What is bitcoin and how does it work? | New Scientist
bitcoin is a digital currency that operates free from any central control or supervision of banks or governments. instead, it relies on peer-to-peer software and cryptography.
A public ledger records all bitcoin transactions and copies are kept on servers around the world. anyone with a spare computer can set up one of these servers, known as a node. consensus on who owns which coins is reached cryptographically through these nodes rather than relying on a central trusted source like a bank.
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Each transaction is publicly broadcast on the network and shared from node to node. Every ten minutes or so, miners collect these transactions into a group called a block and they are permanently added to the blockchain. this is the ultimate bitcoin ledger.
In the same way that you would hold traditional currencies in a physical wallet, virtual currencies are held in digital wallets and can be accessed from client software or from a variety of hardware and online tools.
Currently, bitcoins can be subdivided to seven decimal places: one thousandth of a bitcoin is known as a milli and one hundred millionth of a bitcoin is known as a satoshi.
In truth, there is no such thing as a bitcoin or a wallet, just an agreement between the network on the ownership of a coin. a private key is used to prove ownership of funds to the network when making a transaction. a person could simply memorize her private key and not need anything else to retrieve or spend her virtual money, a concept known as a “brain wallet”.
can bitcoin be converted into cash?
bitcoin can be exchanged for cash like any asset. There are numerous online cryptocurrency exchanges where people can do this, but transactions can also be done in person or on any communications platform, allowing even small businesses to accept bitcoin. There is no official mechanism built into bitcoin to convert to another currency.
nothing intrinsically valuable underpins the bitcoin network. but this is true for many of the world’s most stable national currencies since coming off the gold standard, such as the US dollar and the British pound.
what is the purpose of bitcoin?
bitcoin was created as a way to send money over the internet. the digital currency was intended to provide an alternative payment system that would operate without central control but would otherwise be used like traditional currencies.
are bitcoins safe?
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The cryptography behind bitcoin is based on the SHA-256 algorithm designed by the US National Security Agency. cracking this is for all intents and purposes impossible, as there are more possible private keys that would need to be proved (2256) than there are atoms in the universe (estimated to be between 1078 and 1082).
There have been several high-profile cases of bitcoin exchanges being hacked and funds stolen, but these services invariably stored the digital currency on behalf of clients. what was hacked in these cases was the website and not the bitcoin network.
In theory, if an attacker could control more than half of all existing bitcoin nodes, then they could create a consensus that they own all the bitcoins and embed it in the blockchain. but as the number of nodes grows, this becomes less practical.
A realistic problem is that bitcoin operates without any central authority. Because of this, anyone who makes a mistake with a transaction in your wallet has no recourse. if you accidentally send bitcoins to the wrong person or lose your password, there’s no one to turn to.
Of course, the eventual arrival of practical quantum computing could end it all. much of cryptography relies on mathematical calculations that are extremely difficult for today’s computers to perform, but quantum computers work very differently and can execute them in a fraction of a second.
what is bitcoin mining?
Mining is the process that maintains the bitcoin network and also how new coins are generated.
All transactions are broadcast publicly on the network and miners bundle large collections of transactions into blocks by completing a cryptographic calculation that is extremely difficult to generate but very easy to verify. the first miner to solve the next block transmits it to the network and if it is proven correct, it is added to the blockchain. that miner is then rewarded with an amount of newly created bitcoin.
Inherent in the bitcoin software is a hard limit of 21 million coins. there will never be more than that in existence. The total number of coins will be in circulation by 2,140. Approximately every four years, the software makes it twice as difficult to mine bitcoins by reducing the size of the rewards.
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When bitcoin was first released, it was possible to almost instantly mine a coin using even a basic computer. now it requires rooms full of powerful equipment, often high-end graphics cards that are adept at processing the calculations, which when combined with a volatile bitcoin price can sometimes make mining more expensive than it’s worth.
miners also choose which transactions to group into a block, so the sender adds fees of a variable amount as an incentive. once all coins have been mined, these fees will continue as an incentive for mining to continue. this is necessary as it provides the infrastructure of the bitcoin network.
who invented bitcoin?
In 2008, the .org domain name was purchased and an academic white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was uploaded. established the theory and design of a system for a digital currency free from the control of any organization or government.
the author, under the name of satoshi nakamoto, wrote: “the root problem with conventional currencies is all the trust that is required to make it work. the central bank must be trusted not to debase the currency, but the history of fiat currencies is littered with violations of that trust.”
The following year, the software described in the document was finished and released publicly, launching the bitcoin network on January 9, 2009.
nakamoto continued to work on the project with various developers until 2010, when he withdrew from the project and left it to its own devices. Nakamoto’s true identity has never been revealed and they haven’t made any public statements in years.
The software is now open source, meaning anyone can view, use, or contribute the code for free. many companies and organizations work to improve the software, including mit.
what are the problems with bitcoin?
There have been several criticisms of bitcoin, including that the mining system consumes a lot of energy. The University of Cambridge has an online calculator that tracks power consumption, and in early 2021 it was estimated that it would use more than 100 terawatt hours per year. For perspective, in 2016 the UK used 304 terawatt hours in total.
Cryptocurrency has also been linked to criminality, with critics pointing out that it is a perfect way to transact on the black market. in fact, cash has provided this function for centuries, and the bitcoin public ledger can be a tool for law enforcement.
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