Bitcoin 101

Bitcoin 101

I was  quite unaware of Bitcoin just a month back but fortunately I met someone who has actually worked for Bitcoin exchange. Last week of December was vacation from office and I was looking for something to spend my time on. I wouldn’t claim that I know everything today but I am much better of. Here is a write up from my more than a month research, hopefully it may help people to get started.

Satoshi Nakamoto is known to be the founder of bitcoin. He released  a paper in cryptography mailing in 2008 list describing the bitcoin digital currency and then released the source code in 2009 which was made open source. Satoshi was very active with the development community until mid 2010 after which he disappeared from the scene completely handing over it to others. His last message was “I am not Dorian Nakamoto” on March 2014 against the Newsweek article that states Dorian S. Nakamoto was the real Satoshi Nakamoto. Till today nobody knows if Satoshi existed or was it pseudonym used by a group of people or individual who created the bitcoin. Since the C++ source code is open, many experts have analyzed it and are really amazed by the skills of Satoshi or the group that developed it but suspense remains even today which draws people towards bitcoin.

I will use Satoshi henceforth to mean the founder of bitcoin. The source code is open whereas the people behind the development are elusive, similarly the transaction are open but the individuals behind the transaction are elusive. The basis of bitcoin is the peer-to-peer network without involvement of any trusted parties. The fiat currencies like dollar, rupee or any other currency supported by national banks works because of the trust. All transactions are confirmed by the trusted parties which are the banks that charges the user for any transactions. Banks charge us for the trusted network that they provide.

The concept of bitcoin was revolutionary and is based on two important elements called blockchain and mining. Blockchain is the ledger which contains all the transaction that has happened with bitcoins. Any bitcoin node will download the complete blockchain and any transaction has to be downloaded and approved by atleast six nodes before it can be assumed as correct sequence of blockchain. Nobody can include false transaction as others on the node will reject the blockchain and the transactions will not be valid. In the initial days it was easy for people to install bitcoin node on a computer and then start mining which is the process through which the transactions are verified and the miners are rewarded based on a fixed formula. Nowadays it has become more competitive and specialized hardware is available that are faster in processing the mathematical calculations and wins over any other generic machines.Also based on investment required a full fledged computer nodes isn’t viable due to hardware costs as well as electricity costs. In total there are 21 million bitcoins that can be mined, this limit is set in the code and more than 15 million has been mined already. Mining can be compared to something like renting out your bike and receiving some money from the user. Miners makes the transactions secure by competitively performing the mathematical transactions in order to ratify any new transaction which is normally the job of bank. The current blockchain size is over 53GB,which is the size of the blockchain to be downloaded by someone who wants to start a new full fledged node today. The initial 50 coins were mined by Satoshi himself and is called the genesis block now. Because of this reason bitcoin is sometimes compared to ponzi scheme where the old investors are paid from the money gathered from new investors and the whole scheme fails if there are no new investors and there is no underlying business that generates revenue. The counter to this point is the early adopters of bitcoin did make an investment for which they are getting paid now or in future. Its like investing in a startup.

Once there was a critical mass of people having bitcoin and businesses accepting bitcoin, the transaction was very simple as each node has its own address and wallet attached to it. So a transaction was just a message from one sender to other which had to validated by the peer-to-peer network to stop any double spending. Once the bitcoin is spent its gone forever just like cash. Bitcoin was gaining traction as many hotels, online websites like wordpress started accepting bitcoins. Wikileaks also got contribution in bitcoin world over when their account were seized.

Bitcoin exchanges started and the first one was Mt. Gox where bitcoin can be bought/sold for various currencies. There are numerous bitcoin exchanges that has mushroomed all over the world.

Bitcoin is highly decentralized and nobody owns it. Every node has a part to play to keep the network secure.Transactions can be made anonymously to anyone around the world without depending on any centralized system. This is both good and bad as the government around the world needs to know how the money is being transferred in order to avoid money getting used for terrorist activities or unlawful activities. All conventional banks need to have “KYC” for all their customers updated which isn’t the case with Bitcoin. The biggest example was Silk Road which was a marketplace for selling illegal drugs in the US and was accepting payment only in Bitcoins  using the anonymity of users behind the transactions for their benefit. Bitcoin is a innovation that most of the government banking institutions don’t know what to do with. Many countries do not know how to classify bitcoin and other virtual currencies and how the taxation mechanism needs to created.

Satoshi’s innovation has created a revolution and has the potential to change the way banking transactions are done.

As of writing this article 1 Bitcoin is around $391 but this value fluctuates wildly and bitcoin market is full of speculations. Bitcoin has much more behind the scenes but probably this gives an insight for someone who wants to get started.

I have experimented with OK Cash wallet on Raspberry Pi but even after 5 days in network haven’t been able to get any coins. Probably my raspberry pi isn’t able to compete with other nodes in the network.

If you need any help with Raspberry Pi and ROKOS please refer to the following link. In case of any queries leave me a comment I will try to answer if I can.

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