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Bitcoin

Bitcoin

Bitcoin is a cryptocurrency and a digital payment system invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto. It was released as open-source software in 2009.

The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain. Since the system works without a central repository or single administrator, bitcoin is called the first decentralized digital currency.

 

Besides being obtained by proof-of-work (PoW) "mining", bitcoins can be exchanged for other currencies, products, and services.

 

As of February 2015, over 100,000 merchants and vendors accept bitcoin as payment. According to a research produced by University of Cambridge in 2017, there were 2.9 to 5.8 million unique users actively using a cryptocurrency wallet, most of them using bitcoin.

History

Pioneering work on digital currencies prior to bitcoin was done by David Chaum, who published on blind signatures as the basis for untraceable electronic cash and mail throughout the 1980’s. Wei Dai proposed B-money in 1998, which contained the idea of generation of money through the solving of computational puzzles as well novel methods for reaching consensus among network participants. Adam Back introduced the Hashcash algorithm. Hal Finney later utilized Back’s hashcash when he introduced a reproducible proof of work (RPOW) token in 2005. Nick Szabo proposed Bit gold in 2008, a digital currency which utilizes a proof of work puzzle that is securely timestamped and contains links between transactions.

On October 31st 2008, an individual or group of individuals under the pseudonym Satoshi Nakamoto published the bitcoin whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System". The open source code for bitcoin was released on January 9, 2009. The identity of Satoshi Nakamoto remains unknown, however they are thought to retain the largest known bitcoin wallet containing approximately 1 million bitcoins. No bitcoins have ever been transferred from this account to date.

CBOE launched Bitcoin futures trading on December 10, 2017. After experiencing a surge in price almost immediately the exchange halted trading for two minutes due to the volatility. CME group announced on October 31, 2017 that it intends to launch bitcoin futures in the fourth quarter of 2017. The futures will be based on the CME Bitcoin Reference Rate and will be cash settled.

Architecture

Public Key cryptography

Control of the Bitcoin currency BTC is governed by a pair of cryptographic digital keys known as the public and private keys. The public key is open to the public and can be used to create a unique Bitcoin Address where individuals may receive funds. The private key represents control and ownership over these funds enabling the private key holder to produce a digital signature which is essential for the transfer of bitcoins.

Private keys are a number chosen at random from numbers between 1 and 2^256. The method used to generate this random number must not be reproducible by another party or the security of the key could be compromised. Good sources of entropy include the getnewaddress command on the Bitcoin Core client or flipping a coin. Pseudorandom methods, which appear to produce randomness but are created by a deterministic algorithm which can be reproduced and are not appropriate for private key generation.

Public keys are generated utilizing an elliptic-curve cryptography based multiplication of the private key. It is practically impossible to reverse engineer the private key from the public key without trying all 2^256 possible values. Finally, the Bitcoin address is created from by performing a one-way cryptographic hashing. The SHA256 hash is used on the public key, followed by a RIPEMD160 hash and then a base58 encoding. This outputs the Bitcoin address itself, which is a string of 34 numbers and letters which can safely be made available to the public. Anyone can send Bitcoin directly to this public Bitcoin Address.

Transactions

The creation & validation of transactions on the Bitcoin blockchain, along with the appending of these transactions to the Bitcoin blockchain, is the core feature of the Bitcoin network and most cryptocurrency in general. Transactions are created by the owner of the bitcoins, who generate a specific digital signature using the private keys to create a valid transaction. Any transaction broadcast to the network without a valid digital signature will not be validated and propagated by the honest nodes in the network and will fail to be added to the blockchain. All transactions in the Bitcoin blockchain are globally and publicly visible.

UTXO

The Bitcoin transaction system is based on the unspent transaction outputs (UTXOs) model. A new UTXO is created each time a transaction is created in a new Bitcoin block with a new output. The UTXO is eliminated when the owner of the keys initiates a transaction which empties all of the Bitcoin.

Security

There are a variety of assumptions made by the Bitcoin protocol with regards to transaction security and validity. The double spend attack or majority attack is possible when the attacker controls a larger portion of the mining power in the network, most effective at >50%. To date, no double spending attacks have occurred on Bitcoin, however multiple attacks on smaller chains such as Bitcoin Gold, Zencash, monacoin, and others have been successful. During the time that the attack controls this ability they are able to reverse specific arbitrary transactions by re-mining blocks with those transactions excluded. Thus cryptocurrency exchanges and others who accept large Bitcoin transactions typically wait for additional confirmation of blocks before relying on payment, as the cost to rewrite a transaction becomes larger the further back in the blockchain history it lies. The economic incentives for whether or not miners will benefit from attacking the network through a double spend rely on a number of factors and are actively debated.

In addition to the majority attack, there are lower thresholds of mining power required potentially only 33% of the network has rate to to perform other attacks such as selfish mining.

Timeline

Bitcoin futures start trading

The Chicago Board Options Exchange (CBOE) launches Bitcoin futures trading, enabling investors to speculate on the price of BTC without actually owning Bitcoins themselves. After experiencing a surge in price almost immediately the exchange halted trading for two minutes due to the volatility.

Bitcoin Gold (BTG) forks from Bitcoin (BTC)

The Bitcoin Gold forks on block 491406 from the Bitcoin network.

The Bitcoin network forks into Bitcoin (BTC) and Bitcoin cash (BCH)

The controversial hardfork of Bitcoin and Bitcoin Cash into two separate blockchains occurs on block 478558. The split results from an inability of the Bitcoin community to resolve debates over a proposed increase to the 1megabyte limit on the maximum block size. Bitcoin Cash increases the block limit to 8MB and removes segregated witness.

Bulgarian officials seize 213,519 bitcoins worth more than their national debt

The bitcoins are seized from a criminal group. The rapidly growing price of BTC makes the estimated value of those Bitcoins approximately $3.3 billion dollars on Dec 7, 2017, more than Bulgaria's annual national debt.

WannaCry ransomware attack

The WannaCry ransomware attack cryptoworm infects computers worldwide. Payment in Bitcoin is required in order to restored data encrypted by the attack. Marcus Hitchins discovered a kill switch that shut down the software before it executes simply by registering a specific domain.

The Bitcoin network hash rate exceeds 1 Exa hash per second

The Bitcoin network exceeds 1 Exa Hash/s, making the Bitcoin network around 300 times more powerful than the worlds fastest supercomputer at the time tianhe-2.

Coinbase raises record $75M funding round for its bitcoin exchange

The round includes notable investors such as Andreessen Horowitz, Tim Draper, Union Square Ventures, and others.

FBI seizes and shuts down the online black market called the Silk Road

The Silk Road, an online marketplace best known for selling illegal materials like drugs, is shut down by the BI. The operation to catch the owner of Silk road named Ross William Ulbricht, using the pseudonym Dead Pirate Roberts, is called Operation Onymous. The FBI seized approximately 26k BTC from the Silk Road.

Winklevoss file proposal for Bitcoin exchange traded fund (ETF)

The proposal is for an ETF, usually a basket of stocks or commodities, which would hold Bitcoins.

Bitcoin foundation is launched

The Bitcoin Foundation is a nonprofit corporation launched to accelerate the development of the open source protocol. Board members at the initial founding include Gavin Andresen, Mark Karpeles, Charlie Shrem

MtGox changes ownership

Jed McCaleb sells MtGox to Mark Karpeles, which was the largest Bitcoin exchange at the time.

MtGox Bitcoin exchange is created

The MtGox bitcoin currency exchange market is established by Jed McCaleb. He had previously used the domain for a Magic: The Gathering Online eXchange project which was abandoned.

In first real world transaction, 10k BTC is exchanged for 2 large pizzas

A Jacksonville, Florida programmer Laszlo Hanyecz pays 10,000 bitcoins for 2 large pizzas, making the request via a bitcoin talk forum post. May 22nd is now celebrated as Bitcoin Pizza Day

Hal Finney receives the first Bitcoin transaction from Satoshi Nakamoto

The first Bitcoin transaction is sent to Hal Finney in block 170, who downloaded the Bitcoin release on the first day it was available.

Bitcoin code is released

The first release of Bitcoin called version 0.1 is distributed on a cypherpunk mailing list.

The Bitcoin genesis block is mined

The first block of a blockchain is known as the genesis block. Bitcoin's genesis block contains this message from the Times of London newspaper headline "03/Jan/2009 Chancellor on brink of second bailout for banks". This note proves that the block was created after January 3, 2009 and is also likely a commentary on the instability of the financial system at that time.

Bitcoin code pre-release

The Bitcoin source code pre-release is made available to the public for the first time.

Bitcoin: A Peer-to-Peer Electronic Cash System

The bitcoin whitepaper is published under the pseudonym Satoshi Nakamoto. The whitepaper lays out in detail the framework for bitcoin, the first decentralized digital currency requiring no trusted third party that solves the double-spend problem.

People

Name
Role
Related Golden topics

Adam Back

Andreas Antonopoulos

BtcDrak

Cory Fields

Eric Lombrozo

Gavin Andresen

Gregory Maxwell

Hal Finney

Jameson Lopp

Jeff Garzik

Bloq

Johnson Lau

Jorge Timon

Luke Dash jr

Michal Ford

Nick Szabo

Nicolas Dorier

Patric Strateman

paveljanik

Peter Todd

Pieter Wuille

Roger Ver

Satoshi Nakamoto

Suhas Daftuar

Further reading

Author
Title
Link
Type

Alexander Osipovich and Gabriel T. Rubin

U.S. Bitcoin Futures Climb in First Day of Trade

Andreas M. Antonopoulos

Mastering Bitcoin

Arvind Narayanan and Jeremy Clark

Bitcoin’s academic pedigree

Christian Decker

CABRA — Comprehensive Academic Bitcoin Research Archive

Christian Decker, Roger Wattenhofer

Information Propagation in the Bitcoin Network

Academic paper

Ittay Eyal, Adem Efe Gencer, Emin Gun Sirer, Robbert van Renesse

Bitcoin-NG

Academic paper

Marc Andreessen

Why bitcoin matters

Martin Haferkorn, Manuel Quintana Diaz

Seasonality and Interconnectivity Within Cryptocurrencies - An Analysis on the Basis of Bitcoin, Litecoin and Namecoin

Academic paper

Michael Nielsen

How the bitcoin protocol actually works

Satoshi Nakamoto

Bitcoin: A Peer-to-Peer Electronic Cash System

Documentaries, videos and podcasts

Title
Date
Link

Banking on Bitcoin

2016

Bitcoin - Proof of work by Khan Academy

May 1, 2013

Bitcoin in Uganda - Empowering People

May 16, 2014

Bitcoins in Argentina

2013

Ever wonder how bitcoin (and other cryptocurrencies) actually work?

Jul 7, 2017

Life on Bitcoin

2017

The Bitcoin Doco

2014

The importance of layer two — an HTTP of bitcoin and blockchains

Aug 11, 2017

The Rise and Rise of Bitcoin

2014

What is Bitcoin? (v1)

Mar 22, 2011

Companies

Company
CEO
Location
Products/Services

Bittrex

Bill Shihara

Nevada, US

Cryptocurrency exchange

Coinbase

Brian Armstrong

San Francisco, US

Cryptocurrency exchange

Gemini

Tyler Winklevoss

New York, US

Cryptocurrency exchange

LocalBitcoins.com

Nikolaus Kangas

Finland

In person bitcoin exchange

References