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Bitcoin

Bitcoin is a virtual currency or online payment system, described by Satoshi Nakamoto in 2008 and introduced as free software in 2009. It consists in a P2P network of client nodes, making the coin decentralized, therefore the money is sent directly from the sender to receiver, without any kind of mediator like banks or any other central institution.

Bitcoin is based on cryptography (Hashcash proof-of-work) as a control for creating and transferring money, and consensus (choose the current block) of the members in the network and cannot be manipulated by any bank, government or private.

Some economic features

The system handles transactions, through its own mechanisms (mining), making the transaction fees low.

Bitcoin inflation is very low because the miners receive a small amount as payment for the work and the creation of bitcoins is controlled.

Finally the system is designed so the amount of bitcoins to be created is limited to 21 million of bitcoins, causing, once the last bitcoins created a process of deflation of the coin.

Bitcoin is a very volatile currency, therefore is experiencing very abrupt changes in value relative to others currencies in circulation. This is mainly due to the use of Bitcoin is still restricted.

BlockChain

It is a public accounting book, which gathers all the bitcoins transactions. A block chain is a transaction database which is transmitted to all the nodes of the network. And you can know which value (bitcoins) has a direction at any time.

A block contains some or all of the latest valid transactions that have not been added to any previous block. Each block has the hash code of the previous block. Thus a chain of blocks is created from the original (block genesis) to current and is guaranteed that all blocks are in chronological order.

There is no way to change a block after it has been some time in the chain, since all blocks behind it would have to be modified. This makes spending twice (performed twice a transaction with the same bitcoins) is very difficult, as each transaction is verified when is added to the chain of blocks. A single transaction is added to the last block of the longest chain. The length of a string is the combination of difficulty of that chain, not the number of blocks.

For each block in the chain, there is only one way to the genesis block. However, there may be bifurcations from the original. This occurs in two situations: when two blocks are created within few seconds and on the other hand, other bifurcations have happened to fix errors on very long chains. Also there is now way for two bifurcated paths combined reach (because every single block has only a reference to the previous block). In the first case, when the bitcoin client changes to another longer string, all valid transactions of the short chain are added to the longer and are included in another block. Therefore, the shorter chains are invalid and are not used for anything.

The blocks also contain the answer to a mathematical problem that is hard to solve. The answer to this puzzle is unique for each block and blocks cannot be added to the network without this answer. Although the problem is difficult to solve, once the answer is known, it is very easy for the rest of the network to confirm its validity.

Mining

Mining is therefore to add blocks to the chain, namely to confirm transactions made so far. Miners are in charge to solve the problem mentioned before. The problem consists in generating a valid hash code for the block in question. For a given block there are several hash codes, all below a target (256 bit string) and it is enough to find one of them. The target measures the difficulty of the problem, because the smaller a target, the more difficult to find the hash code of the target. This difficulty is readjusted automatically every 2016 blocks, approximately two weeks, so that on average 10 minutes are required to generate a block.

Each time a block is generated, the miner who has generated it receives an amount of bitcoins, that started as 50 in 2009 and every four years is halved (shifting one bit to the left) . So in this manner creating bitcoins is limited to 21 million. Miners can also receive a reward from those who have made transactions.

Mining is not only the way by which currencies are added to the system, but it is also the way to build a solid and secure system.

There are different types of mining, depending on the hardware used to "mine": CPU, GPU, FPGA or ASIC.

Transactions

Transactions of bitcoins are a section of signed data that is transmitted to the network. Transactions are not encrypted, so it is possible to find and see them. To make a transactions, users have a wallet of bitcoins. It contains "private keys" that allow them to spend bitcoins located in the block chain and see the total balance of bitcoins it controls.

To perform a transaction one needs the private key, the public key, which is used as bitcoin address (where the bitcoins are sent to) and the signature, which is a mathematical mechanism to prove that one owns it, through the private key . The public key is what allows any user to view the transaction.

How is a transaction made? The sender uses the private key to sign the transaction. Afterwards, the transaction is transmitted to all network nodes. It is confirmed once it has been added to the block chain. Encryption allows customers to easily verify it. Without the private key it is not possible to perform transactions, so it is very important to protect the wallet. This process makes transactions anonymous.

Conclusions

Bitcoin use is extending. Increasingly, more companies or institutions accept bitcoins as payment method, but also has many detractors. In some countries its use is restricted and in others it is even illegal.

Bitcoin has been criticized for many things, such as its high volatility, deflation that may occur at the end of the last bitcoins created, but we want to focus mostly on anonymity. Each user has his own public key and doesn’t need to have an account associated with personal data. This anonymity can lead to misuse of the coin.

In 2013 McAfee published a report of the use of virtual currencies like Bitcoin. "... stands out in his study the list of abusive practices and conceptual problems of managing the currency, especially the strong rumors that Bitcoin serves as a way to laundry money. Examples in this regard, the company highlights the shutdown by the FBI of Silk Road, a pioneer in the use of Bitcoin website, where hundreds of thousands of dollars from the sale of drugs where seized, and in which, apparently hitman services are also offered, shielded by the anonymity that allows "peer to peer" monetary system ... ".

External links

Official website of Bitcoin in [1]

Bitcoin wiki page in [2]

Spanish version

Bitcoin versión en español