This article seeks to encapsulate semantic, functional and empirical aspects of the most prominent crypto-currency, bitcoin, in two parts. The first part provides the conceptual idea, which includes definitions, features, merits, demerits and the terms associated with it. The terms are structured in tabular form, as a glossary which is a guide to understanding the remaining part of the article. The latter part breaks down the functioning of the bitcoin network. Along with that, the article also goes on to analyze differential policy regulations adopted by various countries on bitcoins. This is followed by the last subtopic, prospects of bitcoins and its potential to create a global economy.
We have been watching for quite some years how digitalization has turned synonymous to technological advancement, which according to great economist Solow, is the answer to persistent rise in income of any country. This urge to digitalization was not a minor influence on the emergence and flourish of what we call today, the cryptocurrency. A digital form of currency, very basic to the economy seems an innovation metamorphic, no less. But this is not enough to define cryptocurrency. Cryptocurrencies, are digital currencies or electrical waves converted into code lines, to contain monetary value. Strong cryptography (through advanced math) is the fundamental principle of the security and functioning of these currencies, as the word suggests.
Two intertwined properties which can give a clearer idea of cryptocurrency are: the peer to peer network and decentralized structure. There is no centralized agency, trying to control the production and supply of the currency. This might give rise to question about inflationary possibilities. This gets solved in the decreasing nature of production of cryptocurrencies. For instance, bitcoins are programmed in a way that their creation ceases by 2041. This does not mean the end of transactions, but the creation of new ones. Once any transaction is made, it can’t be faked or reversed by any means. The digital currency is a very fast mode of payment, combined with the fact that high level of anonymity prevails. These features have made the currency reliable and popular.
Cryptocurrency has its origin closest tied to that of Bitcoins. After the hustle of the 2008 financial crisis, a man with a supposed pseudonym, Satoshi Nakamato, created and published a Peer to Peer Electronic Cash system within which anyone could trade with its own currency called Bitcoins. Bitcoins are a form of cryptocurrency or digital cash. The last thing the creator intended was to rely on trust among people, so the ‘peer to peer’ network is secured by math and pure math.
As any other cryptocurrency, the primary and the most prominent feature of bitcoins is that it’s a decentralized system. There is no central bank or an authority to control the production and distribution of these coins. To briefly encapsulate this property of bitcoins, one can say that it is a democracy in which the fittest survives. For the people, by the people, of the people and meritocracy rules- odds are in favor of those who can crack the math.
There are no fees payable to set up an account in the bitcoin market and even for cross border transactions. This ‘free’ transaction feature doesn’t make it a sluggish system by any means though.
Complete transparency and anonymity are very hard to coexist, but they do in a bitcoin market. A person would not be aware of the names or addresses of people with who one is transacting. At the same time s/he is absolutely informed about every single transaction occurred in the history of bitcoins. An open book of all the bitcoin transactions is maintained with everyone. Anyone has access to the first ever transaction from the very recent one.
Bitcoin cash is a variant cryptocurrency which forked from bitcoins on August 1st 2017 with a few modifications to defeat the shortcomings of bitcoins. It was not created from scratch. Those who switched to bitcoin cash, could own the same amount of bitcoin cash in proportion to their bitcoin coin value. Though it has advanced features to bitcoins, the bitcoin cash network hasn’t overcome the initial functional difficulties yet. Another problem with bitcoin cash is that exchanges are hesitant to accept them. One of the major features of bitcoin cash is that its blocks are larger in size compared to that of bitcoin blocks. Bitcoin cash block size is 8 mb, whereas bitcoin block size is 1mb. The cryptographic hashes now fit better in the blocks than it would in the smaller ones which make the transaction processes faster.
This is a list of key terms that could be referred to understand the functioning of bitcoins:
Block, blockchain: A block contains a set of transactions which happened at the same period of time. These blocks are arranged in order by solving a mathematical problem and thus a chain of blocks is formed, called blockchain. It is essentially a record of all the transactions that have happened in the history of bitcoins.
Forking (with respect to cryptocurrency): It is the process of division and creation of a new cryptocurrency from a parent network. The newly formed cryptocurrency network holds a format similar to the previous, but differs in its features.
Ledger: It is an account of all bitcoin transactions. It is in the form of a digital file and is maintained in public. Anyone has access to the ledger.
Inputs: Inputs are links/ references to previous transactions in which the sender of bitcoins earned bitcoins. In other words, one can calculate the number of bitcoins he has by adding up the inputs.
Outputs: These are the account of the bitcoins to be sent out to the receiver of payment. The references of all the transactions mentioned in the input are added up and converted into one single link. The converted link is called the output and is sent to the receiver.
Private Key: It is the secret number unique to each individual on the network. Private key is only known the person who possesses it. This key enables the spending of bitcoins from the wallet.
Public Key: It is something like an address. As the name says, this key is visible to everyone. When a transaction happens, bitcoins are sent to the public key of the receiver.
Nodes: Nodes are the computers connected to the bitcoin network. Nodes apply every transaction to its own account and pass on to other nodes.
Pending transactions: After the broadcast of the transaction message, every transaction gets added on to a pool of pending transactions.
Mining: Mining is the process of solving complex mathematical problems in order to add a new block to the blockchain. Since at a point of time, a lot of miners mine at the same time, it’s like winning a mathematical lottery. The reward to the lottery winners (problem solvers) are provided in the form of newly created bitcoins and they are called miners. It is the process of generation of new bitcoins.
Public consensus: If a new block has to be attached to the block chain, the nodes on the network have to agree on the validity of the transactions and its order of occurrence. This process of public agreement is called public consensus.
Cryptographic hash function: In layman’s terms, it is a mathematical problem. It is a long function containing letters as well as numbers. Every block becomes valid only when the respective hash function is solved.
Digital signature: It is created by combining the private key of the receiver of bitcoins and the transaction message. The digital signature is unique to each transaction.
The second part talks about the operational and empirical aspects of bitcoins which could be read on the upcoming article.
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