BITCOIN The Digital Currency

• Bitcoin is a form of digital currency, created and held electronically. It is peer-to-peer system where transactions take place directly without any intermediary. It was introduced in the digital world in 2008 by Satoshi Nakamoto.
• There is no central issuing authority for bitcoin. This is the most important characteristic that makes it different from conventional money, that it is decentralized. The transactions are verified with the help of network nodes and recorded in a public general ledger called ‘Blockchain’ which takes bitcoin as unit of account. This ledger contains every transaction ever processed.
• The process of bitcoin generation is ‘Mining’. Anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service.

• New bitcoins are generated by a competitive and decentralized process called “mining”. Anyone can become a Bitcoin miner by running software with specialized hardware. It involves using software programs that follow a mathematical formula to produce bitcoins. A mathematical problem is linked with each block.
• Miners are constantly processing and recording transactions as part of the process of competing in a type of race. They race to ‘complete the current block’ in order to win Bitcoins software listens for transactions broadcast through the peer-to-peer network and performs appropriate tasks to process and confirm these transactions. Every time a miner solves a problem, a newly minted 25 BTC is awarded to the miner and enters the circulation. Bitcoin miners perform this work because they can earn transaction fees paid by users for faster transaction processing
• The reward associated with each block began at 50 in 2009, is now 25, and will halve every 4 years.
• The Bitcoin protocol is designed in such a way that new bitcoins are created at a fixed rate.
• A transaction is a transfer of value between Bitcoin wallets. Bitcoin wallets keep a secret piece of data called a private key, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. All confirmed transactions are included in the block chain.
• Each Bitcoin is defined by a public address and a private key, which are long strings of numbers and letters that give each a specific identity.
• Transactions are done using the public keys, the identities of the buyers and sellers are veiled to each other and to the public, even though the transaction is recorded publicly.
• A new block is added to the blockchain an average of once every ten minutes.

• Select the header of the most recent block and insert it into the new block as a hash.
• Solve the proof of work problem.
• When the solution is found, the new block is added to the local blockchain and propagated to the network.

• The hash of the submitted block’s header must be less than a “target”. Both the hash and the target are 256 bit integers.
• The block-header has a field called “Nonce”. The value of Nonce can be changed by the miner. When Nonce is changed, a new hash value is generated. This hash value may be below the target, and thus meet the acceptance criterion. If not, then the Nonce is changed again. This process continues until the target is achieved. This is a very computation intensive process, and guessing a value for Nonce is not feasible due to the nature of cryptographic hash functions. There is no shortcut and hence different values for Nonce are tried by the miners, until they stumble upon a value which will get the block accepted. The miners competition is ‘Who finds such a value for Nonce first?’.

• Peers accept a new block on the condition that, the hash of the submitted block’s header must be less than a “target”.
• The target is computed from a 32 bit field called difficulty (which is also stored in the block-header).

• Bitcoin is stored in ‘Digital Wallet’. The digital wallet is a virtual bank account that allows users to send/receive bitcoin, pay for goods or services. Digital
  Wallet come in a variety of forms:
  > Desktop
  > Mobile
  > Web
• Desktop-based wallets aren’t very useful if you are out on the street, trying to pay for something in a physical store. This is where a mobile wallet comes in handy. While online services that host your wallet won’t be able to access it, they are considered less secure as your money could potentially be lost if something catastrophic happens on their end. It is recommend using a local wallet for security reasons.

• The cryptographic puzzles get increasingly harder as more Bitcoins enter circulation. And the rewards are cut in half at regular intervals. In other words, there’s a gradual slow-down in the rate at which new Bitcoins enter circulation. There is a built-in limit of 21 million Bitcoins, meaning when these many have been mined, production will stop completely. At the current rate of creation, the final bitcoin will be mined in the year 2140.
• However, a single Bitcoin can be divided down to 8 decimals, and people can transact with fractions of Bitcoins, known as satoshis, so even if one Bitcoin is worth a lot, the system is still useful for very tiny transactions.

• Bitcoin is based on Mathematics unlike traditional currency which is based on physical properties including Gold and Silver. Bitcoins are produced using software programs that follow a mathematical formula.

• As payment for goods or services –
  > Example – A sells a bike to B. In the ledger, A’s bitcoin balance would increase and B’s bitcoin balance would decrease by the same amount.
• Purchase bitcoins at a Bitcoin Exchange.
• Earn bitcoins through competitive mining.

 Bitcoin Exchanges