Tuesday 24 October 2017

Bitcoin - The Internet of Money

Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. Today's market cap for all bitcoin (abbreviated BTC or, less frequently, XBT) in circulation exceeds $7 billion.
There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite its not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of other virtual currencies collectively referred to as Altcoins.
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What is Bitcoin?
  • Bitcoin is a digital asset and a payment system. It is commonly called a decentralized digital currency.
  • It was invented by Satoshi Nakamoto in 2009.
  • It is an open source software. This means, that no person, company or country owns this network just like no one owns the Internet.
  • The system is peer-to-peer, that is, users can transact directly without an intermediary like a bank, a credit card company or a clearing house.
  • Transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain.
Bitcoin Mining
Bitcoin Mining
  • Just like anyone can join the Internet, anyone can help to verify and record payments into the block chain. This process is called mining.
  • In mining, users offer their computing power.
  • Miners are rewarded with newly created bitcoins and transaction fees.
  • Currently, miners receive 12.5 bitcoins every 10 minutes. This halves every 4 years. The next halving will happen in mid-2020.

How Bitcoin Works

Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network, also known as "miners," are motivated by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. One bitcoin is divisible to eight decimal places (100 millionth of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places.
Bitcoin mining is the process through which bitcoins are released to come into circulation. Basically, it involves solving a computationally difficult puzzle to discover a new block, which is added to the blockchain, and receiving a reward in the form of few bitcoins. The block reward was 50 new bitcoins in 2009; it decreases every four years. As more and more bitcoins are created, the difficulty of the mining process – that is, the amount of computing power involved – increases. The mining difficulty began at 1.0 with Bitcoin's debut back in 2009; at the end of the year, it was only 1.18. As of April 2017, the mining difficulty is over 4.24 billion. Once, an ordinary desktop computer sufficed for the mining process; now, to combat the difficulty level, miners must use faster hardware like Application-Specific Integrated Circuits (ASIC), more advanced processing units like Graphic Processing Units (GPUs), etc.
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What is Blockchain? (a simple explanation)


What is a blockchain?
A blockchain is just a record, a ledger of all bitcoin transactions that has ever taken place.
It is similar to a ledger that a bank would maintain to record all transactions of their customers. However, that’s where the similarity ends. In a bank, the ledger is controlled by the bank itself. Only the bank can see the transactions. The bank has its own security and access system to secure the ledger and to enter transactions.
In the blockchain, a copy of the ledger file is shared between thousands of participants globally, also called miners. Even you can become a miner by simply downloading the open source bitcoin software. New bitcoin transactions are added in the blockchain by a consensus of a majority of the miners, explained below. People do mining because they receive new created bitcoins in return for their efforts. Once a transaction is entered in the blockchain, it can never be erased or modified.
Why is it called blockchain?
Imagine a physical ledger we used to maintain accounting records before computers. It used to a register. At the end of a fixed period, for example, a day, an accountant would typically check all the records, note the balances and then sign at the end of the page. This would mean that transactions till this page are now fixed and no new entries can be made in the past.
Similarly, in the blockchain, this period is fixed at around 10 minutes. Miners collect all the bitcoin transactions globally executed in the last 10 minutes. They then record it together and this is called a block.
In our physical ledger example above, each page is linked with the previous page with running totals. Similarly in the blockchain, each block is also linked with the previous block creating a chain of blocks and hence the name.
How does the blockchain work?
It would feel common sense that the only way to secure a ledger would be to trust a central authority like a bank or a credit card company. However the blockchain is an invention to securely maintain such a ledger without any such central authority but with a democracy in which miners win to do the right thing.
So miners collect all the transactions in the bitcoin network over the last 10 minutes. The miners then enter into a competition and a winning miner is declared. The miner who wins, creates the new block with all the new transactions. All the other miners then update their blockchain file to this new version and the competition starts all over again. The miner who wins is determined based on 2 conditions.
First, the miner who has the most common version of the blockchain. So for example, if a miner cheats and enters a wrong bitcoin transaction to benefit himself, he will have a minority version of the blockchain as no one else will have that transaction in their version. So he will lose.
Second, the first miner who will solve a complex mathematical puzzle will win. Solving this mathematical problem is a combination of luck and computing power. For example, in a lottery, the more tickets you have (computing power) the more your chances of winning. However, that does not guarantee a win. The miner with even 1 lottery ticket (very low computing power) also has a chance, though much lower than the miner with say, a 1,000 tickets (high computing power).
So the miner with the most common version of the blockchain and who first solves the mathematical puzzle wins, updates the chain and in return gets a reward of newly created bitcoins. Currently this reward is 25 bitcoins every 10 minutes. At today’s rate of about Rs 28,000 per bitcoin, that is about Rs 7 lacs.
Why are financial institutions excited about the blockchain?
Before the Internet, to provide for example, voice calling between India and the US would require a multi billion dollar company like AT&T to lay its own cable between the 2 countries and use it. Calls used to be very expensive because this infrastructure would be very expensive. With the Internet, a company like Skype can simply make an app and use the Internet to do voice calls. And now, forget voice calls, even video calls are free.
In the same way, banks, credit card companies and so on have to deploy infrastructure to secure their ledgers. This infrastructure has to be created and maintained by each company separately. And it is very expensive to do so.
Just like the Internet, these companies now have the option to record their transactions on the blockchain at a minimal cost. These transactions are recorded forever and they do not have to worry about its security. Hence, they have the opportunity to save billions of dollars.
Hence, they are excited about the technology looking to the potential it has for the financial ecosystem.

What is a private vs a public blockchain?
You must have heard about financial institutions wanting to create their own private blockchain. A private blockchain is a bitcoin style ledger but which does not use the bitcoin network and does not use bitcoins as its token to record transactions. They want to do this because this could be a better and cheaper way to secure databases than financial institutions currently do.
But the public blockchain which runs on bitcoins is far cheaper and more efficient and more secure. Private blockchains are like private intranets. Intranets have failed and over time, everyone has realized that it is far better to do everything on the ‘public’ Internet.
I believe it will play out exactly like this with private blockchains. In a short time, everyone will realize it is cheaper and ‘more secure’ to use the public bitcoin blockchain.
Can the blockchain work without bitcoin?
The blockchain powered by bitcoin can only work with bitcoin. And this is by far, the biggest and most secure blockchain the world currently has. To talk blockchain and bitcoin separately, as is the case recently, is a fallacy. For blockchain to be used for other applications, bitcoins must succeed in its original ‘motive’ first. For miners to secure the blockchain, the only incentive they get is bitcoins. For mining power to keep increasing, bitcoins demand and subsequently its price should keep increasing in value over time. Which means bitcoins needs to continue to fulfil its potential as a global currency.
Note: The above is an oversimplification of the way the blockchain works. There are some finer elements that are consciously avoided. The purpose of this post is to conceptually explain the technology to non techies.

BITCOIN TIMELINE
June 12, 2017
Reached an all-time high of $3,000.
June 2017
The bitcoin symbol ฿ was encoded in Unicode version 10.0 at position U+20BF.
May 20, 2017
The price of one Bitcoin passed $2,000 for the first time.
April 1, 2017
Japan passed a law to accept bitcoin as a legal payment method.
March 1, 2017
Value of 1 bitcoin surpassed the spot price of an ounce of gold for the first time.
January 2, 2017
Bitcoin tops $1,000 for first time in three years as 2017 trading begins.
December 2016
Bitcoin enjoys end of year price surge has hit a three-year high with each one now worth about $900.
October 2016
Swiss railway ticket machines to sell Bitcoin digital currency.
June 2016
Bitcoin hits two-year high ahead of key event trading at $703.
April 2016
You can now buy games on Steam using Bitcoin.
November 2015
The mysterious creator of bitcoin has been nominated for the Nobel Prize in Economics.
September 2015
Bitcoin is a Commodity according to The Commodity Futures Trading Commission.
August 2015
On August 8 2015, BitLicense came into effect in New York.
May 2015
First regulated bitcoin-based security began trading in Stockholm.
April 2015
Rand Paul became first Presidential Candidate to accept Bitcoin.
March 2015
Japanese e-commerce giant Rakuten Inc. accepts Bitcoin payments.
December 11, 2014
Microsoft announces that it will accept bitcoin on its platform.
October 31, 2014
Zebpay launches a simple bitcoin wallet with a mission to spread bitcoins to billions.
September 23, 2014
PayPal starts accepting bitcoin payments for merchants.
May 8, 2014
Federal Election Commission approves bitcoin donations to political committees.
January 9, 2014
Overstock accepts bitcoin.
November 22, 2013
Space travel becomes possible with Bitcoin.
Richard Branson’s Virgin Galactic begins accepting Bitcoin for space travel.
November 19, 2013
Bitcoin moves more money than Western Union.
Bitcoin transaction volume surpasses Western Union.
November 19, 2013
Bitcoin goes above $1000.
Bitcoin price surges to a record of US$1242 after Senate hearings.
May 2, 2013
First Bitcoin ATM unveiled.
The first Bitcoin ATM in the world is debuted in San Diego, California.
March 28, 2013
Market cap reaches $1 billion.
The total Bitcoin market cap passes US$1 billion.
December 20, 2012
Buysellbitco.in is launched.
Mahin Gupta launches India’s first Bitcoin Exchange.
August 20, 2011
Bitcoin Conference and World Expo.
The first Bitcoin Conference and World Expo was held in New York City, NY.
February 9, 2011
Bitcoin reaches parity with US dollar.
Bitcoin touches US$1.00/BTC at MtGox, reaches parity with the US dollar for the first time.
January 28, 2011
25% of total Bitcoins generated.
With the generation of Block 105000, 5.25 million Bitcoins have been generated, totalling more than 25 percent of the projected total of almost 21 million.
November 6, 2010
Market cap exceeds $1 million USD.
Calculated by multiplying the number of Bitcoins in circulation by the last trade on MtGox, the Bitcoin economy exceeds US$1 million. The price on MtGox reached US$0.50/BTC.
July 12, 2010
Bitcoin value increases tenfold.
Over a five day period beginning on July 12, the exchange value of Bitcoin increases ten times from US$0.008/BTC to US$0.080/BTC.
May 22, 2010
10,000 BTC spent on pizza.
The first, real-world transaction using Bitcoins takes place when a Jacksonville, Florida programmer, Laszlo Hanyecz, offers to pay 10,000 Bitcoins for a pizza on the Bitcoin Forum. At the time, the exchange rate put the purchase price for the pizza at around US$25.
October 5, 2009
An exchange rate is established.
New Liberty Standard publishes a Bitcoin exchange rate that establishes the value of a Bitcoin at US$1 = 1,309.03 BTC, using an equation that includes the cost of electricity to run a computer that generated Bitcoins.
January 12, 2009
The first Bitcoin transaction.
The first transaction of Bitcoin currency, in block 170, takes place between Satoshi and Hal Finney, a developer and cryptographic activist.
January 3, 2009
The Genesis Block is mined.
Block 0, the genesis block, is established at 18:15:05 GMT.
October 31, 2008
The white paper is published.
Nakamoto publishes a design paper through a metzdowd.com cryptography mailing list that describes the Bitcoin currency and solves the problem of double spending so as to prevent the currency from being copied.
2007
Satoshi Nakamoto… the legend.
According to legend, Satoshi Nakamoto began working on the Bitcoin concept in 2007. While he is on record as living in Japan, it is speculated that Nakamoto may be a collective pseudonym for more than one person.


















































































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