Introduction
Emerged in 2009, Bitcoin is a digital cash (Electronic Payment System) that uses peer to peer technology with no central authority or financial institutions for issuing, regulating or managing its transactions. Satoshi Nakamoto is said to be the one who introduced bitcoins concept, however since 2010 there is not any traces of him. Now the whole bitcoins network is decentralized and no-one owns this network and this is controlled by the bitcoin users throughout the world. These Bitcoins need to be purchased using standard currency at Bitcoin exchanges and then you can use these Bitcoins to purchase anything similar to what can be bought using cash/plastic money in shops or online. Mt. Gox is a major exchange to buy Bitcoins, though there are many other exchanges also). Once you purchase the bitcoins, you can use these bitcoins in any part of the world where these are accepted by the merchandise. There are also a finite number of bitcoins in the world, with a limit of 21million bitcoins set.
How it works
This section explains how to activate, purchase and use bitcoins:
- Download a bitcoin wallet from http://bitcoin.org.
- Purchase some bitcoins. From any exchange or receive it from any of other person who have bitcoins.
- Use these bitcoins to purchase items where these bitcoins are acceptable such as Namecheap or WordPress to name a few.
Bitcoin wallets come in three variants based on your usage patterns mainly:
- Software Wallets – This is targeted for Laptops and Desktops.
- Mobiles Wallets (targeted for Smart Phones)
- Web Wallet (targeted for roaming users)
Users download a software meant for their desktop or mobile phone. This can be treated as a Bitcoin wallet. Now the bitcoins can be purchased and stored in this wallet. In the backend, the bitcoin network shares a public ledger “Block Chain” that contains all the processed transactions. These transactions are protected by digital signatures.
Bitcoin Mining
It is the process of spending computing power to process transactions, secure the network, and keep everyone in the system synchronized together in a decentralized environment. All the operators are located geographically at different locations across the globe. Mining is also a temporary mechanism responsible for issuing new bitcoins. Anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service.
For new transactions to be confirmed, they need to be included in a block along with a mathematical proof of work. Such proofs are very hard to generate because there is no way to create them other than by trying billions of calculations per second. This requires miners to perform these calculations before their blocks are accepted by the network and before they are rewarded. As more people start to mine, the difficulty of finding valid blocks is automatically increased by the network to ensure that the average time to find a block remains equal to 10 minutes.
Bitcoin miners are neither able to cheat by increasing their own reward nor process fraudulent transactions that could corrupt the Bitcoin network because all Bitcoin nodes would reject any block that contains invalid data as per the rules of the Bitcoin protocol. Consequently, the network remains secure even if not all Bitcoin miners can be trusted.
Security
Bitcoin use strong protocol and crypto algorithm and since its inception, there has not been any threats reported so far. Some security flaws were identified at times and addressed accordingly. On the other side, as Bitcoins are just a digital representation of cash, there are couple of vulnerabilities associated with this. For example if you lost your cash or accidently damage your cash, the same can happen to your bitcoins. These are stored in the form of private keys in your wallet files, these files can be deleted, stolen or get corrupted by the file-system errors.
Some security features have quickly developed by bitcoin such as wallet encryption, offline wallets, hardware wallets, and multi-signature transactions. There is other concern about changing the bitcoin protocol, however this is not true. All the bitcoin clients need to use the same protocol and with a valid signature. This ensure there is not any double spending of the same bitcoin by the same user, not to generate the bitcoins out of thin air, spend other’s bitcoins or corrupt the entire network.
This is the biggest distributed computing project in the world and till date this has not been hacked.
Challenges
Every new technology come with lot of challenges, Bitcoin is not exception, this also has it’s own challenges:
- In principal, there is not any possibility to change the Bitcoin protocol, however a majority of miners could arbitrarily choose to block or reverse recent transactions. Because Bitcoin only works correctly with a complete consensus between all users, changing the protocol can be very difficult and requires an overwhelming majority of users to adopt the changes in such a way that remaining users have nearly no choice but to follow. Practically this is really very difficult to achieve as no-one want to mess with their money.
- A transaction fee is based on the transaction rather on the amount. This means if you need to transfer a big bitcoin amount, the charges will be comparatively less. On the other hand if you need to have many small denomination transfers, this may cost you higher. Looking this aspect, if we target the users who need to make routine transactions, using bitcoins might not be feasible.
- Too much wait time for a received bitcoin to be used. Bitcoins are received instantly, however it takes approximately 10 minutes before you can spend these bitcoins. The reason for taking this much time is that the transaction needs to be cascaded to public ledger to ensure that these bitcoins are not send to anyone else. Once the transaction is included in 1 block, it will continue to be buried under every block after it to decrease the risk of reverse this transaction.
- Volatility of bitcoin price. Since its inception, there is a huge variance on the bitcoin prices. It was less than $1 for a Bitcoin when started; now it’s more than $650 for a Bitcoin. These price swings may create a fear of accepting bitcoins as a currency although there are enough true believers in the concept and long-term promise of Bitcoin that it is unlikely to fade from the scene any time soon.
- Legality, Bitcoins are yet not legalized in many countries. Regulators from various jurisdictions are taking steps to provide individuals and businesses with rules on how to integrate this new technology with the formal, regulated financial system. Till the time I write this blog, there was not any formal legal regulations were available.
- Illegal Usage, Bitcoin is another form of money (called as virtual money), and money has always been used both for legal and illegal purposes. Recently a website silkroad has been shut down that uses bitcoins to sell drug-and-weapons. This raise a lot of questions; if this technology also gives me the same bad impacts, then what is the purpose of using it?
- Cross Country Usage issues. Although it is said that this currency can be used in any part of the world, there are lot many other issues involved if I want to purchase something in one country and what it to shipped to a different country. This is only a single milestone achieved in the overall Supply Chain Management in cross borders.
Takeaway
I would still like to wait for some more time until this technology is fool proof against all odds and is regulated.
Hope you like this article. Your suggestions are always welcome.
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1 comment:
Really interestingThanks for sharing.
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