ABOUT BLOCK-CHAIN CRYPTO CURRENCY AND NFTS:
INTRODUCTION TO BITCOIN:
Bitcoin
emerged out of the 2008 global economic crisis when big banks were caught
misusing borrowers' money, manipulating the system, and charging exorbitant
fees. To address such issues, Bitcoin creators wanted to put the owners of
bitcoins in-charge of the transactions, eliminate the middleman, cut high
interest rates and transaction fees, and make transactions transparent. They
created a distributed network system, where people could control their funds in
a transparent way.
Bitcoin
has grown rapidly and spread far in a relatively short period of time. Across
the world, companies from a large jewellery chain in the US, to a private
hospital in Poland, accept bitcoin currency. Multi-billion dollar corporations
such as Dell, PayPal, Microsoft, Expedia, etc., are dealing in bitcoins.
Websites promote bitcoins, magazines are publishing bitcoin news, and forums
are discussing cryptocurrencies and trading in bitcoins. Bitcoin has its own
Application Programming Interface (API), price index, trading exchanges and
exchange rate.
However,
there are issues with bitcoins such as hackers breaking into accounts, high
volatility of bitcoins, and long transaction delays. Elsewhere, particularly
people in third world countries find Bitcoins as a reliable channel for
transacting money bypassing pesky intermediaries.
How to use Bitcoins?
We
can make bitcoin transactions as we do with our familiar fiat currencies. While
we use Bitcoin, the purchaser is actually referenced to our digital signature,
which is a security code encrypted with sixteen different symbols. The
purchaser decrypts the code with his device to get the cryptocurrency.
Therefore we can say that cryptocurrency is an exchange of digital information
that permits us to buy or sell goods and services.
The
transaction is secured and made trustworthy by running it on a peer-to-peer
network that is akin to a file-sharing system.
How does Bitcoin handle double spending problem?
For
digital cash system, a payment network necessarily should have valid accounts,
balances and transaction records. The biggest bottleneck common to every
payment network is the double spending problem which is the case when same
money is used multiple times to do transactions.
To
prevent double spending, all transactions have to be recorded and validated
every time in a central server where all the balance records are kept. However,
in a decentralized network, every node on the network has to do the job of a
server; it has to maintain list of transactions and balance records. Thus, it
is compulsory for all nodes/entities in the network to keep a consensus about
all these records. This was achieved by using the blockchain technology in
bitcoins.
So
we can say that bitcoins like other cryptocurrencies are mere token entries
stored in the decentralized databases that keep consensus of all balance and
account records. It is to be noted that cryptography is used extensively to
secure the consensus records. Bitcoins and other cryptocurrencies are secured
by math and logic more than anything else.
Bitcoins
and cyptocurrencies have gained recognition and adoption based on their
perceived value by their creators and users.
Bitcoin
works on the same concept, the
more people participate; the more value is created.
History of Bitcoins
The
first Bitcoin protocol and proof of concept was published in a Whitepaper in
2009 by a shadowy individual or group under the pseudonym Satoshi Nakamoto.
Eventually Nakamoto, who remained mysterious, left the project in late 2010.
Other developers took over and the Bitcoin community has since grown
exponentially.
While
Satoshi Nakamoto's real identity remains shrouded in mystery, it is on record
that he communicated extensively in Bitcoin's early days. Let us speculate on
questions like when he started working on Bitcoin, to what extent he was
inspired by similar ideas and what was the motivation for bitcoin.
Creation of the first bitcoin domain
It
is believed that Satoshi started coding Bitcoin around May 2007. He is said to
have registered the domain bitcoin.org in August 2008. Around that time, he
started sending emails to a few individuals he thought might be interested in
the idea of bitcoins.
In
October 2008, he publicly published a white paper that dwelt on the Bitcoin
protocol, and released the Bitcoin code as well. Then he stayed in contact for
about two years, during which he interacted actively in forums, communicated
with several developers and later he also submitted patches to the initial
code. He maintained the source code along with other developers, tackling
issues as they happened. By December 2010, as others had slowly taken over, he
quietly left the scene.
Entities
The
entities involved in the implementation and maintenance of Bitcoins are −
·
The Blockchain platform
·
Cryptographic algorithms
·
Bitcoin miners which are computers or
specialized machines that mint the currency and make possible transactions
·
People who participate in the
transactions and thus help to move the payment system
The
philosophy of Bitcoin, and in general, of all cryptocurrencies is that they are
distributed systems where there is no central entity that manages the
activities such as transactions, among others. It is a peer-to-peer (p2p)
system that operates at the level of participants.
Bitcoin Transactions
We
shall now see how a new block of bitcoin transaction is created.
A
bitcoin miner creates a block by using the following steps −
·
Gathering pending transactions,
preferentially those with transaction fees first, and then the free ones
·
Verifying the transactions for their
validity
·
Solving a hashing problem
According to the statistics, in October, 2015, blockchain.info site stated that, the average number of transactions per block was 411, and as of May 2018, the current number of pending unconfirmed transactions is around 2495.
Reward and
cost per bitcoin transaction
Assuming
that one bitcoin is worth $400, the reward of 25 bitcoins per block is worth
around $10,000, ignoring negligible amount of transaction fees. Taking average
number of transactions per second as 2, and the number of transactions per
block as 1200, the reward per transaction works out to $8.33. It is found that
the cost of electricity consumed in mining is close to the reward which makes
mining bitcoins not so profitable. The basic problem of mining as of now, is
the 1 MB limit on block size which makes it possible to have at most only 10
transactions per second.
Confirmation
of a bitcoin transaction
A
transaction is considered to have received n confirmations
if it has been published in a block in the block chain, and n-1 more
blocks have also been added. A transaction is normally considered
"confirmed" once it has six confirmations. Newly created Bitcoins are
considered confirmed after they have received about a hundred confirmations.
How does Bitcoin have value?
It
is the common consensus, belief and the perception that gives value to the
bitcoin. All the participants in this system have consensus on the following −
·
immutability and integrity of the
blockchain
·
security and validity of the payments
·
rules of the system
Bitcoin
was the first practical implementation of blockchain technology and is
currently the most significant triple entry bookkeeping system globally. In a
bitcoin ecosystem, access to entire source code is available to everyone always
and any one can review or modify the code. The authenticity of each transaction
is secured by digital signatures of the sending parties thus ensuring that all
users have complete control over sending bitcoins.
Thus,
leaving a little room for fraud, no chargebacks and no identifying information
that could be hacked resulting in identity theft.
Here
is a list of some of the entities who accept Bitcoins −
·
Wordpress
·
Namecheap
·
Microsoft
·
Dell Computers
·
Archive.org
·
Bitpay
·
Bitspend.net
Satoshi
Nakamoto released the first bitcoin software as open source code in January
2009. He later renamed it to "Bitcoin
Core" to differentiate it from Bitcoin
network.
Bitcoin
Core is a bitcoin implementation. It is a full Bitcoin client and is backbone of
the network which provides high levels of security, stability, and privacy. It
also assists network in relaying transactions. It requires at least 50 GB of
hard disk space and is not recommended for new Bitcoin users who can opt for
lightweight mobile or desktop wallets.
What is a Bitcoin full node?
A full node is a software program that fully validates
transactions and blocks. Most full nodes also assist the network by accepting
and validating transactions and blocks from other full nodes, and then relaying
them further to other full nodes.
Bitcoin
Core full nodes need to have certain requirements. If a node is run on weak
hardware, it may work − but with a host of issues. It will be an easy-to-use
node, if the following requirements are met −
·
Desktop or laptop hardware running
latest versions of Windows, Mac OS X, or Linux
·
About 150 Gb of free disk space,
accessible at a minimum speed of 100 MB/s
·
2 GB of RAM memory
·
A broadband internet connection with
upload speed of at least 50 kilobytes per second
·
Preferably, an unmetered connection, a
connection with high upload limits. It is common for full nodes on high-speed
connections to use 200 GB upload or more a month. Download usage is around 20
GB a month, plus an additional 150 GB the first time you start your node
·
6 hours a day of full node running
Bitcoin
Core can be downloaded from the site https://bitcoin.org
Apart
from downloading bitcoin client, we have to set up several accounts. Going
further in this tutorial, we will learn how to open accounts in bitcoin sites
and to create accounts in bitcoin wallets, bitcoin exchanges, bitcoin mining
sites, faucet sites, and sites that offer bitcoin tools and value added
services.
Java Installation
To
run a mining software like BitMinter
client, we need to have latest compatible
version of Java installed. BitMinter client can be downloaded from https://bitminter.com
To
install Java, you can follow these steps −
·
Go to www.java.com/download.
·
Click on the button "Free Java Download".
·
Click on "Agree and Start Free Download" button.
·
Select the version that is compatible
with your operating system.
·
Follow the onscreen instructions to
continue installing the software.
·
Once the installation is completed,
click on Finish button.
·
Continue on to the next step to set up
a miner.
Bitcoin - Blockchain Technology
It
is believed that Blockchain is a new age technology that is solution
waiting for a host of problems. There is no doubt that it is a new wonder in
the field of computing.
What is a blockchain?
A blockchain is
basically a perpetually growing list of records, called blocks.
These blocks are linked and secured by using cryptography. Each block generally
contains a cryptographic hash of the previous block along with timestamp and
transaction data. By its design, a blockchain does not allow modification of
the data.
It
is an open, distributed ledger that records transactions between different
parties efficiently and in a verifiable and permanent way. A blockchain, as
shown in figure below is typically managed by a p2p or peer-to-peer network
collectively following a protocol for communication between nodes and for
validating new blocks. Once recorded, the data in any given block cannot be
altered without consensus of the network majority.
In
case of bitcoins, the blockchain is a public ledger that records bitcoin
transactions. It is implemented as a chain
of blocks. Each block contains a hash of the
previous block up to the genesis block which is the first block of the bitcoin
blockchain. This is however achieved without any trusted central authority: the
working of the blockchain is performed by a network of communicating nodes
running bitcoin software. Transactions of the type payer A sends B bitcoins to
payee C are broadcast to this network using existing software applications.
Nodes
in the network validate new transactions, add them to their copy of the ledger,
and then convey these ledger additions to other nodes. Each network node stores
its own copy of the blockchain. Roughly every 10 minutes, a new group of
validated transactions, a block, is created, and added to the blockchain, and
then quickly published to all network nodes. This makes it possible for bitcoin
software to determine when a particular bitcoin amount has been spent, and this
prevents double-spending in a decentralized environment. It is noted that the
blockchain is the only place where bitcoins can be said to exist in the unspent
form.
Blockchain
technology has led to the development of new, digital currencies like Bitcoin
and Litecoin that are not issued or managed by government or any central bank
of a country. This frees individuals from any kind of control and
intermediaries like banking systems that are scam and subject to collapses. It
has also led to distributed computing technologies like Ethereum, which has
introduced smart contracts.
Blockchain
is a replicated, shared ledger technology that allows any participant in the
network to see ledger and make changes. It is open source, bringing down costs,
improving efficiencies, increasing accessibility, addressing exciting and
topical business challenges across a broad spectrum. Linux Foundation's
Hyperledger is a project developing an open source, open standards shared
ledger technology.
Nowadays,
consumers demand transparency regarding products and their making. Governments
require more information about corporate supply chains, with penalties for
non-compliance. In such scenario, blockchain technology promises to deliver
such expectations. It enables secure digital transfer of value or property
across supply chains.
Advantages of Blockchain Technology
The
following are the advantages of Blockchain Technology −
·
Transactions are now verifiable,
disallowing any party from making changes
·
Greater efficiencies are being achieved
through greater transparency
·
Consumers have been empowered to make
informed purchases
·
Now governments are able to procure
reliable information.
Many
experts believe that blockchain technology can be used in online voting,
crowdfunding and other emerging technologies and novel ideas. Major financial
institutions such as JP Morgan Chase are confident that cryptocurrencies can
lower transaction costs and make payment processing more efficient.
Bitcoin
is one of the most popular and successful implementations of blockchain
technology. It is an open source cryptocurrency that uses distributed peer-to-peer
computing. There is no need of a central authority to manage bitcoin network.
It was created by a person or group under the pseudonym of Satoshi Nakamoto. The transactions on this network are verified by
proof-of-work algorithms on computers running a mining software.
Cryptocurrency
is digital currency that uses cryptography to secure its transactions. It is
difficult to make counterfeit crypto currency because of this security feature.
A remarkable feature of any cryptocurrency, is the fact that it is not issued
by any central bank or government authority, making it immune to any government
manipulation.
There
are over 17 million bitcoins in circulation as of May 2018, with a total market
capitalization of over $140 billion. Bitcoin's success has given rise to a
number of similar cryptocurrencies called altcoins: Namecoin, Litecoin, PPCoin,
etc.
Pros and Cons of Cryptocurrencies
Cryptocurrencies
make it possible to transfer funds between parties and these transfers are
effected through the use of public and private keys as a means of security.
These fund transfers are carried out with nominal or zero processing fees,
allowing users to avoid the exorbitant fees charged by most banks and other
financial intermediaries for the transfers.
Apart
from the fact that prices of cryptocurrencies are based on supply and demand,
it has been found that the exchange rates of cryptocurrency fluctuate widely
due to a host of reasons.
The
anonymous feature of cryptocurrency transactions renders them vulnerable to
illegal transactions, such as money laundering, drug and weapons dealing,
terror funding and tax evasion by criminals. However, anonymity of transactions
has its own host of plus points. Cryptocurrencies are also considered by some
economists to be a passing phenomenon or a speculative bubble that can burst
any moment because of their virtual or digital nature. Bitcoin has indeed seen
some exponential surges and sudden collapses in value.
Cryptocurrencies
are also not totally secure from hacking. In Bitcoin's short life-span, the
currency has been subject to over 40 hackings, including few that topped $1
million in value. Still, many see cryptocurrencies with hope as a medium of
exchange that preserves value, facilitates easy exchange, is more liquid and
portable than bullion, and is outside the purview of central banks and
governments.
Through
many of their unique properties, cryptocurrencies allow exciting applications
that could not be provided by any traditional payment systems.
There
is no physical cryptocurrency, but balances are secured with public and private
keys. These balances are maintained on public ledgers, along with all transactions,
that are verified by a huge amount of computing power.
In
early 2014, the Inland Revenue Service of the US declared that all
crypto-currencies, including Bitcoin, would be taxed as property rather than
currency. It was stated that all gains or losses from such currencies held as
capital will be treated as capital gains or losses, while those held as
inventory will attract ordinary gains or losses.
We
have seen that bitcoins are becoming more and more popular and their usage is
increasing at accelerated pace geographically. We will understand this process
if we study different useful features of bitcoin that make them what they are.
Features of bitcoins
One
of the most direct benefits of Bitcoins is that they are out of purview of governments,
banks and other intermediaries who cannot interrupt user transactions or freeze
Bitcoin accounts. The users experience greater freedom vis-Ã -vis dealing in
national currencies. There cannot be inflation in case of bitcoins by printing
more money as in the case of fiat currencies. By design, the number of bitcoins
that can be minted is limited.
Since
there is no way to identify, track or intercept bitcoin transactions, one of
the major advantages of bitcoin usage is that taxes are not added onto any
purchases.
Bitcoin
transactions are relatively faster as compared to bank transfers in traditional
currencies. Bitcoin transactions are done with nominal or sometimes zero
transaction charges. These transactions are anonymous with no names involved.
Every transaction is a public record which anyone can see. Your private key is
the only link between you and your bitcoins. As long as the private key is
secure, your money is safe. It is very easy to send and receive bitcoins
because of ease of operation of bitcoin accounts.
Small
amounts of bitcoin that are used as alternative units are: millibitcoin (1 mBTC = 0.001 BTC), and satoshi
(1 sat = 0.00000001 BTC) which is a millionth of a biticoin in value.
You
can use different wallets and tools for transacting in bitcoins.
Drawbacks of bitcoins
Let
us examine the cons or drawbacks of bitcoins. These limitations of bitcoins
make them less attractive and makes us seek better options. We have to somehow
overcome or eliminate these limitations of bitcoins to make them user friendly.
·
Bitcoins are a new emerging currency
whose work is still in progress.
·
Their value is highly volatile and
unstable seeing wild fluctuations.
·
It is internet-based, without which it
cannot function.
·
It is totally virtual currency and
money can be lost due to computer breakdown or the absence or failure of a
backup.
·
Losing your private key can result in
losing your bitcoins.
·
There is no way that the transactions
can be reversed or cancelled once completed.
·
There can be misuse of anonymity of
bitcoin transactions for criminal activities.
·
The benefits of bitcoins are skewed
highly in favor of early adopters.
·
Bitcoin can be replaced with a better
similar product and there is uncertainty regarding its continuation over a long
period of time.
·
Governments can ban bitcoins and make
transactions in bitcoins difficult.
·
The slowness of transaction
verification is also an issue.
·
The current version of bitcoins is not
fit to handle very high volume of transactions.
The
process of creating or minting bitcoins is difficult to hack and this gives
security to bitcoins. Another layer of security is the provision that every
transaction has to be verified before being validated. This verification is
effected through "mining". Mining is a process where some high-level
computing like SHA256 decoding is done to verify transfers of bitcoins.
Bitcoins
are stored in a "digital wallet", which exists either on a user's
computer or on the cloud. The wallet is a type of virtual bank account that
facilitates users to send or receive bitcoins, pay for goods and services or
save their money.
How do bitcoin transactions work?
Every
bitcoin account consists of a public key which works like a bitcoin address and
a private key. Anyone can send you bitcoins if he/she knows your public key. To
spend bitcoins, you have to use your private key for authentication. Every bitcoin
transaction appears on the bitcoin network. The miners confirm the transactions
after verification to validate them.
Addresses
An
example of a bitcoin address is as follows −
73nRKoXJAUqKYYbzw6Nrqh9gW2p26zerpZ
There
are 2160 or about 1048possible
addresses.
The
corresponding private key is as given below −
5HuEupY3DNF87UypjFtXDTm4BVuAwZtAgYf94sMALPyakgafVnU
Private
keys are of 256-bit length. There are about 1077 possible
private keys.
How to send bitcoins?
In
the previous section we have seen how a bitcoin transaction works. Now, we
shall discuss how to send bitcoins.
To
buy some merchandise or pay for some services, you will have to send bitcoins
to the address of vendor. To receive bitcoins, you will have to share your
address with the vendor.
Following
is the process of sending bitcoins to someone −
·
Copy the vendor's address and open your
bitcoin wallet.
·
Click on the "Send coins" tab
and enter the address in the 'Pay to' field to which you want to send bitcoins.
·
If you have to send bitcoins to the
same person or a group several times, you can create a label so as to find them
in the address book.
·
Enter amount in the next field and
click send to complete the operation.
Confirmations
In
the mining process, all transactions are collected in a container called block.
A new block is created in about every 10 minutes. In case of small payments or
transactions with trusted peers, confirmations may not be necessary. However,
for large transactions to be considered safe, the norm is 6 confirmations.
Anonymity of
Bitcoin transactions
The
level of anonymity can be customized depending on the requirement. Every transaction
from one address to another address is public. The analysis of the transactions
through their addresses or public keys whose records are public is called
traffic analysis. The larger the transfer the easier the traffic analysis.
To
increase anonymity, mixing services are used. It is also advisable to create a
new public key or new address for every transaction to ramp up security and
anonymity. From the point of view of a user, Bitcoin is nothing but a mobile
app or software that makes available a personal Bitcoin wallet which allows a
user to send and receive bitcoins. However, at the backend, the Bitcoin network
shares a humongous public ledger called the "block chain". This
ledger carries the record of every transaction ever processed that makes it
possible for a user's system to verify the validity of each transaction.
The need of
consensus for compatibility
In
order to maintain compatibility with each other, all users of Bitcoins have to
use the software following the same rules. Bitcoin can only work correctly as
long as there is a complete consensus among all the users. Thus, it is
imperative that all users and developers maintain and protect this consensus.
Securing a
blockchain
Bitcoins
are not stored on your computer unless you host a node on the network. You
carry a clone of the ledger which is secure as each block is hashed before
being appended to the chain. This means, changing even one bit of any data on
the previous blocks changes the hash of the ledger which marks it as counterfeit.
Hash
function is an irreversible function that is used extensively in cryptography;
the output of this function is shorter than the input.
Validation
of bitcoin transactions is just a process of quickly checking the keys like
finding if the sender has the private key that can unlock any record in the
ledger/blockchain.
As
we have already discussed, Bitcoin is a virtual currency made up of 0s and 1s.
They are collected and stored in a software portfolio called a wallet.
A wallet identifies amount of cryptocurrency with unique addresses that are
used to send and receive money.
A
cryptocurrency wallet is a digital wallet that is used to store and transact in
different cryptocurrencies. The crypto wallet doesn't exactly "store"
the currency as real-world wallets do. Instead, it stores public and private keys which
help in sending and receiving money. Bitcoin owners save bitcoins in either an
online wallet or a paper wallet which are similar to a physical wallet. Wallet
holds keys to each bitcoin, securing them and preventing any fraud.
What are public and private keys?
The
public key is the address to which others can send you the money, while the
private key is that which you will use to send money to anyone. It is important
that ONLY you should know your private key; otherwise anyone who knows your
private key can steal your money.
You
should not lose or reveal your private key come what may. Otherwise, losing
your private key is similar to losing your money. You should use at least two
different techniques to save and store your private keys.
As
of now, let us discuss two methods of storage that can be used to store crypto
money; hot storage, and cold storage.
As
a recap, a wallet is used to −
·
Send and receive money as
cryptocurrency
·
Collect and store coins created by the
miner
·
Synchronize blockchain with all nodes
of the network
Opening
a wallet is fairly simple; one can download free and paid bitcoin wallets from
internet. Some deal only in bitcoins while others handle multiple cryptocurrencies.
A
Bitcoin wallet is simply an app, software, website, or device that manages
Bitcoin private keys for you.
Types of Bitcoin Wallets
There
are several types of wallets available in the market. They can be of several
types as follows
·
Hardware
·
Paper
·
Mobile
·
Desktop
·
Web
Paper
Wallets
A
paper wallet is a piece of paper on which the public address and private
address are printed, usually in the form of QR code. Public address is used to
receive bitcoins, and the private address is used to send or transfer the
bitcoins stored at that address. The paper wallet should be used securely and
not revealed or lost. The paper wallet can be generated by using services
like Bitcoinpaperwallet or Bitaddress, and then can be printed out.
Mobile,
Desktop and Web Wallets
These
are software apps available on mobile phones, desktops, laptops or websites
that allow bitcoin transactions.
For
those people who use Bitcoins frequently, paying for goods and services, a
mobile bitcoin wallet is a necessary tool. A mobile app runs on your
smartphone, has your private keys and allows making payments directly from your
phone.
A
full Bitcoin client would require access to the complete Blockchain ledger,
which needs several gigabytes of storage. Therefore, mobile wallets use
simplified payment verification (SPV) technology which works with very small
subsets of the Blockchain. In spite of being a convenient on-the-go solution
for Bitcoin transactions, mobile wallets are very susceptible to hacker attacks
and also if the mobile is lost, others can access the wallet.
Hardware
Wallets
A
hardware wallet is a physical electronic device to secure bitcoins.
The hardware wallet must be connected to your computer or smartphone, before
bitcoins may be spent.
The
three most popular and best Bitcoin hardware wallets are as follows −
·
Ledger Nano S
·
TREZOR
·
KeepKey
Hardware
wallets are the preferred choice if large amounts of bitcoins need to be stored
and are secure, reliable, and convenient. Bitcoin hardware wallets isolate
private keys from internet-connected devices that are vulnerable to hackers.
Your private keys are held in a secure offline environment on the hardware
wallet.
Hot Wallets
Hot
wallets are Bitcoin wallets that run on internet connected devices like a
computer, mobile phone, or tablet. Private keys are secret codes that hot
wallets generate on an internet connected device. As such we cannot say these
private keys are completely secure.
Hot
wallets are like your physical wallets which you use to store some cash, but
not your life savings. Hot wallets are useful if you make frequent and small
payments, but are not suitable to store a large amount of bitcoins.
Software
wallets allow us to send and receive bitcoins and are mostly free. There are
some paid software wallets which provide some extra value-added services.
Opening a Bitcoin Wallet Account
We
can go to sites like coinbase.org and sign up with our name, email id and phone
number. Opening a wallet account is like opening a bank account where we can
send, receive and store money in bitcoins.
In
Coinbase, we can create multiple wallets which is a great way to organize the
record of your expenses and savings. By default, there are following wallets in
Coinbase, namely, Bitcoin BTH
wallet, Bitcoin Cash BCH wallet, Ethereum ETH Wallet and Litecoin LTC Wallet. You have a wallet in US dollars as well so
that you can buy and sell the cryptocurrencies using US dollars.
Each
account on Coinbase is a bunch of addresses. New addresses are generated for
each transaction on Coinbase automatically and stay mapped with your account
forever and it is secure to reuse them.
Each
wallet account is associated with an address and QR code as displayed. For
example, selecting bitcoin wallet and then clicking on the BTC wallet address
shows below address along with its QR code.
We
can download bitcoin software client which might take a few hours to download
all blocks to our computer that now acts as a node in the network. We have to
ensure that there is enough bandwidth and storage for full block chain size
which is over 145 GB. It is also possible to use a wallet without downloading
the bitcoin client.
With
Bitcoins, the process of creating the currency is called mining. Bitcoin miners
use specialized software and hardware to verify bitcoin transactions and to
solve complex math problems and are compensated by a certain number of bitcoins
in exchange. This is how bitcoin currency is issued and anyone can mine
bitcoins. We can use mining to create or earn our own bitcoins. Presently, a
successful miner is rewarded with 25 bitcoins for every new block that is
created roughly for every 10 minutes. This mutually agreed value will halve
after every 210,000 blocks are added to the chain.
Bitcoin
mining involves verifying and adding transaction records to Bitcoin's public
ledger of past transactions or blockchain. The blockchain is used to confirm
transactions as having taken place to the rest of the network.
Bitcoin
nodes use the blockchain to legitimate or validate genuine Bitcoin transactions
and prevent double spending of bitcoins, that is, stop re-spend of coins that
have already been spent elsewhere.
Bitcoin
mining is willfully designed to be resource-intensive and difficult so that the
number of blocks mined each day by miners remains moderate and steady.
Individual blocks are also required to contain a proof of work to be considered
valid. This proof of work is verified by other Bitcoin nodes every time they
receive a block. Bitcoin employs the hashcash proof-of-work function for its
working.
The
primary goal of mining is to facilitate Bitcoin nodes to reach a secure,
tamper-proof consensus. Mining is also the mechanism used to introduce Bitcoins
into the bitcoin eco system: Miners earn (if any) transaction fees as well as a
"reward or bounty" of newly created bitcoins.
This
both serves the purpose of distributing new coins as well as motivating people
to secure the system.
Proof of work
A
proof of work is a piece of data which was resource-intensive and
time-consuming to produce so as to satisfy certain requirements.
Producing
a proof of work is usually a random process with low probability, and a lot of
trial and error is required before a valid proof of work is generated. Bitcoin
uses the Hashcash type of proof of work.
Additionally,
the miner is awarded the transaction fees paid by users. The fee is a sort of
incentive for the miners to include the transaction in their block. In the
future, the fees will make up a significant percentage of mining income.
There
are two main types of mining: Solo and Pool.
Solo Mining
Solo
mining is done alone or on your own.
With the configuration of a normal desktop or laptop, it would take years to
earn actual bitcoins as mining requires enormous computing power.
Pool Mining
The
second method we can use is pool
mining. It involves signing up for an account
with any one of the different pooling sites. Using their software and hardware,
these sites pool the mining efforts of a lot of people's computers. Every
person in the pool gets small number of bitcoins as his share as a reward. For
individuals, pooling is preferable over solo mining.
BitMinter
BitMinter is a bitcoin mining pool that aims to make it
easy for anyone to make bitcoins. It is one of the oldest pools. Since its
opening in 2011, over 450000 people have registered accounts with it. In the
earlier period, CPUs and GPUs were used for bitcoin mining. Now we need to have
specialized Application Specific Integrated Circuits (in short ASIC) machines
for bitcoin mining. The speed of these machines is given by their hash rate
which is presently of the order of tera hashes/second or T H/s.
ASICs
took over mining in 2013. Mining just one bitcoin with an ordinary PC would
take quite lot of time. You will need a 1 TH/s or faster ASIC machine to start
a small mining operation at your home.
Using BitMinter for Mining
Below
is the process to use BitMinter for mining −
Step
1 − First, we signup with BitMinter site using our google or yahoo mail accounts and
then confirm our mail id by clicking on the link in our mail received from
BitMinter.
Step
2 − We set up a Worker account with a worker name and worker password
besides the username created when creating BitMinter account. We link the
Bitminter Client to the worker account.
Step
3 − Then we log in by filling up account details as shown below.
Step
4 − After this by opening the BitMinter Client application, we get following console as shown below −
Step
5 − We press the Engine Start
button to start mining. We have to ensure that our machine clocks a hashrate
speed of atleast 25 million hashes/second or 25
M H/s.
Step
6 − We will also need to change a
few settings regarding automation. We can leave our machine on all day and all
night.
Step
7 − We can go to Settings > Options to change these settings. Automated devices
are a list of devices that you set so that they start automatically when the
software starts.
Step
8 − We will let our machine run at
night increasing the prospect of making more number of bitcoins.
Mining
secures the transactions by finding random strings that make the block to hash
to a value with lot of leading zeros. The more the zeros, the more difficult it
is to decrypt. Mining bitcoins does not mean finding new bitcoins; these are
awarded by the network for completing validation of all outstanding
transactions of a block and solving some complex math puzzle.
Ways to Earn Bitcoins
The
best way to earn bitcoins is to find and execute work paying in bitcoins. We
can purchase the bitcoins as well. Lastly, if we want to earn them the hard
way, we should go for mining. To mine bitcoins, we can buy some cheap hardware
on sites: ebay.
Cryptocurrency
exchange is where users can come together and trade in different
cryptocurrencies and fiat currencies. Online currency exchanges are websites
that are used for trading, that is, buying or selling bitcoins for dollars or
any other currencies like Euros, Pounds, Yen, etc. We can transfer money
through any online currency transfer services to trade in bitcoins on these
exchanges.
Exchanges of Bitcoin
The
following exchanges dominate Bitcoin market −
Bitfinex − Bitfinex is the world's #1 Bitcoin exchange
if trading volume in US dollars is considered. Here about 25,000 BTC are traded
every day.
Bitstamp − Bitstamp, founded in 2011, is one of the
oldest exchanges of Bitcoins. It is presently the second largest exchange in
the world based on USD volume, with around 10,000 BTC traded per day.
OKCoin − This bitcoin exchange is based in China but
trades in US Dollars.
Coinbase − This was the first regulated Bitcoin
exchange in the United States. About 8,000 BTC are traded daily on this
exchange.
Kraken − Kraken is the #1 trading exchange in Euros
handling nearly 6,000 BTC transactions per day.
Bitcoin
trading can be highly profitable for professional investors as well as
beginners. The market is new, highly fragmented and has huge spreads. It is
open to arbitrage and margin trading. Thus, it is possible for many people to
make money trading bitcoins.
Arbitrage in bitcoins
Arbitrage
is basically buying a security or asset like bitcoin in one market and simultaneously
selling it in another market at a higher price, making a profit from the
temporary difference in prices.
Margin trading in bitcoins
Margin
trading is the process in which a trader borrows money from the broker to
either buy or sell more stock or bitcoins than that trader would have been able
to with his funds. It is like a short-term loan that increases the leverage and
buying power of the trader.
Each
bitcoin bubble drums up a hype that puts Bitcoin in the news. The media
attention makes more people interested in bitcoins, and the price rises until
the hype dies down.
Trading in bitcoins
Trading
in bitcoins is simple as bitcoin is global currency and easy to send anywhere.
Bitcoin has very little barrier to entry. In many cases, even verification is
not required for trading in bitcoins. Because of steep increase in bitcoin
prices, investors and speculators are attracted to trading to make profits.
There
are no official bitcoin exchanges or official bitcoin price. This makes
arbitrage trading possible. Unlike other stock trading, bitcoin trading works
24/7.
Bitcoin
trading is exciting because of Bitcoin's wild price movements, its global nature,
and 24/7 trading. It is important, however, to understand and remember the
risks that come with trading in Bitcoins.
Types of
trading
When
we enter the trading system, there are two ways we work. One is trading on a
day-to-day basis or doing long term investing, where there is buying and then
waiting for their value to appreciate over time.
These
two strategies can be followed simultaneously by day-to-day trading in some
bitcoins while investing in some other bitcoins for long term gains. In both cases,
we have to open an account on one of the several crypto-currency exchanges.
Coinbase and trading
One
of the best options is to open an account on Coinbase, a safe and reliable
crypto currency exchange. On Coinbase, we can buy Bitcoin (BTC), Ethereum (ETH)
and Litecoin (LTC) currencies either by making a transfer in Euros, or by
direct purchase using a credit card. The fee for each transaction is a nominal
4%.
Coinbase
is extremely simple and intuitive, and this makes it the perfect choice to
start trading in important cryptocurrencies now on the market. mt.gox used
to be a popular Japanese exchange in bitcoins till a scam led to its closure.
In
this chapter, we shall learn bitcoin glossary which describes over 50 bitcoin
terms.
Address
A
bitcoin address allows us to send and receive bitcoins on the bitcoin network.
It is also the public key or address that is used to transact in bitcoins.
Altcoin
Altcoin
is a group of 'alternate' cryptocurrencies other than bitcoins. Examples of altcoins
include Ethereum, Litecoin and PPcoin.
Asic
An Application Specific Integrated Circuit (ASIC) is built specially to process the SHA-
256 hashing equations that are used in mining bitcoins.
Asic miner
An
ASIC miner is the latest mining hardware used in bitcoin mining. It is used to
calculate the SHA-256 equation faster than a CPU or a GPU. ASIC miners are
custom-built and connect to the network through a wireless or Ethernet
connection.
Bitcoin Price Index (BPI)
The Bitcoin Price Index, designed by Coin Desk, shows the average bitcoin
prices across the top global currency exchanges.
Bitcoin Whitepaper
The
Bitcoin Whitepaper dubbed as the Bible of the Bitcoin ecosystem, was submitted
by the currency's mysterious founder, Satoshi Nakamoto, in 2008. It gives a
detailed description of the bitcoin protocol, and is a good reference material
for newbies and experienced people alike.
Block Chain
This
chain contains the records of all bitcoin 'blocks' that have been mined since
the start of the currency. The chain is designed such that each block contains
the hash of the preceding block, which makes the chain secure against
counterfeit mining operations.
Block Reward
A
reward is given to each miner who completes a transaction block. It can be in the
form of coins or transaction fees; Bitcoin network currently rewards 25 coins
for each completed block. Once the threshold of blocks has been mined (which
currently stands at 210,000 blocks) the reward is halved; such an event as
described above is called halving. The next halving is due to take place in
2020. Then the reward would become 12.5 coins for mining one block.
BTC
BTC
is the abbreviation of bitcoin, similar to USD and GBP for US dollar and Great.
Bitcoin Client
This
is the software program that connects a device, whether a desktop computer,
laptop or mobile phone to the bitcoin network.
Confirmation
A
confirmation of a transaction is its successful hashing into the block of a
blockchain. It can take up to ten minutes, though larger transactions may
require up to 6 confirmations.
Coloured Coins
Coloured
coins is a proposed new feature of bitcoins that allows users to define their
own attributes of the currency. It is intended that users could mark a bitcoin
as a physical asset, which could then be exchanged as a token for other
property.
Coinbase
The
name of a bitcoin wallet operator that offers payment processing for merchants,
and acts as an intermediary in bitcoin exchanges.
Coin Age
A
coin's age is calculated by the product of the currency amount and the period
of time it has been owned.
Cryptocurrency
A
cryptocurrency is considered legal tender by consensus and is secured by using
cryptography based on mathematical formulas.
Cryptography
It
is the field where math formulas and algorithms are used to create the codes
that encrypt and decrypt information.
Double Spending
This
is the criminal act of spending the same bitcoins more than once. The user
completes a transaction using his bitcoins and then makes a second transaction
with some other party using the same bitcoins. So confirmation is necessary to
validate a transaction and prevent double spend. So zero-confirmation
transactions are risky as they could involve double spending.
Dust Transaction
This
is a transaction that has a record in the block chain but has very little
worth. Steps are being taken to minimise the number of dust transactions that
take place by introducing a minimum transaction amount.
ECDSA
ECDSA
is the name of a code and an abbreviation for Elliptic Curve Digital Signature
Algorithm. It is used in the Bitcoin protocol to sign transactions.
Escrow
An
escrow is a kind of third party online wallet that stores funds securely during
a transaction between two parties. It is used in cases where two parties cannot
transact bitcoins till certain conditions are met, and want to ensure that
their money is not 'stolen' digitally.
Faucet
A
faucet is the method of mining a certain number of coins when launching a new
cryptocurrency, and then giving these away in order to promote interest in the
new currency. There are several bitcoin faucet sites that give away very small
amounts of bitcoins to promote them
Fiat Currency
A
Fiat currency is another name for token money used across the world that has
been declared legal tender by governments and central banks and is not backed
by a physical commodity.
Fork
A
fork in a blockchain is said to occur when one group of miners starts hashing a
different set of transaction blocks. It can also happen when a new version of
the bitcoin client is introduced. A fork is deemed successful if it becomes the
longer version of the chain.
Genesis Block
The
original block in a chain.
GPU
This
is a graphical processing unit, as found in standard PC graphics card. As GPUs
are designed to process huge data at faster speeds in pixel-heavy computer
games, they are also perfect for processing calculations required in
cryptocurrency mining.
Hash
A
hash is the mathematical processing done during bitcoin mining. It is a complex
process that makes the currency secure and renders decryption very difficult
and alteration of the output detectable.
Hash Rate
Hash
rate counts the number of hash calculations done in a second. This generally
indicates how fast and successful a mining operation is.
Input
Input
shows where a bitcoin transaction has originated, and is generally a bitcoin
address, unless it is a generation transaction meaning that the bitcoin has
been newly-mined.
Litecoin
It
is a type of alternate crypto currency that uses the Scrypt hashing formula.
Megahashes/SEC
It
is the number of hashes per second measured in millions of hashes (a Megahash).
Market Order
A
market order can be placed at an exchange when buying or selling bitcoins
instantly, and at the prevailing market rate.
MBTC
A
small amount: one thousandth of a bitcoin (0.001 BTC).
Micro-Transaction
Paying
a very small amount as part of a transaction online, these are hard to execute
under traditional payment systems. It is like paying for a bag of snack with a
credit card.
Mining
Mining
can be done by anyone who wants to mint some new bitcoins for his wallet. For
this he should validate a block of outstanding transactions and solve
cryptographic equations using some hashing algorithms.
Node
Every
connected computer in the bitcoin network that relays transactions to other
computers is called a node.
Orphan Block
Any
block that was part of a discarded fork is known as an orphan block. This is
not part of the valid blockchain.
Output
The
output is the final address of a bitcoin transaction. It is quite possible that
there can many outputs for a single transaction.
Paper Wallet
This
is a physical record of public bitcoin addresses and their private keys. It can
be a piece of paper, and presents a safer way to store bitcoins that cannot be
hacked or corrupted.
Pool
A
group of miners working in tandem is called a pool. These miners pool their
work together to mine a block, and then share the reward accordingly. Mining
pools improve the chances of successfully mining a block.
PP Coin
PP
coin is sometimes known as peer coin or P2P coin. This is an altcoin that uses
a 'proof of stake' calculation apart from proof of work for validation of work
done.
Private Key
The
security of private key is important in keeping bitcoins safe. The private key
of an account is unique, and only the owner should know the private key. It is
usually a string that signs a digital communication hashed with corresponding
public key.
Proof Of Work
This
calculation is used to give reward for mining work done in bitcoins. It does
take a lot of time and effort to hash a block successfully, and this is
considered as a proof of work which is rewarded appropriately.
Public Key
A
public key is a bitcoin address, which is public or known or accessible to
everyone. When a public key is hashed with a private key it makes a digital
communication secure.
QR Code
A
QR Code is a graphic that contains a data sequence. QR codes are scanned by
mobile phones and other devices and are used in encoding bitcoin addresses and
in facilitating bitcoin transactions.
Ripple
Ripple
is a payment network on which users exchange any currency. Payments are done on
an 'IOU' basis and are based on trust. The network consists of nodes and
gateways operated by authorized people.
Satoshi
Satoshi,
the name of the creator of bitcoin, is also the smallest denomination of
bitcoin: 1 sat = 0.00000001 BTC.
Scrypt
A
proof of work system meant for altcoin miners; it is relatively simple as
compared to SHA-256; that is why altcoins using Scrypt are mined more than
those using CPU and GPU set-ups.
Signature
When
private and public keys are hashed together, they make a digital signature that
authenticates the originating address of a bitcoin transaction.
SHA-256
It
is the standard cryptographic equation that is used in the proof of work system
of bitcoin mining.
SPV
The
Simplified Payment Verification makes it possible for users to verify their
transactions without downloading the massively-sized full block chain. Here
users make by simply downloading the block headers only.
Transaction Block
The
transaction block is the record of transactions which are collated and hashed,
and then appended to the block chain.
Transaction Fee
Some
bitcoin transactions will be charged a small fee when sent across the network.
This fee is paid to the miner who has successfully hashed the block that
contains that transaction.
µBTC
Another
very small denomination of bitcoin; a µBTC is a 'microbitcoin'
1
µBTC = 0.000001 BTC
Volatility
The
fluctuations in price of bitcoin are defined as its Volatility.
Wire Transfer
A
wire transfer is a method of transferring bitcoin currency to and from a
bitcoin exchange. This transfer is done electronically, and can be secured to a
bank account anywhere in the world.
Zero-Confirmation Transaction
It
is a transaction where a vendor sells a product or service in return for a
bitcoin payment, yet the transaction cannot yet be confirmed by a miner or
added to the chain. This is where 'double spending' can happen.
Bitcoin - Applications
The
following is a list of applications of bitcoins
·
Bitcoins are being used to buy goods
and services as more and more stores across the world are accepting bitcoin
payments.
·
Bitcoin transactions provide a
customized level of anonymity and it is relatively difficult to trace their
trail. So bitcoins are being used to transact anonymously.
·
International payments can be made
easily and cheaply as bitcoins are not related to any country or subject to any
government regulation.
·
There is the freedom of the fact that
there is no need of permission from any authority for your transactions.
·
Bitcoins provide a way to transact
securely online as they use very strong cryptographic algorithms.
·
Users and businesses like bitcoin
payments because there are no credit card fees to pay.
·
Bitcoins can be as an investment,
expecting that their value will appreciate significantly in future.
·
Bitcoins can be used to gamble on
online sites like SatoshiDice, RoyalBitcoin, Bitzino, Peerbet, etc.
·
Bitcoins are being used to shop online
as increasing numbers of vendors are allowing bitcoin transactions. Users now
can make payments in bitcoins on their smartphones through bitcoin wallet apps.
·
Unlike credit card or bank payments,
there is no need to provide personal information to complete the transactions.
So the hassle of providing identity can be avoided.
Since
Bitcoin is a new emerging technology which is underway, unforeseen developments
can make its existence and continuation difficult. Concerning its security and
future, there are numerous questions which no one can answer. How far can we
trust Bitcoins? Are they a bubble that is going to burst? Are they a passing
phenomenon and a fad that would fizzle out over a period of time? Or are they
going to stay put and perhaps dominate other currencies in future?
As
of now, bitcoins are mostly unregulated, however this may change. Governments
are worried about losing taxes and control over the currency. They may bring
legislations to regulate bitcoin which may hugely impact the advantages that
bitcoins have over other currencies. The volatility of bitcoin prices is one
huge issue. The wild fluctuations in its index is sign of such volatility. In recent
years, bitcoin prices have risen exponentially and after some corrections have
dipped but still they are on the high side. Many expect that the price will
further increase.
Favoring Growth Factors
The
things that favor the growth of bitcoin adoption are as follows −
·
There are limited number of bitcoins.
·
The awareness about bitcoins is growing
and so their acceptance and adoption.
·
The number of bitcoin transactions is
increasing day by day.
·
A large number of wealthy people do not
want government's regulations on their wealth and would rather prefer storing
in bitcoins.
Next
halving is scheduled to occur in 2020. This will further decrease the rate of
supply of bitcoins while bitcoin usage would have increased manifold by 2020.
As of now, the number of bitcoin transactions is way behind the number of
credit card transactions and the former has to significantly increase to
realize the full potential of bitcoins.
Some
of the issues which have to be tackled to help bitcoin's growth are as follows
−
·
Bitcoin transaction time or the time
required to get confirmations is still on the high side as compared to credit
or debit card transactions.
·
The security of Bitcoins has become a
major issue. As the usage of Bitcoin is increasing, hacking of bitcoin wallets
and even exchanges has been more widespread.
·
As of now Bitcoins are too technical
for common people and are not so user friendly. It is difficult for people to
understand why bitcoin prices are so volatile, why transaction time is so high
and how they should safeguard their bitcoins.
Governments
of several countries including India are discouraging legal use of Bitcoins as
they understand that Bitcoin is a parallel financial system beyond their
control. However, countries like Japan, Australia and several European
countries have made Bitcoin legal as they realized that they cannot stop the
usage of bitcoins. Some countries have banned bitcoin exchanges. People are
using global exchanges to hide their transactions. Meanwhile India and China
have been discouraging Bitcoin transactions. China has tried to ban all Bitcoin
Exchanges in their country while India has not banned any exchange. Zebpay and
Unocoin are Bitcoin Exchanges that are under operation in India. They require
submission of KYC documents before executing any Buy or Sell transaction.
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