How was bitcoin created

Why was Bitcoin created?

To some, the fact that Satoshi, the “inventor of Bitcoin”, is an unidentified person or group of people, raises some red flags. While their anonymity brings the benefit of piquing further interest, it also delegitimizes the technology in the eyes of others. This is why I think it is important to discuss what could have motivated Satoshi to create Bitcoin.

Question #4: Why was Bitcoin created?

Satoshi Nakamoto wanted to create a “trust-less” cash system.

Satoshi explicitly stated that the reason for creating this digital cash system is to remove the third party intermediaries that are traditionally required to conduct digital monetary transfers. Third parties incur significant costs for conducting these services; these costs are then passed on to end users and can restrict transactions below a certain size. Such costs include:

• covering back office expenses — the effort it takes to collect and reconcile transactional data;
• taking appropriate security measures — costs related to the risk of security breaches given that they are centralized repositories of sensitive data;
• and accounting for fraudulent activity — the costs associated with having to refund money in the case of fraud, among others.

Many of these costs are a fixed amount per transaction, regardless of the transaction’s size. However, since the profit garnered per transaction is largely a percentage of the size, the juice doesn’t justify the squeeze for processing smaller transactions.

In short, banks, card associations (like Visa), and other large incumbents own today’s electronic payments system and impose a lot of fees. (Visa alone generated over 13B USD in revenue in 2015.) Bypassing these players was certainly a motivating factor for creating Bitcoin. But, there is even more to it. In February 2009, Satoshi wrote the following on an peer-to-peer focused online forum:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

In addition to paying overhead costs, reliance on traditional electronic payments systems has other major implications. These implications require us to take a step a back and think about how our wider financial system functions and the role our government plays in controlling the monetary supply. We’ll focus on the two breaches of trust Satoshi mentions above (in reverse order).

1. Trusting Banks

When we leave our money in banks accounts (for them to transfer on our behalf), these deposits are not actually held there for us. Instead, deposits are used by banks to find opportunities for additional financial return and they are only legally mandated to keep a certain percentage of your money on hand — about 10% for larger banks. One such opportunity is offering lending products (ie. fronting someone else’s mortgage or car purchase) in return for the principal plus interest. Extending credit is not necessarily a bad thing. However, when you add in more players, more complex financial instruments and less transparency, it can lead to unsustainable levels of lending that result in significant losses when markets correct. (For instance, the Great Recession of 2008.)

To explain, let’s use the example of mortgages:

1. A bank originates a mortgage loan to a borrower. They collect information regarding the borrowers credit score, income, value of the loan in comparison to the value of the property, and more.

2. Mortgage information is then forwarded to the secondary mortgage market so that mortgages associated with a diverse set of borrowers, geographies and profiles can be pooled together to create an investable asset called a mortgage-backed security. During the crisis, this was primarily being done by large investment banks.

3. Credit rating agencies “grade” the security so that it is certified as being of a specific risk level ie. “AAA” means very likely the debt will be paid back. Think of it as a credit score for an investment product.

4./5. Pensions funds, hedge funds, and other investors, invest in these securities based on the ratings provided. By investing, they earn the interest payments made by borrowers which are forwarded from the originating bank.

6. Consumers are directly affected by the decisions of these these investors by being their clients, contributing to their pension funds, etc.

7./8. The investment bank issuing these securities, take out insurance to protect against the default of these products in case they are unable to deliver the returns promised to the investors. Moreover, these are the same insurance giants that provide you life, medical, and travel insurance, among other offerings.

The problem with this process is that at each step, parties are incentivized to take overly risky behavior because they are paid in fees to continue lending despite the quality of the underlying product. Banks get paid fees for originating loans which motivates them to be more lenient with their lending standards. Investment banks get paid fees for pooling mortgages together and offering private label mortgage backed securities to investors which leads to selling products they know can’t deliver. And credit rating agencies profit from keeping the business of those whose products they grade.

In the early 2000s, investment banks sold complex financial instruments based off of debt they knew could not be repaid. And when the insurers couldn’t cover the massive amount of default, the government threw the investment banks and insurance agencies a life jacket in the form of bailouts because these financial institutions were “too big to fail.”

This is a very oversimplified example to illustrate one of many ways that our wider financial system is inherently plagued with a moral hazard problem. Financial institutions are all incentivized to take on risky behavior because they do not have to shoulder the costs of possible system-wide failure by themselves. When things fall apart, the burden ultimately falls to consumers and taxpayers.

2. Trusting Central Banks

In addition to bailouts, central banks across the world also employed monetary policy to mitigate the wider economic downturn that was to result from the risk-seeking behavior of these financial institutions. Monetary policy encompasses measures, such as adjusting the lending rate between banks and the amount of money each bank should keep in reserve, that central banks can employ to essentially change the amount of money in circulation. The theory behind using monetary policy to help the economy deal with the impact of unhealthy financial swings related to credit, housing and equity markets, dates back to John Keynes in the 1930s.

Again, government intervention in regards to the monetary supply is not necessarily a bad thing. It can be argued that without increasing the monetary supply post-2008, the Great Recession would have resulted in even more economic turmoil and turned into a Great Depression 2.0. However, there can be other motivations for increasing the monetary supply at the expense of consumers. For example, governments can effectively “print” more currency to help pay off their debt instead of being more fiscally conservative. The U.S. has continued to raise the debt ceiling, in spite of fierce debate, and in 2016 the debt to GDP ratio reached a record high of 106%.

Over the longer term, increasing the money in circulation as a fix for other problems can result in serious economic consequences. Countries like Argentina and Zambia have been plagued with hyperinflation that has resulted in significant loses in quality of life. Moreover, it is in places where individuals cannot rely on the value of their nation’s currency that Bitcoin has the most promise to be used as a means for daily exchange.

Moving to a Trust-less Cash System

Embedded in the Bitcoin genesis block was a message that read: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

The message was the title of an article on the cover of The Times newspaper that day. Not only does it commemorate the day the block was generated but puts into perspective why Bitcoin was created.

Bitcoins are not issued by governments. The amount of bitcoins in circulation grows about every 10 minutes and will eventually reach a cap of about 21M BTC. Changes to the amount of bitcoin in circulation could only result from reaching majority consensus across participants, not the say of individual governments. Furthermore, you can store your bitcoin for yourself and remove the banks from taking custody of your funds and acting as powerful, risk-seeking middle men.

We are far from a reality where bitcoins are used ubiquitously as an alternative form of payment to fiat currencies issued by central banks. However, this was the libertarian ideal that inspired it. For now, bitcoins are treated as an emerging asset class. More on that next.

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Bitcoin

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Bitcoin is a decentralized digital currency created by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009. It does not rely on a central server to process transactions or store funds.
There are a maximum of 2,099,999,997,690,000 Bitcoin elements (called Satoshis, the unit has been named in collective homage to the original creator), which are currently most commonly measured in units of 100,000,000 known as BTC. There will only ever be 21 million Bitcoin (BTC) to ever be created.

As of January 2018, it is the most widely used alternative currency, now with the total market cap around 250 billion US dollars.

Bitcoin has no central issuer; instead, the peer-to-peer network regulates Bitcoins, transactions and issuance according to consensus in network software. These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain.

Bitcoins are issued to various nodes that verify transactions through computing power. It is established that there will be a limited and scheduled release of no more than 21 million BTC worth of coins, which will be fully issued by the year 2140.

Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services. As of February 2015, CoinJolt provided over 100,000 merchants and vendors accepted Bitcoin as payment. Research produced by the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using Bitcoin.

Internationally, Bitcoins can be exchanged and managed through various websites and software along with physical banknotes and coins.

Contents

Basic Concepts [ edit ]

Currency [ edit ]

Alice wants to buy alpaca socks which Bob has for sale. In return, she must provide something of equal value to Bob. The most efficient way to do this is by using a medium of exchange that Bob accepts which would be classified as currency. Currency makes trade easier by eliminating the need for coincidence of wants required in other systems of trade such as barter. Currency adoption and acceptance can be global, national, or in some cases local or community-based.

Banks [ edit ]

Alice doesn’t necessarily need to be in direct contact with bob in order for the funds to be transferred. She may instead transfer this value by first entrusting her currency to a bank who promises to store and protect Alice’s currency notes. The bank gives Alice a written promise (called a «bank statement») that entitles her to withdraw the same number of currency bills that she deposited. Since the money is still Alice’s, she is entitled to do with it whatever she pleases, and the bank (like most banks), for a small fee, will do Alice the service of passing on the currency bills to Bob on her behalf. This is done by Alice’s bank by giving the dollar bills to Bob’s bank and informing them that the money is for Bob, who will then see the amount the next time he checks his balance or receives his bank statement.

Since banks have many customers, and bank employees require money for doing the job of talking to people and signing documents, banks in recent times have been using machines such as ATMs and web servers that do the job of interacting with customers instead of paid bank employees. The task of these machines is to learn what each customer wants to do with their money and, to the extent that it is possible, act on what the customer wants (for example, ATMs can hand out cash). Customers can always know how much money they have in their accounts, and they are confident that the numbers they see in their bank statements and on their computer screens accurately reflect the number of dollars that they can get from the bank on demand. They can be so sure of this that they can accept those numbers in the same way they accept paper banknotes (this is similar to the way people started accepting paper dollars when they had been accepting gold or silver).

Such a system has several disadvantages:

• It is costly. EFTs in Europe it can cost up to 25 euros. Credit transactions may cost a significant proportion of the transaction in place.
• It is slow. Checking and low-cost wire services take days to complete.
• In most cases, it cannot be anonymous.
• Accounts can be frozen, or their balance partially or wholly confiscated.
• Banks and other payment processors like PayPal, Visa, and Mastercard may refuse to process payments for certain legal entities.

Bitcoin is a system of owning and voluntarily transferring amounts of so-called bitcoins, in a manner similar to online banking, but pseudonymously and without reliance on a central authority to maintain account balances. If bitcoins are valuable, it is because they are useful and limited in supply.

Bitcoin Basics [ edit ]

Buying Bitcoin [ edit ]

How to buy Bitcoin? There are many ways to buy Bitcoin cryptocurrency, with debit or credit card, PayPal, online on cryptocurrency exchange, with bank transfers and etc. It’s difficult to say what is the best way to buy Bitcoin. After the opening Bitcoin address-account you can start buying coins.

Buying and selling coins to individuals is carried on specialized sites, such as LocalBitcoins. User should select the country and the city in the special window, fill in the information on the number of coins and select the purchase payment method.

Seller should be chosen according to the grade level on the site. Purchasing Bitcoins at the unaccredited sites or from individuals is not recommended due to the high fraud risk.

Creation of coins [ edit ]

The creation of coins must be limited for the currency to have any value.

New coins are slowly mined into existence by following a mutually agreed-upon set of rules. A user mining bitcoins is running a software program that searches tirelessly for a solution to a very difficult math problem whose difficulty is precisely known. The difficulty is automatically adjusted regularly so that the number of solutions found globally, by everyone, for a given unit of time is constant: an average of 6 per hour. When a solution is found, the user may tell everyone of the existence of this newly found solution, along with other information, packaged together in what is called a «block».

Blocks create 12.5 new bitcoins at present. This amount, known as the block reward, is an incentive for people to perform the computation work required for generating blocks. Every 210,000 new blocks generated (roughly every 4 years), the number of bitcoins that can be «mined» in a block reduces by 50%. Originally the block reward was 50 bitcoins; it halved in November 2012 and then once more in July 2016. Any block that is created by a malicious user that does not follow this rule (or any other rules) will be rejected by everyone else. In the end, no more than 21 million bitcoins will ever exist.

Because the block reward will decrease over the long term, miners will some day instead pay for their hardware and electricity costs by collecting transaction fees. The sender of money may voluntarily pay a small transaction fee which will be kept by whoever finds the next block. Paying this fee will encourage miners to include the transaction in a block more quickly.

Bitcoin Mining [ edit ]

Bitcoin Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions (and a mining rig is a colloquial metaphor for a single computer system that performs the necessary computations for mining). This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.

Bitcoin mining’ is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.

The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Bitcoin Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a subsidy of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.

Sending payments [ edit ]

To guarantee that a third-party, let’s call her Eve, cannot spend other people’s bitcoins by creating transactions in their names, Bitcoin uses public key cryptography to make and verify digital signatures. In this system, each person, such as Alice or Bob, has one or more addresses each with an associated pair of public and private keys that they may hold in a wallet. Only the user with the private key can sign a transaction to give some of their bitcoins to somebody else, but anyone can validate the signature using that user’s public key.

Suppose Alice wants to send a bitcoin to Bob.

• Bob sends his address to Alice.
• Alice adds Bob’s address and the amount of bitcoins to transfer to a message: a ‘transaction’ message.
• Alice signs the transaction with her private key, and announces her public key for signature verification.
• Alice broadcasts the transaction on the Bitcoin network for all to see.

(Only the first two steps require human action. The rest is done by the Bitcoin client software.)

Looking at this transaction from the outside, anyone who knows that these addresses belong to Alice and Bobcan see that Alice has agreed to transfer the amount to Bob, because nobody else has Alice’s private key. Alice would be foolish to give her private key to other people, as this would allow them to sign transactions in her name, removing funds from her control.

Later on, when Bob wishes to transfer the same bitcoins to Charlie, he will do the same thing:

• Charlie sends Bob his address.
• Bob adds Charlie’s address and the amount of bitcoins to transfer to a message: a ‘transaction’ message.
• Bob signs the transaction with his private key, and announces his public key for signature verification.
• Bob broadcasts the transaction on the Bitcoin network for all to see.

Only Bob can do this because only he has the private key that can create a valid signature for the transaction.

Eve cannot change whose coins these are by replacing Bob’s address with her address, because Alice signed the transfer to Bob using her own private key, which is kept secret from Eve, and instructing that the coins which were hers now belong to Bob. So if Charlie accepts that the original coin was in the hands of Alice, he will also accept the fact that this coin was later passed to Bob, and now Bob is passing this same coin to him.

Preventing double-spending [ edit ]

The process described above does not prevent Alice from using the same bitcoins in more than one transaction. The following process does; this is the primary innovation behind Bitcoin.

• Details about the transaction are sent and forwarded to all or as many other computers as possible.
• A constantly growing chain of blocks that contains a record of all transactions is collectively maintained by all computers (each has a full copy).
• To be accepted in the chain, transaction blocks must be valid and must include proof-of-work (one block generated by the network every 10 minutes).
• Blocks are chained in a way so that, if any one is modified, all following blocks will have to be recomputed.
• When multiple valid continuations to this chain appear, only the longest such branch is accepted and it is then extended further.

When Bob sees that his transaction has been included in a block, which has been made part of the single longest and fastest-growing blockchain (extended with significant computational effort), he can be confident that the transaction by Alice has been accepted by the computers in the network and is permanently recorded, preventing Alice from creating a second transaction with the same coin. In order for Alice to thwart this system and double-spend her coins, she would need to muster more computing power than all other Bitcoin users combined.

Anonymity [ edit ]

When it comes to the Bitcoin network itself, there are no «accounts» to set up, and no e-mail addresses, user-names or passwords are required to hold or spend bitcoins. Each balance is simply associated with an address and its public-private key pair. The money «belongs» to anyone who has the private key and can sign transactions with it. Moreover, those keys do not have to be registered anywhere in advance, as they are only used when required for a transaction. Transacting parties do not need to know each other’s identity in the same way that a store owner does not know a cash-paying customer’s name.

A Bitcoin address mathematically corresponds to a public key and looks like this:

Each person can have many such addresses, each with its own balance, which makes it very difficult to know which person owns what amount. In order to protect his privacy, Bob can generate a new public-private key pair for each individual receiving transaction and the Bitcoin software encourages this behavior by default. Continuing the example from above, when Charlie receives the bitcoins from Bob, Charlie will not be able to identify who owned the bitcoins before Bob.

Capitalization / Nomenclature [ edit ]

Since Bitcoin is both a currency and a protocol, capitalization can be confusing. Accepted practice is to use Bitcoin (singular with an upper case letter B) to label the protocol, software, and community, and bitcoins (with a lower case b) to label units of the currency.

Bitcoin Halving [ edit ]

Bitcoin halving — is a process when every 210 000 blocks (approximately every four years) Bitcoin’s extraction complexity is increased (new coins begin to appear two times slower), and the reward for miners is reduced [1] .

Bitcoin price [ edit ]

The price of BTC token or Bitcoin is always chaining, however, BitcoinWiki gives you a chance to see the prices online on Coin360 widget.

Where to see and explore [ edit ]

You can directly explore the system in action by visiting Biteasy.com, Blockchain.info, Blokr.io Bitcoin Block Explorer or Bitcoin Block Explorer. This last site will show the latest blocks in the blockchain. The blockchain contains the agreed history of all transactions that took place in the system. Note how many blocks were generated in the last hour, which on average will be 6. Also notice the number of transactions; in just one hour there are between 6000 to 7000 transactions. This indicates how active the system currently is.

Next, navigate to one of these blocks. The block’s hash begins with a run of zeros. This is what made creating the block so difficult; a hash that begins with many zeros is much more difficult to find than a hash with few or no zeros. The computer that generated this block had to try many Nonce values (also listed on the block’s page) until it found one that generated this run of zeros. Next, see the line titled Previous block. Each block contains the hash of the block that came before it. This is what forms the chain of blocks. Now take a look at all the transactions the block contains. The first transaction is the income earned by the computer that generated this block. It includes a fixed amount of coins created out of «thin air» and possibly a fee collected from other transactions in the same block.

Drill down into any of the transactions and you will see how it is made up of one or more amounts coming in and out. Having more than one incoming and outgoing amount in a transaction enables the system to join and break amounts in any possible way, allowing for any fractional amount needed. Each incoming amount is a past transaction (which you can also view) from someone’s address, and each outgoing amount is addressed to someone and will be part of a future transaction (which you can also navigate down into if it has already taken place.)

Finally you can follow any of the addresses links and see what public information is available for them.

To get an impression of the amount of activity on the Bitcoin network, you might like to visit the monitoring websites Bitcoin Monitor and Bitcoin Watch. The first shows a real-time visualization of events on the Bitcoin network, and the second lists general statistics on the amount and size of recent transactions.

How many people use Bitcoin? [ edit ]

This is quite a difficult question to answer accurately. One approach is to count how many bitcoin clients connected to the network in the last 24 hours. We can do this because some clients transmit their addresses to the other members of the network periodically. In September 2011 this method suggested that there were about 60,000 users.

White Paper [ edit ]

Bitcoin WhitePaper (WP) is a document that helps your prospective customer make an informed decision in favor of your company or a specific product. If the document does not facilitate a decision, it may be anything but not WP. Speaking in the most understandable language, white paper is something between an article and an advertising brochure. The document contains quite useful information and at the same time leads to the fact that the best solution is to purchase a certain product or service.

You can read English (Original) Bitcoin White Paper here.

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