Bitcoin

Bitcoin is a peer-to-peer system in which transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and are 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. It has been reported that more than 15,000 businesses worldwide accept bitcoin as payment. As of the end of 2022, there were an estimated 300 million cryptowallets in use.

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 1980s. Wei Dai proposed B-money in 1998, which contained the idea of the generation of money through the solving of computational puzzles as well as 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 that utilizes a proof-of-work puzzle that is securely timestamped and contains links between transactions.

On October 31, 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 experienced slowness and was unavailable to some users. CME group announced on October 31, 2017, that it intended to launch bitcoin futures in the fourth quarter of 2017. Bitcoin CME futures were launched in December 2017 with contracts representing five bitcoins.

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 2²⁵⁶. 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 appear to produce randomness but are created by a deterministic algorithm that 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 2²⁵⁶ possible values. The Bitcoin address is created 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 thirty-four numbers and letters, which can safely be made available to the public. Anyone can send bitcoin directly to this public Bitcoin address.

The creation and 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.

Graphic explaining bitcoin transactions from https://bitcoiner.guide/graphics/#transactions

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.

Graphic explaining UTXO from https://bitcoiner.guide/graphics/

Bitcoin can be used to make mobile payments when it is used on a mobile device, such as a smartphone. It uses a scan-and-pay process and also allows users to accept payments by providing a QR code in their bitcoin wallet that can be scanned by the other party, who can then deposit the payment into the wallet. Payments can be made internationally and extra fees and wait times are generally not required.

There are a variety of assumptions made by the Bitcoin protocol with regard 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 percent. 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.

To combat a double-spend attack, 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 percent of the network is needed to perform other attacks, such as selfish mining. This is a mining strategy that allows pools of colluding miners that adopt it to earn revenues in excess of their mining power. Earning more revenue is alluring to many miners, and the fact that selfish mining only requires 33% of the network means that it would take fewer people to execute this type of attack.

The price of bitcoin started at $0 when it was launched in 2009. In February of 2011, it first reached $1 and also reached $30 in the same year. By the end of 2011, it was valued at $5. Bitcoin had a 6,600% gain in 2013 and peaked at $1,100. Since then, the price of bitcoin has increased but remains volatile. As of January 2023, the highest price of bitcoin was in 2021 when it reached more than $61,000, but its low in the following year was approximately $15,000.