Bitcoin is a type of currency that is digital in nature and is also called by the name cryptocurency. The Bitcoin was created by an individual, who called himself Satoshi Nakomoto, in 2008 as open-source software. However, recently, Craig Steven Wright from Australia has made claims that he is indeed the creator of Bitcoins. He has purportedly proved his claim by using ‘signature’ Bitcoins that were associated with its inventor. Bitcoins are produced using a mathematical formula which is freely available to anyone who wants to use it.
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Bitcoin – How Different It Is from Normal Currency
Bitcoins are created by people running computers. It is becoming more popular and is increasingly being used by businesses in different parts of the world. It is created and maintained electronically and not printed like other currency bills. Bitcoins are mined through computers running in a distributed network.
However, Bitcoins may be used to make purchases online and also traded electronically much like other traditional currencies. Bitcoin’s most discerning characteristic is that it is decentralized. There is no centralized institution/authority that controls the currency. It can be transferred in a short period of time and the transaction fee is very low.
There is a cap on the maximum number of Bitcoins that can be mined. According to the rules that govern the production of Bitcoins, a maximum of only 21 million of them can ever be mined by its users. However, it is possible to divide the Bitcoins into smaller parts. The smallest part is called a Satoshi (named after its creator) and its value is one hundred millionth of a Bitcoin.
Bitcoin – Unique Characteristics
There are several unique characteristics that set Bitcoins apart from the traditional currencies.
Bitcoin is decentralized
One single authority or institution is not in charge of Bitcoins and, therefore, cannot devalue or cause a meltdown. Any machine that mines Bitcoins forms a part of the Bitcoin network wherein many machines work together. If one part of the network goes down, the other parts continue to work.
Bitcoin account is easy to set up
A Bitcoin address is very easy to set up and takes only a few seconds unlike traditional bank accounts. There are no questions asked and no fees to be paid.
It is pseudo anonymous
A single user can have any number of Bitcoin addresses and these are not linked to any kind of identifying information such as names or addresses.
Bitcoin transactions are transparent
The Bitcoin network of computers stores every transaction that has ever taken place since the inception of the cryptocurrency. The blockchain is where all of the transactions are stored and is like the general ledger in traditional banks.
A publicly used Bitcoin address will reveal the number of Bitcoins that are stored in the location. Some of the activities that cause the transaction results to appear vague are by not using the same Bitcoin address and not transferring large amounts frequently to a single address.
Transaction fee for Bitcoins is near zero
Transaction fees are near zero even for large Bitcoin transactions.
Bitcoin transactions are fast
Bitcoin transactions are processed very fast and are only dependent on the network processing time.
Bitcoins are Non-repudiable
Once Bitcoins are sent to another address there is no way that you can get them unless the receiver sends it back to you.
How Bitcoins Can be mined
In traditional currency systems, governments print more money whenever the requirement arises. However, when using Bitcoins, they are mined by computers that are in competition with one another. Bitcoin transactions are taking place all the time and a record of every transaction is made to figure out who has transferred how many Bitcoins. A list of transactions is maintained and is referred to as a block. The miners confirm these transactions and then write them on to a general ledger.
The ledger is thus a list of blocks and is called a blockchain. The blockchain is therefore very lengthy. A copy of the blockchain is made available to everyone who transacts with Bitcoins for the purpose of transparency and reference.
Though the blockchains are held digitally, miners keep it away from being manipulated and tampered with. Miners encrypt a block whenever a new one is created. They do this by applying a mathematical formula and encrypt it to result in a sequence of numbers and letters known as a ‘hash’. The hash is stored at the end of a blockchain.
It is difficult to decrypt the hash and check the data that lies hidden. Even if one character in the block is changed the hash is changed. Another interesting fact is that the creation of every hash involves the hash of the last block stored in the blockchain. This would reflect immediately whether the data was tampered with. This is the method that miners use for sealing or locking a block.
Any individual that is able to create a new hash is rewarded with 25 Bitcoins. The blockchain is updated with immediate effect and this is made obvious to all the users on the Bitcoin. This is the biggest incentive for the miners. However, to make it more tough for the miners, there are some rules that are to be followed when making up a hash. It has to appear according to specific rules, that is, it should be preceded by a specific number of zeroes. A miner cannot get away with creating just about any hash.
Miners should also take care not to use the transactions already present in a block while creating a hash. They should only change the data that they are using to create the new hash. For this purpose, another random piece of data called the ‘nonce’ is used. This data is used along with the transaction data to create a new hash. If the required end format is incorrect, the nonce is changed. Miners make many attempts to create a new hash by changing the nonce. All the miners in the network compete to produce the new hash.