KYT CryptoLibrary – What is Bitcoin?


Bitcoin is a decentralized electronic currency. It is not controlled by a corporation or government,
and is not backed by any physical good or promise other than the transparent rules it
follows, as coded into the Bitcoin protocol. Depending on how you look at it, Bitcoin can
also be described as a virtual commodity, a payment system, a network, software, or
an industry. Bitcoin is used to send value over the internet. Other electronic financial systems–such as
online banking or Paypal–use account numbers and passwords to identify and authenticate
their users. Bitcoin uses cryptographic keys and signatures,
called a public and private keypair. Bitcoin are transferred by signing messages
with your private keys. The message is passed on to the network, which
is immediately able to verify whether the account holder exists, has enough Bitcoin
and successfully attached a valid signature. To create a Bitcoin account, you only need
to run software on a smartphone or computer. Anybody can create as many accounts as they
want anonymously and at no cost. Nobody can stop you from creating an account. This permissionless system makes it impossible
for anyone to deliberately slow down or restrict innovation and commerce. Bitcoin servers are spread around the globe
and anyone can join the Bitcoin network by simply running software on their computer. It is important that everyone at all times
has the opportunity to validate rules like the total limit of Bitcoin, and whether transactions
are appropriately signed. Joining the network should be possible anonymously
and without much cost, bandwidth requirements, or effort. Bitcoin transactions are recorded on a shared
ledger called a blockchain. Anybody can verify and download this ledger,
and use it check and calculate their own Bitcoin holdings as well as how many Bitcoin there
are in total. The blockchain is amended every ten minutes
on average through a process called mining. In the process of Bitcoin mining, participants
propose amendments to the blockchain by issuing new blocks that are limited in size. They are incentivized to be honest by having
to attach a cost in the form of electricity to each block. By using an energy-intensive algorithm, miners
find rare numbers. The rarer a number is, the more electricity
they must use to find it. In exchange for the costs the miners incur,
they are rewarded with newly created Bitcoin and transaction fees. This creates an active exchange market for
Bitcoin because the miners have to find buyers for their Bitcoin in order to pay their electricity
bills. This system also keeps miners honest. If the block that they propose is rejected
for violating the rules, they would still have to pay for the electricity costs incurred,
but would receive no reward. As transactions are passed along the network
they are still unconfirmed. Only once a miner includes a transaction in
a block, it is considered confirmed. Once another miner has added another block
on top, the transaction is considered to have two confirmations. The more confirmations a transaction has,
the less likely it is to be invalidated. To incentivize a miner to include your transaction,
you will have to pay them a fee. Adding no or too small a fee, means that a
transaction could take hours or days to confirm when the network is experiencing congestion
because miners are not incentivized to include your transaction. When this happens, the Bitcoin are still yours
and you can spend them again to the same or a different recipient with a higher fee. Once a transaction is confirmed, other transactions
using the same inputs are invalidated. Depending on the value of the transaction,
it is appropriate to wait for 1 to 6 confirmations, which can take 10-60 minutes. Bitcoin miners create Bitcoin not out of thin
air, but by performing energy intensive calculations. They sell these coins to people who want to
invest or send money to anywhere around the globe. Anybody can cheaply run the Bitcoin software
and verify the integrity of the system, as well as make transactions. Nobody controls Bitcoin. Neither the miners nor the developers can
force anybody to change the rules, and they can not stop you from using it. Like the internet, Bitcoin is becoming an
important tool for individual empowerment.

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