Archive for the ‘Bitcoin’ Category

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Evolution of money has always been an integral part of the economy, be it the medieval or the modern time. The abstraction of money might has changed over time, but one thing remained. The Money! But every monetary system, including the one we have today has always been controlled by a central authority. It is your cash, yet you do not have control over it. What if you get to control your cash? What if you get to be your own bank? That is exactly what bitcoin is!

In 2008 a pseudonymous person or a group of people under the name Satoshi Nakomoto published a paper on The Cryptography Mailing list at metzdowd.com that gave an account of a decentralized electronic payment system eliminating the need for a trusted third party. Later in 2009, the proposed system was made live by using various technologies and concepts, by Satoshi. And the first ever virtual decentralized digital cash, the bitcoin was generated. Since 2008 up to the mid of 2010 Nakamoto was active on the Internet as well as in the Bitcoin space., after which he set up Gavin Andresen as his successor and disappeared ever since.

The fully implemented decentralized software based payment system, more specifically, the bitcoin protocol stack is made open source and is available for download, and can be run on various computing devices including your smartphone. This protocol is used by the bitcoin users to communicate with the bitcoin network. In other words, the units of digital currency or the bitcoins, are transacted over the bitcoin network using the bitcoin protocol.

The users can pretty much do anything with the bitcoin that they could do using the traditional currency. They can send or receive bitcoin, buy goods with bitcoin, pay for the flight tickets, do charity/donations, exchange for other currencies, and so on… The best part is, your transaction/payment need not wait for days or hours to be validated, but ten minutes is sufficient. Each transaction is validated by the computing devices or the “nodes” running the bitcoin protocol stack. These nodes collectively form the bitcoin network. Every node in the network is a “peer” to another and all are equal. The nodes running “full bitcoin protocol stack” use their processing power to look for a solution to a difficult problem. On an average, every ten minutes a new solution is found by a node which then validate the transactions that happened in the past ten minutes. The node is rewarded with the newly generated bitcoins. Every 10 minutes, brand new bitcoins are generated. The process is called mining, and the nodes are called miners. The valid transactions are then added to the blockchain database. The blockchain database is the distributed public global ledger. Every transaction that ever happened right from the beginning is recorded in this distributed ledger eliminating the need for an intermediate financial institution who serve as the trusted third party. With this, it also eliminates the transaction fee associated with the transaction as well.

The system’s security is ensured by features like encryption and digital signature. The bitcoins are held using a digital wallet. The wallet addresses are shared to receive bitcoins. And a private key held by the user that ensures the ownership is used to unlock the value of bitcoin to be spent or transferred. This lets you have complete control over your money. Since the transaction deals only with the use of wallet addresses masking the true identity of the person behind the transaction, makes bitcoin transaction pseudonymous ensuring privacy.

In the traditional system, the monetary base is controlled by the central bank that prints/issues currency at the rate to match the growth of the amount of goods that are exchanged. However the monetary base of the bitcoin system is fixed, and cannot be regulated. A total of 21 million bitcoins will only be ever generated. By now more than 75% of the bitcoin has been mined already. The demand for bitcoin will only increase its value, just like the metal, gold. And for the very reason, the virtual currency is called as “the digital gold”.

Bitcoin in a way, is the perfect abstraction of money since it is fast, secure, decentralized and ensures your privacy. Also, an interesting prospect is to take the system to the unbanked (roughly 2.5 billion adults). Bitcoin is not just a money, but it is the Internet of Money. The currency is not the actual invention but the system is. Bitcoin is the first application built on this system, and will not be limited just to bitcoin.

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