. This means that anywhere around the world where people are mining for a solution only six will be found each hour. When a solution is found it is packaged into a block. A block represents 25 new bitcoins as of late. The amount—which is referred to as the block reward—is the incentive for people to do the hard computer work required finding new solutions and generating new blocks. Every four years the number of mined bitcoins in a block reduces by 50%. The original black reward which was halved at the four year mark in November of 2012 was 50 bitcoins. Any block which does not follow the rules is rejected by everyone. This means that overall there can exist no more than 21 million bitcoins. Due to the fact that the block reward decreases with time, miners will eventually pay for the electricity costs and hardware required to mine by collecting a transaction fee. The transaction fee is the only thing to encourage miners at this point in time to create more bitcoins.
Sending Payments with bitcoins
To guarantee—again take that word with a grain of salt—that people cannot spend someone else’s coins by creating a third party transaction in their name, Bitcoin relies on public key cryptography in order to make and to verify all online signatures. In the system, each person has an address that is associated with public keys and private keys. Only the user who has the private key can actually sign for an online transaction.
So is Mary wants to send John a bitcoin the following steps would be taken:
- John would send Mary his address
- Mary would add John’s address and the number of bitcoins she is transferring to a “transaction” message
- Mary would sign the transaction using her private key and announce the public key to verify the signature.
- The transaction would be broadcasted by Mary on the Bitcoin network for everyone to see.
Out of these steps, only two are required by people and the remainder can be handled by the client software.
Short Term Anonymity
The Bitcoin network provides almost excusive anonymity. There is no e-mail addresses used, no passwords, no user names, no accounts to set up. There is nothing required to hold bitcoins or to spend them. The balance is associated with an address, as well as a public-private key pair. The money is then in the hands of whoever has the private key and is able to use it to sign transactions. In addition, there is no registration required for the keys in advance because they are only used when a transaction is made. The parties conducting the transaction do not need to know the other person, like they would need a name and information in a store. The address is mathematically associated with a public key and would look something like this:
Each person may have multiple addresses like this with different balances, which is what makes it difficult to know how much money any single person has. In order to protect privacy, customers can generate new public-private key pairs for every transaction. This means there is no way to identify who last owned the bitcoins that a person receives in a transaction.
Because Bitcoin is a protocol AND a currency, capitalization and nomenclature can be confused. It is common practice to use “Bitcoin” to label the software and the community, and “bitcoins” to label the currency units. The uppercase “B” is for the software and the lower case “b” is for the currency.
It is hard to determine the number of people who use Bitcoin. One of the best approaches though is to count how many Bitcoin clients connected them to the network in any previous twenty four hour period. This is done because some clients will transfer information such as addresses periodically through the network, which helps to count the number of people who use it. For example, in September of 2011 it was estimated that there were sixty thousand users.