Bitcoin explained in detailed
El Salvador, the only country to recognise Bitcoin as a legal tender, is planning to build an entire city based on the largest cryptocurrency Bitcoin, President Nayib Bukele announced to a gathering of Bitcoin enthusiasts on Saturday at Bitcoin Week in El Salvador. The city will be located along the Gulf of Fonseca near a volcano. Bitcoin city, as planned by the El Salvador president, will be laid out in a circle like a coin and in the city center will be a plaza that will be host to a huge Bitcoin symbol, according to a report by Reuters. It is worth noting that El Salvador is already running a pilot Bitcoin mining venture at another geothermal power plant beside the Tecapa volcano. The city would be built with attracting foreign investment in mind. Further, there would be residential areas, malls, restaurants and a port in the Bitcoin city, Bukele said.
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Bitcoin is the greatest scam in history
Many thousands of articles have been written purporting to explain Bitcoin, the online, peer-to-peer currency. Most of those articles give a hand-wavy account of the underlying cryptographic protocol, omitting many details. Even those articles which delve deeper often gloss over crucial points. My aim in this post is to explain the major ideas behind the Bitcoin protocol in a clear, easily comprehensible way.
Understanding the protocol in this detailed way is hard work. It is tempting instead to take Bitcoin as given, and to engage in speculation about how to get rich with Bitcoin, whether Bitcoin is a bubble, whether Bitcoin might one day mean the end of taxation, and so on.
Understanding the details of the Bitcoin protocol opens up otherwise inaccessible vistas. New financial instruments can, in turn, be used to create new markets and to enable new forms of collective human behaviour. Talk about fun!
This post concentrates on explaining the nuts-and-bolts of the Bitcoin protocol. To understand the post, you need to be comfortable with public key cryptography , and with the closely related idea of digital signatures. None of this is especially difficult. The basic ideas can be taught in freshman university mathematics or computer science classes. In the world of atoms we achieve security with devices such as locks, safes, signatures, and bank vaults.
In the world of bits we achieve this kind of security with cryptography. My strategy in the post is to build Bitcoin up in stages. We will have reinvented Bitcoin! This strategy is slower than if I explained the entire Bitcoin protocol in one shot.
But while you can understand the mechanics of Bitcoin through such a one-shot explanation, it would be difficult to understand why Bitcoin is designed the way it is. The advantage of the slower iterative explanation is that it gives us a much sharper understanding of each element of Bitcoin.
You may find these interesting, but you can also skip them entirely without losing track of the main text. On the face of it, a digital currency sounds impossible. If Alice can use a string of bits as money, how can we prevent her from using the same bit string over and over, thus minting an infinite supply of money?
Or, if we can somehow solve that problem, how can we prevent someone else forging such a string of bits, and using that to steal from Alice? These are just two of the many problems that must be overcome in order to use information as money. Suppose Alice wants to give another person, Bob, an infocoin. She then digitally signs the message using a private cryptographic key, and announces the signed string of bits to the entire world.
A similar useage is common, though not universal, in the Bitcoin world. But it does have some virtues. So the protocol establishes that Alice truly intends to give Bob one infocoin.
The same fact — no-one else could compose such a signed message — also gives Alice some limited protection from forgery. Later protocols will be similar, in that all our forms of digital money will be just more and more elaborate messages [1]. A problem with the first version of Infocoin is that Alice could keep sending Bob the same signed message over and over. Does that mean Alice sent Bob ten different infocoins? Was her message accidentally duplicated? Perhaps she was trying to trick Bob into believing that she had given him ten different infocoins, when the message only proves to the world that she intends to transfer one infocoin.
They need a label or serial number. To make this scheme work we need a trusted source of serial numbers for the infocoins. One way to create such a source is to introduce a bank. This bank would provide serial numbers for infocoins, keep track of who has which infocoins, and verify that transactions really are legitimate,. This last solution looks pretty promising. However, it turns out that we can do something much more ambitious.
We can eliminate the bank entirely from the protocol. This changes the nature of the currency considerably. It means that there is no longer any single organization in charge of the currency. The idea is to make it so everyone collectively is the bank. You can think of this as a shared public ledger showing all Infocoin transactions. Now, suppose Alice wants to transfer an infocoin to Bob.
A more challenging problem is that this protocol allows Alice to cheat by double spending her infocoin. And so they will both accept the transaction, and also broadcast their acceptance of the transaction. How should other people update their block chains? There may be no easy way to achieve a consistent shared ledger of transactions. And even if everyone can agree on a consistent way to update their block chains, there is still the problem that either Bob or Charlie will be cheated. At first glance double spending seems difficult for Alice to pull off.
After all, if Alice sends the message first to Bob, then Bob can verify the message, and tell everyone else in the network including Charlie to update their block chain. Once that has happened, Charlie would no longer be fooled by Alice. So there is most likely only a brief period of time in which Alice can double spend. Worse, there are techniques Alice could use to make that period longer.
She could, for example, use network traffic analysis to find times when Bob and Charlie are likely to have a lot of latency in communication. Or perhaps she could do something to deliberately disrupt their communications.
If she can slow communication even a little that makes her task of double spending much easier. How can we address the problem of double spending?
Rather, he should broadcast the possible transaction to the entire network of Infocoin users, and ask them to help determine whether the transaction is legitimate. If they collectively decide that the transaction is okay, then Bob can accept the infocoin, and everyone will update their block chain. Also as before, Bob does a sanity check, using his copy of the block chain to check that, indeed, the coin currently belongs to Alice.
But at that point the protocol is modified. Other members of the network check to see whether Alice owns that infocoin. This protocol has many imprecise elements at present. Fixing that problem will at the same time have the pleasant side effect of making the ideas above much more precise. Suppose Alice wants to double spend in the network-based protocol I just described.
She could do this by taking over the Infocoin network. As before, she tries to double spend the same infocoin with both Bob and Charlie. The idea is counterintuitive and involves a combination of two ideas: 1 to artificially make it computationally costly for network users to validate transactions; and 2 to reward them for trying to help validate transactions. The benefit of making it costly to validate transactions is that validation can no longer be influenced by the number of network identities someone controls, but only by the total computational power they can bring to bear on validation.
But to really understand proof-of-work, we need to go through the details. For instance, another network user named David might have the following queue of pending transactions:. David checks his copy of the block chain, and can see that each transaction is valid. He would like to help out by broadcasting news of that validity to the entire network.
However, before doing that, as part of the validation protocol David is required to solve a hard computational puzzle — the proof-of-work. What puzzle does David need to solve? Bitcoin uses the well-known SHA hash function, but any cryptographically secure hash function will do.
Suppose David appends a number called the nonce to and hashes the combination. The puzzle David has to solve — the proof-of-work — is to find a nonce such that when we append to and hash the combination the output hash begins with a long run of zeroes.
The puzzle can be made more or less difficult by varying the number of zeroes required to solve the puzzle. A relatively simple proof-of-work puzzle might require just three or four zeroes at the start of the hash, while a more difficult proof-of-work puzzle might require a much longer run of zeros, say 15 consecutive zeroes.
We can keep trying different values for the nonce,. Finally, at we obtain:. This nonce gives us a string of four zeroes at the beginning of the output of the hash.
This will be enough to solve a simple proof-of-work puzzle, but not enough to solve a more difficult proof-of-work puzzle. So if we want the output hash value to begin with 10 zeroes, say, then David will need, on average, to try different values for before he finds a suitable nonce. In fact, the Bitcoin protocol gets quite a fine level of control over the difficulty of the puzzle, by using a slight variation on the proof-of-work puzzle described above.
This target is automatically adjusted to ensure that a Bitcoin block takes, on average, about ten minutes to validate. In practice there is a sizeable randomness in how long it takes to validate a block — sometimes a new block is validated in just a minute or two, other times it may take 20 minutes or even longer.
Instead of solving a single puzzle, we can require that multiple puzzles be solved; with some careful design it is possible to considerably reduce the variance in the time to validate a block of transactions. Other participants in the Infocoin network can verify that is a valid solution to the proof-of-work puzzle. And they then update their block chains to include the new block of transactions. For the proof-of-work idea to have any chance of succeeding, network users need an incentive to help validate transactions.
The solution to this problem is to reward people who help validate transactions. In particular, suppose we reward whoever successfully validates a block of transactions by crediting them with some infocoins.
Modeling Bitcoin Price and Bubbles
Bitcoin explained: all you need to know about the crypto frenzy. The Sydney-based tech consultant says it's mainly because of her painful experiences growing up in Brazil in the s, as it transitioned from military dictatorship to democracy. Hyperinflation was in full swing as food, electronics and all types of consumer goods shot up more than 2, per cent each year. Shopkeepers were lifting their prices every week or even several times a week. For that reason, Ms Belotti regards bitcoin as "digital gold" — or an asset to protect her from the debilitating experience of watching her hard-earned money lose all its value almost instantly. Although Ms Belotti acknowledged this was a "very high risk strategy", she has no regrets because her overall investment has tripled in value since buying her first bitcoin years ago. Despite its extreme price swings, she says bitcoin is a lot more stable compared to the Brazilian currency she used to be paid in.
What is blockchain?
How exactly to categorize Bitcoin is a matter of controversy. Is it a type of currency, a store of value, a payment network, or an asset class? Fortunately, it's easier to define what Bitcoin actually is. It's software and a purely digital phenomenon—a set of protocols and processes. It is also the most successful of hundreds of attempts to create virtual money through the use of cryptography. Bitcoin has inspired hundreds of imitators, but it remains the largest cryptocurrency by market capitalization, a distinction it has held throughout its decade-plus history. Like standard currency, Bitcoin is produced and has processes and safeguards in place to prevent fraud and ensure appreciation in its value. The main building blocks of Bitcoin are blockchain, mining, hashes, halving, keys, and wallets.
What is bitcoin?
Explained: Everything you need to know about cryptocurrencies. AirAsia News. Adani Wilmar IPO. Nirmala Sitharaman.
Bitcoin: What is it, where can you use it and is it worth investing?
We use cookies to allow us and selected partners to improve your experience and our advertising. By continuing to browse you consent to our use of cookies. You can understand more and change your cookies preferences here. Bitcoin is one of thousands of cryptocurrencies also referred to as 'digital' or 'virtual' currency that aren't controlled by any country, treasury or central bank. Bitcoin was created in by an anonymous developer, who went by the pseudonym Satoshi Nakamoto, and hit the mainstream in following a rise in its value.
Bitcoin explained in layman's terms
The financial world can't stop talking about bitcoin. In recent weeks, the headlines of business journals and finance sections have covered everything from the importance of investing in bitcoin to how the bubble is about to burst within days of bitcoin futures hitting the stock exchange. To anyone on the outside, those words make no sense. Introduced in , bitcoin is an anonymous cryptocurrency, or a form of currency that exists digitally through encryption. It was invented to be unhackable, untraceable, and safe for investors.
Okay, Here's What You Actually Need to Know About Bitcoin
This op-ed was originally published by The New York Times. Bitcoin, the original cryptocurrency, has been on a wild ride since its creation in Then it fell to half that value in just a few weeks. Are cryptocurrencies the wave of the future and should you be using and investing in them?
Comments on these FAQs may be submitted electronically via email to Notice. Comments irscounsel. All comments submitted by the public will be available for public inspection and copying in their entirety. Note: Except as otherwise noted, these FAQs apply only to taxpayers who hold virtual currency as a capital asset. For more information on the definition of a capital asset, examples of what is and is not a capital asset, and the tax treatment of property transactions generally, see Publication , Sales and Other Dispositions of Assets.
When did you buy your first Bitcoin , register on Binance , or use the crypto wallet for the first time? It might feel like ages ago, but Bitcoin has been here for a mere ten years. Where will it be in the next decade? The public interest in Bitcoin and cryptocurrencies is growing every year. With mainstream media coverage, conferences, and even state-led implementation of crypto and blockchain, we truly are early. The research from Glassnode reports only around 23 million bitcoin users in the world. Seems a lot?
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