Cryptocurrency Bitcoin. Creation history, working principle, main features
The term Bitcoin itself is derived from two English words, bit and coin, meaning bit, as a minimal computer unit of information, and coin. The bitcoin network itself is a peer-to-peer payment system, which is settled using the monetary unit of the same name. Functioning and protection is provided by advanced cryptography methods, however, all information about transfers and wallet balances are available and in the public domain. The minimum unit of account in the network is Satoshi, which is named after its creator and is 10-8 bitcoin.
The main feature of bitcoin is irreversibility of operations and transactions without intermediaries. This implies irreversibility in the full sense of the word. You cannot reverse a payment to an incorrect or even non-existent address, you cannot dispute a transfer from a compromised address, and in all other cases. However, this also has its own advantage. For example, no one can block or seize bitcoins, even temporarily, and only the one who owns a private key to the wallet can spend or use them for other purposes.
It is fair to say, though, that some semblance of reversible transactions does exist. The first implementation is multisignature transactions, where a third party acts as an arbitrator and without his signature you can’t get money from either party. The second is smart contracts, however, they do not have all the Turing completeness and do not compare with the later implementation in Ethereum, for example.
When it comes to the use of bitcoin, it can be exchanged for goods or services from anyone willing to accept the cryptocurrency as payment. It is also possible to make a direct exchange for cash through a specialized system, either directly between participants on an exchange or through over-the-counter arrangements. In this case, the price of bitcoin directly depends on the balance of supply and demand, and no one has the right to oblige the seller to accept it as payment.
Transaction fees for bitcoin transactions are assigned by the user and are not mandatory. However, if there is no fee or the fee is too small, the transaction may take an unacceptably long time to process. Currently, most clients automatically recommend a fee depending on network congestion and desired processing time. Also, most software clients do not currently offer zero fees.
The history of bitcoin’s emergence
When it comes to the emergence of bitcoin, a series of events followed:
- 1983 – David Chaum and Stephan Brands propose the first electronic cash protocol,
- 1997 – Adam Beck proposes the concept of Hashcash to prevent spam and DoS attacks,
- 1998 Wei Dai and Nick Szabo independently propose the idea of b-money and bit-gold cryptocurrencies,
- In the same year Hal Finney (who is the second member of the bitcoin network) realizes the hash block chain for HashCash.
And only in 2008 Satoshi Nakamoto, whose pseudonym is a person or a whole group of people, publishes a file with the detailed description of the peer-to-peer payment network working principles. The development itself was finished in the beginning of 2009 and the source code of the client-program was also published at the same time. The first bitcoin block was received on the 3rd of January, 2009. The first transaction in the network occurred on January 12, 2009, when Satoshi Nakamoto transferred 10 bitcoins to Hal Finney.
If we talk about the first interaction of the cryptocurrency with the real world, the time can be considered September 2009, when Marty Malmy sold 5050 bitcoins for $5.02 to a certain NewLibertyStandard. The latter also offered to use electricity, or more precisely its cost, to form the price of the first cryptocurrency. And the first use of bitcoin as a means of payment can be attributed to May 22, when Laszlo Hanech exchanged his 10,000 coins of the first cryptocurrency for two pizzas with home delivery. Although, to be fair, it is worth noting that it was not a pure sale of goods for bitcoins, but still an exchange through an intermediary who paid for two pizzas, receiving bitcoins for it. But it was May 22 that became the holiday and was called Bitcoin Pizza Day.
What is bitcoin
The problem of transferring money when selling remotely has been around for thousands of years. In the earliest days of international trade, there was a need to transport “money”, which were mostly precious metals and stones, and the seller had a problem with verifying the authenticity of the payment, and the buyer with confirmation of receipt of payment.
With the lapse of time, networks of intermediaries appeared who were trusted by both sides of the trade. They no longer had the need to constantly move money around, and it was enough to use their own funds. Also with the use of intermediaries was the possibility of freezing money until receipt of goods or cancelation of payment in case of breach of contract. From such intermediaries, modern banks gradually emerged, also absorbing the functions of market changers and usurers.
In the age of computer technology, it gradually became possible to do away with physical forms of money, not only in cross-border settlements, but also in ordinary retail trade. However, the use of banks as intermediaries has a significant disadvantage – it is a low degree of confidentiality. If in the case of the state and regulatory bodies the problem is not so acute, yet the social contract involves not only rights, but also obligations, in particular the payment of taxes, but the receipt by commercial organizations of personal data, including information on purchases, for marketing purposes for analysis, already carries huge risks of personal freedom for everyone.
To solve the above-mentioned problems, there were repeated attempts to develop a system of remote payments, where the role of the intermediary would be minimized. However, such systems of electronic payments proved to be unviable due to reliability and security problems. Because of the nature of computer technology where one and the same information can be copied to the bit accuracy, all remote payment solutions allowed to pay, under certain circumstances, the same coin several times. That is why any such system requires a trusted intermediary who will provide confirmation of payment and the availability of funds in the payer’s account.
Knowing this, we can understand that bitcoin is a means of payment, which can provide trust of transaction participants in those situations, when this trust can not be obtained in an objective way. Also, the first cryptocurrency solved another problem of payment systems – the absence of the need to use secure communication channels to transmit payment information. Thus, bitcoin became the means that allowed to transfer the right of ownership of an asset directly, without intermediaries, through the usual channels of communication, which were the World Wide Web.
How Bitcoin Works
Bitcoin is essentially a registry of records, stored as a distributed ledger called blockchain. Although blockchain stores information in the public domain, there is no record of the actual owner of a particular address. Also, as opposed to banking and classic payment systems, information about a wallet’s balance is not recorded, but is computed each time the distributed ledger is accessed. Simply put, if the bank database has a cell with data about available funds, then bitcoin goes through the chain, where, for example, there is information that a particular address received 5 bitcoins in two transactions, but spent only two, will reflect in the client program available balance of three coins.
The main components of bitcoin usage, however, are keys, private and public. We discussed this implementation in more detail in our articles about cryptography here and here. In simple words about bitcoin we can say that generating a wallet access key, user automatically gets address where payments will be made. At the same time, there is no need to have access to the Internet, the program can generate a pair and offline, which makes it possible to organize the safe storage of cryptocurrency.
To send funds from one address to another, all you need to do is initiate the transfer in the client program and sign it with your private key. After sending to the network, the miners involved in keeping the bitcoin network operational will include information about the transaction in a distributed registry, and the transfer can be considered complete. You can read more about blockchain implementation in cryptocurrency in this article.
Conclusion
Although bitcoin was a breakthrough in the world of digital finance, it was followed by many other cryptocurrencies. Some simply copied the source code and blockchain when they saw the coin developing in a different direction than most. Others developed a completely new model, giving users new features or increased privacy. Either way, it was bitcoin that launched a new milestone in the world of digital money, and understanding what it is will be useful if you want to use a reliable means of savings or payment.
