Bitcoin (BTC)

Bitcoin?is a?cryptocurrency?and a?payment system?invented by an unidentified programmer, or group of programmers, under the name of?Satoshi Nakamoto. Bitcoin was introduced on 31 October 2008 to a cryptography mailing list?and released as?open-source software?in 2009.?There have been various claims and speculation concerning the identity of Nakamoto, none of which are confirmed.?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,?which uses bitcoin as its?unit of account. Since the system works without a central repository or single administrator, the?U.S. Treasury?categorizes bitcoin as a decentralized?virtual currency. Bitcoin is often called the first cryptocurrency, although prior systems existed and it is more correctly described as the first decentralized?digital currency. Bitcoin is the largest of its kind in terms of total market value.

Bitcoins are created as a reward in a competition in which users offer their computing power to verify and record bitcoin transactions into the blockchain. This activity is referred to as?mining?and successful miners are rewarded with transaction fees and newly created bitcoins. Besides being obtained by mining, bitcoins can be exchanged for other currencies products, and services.?When sending bitcoins, users can pay an optional transaction fee to the miners. This may expedite the transaction being confirmed.

In February 2015, the number of merchants accepting bitcoin for products and services passed 100,000. Instead of 2–3% typically imposed by?credit card?processors, merchants accepting bitcoins often pay fees in the range from 0% to less than 2%. Despite the fourfold increase in the number of merchants accepting bitcoin in 2014, the cryptocurrency did not have much momentum in retail transactions. The?European Banking Authority and other sources have warned that bitcoin users are not protected by refund rights or?chargebacks. The use of bitcoin by criminals has attracted the attention of financial regulators,?legislative bodies, law enforcement, and media.?Criminal activities are primarily focused on?darknet markets?and theft, though officials in countries such as the United States also recognize that bitcoin can provide legitimate financial services

Bitcoin Design

Blockchain

The?blockchain?is a public?ledger?that records bitcoin transactions.?A novel solution accomplishes this without any trusted central authority: maintenance of the blockchain is performed by a?network?of communicating?nodes?running bitcoin software. Transactions of the form?payer X sends Y bitcoins to payee Z?are?broadcast?to this network using readily available software applications. Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. The blockchain is a?distributed database?– to achieve independent verification of the chain of ownership of any and every bitcoin (amount), each network node stores its own copy of the blockchain.?Approximately six times per hour, a new group of accepted transactions, a block, is created, added to the blockchain, and quickly published to all nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent?double-spending?in an environment without central oversight. Whereas a conventional ledger records the transfers of actual?bills?or?promissory notes?that exist apart from it, the blockchain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions

Units

The unit of account of the bitcoin system is bitcoin. As of 2014, symbols used to represent bitcoin are BTC, XBT, and Small amounts of bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (μBTC, sometimes referred to as a?bit), and satoshi. Named in homage to bitcoin's creator, a?satoshi?is the smallest amount within bitcoin representing 0.00000001 bitcoin, one hundred millionths of a bitcoin. A?millibitcoin?equals 0.001 bitcoin, one-thousandth of bitcoin.?One?microbitcoin?equals to 0.000001 bitcoin, one-millionth of a bitcoin.

A proposal was submitted to the?Unicode Consortium?in October 2015 to add a codepoint for the symbol. As of November 2016, it is in the pipeline for position 20BF in the?Currency Symbols?block.

Ownership

Simplified chain of ownership. In reality, a transaction can have more than one input and more than one output.

Ownership of bitcoins implies that a user can spend bitcoins associated with a specific address. To do so, a payer must?digitally sign?the transaction using the corresponding?private key. Without knowledge of the private key, the transaction cannot be signed and bitcoins cannot be spent. The network verifies the signature using the?public key.

If the private key is lost, the?bitcoin network?will not recognize any other evidence of ownership; the coins are then unusable, and thus effectively lost. For example, in 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key.

Transactions

A transaction must have one or more inputs. For the transaction to be valid, every input must be an unspent output of a previous transaction. Every input must be digitally signed. The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. A transaction can also have multiple outputs, allowing one to make multiple payments in one go. A transaction output can be specified as an arbitrary multiple of satoshi. As in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer. Any input satoshis not accounted for in the transaction outputs become the transaction fee.

Wallets

A?wallet?stores the information necessary to transact bitcoins. While wallets are often described as a place to hold?or store bitcoins, due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger. A better way to describe a wallet is something that "stores the digital credentials for your bitcoin holdings" and allows you to access (and spend) them. Bitcoin uses?public-key cryptography, in which two cryptographic keys, one public and one private, are generated. At its most basic, a wallet is a collection of these keys.

There are several types of wallets.?Software wallets?connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership. Software wallets can be split further into two categories: full clients and lightweight clients.

• Full clients?verify transactions directly on a local copy of the blockchain (over 80?GB as of November 2016). Because of its size/complexity, the entire blockchain is not suitable for all computing devices.
• Lightweight clients?on the other hand consult a full client to send and receive transactions without requiring a local copy of the entire blockchain (see?simplified payment verification?– SPV). This makes lightweight clients much faster to set up and allows them to be used on low-power, low-bandwidth devices such as smartphones. When using a lightweight wallet, however, the user must trust the server to a certain degree. When using a lightweight client, the server can not steal bitcoins, but it can report faulty values back to the user. With both types of software wallets, the users are responsible for keeping their private keys in a secure place.

Besides software wallets, Internet services called?online wallets?offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware. As a result, the user must have complete trust in the wallet provider. A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen. An example of such a security breach occurred with?Mt. Gox?in 2011.

Physical wallets?also exist and are more secure, as they store the credentials necessary to spend bitcoins offline. Examples combine a novelty coin with these credentials printed on metal, Others are simply paper printouts. Another type of wallet called a?hardware wallet?keeps credentials offline while facilitating transactions.

Privacy

Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public. In addition, transactions can be linked to individuals and companies through "idioms of use" (e.g., transactions that spend coins from multiple inputs indicate that the inputs may have a common owner) and corroborating public transaction data with known information on owners of certain addresses. Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, may be required by law to collect personal information.

To heighten financial privacy, a new bitcoin address can be generated for each transaction.?For example, hierarchical deterministic wallets generate?pseudorandom?"rolling addresses" for every transaction from a single?seed, while only requiring a single passphrase to be remembered to recover all corresponding private keys. Additionally, "mixing" and?CoinJoin?services aggregate multiple users' coins and output them to fresh addresses to increase privacy. Researchers at?Stanford University?and?Concordia University?have also shown that bitcoin exchanges and other entities can prove assets,?liabilities, and?solvency?without revealing their addresses using?zero-knowledge proofs.

According to Dan Blystone, "Ultimately, bitcoin resembles cash as much as it does credit cards.

Legal status and regulation

The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed its use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.

In April 2013,?Steven Strauss, a Harvard public policy professor, suggested that governments could outlaw bitcoin, and this possibility was mentioned again by a bitcoin investment vehicle in a July 2013 report to a regulator.?However, the vast majority of nations have not done so as of 2014. It is illegal in Bangladesh, Bolivia,?Ecuador.

In China, in December 2013 the Chinese government declared that "bitcoin is not a currency and should not be circulated and used in the market as a currency." 'While people there are free to buy and sell it, financial institutions have been warned away'

Malware

• Malware stealing

Some malware can steal private keys for bitcoin wallets allowing the bitcoins themselves to be stolen. The most common type searches computers for cryptocurrency wallets to upload to a remote server where they can be cracked and their coins were stolen. Many of these also?log keystrokes?to record passwords, often avoiding the need to crack the keys. A different approach detects when a bitcoin address is copied to a?clipboard?and quickly replaces it with a different address, tricking people into sending bitcoins to the wrong address. This method is effective because bitcoin transactions are irreversible.

One?virus, spread through the Pony?botnet, was reported in February 2014 to have stolen up to $220,000 in cryptocurrencies including bitcoins from 85 wallets. Security company?Trustwave, which tracked the malware, reports that its latest version was able to steal 30 types of digital currency.

A type of Mac malware active in August 2013, Bitvanity posed as a vanity wallet address generator and stole addresses and private keys from other bitcoin client software. A different trojan for Mac OS X, called CoinThief was reported in February 2014 to be responsible for multiple bitcoin thefts. The software was hidden in versions of some cryptocurrency apps on?Download.com?and?MacUpdate.

• Ransomware

Another type of bitcoin-related malware is?ransomware. One program called?CryptoLocker, typically spread through legitimate-looking email attachments, encrypts the hard drive of an infected computer, then displays a countdown timer and demands a ransom, usually two bitcoins, to decrypt it. Massachusetts police said they paid a 2 bitcoin ransom in November 2013, worth more than $1,300 at the time, to decrypt one of their hard drives.?Linkup, a combination ransomware and bitcoin mining program that surfaced in February 2014, disables internet access and demands credit card information to restore it, while secretly mining bitcoins.

? Tharaka Francis