Sunday, December 3, 2017

What is Bitcoin and cryptocurrency?

Article written in June 2017 and published in December 2017

Crypto currencies are based on the use of cryptography, which is the practice of encoding messages for communication so that they are not understood by anybody who intercepts the communication. In the case of a currency, the coding is done so that another person who is on the network that uses the currency is not able to lay their digital hands on that held by the rightful owner. The procedure that is followed to ensure that all transactions with a currency unit are carried out only once and not ‘double-spent” is based on the implementation of a peer-to-peer network. Such a network is one which does not have a centralized server, in other words, all the systems in the network are peers. When was this model for a digital currency evolved?

Satoshi Nakamoto
Bitcoin was the first cryptocurrency. The Paper that specified the alogorithm and procedure for Bitcoin was written by Satoshi Nakamoto, whose identity is not known and it can an individual or an entity. Nakamoto presented the paper in 2009 and left the project in 2010. Bitcoin is run by all its users. The concept behind it also involves all users also known as peers working on its implementation.

Peer to Peer Model
The peer-to-peer model works through the involvement of the entire network of users in the production and utilization of the crypto currency. The core method is the application of a cryptographic hash function. This is a function that takes data of any size and converts it into a string of bits, with the string being of a fixed size. The procedure is called hashing. As laid out by Nakamoto, each transaction is hashed, i.e., represented by a fixed string of binary digits(bits), into an “ongoing chain.” This becomes a record that cannot be changed without the chain being redone. The chain that is thus created, termed as a block chain, is available with every user of the network.

Doing the math for confirming a bitcoin transaction
The process of hashing i.e., the conversion of network timestamps into bits, requires computing power which is supplied by each user. When the owner of a coin pays, the hash of the previous transaction is transferred along with a digital signature as well as a public key of the new owner of the coin. As each timestamp is used to create a hash and the ongoing hashes, the chain reveals the utilization of a coin in the first instance and so it cannot be used a second time by a rogue user.

Effort(energy) required
The confirmation of a transaction is called “Mining” and requires the utilization of a CPU. This requires scanning for a value so that the bit string conforms to certain specifications. The specification is that the bit string must have a number of zeros at its start. The calculations become exponentially tougher as the number of zeros are higher. The mathematical computation involved is for the identification of the right number that can be combined with the block can yield the bit string with the specified number of leading zero bits. The computation involves billions of calculations per second.

Proof of Work
After the calculation is completed by the CPU, which is termed as Proof of Work, the block is completed. The block is the cryptographic proof that the order of transactions is secure. When a transaction takes place, it is communicated to all nodes on the system. Every node then starts to gather new transactions into a block.

Creation of new Bitcoins
A confirmation might not be needed if the users know and trust each other. A single confirmation by a node of a transaction can suffice for smaller transactions whereas larger transactions would need six confirmations. The more confirmations there are, the lower are the risks. The average rate of addition of blocks to the chain is one every ten minutes. When a miner verifies a transaction, they get a reward in the form of newly-generated Bitcoins. When the number of Bitcoins reaches 21 million, issuance of new units will be stopped.

Spending the cryptocurrency
There are many types of wallets that can be used to store and transact. They are available in the form of mobile wallets, desktop wallets, hardware wallets and web wallets. The wallets needs to be kept secure and must have backups. If the wallet is on a user’s phone, it needs to be encrypted. Hardware wallets are devices that are built solely for bitcoin storage. In a user’s wallet, private keys will be stored. A transaction for spending the currency will be signed by the user with this private key. The person receiving the currency will have to provide an address, which is not used again for any other transaction. The spender has control over the selection of any fees that may be required for the transaction.

Buying Bitcoin
Bitcoin can be bought at exchanges dealing in it in exchange for other currencies. The denomination that is used is known as ‘satoshi’ with one Bitcoin equal to 100,000,000 Satoshis. One Bitcoin is represented by BTC.

Exchanges in India
·        BTCXIndia
·        Coinsecure
·        Unocoin
·        Zebpay

Advantages over normal currencies
·        No processing fees by a central authority
·        No other unwanted charges can be levied on a purchase
·        Individuals are insulated from fraud
·        A transaction cannot be reversed
·        Personal data is not required for a transaction
·        No delays on international transactions
Disadvantages are primarily about the volatility of the value of the currency.

Current value of bitcoin
Bitcoin has risen nearly 500 percent in the last year, and 50 percent in May of 2017. In June 2017, it had been maintaining a range of between $2000 and all time high of $2791. As more countries have begun to look closely at the crypto currency, there is an expectation that demand will be high in the coming days. The BTC value in India in June was around 178,000. The Government of India is currently seeking suggestions from the public on cryptocurrencies. Update: In early December BTC has risen to above $11,000 and in Indian Rupees is trading at 75200.

Competitors
There are many other crypto currencies in the wake of Bitcoin, with Ripple coming second. A prominent competitor is Ethereum which has grown rapidly from $8 at the beginning of 2017 to over $200 in May.

Last Word

Bitcoin has been projected to grow rapidly as is the case currently too. Its competitors are also all growing. However, volatility is a fundamental feature. It can be used as an alternate asset at the moment while not yet being at the level of a regular investment. People must avoid making any investments in Bitcoins with their primary cash and savings.

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