What is Bitcoin?
Bitcoin is a consensus network that enables a new payment system and a
completely digital money. It is the first decentralized peer-to-peer
payment network that is powered by its users with no central authority
or middlemen. From a user perspective, Bitcoin is pretty much like cash
for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence.
Who created Bitcoin?
Bitcoin is the first implementation of a concept called
"crypto-currency", which was first described in 1998 by Wei Dai on the
cypherpunks mailing list, suggesting the idea of a new form of money
that uses cryptography to control its creation and transactions, rather
than a central authority. The first Bitcoin specification and proof of
concept was published in 2009 in a cryptography mailing list by Satoshi
Nakamoto. Satoshi left the project in late 2010 without revealing much
about himself. The community has since grown exponentially with many developers working on Bitcoin.
Satoshi's anonymity often raised unjustified concerns, many of which
are linked to misunderstanding of the open-source nature of Bitcoin. The
Bitcoin protocol and software are published openly and any developer
around the world can review the code or make their own modified version
of the Bitcoin software. Just like current developers, Satoshi's
influence was limited to the changes he made being adopted by others and
therefore he did not control Bitcoin. As such, the identity of
Bitcoin's inventor is probably as relevant today as the identity of the
person who invented paper.
Who controls the Bitcoin network?
Nobody owns the Bitcoin network much like no one owns the technology
behind email. Bitcoin is controlled by all Bitcoin users around the
world. While developers are improving the software, they can't force a
change in the Bitcoin protocol because all users are free to choose what
software and version they use. In order to stay compatible with each
other, all users need to use software complying with the same rules.
Bitcoin can only work correctly with a complete consensus among all
users. Therefore, all users and developers have a strong incentive to
protect this consensus.
From a user perspective, Bitcoin is nothing more than a mobile app or
computer program that provides a personal Bitcoin wallet and allows a
user to send and receive bitcoins with them. This is how Bitcoin works
for most users.
Behind the scenes, the Bitcoin network is sharing a public ledger
called the "block chain". This ledger contains every transaction ever
processed, allowing a user's computer to verify the validity of each
transaction. The authenticity of each transaction is protected by
digital signatures corresponding to the sending addresses, allowing all
users to have full control over sending bitcoins from their own Bitcoin
addresses. In addition, anyone can process transactions using the
computing power of specialized hardware and earn a reward in bitcoins
for this service. This is often called "mining". To learn more about
Bitcoin, you can consult the dedicated page and the original paper.
Is Bitcoin really used by people?
Yes. There is a growing number of businesses
and individuals using Bitcoin. This includes brick and mortar
businesses like restaurants, apartments, law firms, and popular online
services such as Namecheap, WordPress, Reddit and Flattr. While Bitcoin
remains a relatively new phenomenon, it is growing fast. At the end of
August 2013, the value of all bitcoins in circulation exceeded US$ 1.5 billion with millions of dollars worth of bitcoins exchanged daily.
How does one acquire bitcoins?
- As payment for goods or services.
- Purchase bitcoins at a Bitcoin exchange.
- Exchange bitcoins with someone near you.
- Earn bitcoins through competitive mining.
While it may be possible to find individuals who wish to sell
bitcoins in exchange for a credit card or PayPal payment, most exchanges
do not allow funding via these payment methods. This is due to cases
where someone buys bitcoins with PayPal, and then reverses their half of
the transaction. This is commonly referred to as a chargeback.
How difficult is it to make a Bitcoin payment?
Bitcoin payments are easier to make than debit or credit card
purchases, and can be received without a merchant account. Payments are
made from a wallet application, either on your computer or smartphone,
by entering the recipient's address, the payment amount, and pressing
send. To make it easier to enter a recipient's address, many wallets can
obtain the address by scanning a QR code or touching two phones
together with NFC technology.
What are the advantages of Bitcoin?
- Payment freedom - It is possible to send and
receive any amount of money instantly anywhere in the world at any time.
No bank holidays. No borders. No imposed limits. Bitcoin allows its
users to be in full control of their money.
- Very low fees - Bitcoin payments are currently
processed with either no fees or extremely small fees. Users may include
fees with transactions to receive priority processing, which results in
faster confirmation of transactions by the network. Additionally,
merchant processors exist to assist merchants in processing
transactions, converting bitcoins to fiat currency and depositing funds
directly into merchants' bank accounts daily. As these services are
based on Bitcoin, they can be offered for much lower fees than with
PayPal or credit card networks.
- Fewer risks for merchants - Bitcoin transactions
are secure, irreversible, and do not contain customers’ sensitive or
personal information. This protects merchants from losses caused by
fraud or fraudulent chargebacks, and there is no need for PCI
compliance. Merchants can easily expand to new markets where either
credit cards are not available or fraud rates are unacceptably high. The
net results are lower fees, larger markets, and fewer administrative
costs.
- Security and control - Bitcoin users are in full
control of their transactions; it is impossible for merchants to force
unwanted or unnoticed charges as can happen with other payment methods.
Bitcoin payments can be made without personal information tied to the
transaction. This offers strong protection against identity theft.
Bitcoin users can also protect their money with backup and encryption.
- Transparent and neutral - All information
concerning the Bitcoin money supply itself is readily available on the
block chain for anybody to verify and use in real-time. No individual or
organization can control or manipulate the Bitcoin protocol because it
is cryptographically secure. This allows the core of Bitcoin to be
trusted for being completely neutral, transparent and predictable.
What are the disadvantages of Bitcoin?
- Degree of acceptance - Many people are still
unaware of Bitcoin. Every day, more businesses accept bitcoins because
they want the advantages of doing so, but the list remains small and
still needs to grow in order to benefit from network effects.
- Volatility - The total value
of bitcoins in circulation and the number of businesses using Bitcoin
are still very small compared to what they could be. Therefore,
relatively small events, trades, or business activities can
significantly affect the price. In theory, this volatility will decrease
as Bitcoin markets and the technology matures. Never before has the
world seen a start-up currency, so it is truly difficult (and exciting)
to imagine how it will play out.
- Ongoing development - Bitcoin software is still in
beta with many incomplete features in active development. New tools,
features, and services are being developed to make Bitcoin more secure
and accessible to the masses. Some of these are still not ready for
everyone. Most Bitcoin businesses are new and still offer no insurance.
In general, Bitcoin is still in the process of maturing.
Why do people trust Bitcoin?
Much of the trust in Bitcoin comes from the fact that it requires no
trust at all. Bitcoin is fully open-source and decentralized. This means
that anyone has access to the entire source code at any time. Any
developer in the world can therefore verify exactly how Bitcoin works.
All transactions and bitcoins issued into existence can be transparently
consulted in real-time by anyone. All payments can be made without
reliance on a third party and the whole system is protected by heavily
peer-reviewed cryptographic algorithms like those used for online
banking. No organization or individual can control Bitcoin, and the
network remains secure even if not all of its users can be trusted.
Can I make money with Bitcoin?
You should never expect to get rich with Bitcoin or any emerging
technology. It is always important to be wary of anything that sounds
too good to be true or disobeys basic economic rules.
Bitcoin is a growing space of innovation and there are business
opportunities that also include risks. There is no guarantee that
Bitcoin will continue to grow even though it has developed at a very
fast rate so far. Investing time and resources on anything related to
Bitcoin requires entrepreneurship. There are various ways to make money
with Bitcoin such as mining, speculation or running new businesses. All
of these methods are competitive and there is no guarantee of profit. It
is up to each individual to make a proper evaluation of the costs and
the risks involved in any such project.
Is Bitcoin fully virtual and immaterial?
Bitcoin is as virtual as the credit cards and online banking networks
people use everyday. Bitcoin can be used to pay online and in physical
stores just like any other form of money. Bitcoins can also be exchanged
in physical form such as the Casascius coins,
but paying with a mobile phone usually remains more convenient. Bitcoin
balances are stored in a large distributed network, and they cannot be
fraudulently altered by anybody. In other words, Bitcoin users have
exclusive control over their funds and bitcoins cannot vanish just
because they are virtual.
Is Bitcoin anonymous?
Bitcoin is designed to allow its users to send and receive payments
with an acceptable level of privacy as well as any other form of money.
However, Bitcoin is not anonymous and cannot offer the same level of
privacy as cash. The use of Bitcoin leaves extensive public records. Various mechanisms
exist to protect users' privacy, and more are in development. However,
there is still work to be done before these features are used correctly
by most Bitcoin users.
Some concerns have been raised that private transactions could be
used for illegal purposes with Bitcoin. However, it is worth noting that
Bitcoin will undoubtedly be subjected to similar regulations that are
already in place inside existing financial systems. Bitcoin cannot be
more anonymous than cash and it is not likely to prevent criminal
investigations from being conducted. Additionally, Bitcoin is also
designed to prevent a large range of financial crimes.
What happens when bitcoins are lost?
When a user loses his wallet, it has the effect of removing money out
of circulation. Lost bitcoins still remain in the block chain just like
any other bitcoins. However, lost bitcoins remain dormant forever
because there is no way for anybody to find the private key(s) that
would allow them to be spent again. Because of the law of supply and
demand, when fewer bitcoins are available, the ones that are left will
be in higher demand and increase in value to compensate.
Can Bitcoin scale to become a major payment network?
The Bitcoin network can already process a much higher number of
transactions per second than it does today. It is, however, not entirely
ready to scale to the level of major credit card networks. Work is
underway to lift current limitations, and future requirements are well
known. Since inception, every aspect of the Bitcoin network has been in a
continuous process of maturation, optimization, and specialization, and
it should be expected to remain that way for some years to come. As
traffic grows, more Bitcoin users may use lightweight clients, and full
network nodes may become a more specialized service. For more details,
see the Scalability page on the Wiki.
Legal
Is Bitcoin legal?
To the best of our knowledge, Bitcoin has not been made illegal
by legislation in most jurisdictions. However, some jurisdictions (such
as Argentina and Russia) severely restrict or ban foreign currencies.
Other jurisdictions (such as Thailand) may limit the licensing of
certain entities such as Bitcoin exchanges.
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. For example, the
Financial Crimes Enforcement Network (FinCEN), a bureau in the United
States Treasury Department, issued non-binding guidance on how it
characterizes certain activities involving virtual currencies.
Is Bitcoin useful for illegal activities?
Bitcoin is money, and money has always been used both for legal and
illegal purposes. Cash, credit cards and current banking systems widely
surpass Bitcoin in terms of their use to finance crime. Bitcoin can
bring significant innovation in payment systems and the benefits of such
innovation are often considered to be far beyond their potential
drawbacks.
Bitcoin is designed to be a huge step forward in making money more
secure and could also act as a significant protection against many forms
of financial crime. For instance, bitcoins are completely impossible to
counterfeit. Users are in full control of their payments and cannot
receive unapproved charges such as with credit card fraud. Bitcoin
transactions are irreversible and immune to fraudulent chargebacks.
Bitcoin allows money to be secured against theft and loss using very
strong and useful mechanisms such as backups, encryption, and multiple
signatures.
Some concerns have been raised that Bitcoin could be more attractive
to criminals because it can be used to make private and irreversible
payments. However, these features already exist with cash and wire
transfer, which are widely used and well-established. The use of Bitcoin
will undoubtedly be subjected to similar regulations that are already
in place inside existing financial systems, and Bitcoin is not likely to
prevent criminal investigations from being conducted. In general, it is
common for important breakthroughs to be perceived as being
controversial before their benefits are well understood. The Internet is
a good example among many others to illustrate this.
Can Bitcoin be regulated?
The Bitcoin protocol itself cannot be modified without the
cooperation of nearly all its users, who choose what software they use.
Attempting to assign special rights to a local authority in the rules of
the global Bitcoin network is not a practical possibility. Any rich
organization could choose to invest in mining hardware to control half
of the computing power of the network and become able to block or
reverse recent transactions. However, there is no guarantee that they
could retain this power since this requires to invest as much than all
other miners in the world.
It is however possible to regulate the use of Bitcoin in a similar
way to any other instrument. Just like the dollar, Bitcoin can be used
for a wide variety of purposes, some of which can be considered
legitimate or not as per each jurisdiction's laws. In this regard,
Bitcoin is no different than any other tool or resource and can be
subjected to different regulations in each country. Bitcoin use could
also be made difficult by restrictive regulations, in which case it is
hard to determine what percentage of users would keep using the
technology. A government that chooses to ban Bitcoin would prevent
domestic businesses and markets from developing, shifting innovation to
other countries. The challenge for regulators, as always, is to develop
efficient solutions while not impairing the growth of new emerging
markets and businesses.
What about Bitcoin and taxes?
Bitcoin is not a fiat currency with legal tender status in any
jurisdiction, but often tax liability accrues regardless of the medium
used. There is a wide variety of legislation in many different
jurisdictions which could cause income, sales, payroll, capital gains,
or some other form of tax liability to arise with Bitcoin.
What about Bitcoin and consumer protection?
Bitcoin is freeing people to transact on their own terms. Each user
can send and receive payments in a similar way to cash but they can also
take part in more complex contracts. Multiple signatures allow a
transaction to be accepted by the network only if a certain number of a
defined group of persons agree to sign the transaction. This allows
innovative dispute mediation services to be developed in the future.
Such services could allow a third party to approve or reject a
transaction in case of disagreement between the other parties without
having control on their money. As opposed to cash and other payment
methods, Bitcoin always leaves a public proof that a transaction did
take place, which can potentially be used in a recourse against
businesses with fraudulent practices.
It is also worth noting that while merchants usually depend on their
public reputation to remain in business and pay their employees, they
don't have access to the same level of information when dealing with new
consumers. The way Bitcoin works allows both individuals and businesses
to be protected against fraudulent chargebacks while giving the choice
to the consumer to ask for more protection when they are not willing to
trust a particular merchant.
Economy
How are bitcoins created?
New bitcoins are generated by a competitive and decentralized process
called "mining". This process involves that individuals are rewarded by
the network for their services. Bitcoin miners are processing
transactions and securing the network using specialized hardware and are
collecting new bitcoins in exchange.
The Bitcoin protocol is designed in such a way that new bitcoins are
created at a fixed rate. This makes Bitcoin mining a very competitive
business. When more miners join the network, it becomes increasingly
difficult to make a profit and miners must seek efficiency to cut their
operating costs. No central authority or developer has any power to
control or manipulate the system to increase their profits. Every
Bitcoin node in the world will reject anything that does not comply with
the rules it expects the system to follow.
Bitcoins are created at a decreasing and predictable rate. The number
of new bitcoins created each year is automatically halved over time
until bitcoin issuance halts completely with a total of 21 million
bitcoins in existence. At this point, Bitcoin miners will probably be
supported exclusively by numerous small transaction fees.
Why do bitcoins have value?
Bitcoins have value because they are useful as a form of money.
Bitcoin has the characteristics of money (durability, portability,
fungibility, scarcity, divisibility, and recognizability) based on the
properties of mathematics rather than relying on physical properties
(like gold and silver) or trust in central authorities (like fiat
currencies). In short, Bitcoin is backed by mathematics. With these
attributes, all that is required for a form of money to hold value is
trust and adoption. In the case of Bitcoin, this can be measured by its
growing base of users, merchants, and startups. As with all currency,
bitcoin's value comes only and directly from people willing to accept
them as payment.
What determines bitcoin’s price?
The price of a bitcoin is determined by supply and demand. When
demand for bitcoins increases, the price increases, and when demand
falls, the price falls. There is only a limited number of bitcoins in
circulation and new bitcoins are created at a predictable and decreasing
rate, which means that demand must follow this level of inflation to
keep the price stable. Because Bitcoin is still a relatively small
market compared to what it could be, it doesn't take significant amounts
of money to move the market price up or down, and thus the price of a
bitcoin is still very volatile.
Bitcoin price, 2011 to 2013:
Can bitcoins become worthless?
Yes. History is littered with currencies that failed and are no longer used, such as the German Mark during the Weimar Republic and, more recently, the Zimbabwean dollar.
Although previous currency failures were typically due to
hyperinflation of a kind that Bitcoin makes impossible, there is always
potential for technical failures, competing currencies, political issues
and so on. As a basic rule of thumb, no currency should be considered
absolutely safe from failures or hard times. Bitcoin has proven reliable
for years since its inception and there is a lot of potential for
Bitcoin to continue to grow. However, no one is in a position to predict
what the future will be for Bitcoin.
Is Bitcoin a bubble?
A fast rise in price does not constitute a bubble. An artificial
over-valuation that will lead to a sudden downward correction
constitutes a bubble. Choices based on individual human action by
hundreds of thousands of market participants is the cause for bitcoin's
price to fluctuate as the market seeks price discovery. Reasons for
changes in sentiment may include a loss of confidence in Bitcoin, a
large difference between value and price not based on the fundamentals
of the Bitcoin economy, increased press coverage stimulating speculative
demand, fear of uncertainty, and old-fashioned irrational exuberance
and greed.
Is Bitcoin a Ponzi scheme?
A Ponzi scheme is a fraudulent investment operation that pays returns
to its investors from their own money, or the money paid by subsequent
investors, instead of from profit earned by the individuals running the
business. Ponzi schemes are designed to collapse at the expense of the
last investors when there is not enough new participants.
Bitcoin is a free software project with no central authority.
Consequently, no one is in a position to make fraudulent representations
about investment returns. Like other major currencies such as gold,
United States dollar, euro, yen, etc. there is no guaranteed purchasing
power and the exchange rate floats freely. This leads to volatility
where owners of bitcoins can unpredictably make or lose money. Beyond
speculation, Bitcoin is also a payment system with useful and
competitive attributes that are being used by thousands of users and
businesses.
Doesn't Bitcoin unfairly benefit early adopters?
Some early adopters have large numbers of bitcoins because they took
risks and invested time and resources in an unproven technology that was
hardly used by anyone and that was much harder to secure properly. Many
early adopters spent large numbers of bitcoins quite a few times before
they became valuable or bought only small amounts and didn't make huge
gains. There is no guarantee that the price of a bitcoin will increase
or drop. This is very similar to investing in an early startup that can
either gain value through its usefulness and popularity, or just never
break through. Bitcoin is still in its infancy, and it has been designed
with a very long-term view; it is hard to imagine how it could be less
biased towards early adopters, and today's users may or may not be the
early adopters of tomorrow.
Won't the finite amount of bitcoins be a limitation?
Bitcoin is unique in that only 21 million bitcoins will ever be
created. However, this will never be a limitation because bitcoins can
be divided up to 8 decimal places ( 0.000 000 01 BTC ) and potentially
even smaller units if that is ever required in the future. As the
average transaction size decreases, transactions can be denominated in
sub-units of a bitcoin, such as millibitcoins ( 1 mBTC or 0.001 BTC ).
Won't Bitcoin fall in a deflationary spiral?
The deflationary spiral theory says that if prices are expected to
fall, people will move purchases into the future in order to benefit
from the lower prices. That fall in demand will in turn cause merchants
to lower their prices to try and stimulate demand, making the problem
worse and leading to an economic depression.
Although this theory is a popular way to justify inflation amongst
central bankers, it does not appear to always hold true and is
considered controversial amongst economists. Consumer electronics is one
example of a market where prices constantly fall but which is not in
depression. Similarly, the value of bitcoins has risen over time and yet
the size of the Bitcoin economy has also grown dramatically along with
it. Because both the value of the currency and the size of its economy
started at zero in 2009, Bitcoin is a counterexample to the theory
showing that it must sometimes be wrong.
Notwithstanding this, Bitcoin is not designed to be a deflationary
currency. It is more accurate to say Bitcoin is intended to inflate in
its early years, and become stable in its later years. The only time the
quantity of bitcoins in circulation will drop is if people carelessly
lose their wallets by failing to make backups. With a stable monetary
base and a stable economy, the value of the currency should remain the
same.
Isn't speculation and volatility a problem for Bitcoin?
This is a chicken and egg situation. For bitcoin's price to
stabilize, a large scale economy needs to develop with more businesses
and users. For a large scale economy to develop, businesses and users
will seek for price stability.
Fortunately, volatility does not affect the main benefits of Bitcoin
as a payment system to transfer money from point A to point B. It is
possible for businesses to convert bitcoin payments to their local
currency instantly, allowing them to profit from the advantages of
Bitcoin without being subjected to price fluctuations. Since Bitcoin
offers many useful and unique features and properties, many users choose
to use Bitcoin. With such solutions and incentives, it is possible that
Bitcoin will mature and develop to a degree where price volatility will
become limited.
What if someone bought up all the existing bitcoins?
Only a fraction of bitcoins issued to date are found on the exchange
markets for sale. Bitcoin markets are competitive, meaning the price of a
bitcoin will rise or fall depending on supply and demand. Additionally,
new bitcoins will continue to be issued for decades to come. Therefore
even the most determined buyer could not buy all the bitcoins in
existence. This situation isn't to suggest, however, that the markets
aren't vulnerable to price manipulation; it still doesn't take
significant amounts of money to move the market price up or down, and
thus Bitcoin remains a volatile asset thus far.
What if someone creates a better digital currency?
That can happen. For now, Bitcoin remains by far the most popular
decentralized virtual currency, but there can be no guarantee that it
will retain that position. There is already a set of alternative
currencies inspired by Bitcoin. It is however probably correct to assume
that significant improvements would be required for a new currency to
overtake Bitcoin in terms of established market, even though this
remains unpredictable. Bitcoin could also conceivably adopt improvements
of a competing currency so long as it doesn't change fundamental parts
of the protocol.
Transactions
Why do I have to wait 10 minutes?
Receiving a payment is almost instant with Bitcoin. However, there is
a 10 minutes delay on average before the network begins to confirm your
transaction by including it in a block and before you can spend the
bitcoins you receive. A confirmation means that there is a consensus on
the network that the bitcoins you received haven't been sent to anyone
else and are considered your property. Once your transaction has been
included in one block, it will continue to be buried under every block
after it, which will exponentially consolidate this consensus and
decrease the risk of a reversed transaction. Every user is free to
determine at what point they consider a transaction confirmed, but 6
confirmations is often considered to be as safe as waiting 6 months on a
credit card transaction.
How much will the transaction fee be?
Most transactions can be processed without fees, but users are
encouraged to pay a small voluntary fee for faster confirmation of their
transactions and to remunerate miners. When fees are required, they
generally don't exceed a few pennies in value. Your Bitcoin client will
usually try to estimate an appropriate fee when required.
Transaction fees are used as a protection against users sending
transactions to overload the network. The precise manner in which fees
work is still being developed and will change over time. Because the fee
is not related to the amount of bitcoins being sent, it may seem
extremely low (0.0005 BTC for a 1,000 BTC transfer) or unfairly high
(0.004 BTC for a 0.02 BTC payment). The fee is defined by attributes
such as data in transaction and transaction recurrence. For example, if
you are receiving a large number of tiny amounts, then fees for sending
will be higher. Such payments are comparable to paying a restaurant bill
using only pennies. Spending small fractions of your bitcoins rapidly
may also require a fee. If your activity follows the pattern of
conventional transactions, the fees should remain very low.
What if I receive a bitcoin when my computer is powered off?
This works fine. The bitcoins will appear next time you start your
wallet application. Bitcoins are not actually received by the software
on your computer, they are appended to a public ledger that is shared
between all the devices on the network. If you are sent bitcoins when
your wallet client program is not running and you later launch it, it
will download blocks and catch up with any transactions it did not
already know about, and the bitcoins will eventually appear as if they
were just received in real time. Your wallet is only needed when you
wish to spend bitcoins.
What does "synchronizing" mean and why does it take so long?
Long synchronization time is only required with full node clients
like Bitcoin Core. Technically speaking, synchronizing is the process of
downloading and verifying all previous Bitcoin transactions on the
network. For some Bitcoin clients to calculate the spendable balance of
your Bitcoin wallet and make new transactions, it needs to be aware of
all previous transactions. This step can be resource intensive and
requires sufficient bandwidth and storage to accommodate the full size of the block chain.
For Bitcoin to remain secure, enough people should keep using full node
clients because they perform the task of validating and relaying
transactions.
Mining
What is Bitcoin mining?
Mining is the process of spending computing power to process
transactions, secure the network, and keep everyone in the system
synchronized together. It can be perceived like the Bitcoin data center
except that it has been designed to be fully decentralized with miners
operating in all countries and no individual having control over the
network. This process is referred to as "mining" as an analogy to gold
mining because it is also a temporary mechanism used to issue new
bitcoins. Unlike gold mining, however, Bitcoin mining provides a reward
in exchange for useful services required to operate a secure payment
network. Mining will still be required after the last bitcoin is issued.
How does Bitcoin mining work?
Anybody can become a Bitcoin miner by running software with
specialized hardware. Mining software listens for transactions broadcast
through the peer-to-peer network and performs appropriate tasks to
process and confirm these transactions. Bitcoin miners perform this work
because they can earn transaction fees paid by users for faster
transaction processing, and newly created bitcoins issued into existence
according to a fixed formula.
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. As a result, mining is a very competitive business where no
individual miner can control what is included in the block chain.
The proof of work is also designed to depend on the previous block to
force a chronological order in the block chain. This makes it
exponentially difficult to reverse previous transactions because this
requires the recalculation of the proofs of work of all the subsequent
blocks. When two blocks are found at the same time, miners work on the
first block they receive and switch to the longest chain of blocks as
soon as the next block is found. This allows mining to secure and
maintain a global consensus based on processing power.
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.
Isn't Bitcoin mining a waste of energy?
Spending energy to secure and operate a payment system is hardly a
waste. Like any other payment service, the use of Bitcoin entails
processing costs. Services necessary for the operation of currently
widespread monetary systems, such as banks, credit cards, and armored
vehicles, also use a lot of energy. Although unlike Bitcoin, their total
energy consumption is not transparent and cannot be as easily measured.
Bitcoin mining has been designed to become more optimized over time
with specialized hardware consuming less energy, and the operating costs
of mining should continue to be proportional to demand. When Bitcoin
mining becomes too competitive and less profitable, some miners choose
to stop their activities. Furthermore, all energy expended mining is
eventually transformed into heat, and the most profitable miners will be
those who have put this heat to good use. An optimally efficient mining
network is one that isn't actually consuming any extra energy. While
this is an ideal, the economics of mining are such that miners
individually strive toward it.
How does mining help secure Bitcoin?
Mining creates the equivalent of a competitive lottery that makes it
very difficult for anyone to consecutively add new blocks of
transactions into the block chain. This protects the neutrality of the
network by preventing any individual from gaining the power to block
certain transactions. This also prevents any individual from replacing
parts of the block chain to roll back their own spends, which could be
used to defraud other users. Mining makes it exponentially more
difficult to reverse a past transaction by requiring the rewriting of
all blocks following this transaction.
What do I need to start mining?
In the early days of Bitcoin, anyone could find a new block using
their computer's CPU. As more and more people started mining, the
difficulty of finding new blocks increased greatly to the point where
the only cost-effective method of mining today is using specialized
hardware. You can visit
BitcoinMining.com for more information.
Security
Is Bitcoin secure?
The Bitcoin technology - the protocol and the cryptography - has a
strong security track record, and the Bitcoin network is probably the
biggest distributed computing project in the world. Bitcoin's most
common vulnerability is in user error. Bitcoin wallet files that store
the necessary private keys can be accidentally deleted, lost or stolen.
This is pretty similar to physical cash stored in a digital form.
Fortunately, users can employ sound security practices to protect their money or use service providers that offer good levels of security and insurance against theft or loss.
Hasn't Bitcoin been hacked in the past?
The rules of the protocol and the cryptography used for Bitcoin are
still working years after its inception, which is a good indication that
the concept is well designed. However, security flaws
have been found and fixed over time in various software
implementations. Like any other form of software, the security of
Bitcoin software depends on the speed with which problems are found and
fixed. The more such issues are discovered, the more Bitcoin is gaining
maturity.
There are often misconceptions about thefts and security breaches
that happened on diverse exchanges and businesses. Although these events
are unfortunate, none of them involve Bitcoin itself being hacked, nor
imply inherent flaws in Bitcoin; just like a bank robbery doesn't mean
that the dollar is compromised. However, it is accurate to say that a
complete set of good practices and intuitive security solutions is
needed to give users better protection of their money, and to reduce the
general risk of theft and loss. Over the course of the last few years,
such security features have quickly developed, such as wallet
encryption, offline wallets, hardware wallets, and multi-signature
transactions.
Could users collude against Bitcoin?
It is not possible to change the Bitcoin protocol that easily. Any
Bitcoin client that doesn't comply with the same rules cannot enforce
their own rules on other users. As per the current specification, double
spending is not possible on the same block chain, and neither is
spending bitcoins without a valid signature. Therefore, It is not
possible to generate uncontrolled amounts of bitcoins out of thin air,
spend other users' funds, corrupt the network, or anything similar.
However, a majority of miners could arbitrarily choose to block or
reverse recent transactions. A majority of users can also put pressure
for some changes to be adopted. 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. As a general rule, it is hard to imagine why any
Bitcoin user would choose to adopt any change that could compromise
their own money.
Is Bitcoin vulnerable to quantum computing?
Yes, most systems relying on cryptography in general are, including
traditional banking systems. However, quantum computers don't yet exist
and probably won't for a while. In the event that quantum computing
could be an imminent threat to Bitcoin, the protocol could be upgraded
to use post-quantum algorithms. Given the importance that this update
would have, it can be safely expected that it would be highly reviewed
by developers and adopted by all Bitcoin users.
