Bitcoin is the first Cryptocurrency as well as the first blockchain implementation in the world. We have already discussed what cryptocurrency is. In this section, let us explore little deep into the topic with the most famous cryptocurrency, Bitcoin. The historical aspects of its creator and all have already pinpointed at many places. However, for the sake of continuity let’s have a glance. Based on the conceptual framework put forward by some researchers in late 90’s Satoshi Nakamoto introduced bitcoin in 2009. It does follow the exact structure of a typical Blockchain with P2P shared network, Distributed ledgers, and cryptographically protected data.
So how someone can use the Bitcoin service? May the people are already familiar with the method. It is simple and we don’t need any technical knowledge or programming skills to use Bitcoin. The first thing we have to do is create an Account in Bitcoin blockchain. For that, the simplest way is to create a digital wallet. There is a number of wallet service providers like coinbase and BitCore. While creating an account the user has to provide a ‘Key’ (similar to a password). Using this key the wallet will generate a valid bitcoin Private key- Public Key pair. The public key will be visible to all and it is the visible account ID of the user. On the other hand, the user keeps the private key by himself, it is the access key to his account. If a person loses his private key he loses access to his account and his money.
The easiest way to own Bitcoin is to buy them from a bitcoin exchange. There are a number of online bitcoin exchanges which exchange normal currency to bitcoin. People can exchange their normal currency for bitcoin and move it to their wallet. Another method to own bitcoin is to participate in Bitcoin mining.
Sending bitcoin from one account to another is called as a transaction. It is usually done through wallets. The wallet app will provide an interface where we can input the account Id of the recipient and the amount we wish to transfer. Once we have made the transaction, the miners will verify the transaction and add to the blockchain ledger if it is a legitimate one. In Bitcoin, the transactions are cost-free. Usually, a transaction validation time is about 10 minutes in bitcoin, but if we give a small transaction fee we can speed up the process.
The mining is the most important as well as the interesting topic in bitcoin. This is the process by which new transactions are validated and added to the socalled ‘blockchain’. This demands dedicated mining hardware and thus, not all nodes are involved in mining. Those nodes who are participating in mining process is known as ‘miners’.
When a new bitcoin transaction happens in the network that is broadcasted on the network. The miners listen to this broadcasting and engage in transaction verification. Once the transactions are verified they are added to a block.
what do miners actually do?
Here, the mission is to find a hash value for the new block. The miner who finds the hash value first is rewarded with some bitcoins called block reward. Now it is 12.5 BTC. The reward is halved every 210,000 blocks or roughly every 4 years.
Finding hash value is not a big deal. Every node can do that. Therefore, a difficulty level is associated with it to make the nodes compete with each other. The difficulty level is a measure of how difficult is to find the hash. Difficulty level shrinks the set of hash values that a block can have. Without difficulty level, the hash can have any of the value within the super gigantic set of 2^256 possibilities (since the length of hash = 256 bits). By associating a difficult level, the target set is reduced considerably. The difficulty level is specified in terms of a number of zeroes, which means the miner has to find a hash value which starts with a specified number of zeroes. The nodes keep finding different hash values and checks whether it satisfies the required difficulty level. Since the data of a block remains same, the hash is always same. Therefore, the only possibility to try out different hash values is by associating a nonce with the content of the block. The nonce is an arbitrary string of 32-bit length. i.e. H(block + nonce)
Being a small target set, the probability of finding success is reduced. The miners keep changing the nonce in a brute force manner and the corresponding hash is computed each time. This is the real game and the computational power of nodes really matters here because the miners have to try out large combinations of ‘Nonce’. The node which equipped with dedicated hardware and high computational power has a greater chance to win this game and get the block reward. Those who find hash first will broadcast the block along with the nonce. By receiving this, others stop mining and validate whether the received hash satisfies the specified difficulty level. If yes, the nodes show their acceptance by adding it to the blockchain.
Value of Bitcoin
The value of bitcoin has drastically increased and touched new heights in the last couple of months. So a general question that may arise in anyone’s mind is ‘who determines the value (or more economically speaking exchange rate) of bitcoin. As we know there is no central bank or any other designated agency to control it; then how the value is determined, or who determines it? The answer lays in the basic economics, which is demand and supply. Following is the simplest model to determine the value of bitcoin.
T : Total bitcoin transaction/second
D : Duration that a BTC needed by a transaction
S : Supply of the bitcoin
P : Price of the bitcoin
S/D=Bitcoins available per Second
T/P= Bitcoins needed per Second
According to demand-supply rule, when the supply of the bitcoin increases the demand decrease consequently the price will also decrease. And when the demand increases the supply of bitcoin will also decrease, consequently the price of the bitcoin will also increase.
At an equilibrium state, where the supply S over D, is equal to the demand T over P. We can deduce the price P as
That is at equilibrium, the price should be equal to T times D divided by S.
This is the very basic equation to calculate bitcoin exchange rate. The value of
the bitcoin basically depends on the demand and supply. However, there are
many other factors including public perceptions, mining difficulty level, energy
consumption for mining process etc.that are taken into consideration while calculating the actual exchange rate. So that there will be some slight variations in exchange rate across the different market. It is evident that a single authority can’t control the value of bitcoin, rather it is determined strictly based on the user transaction.
Community, Politics and Regulations
Along with the enormous possibilities it opened, the Bitcoin (or the cryptocurrencies as a whole) poses potential threats also. The latest discourses on crypto currencies are mostly related to this aspect, especially that from government authorities and financial institutions. The cryptocurrencies can bring a lot of benefits to existing economic systems as well as the society. But an unfettered and anonymous economic regime also raises many other questions like security, illicit usage, black money etc. The discussion is still going on and both sides are upholding their own version. Here are some of the advantages as well as disadvantages of the cryptocurrencies.
Cryptocurrencies offer very fast transaction which is far more superior than the Present banking transaction speed. Bitcoin takes a maximum of 10 minutes for validating a transaction and it is about 10 seconds in Ethereum.
Cryptocurrency transactions are fully anonymous and it is not possible to identify who had done this transaction or to whom this transaction is made. The participants will be using only the network address of the sender and receiver. No identity of those participants will be published in the shared ledger.
No restriction on payments
It is the most noticeable advantage of cryptocurrency. There is no restriction on transactions. The user can send the currency at anytime from anywhere to everywhere. That means no time boundaries like bank holidays.
Less /No transaction fees
The cryptocurrency transactions are normally free. Or the fee is much less than present financial transaction charges. In bitcoin, anybody can do transactions without paying any transaction fees. The user also has the option to offer transaction fees for speeding up their transaction. That is if a person is providing a transaction fee, more miners will come to validate the transaction; hence the transaction gets validated fast.
Cryptocurrencies are one of the most secure currency systems available today. It has the ‘immutable’ property; i.e. If one transaction had occurred in the blockchain based cryptocurrency, it is irreversible. So the chances of fraudulent transactions are nearly impossible.
Government can’t De-monetize
Most of the cryptocurrencies work as a decentralized system and its exchange rate is fixed dynamically according to the demand-supply factors. No government regulation or anything can’t stop such independent cryptocurrencies. The only thing that a government can do is restrict the conversion of it to normal currency. However, they can’t stop the transactions in cryptocurrencies.
Secure Payment information
Cryptocurrency transactions don’t use any identity of the users. They will only use the wallet address of the sender and receiver, all other information is securely hashed and no one can retrieve it back. When someone sends a cryptocurrency to another person/entity, none of the personal information will be shared with them. Only the particular amount of bitcoin will be transferred from one account to another account.
Most of the cryptocurrencies have a fixed number of currencies in their exchequer. In case of bitcoin, it is 21 million. Once the entire thing has mined there won’t be any more new bitcoins. So there is no chance for inflation.
Even though the demand for ‘cryptocurrency’ is steadily increasing, the point is that many governments have not given any official approval for ‘cryptocurrency’ transaction. And its usage is now limited some specific domains only. Moreover, the ‘cryptocurrencies’ are still far away from the common mass.
It can consider either as an advantage or disadvantage. Although there is a strict demand supply rule to define the exchange rate of cryptocurrencies, present market trends indicate an uncommon surge in the exchange rate of cryptocurrencies, especially that of Bitcoin. But it is believed soon that it will attain the normal pace.
As we said government can’t control cryptocurrencies, but they can ban it and illegalize its transaction. Of course, it cast a shadow over such ambitious, unfettered movements.
Deflation can happen
Cryptocurrencies are generally limited in number and its exchange rate is basically depended upon the supply and demand. Since most of the cryptocurrencies have only a fixed number of currencies, the possibilities of deflation are greater than any other economic system. In case of bitcoin, if someone holds the bitcoin for a long time, then the supply will reduce and still the demand will increase and it will create deflation.
Key recovery is impossible
Since most of the cryptocurrencies don’t have a central authority, every individual is responsible for keeping their account safe. If anyone loses the wallet key, no one can help them get it back..
Supports Money Laundering/Black Market
The anonymity of the cryptocurrency makes it attractive to the black market and money launderers. Since the identity is not revealed anywhere misuses are reported several times. Famous two are the “silk road” website which provides illegal drugs and other illegal items payable by bitcoin and recent ‘Wannacry’ cyber-attack. The discussion is still going on and most of the governments have not yet formulated any direct legal frameworks regarding this. Of course, the potentials of cryptocurrency can be used to develop a more transparent economic system, but the loopholes and security threats have to be taken care of before taking such big leaps. A potential technology like this can’t be avoided forever, so we can expect a fully legalized cryptocurrency based economic system soon.