How Does Bitcoin Work? A Detailed Review of the Most Popular Coin

bitcoin works

2017 can be surely called the year of cryptocurrency. It was last year when their existence became known to the general public. At the moment there are more than a thousand different coins. Most of the credit, of course, belongs to Bitcoin. Demand for Bitcoin is quite large, even if we take into account the current drop of the course. In this article we will explain how cryptocurrency is arranged, how it is mined, and we need it in general. We will take the most popular coin – Bitcoin – as an example.

Contents:
(please click the topic to scroll down to it)

  1. What are cryptocurrencies and why do we need them?
  2. What is Bitcoin transaction or how is Bitcoin transferred?
  3. How does a Bitcoin farm work or where do new coins come from?
  4. How to use Bitcoins?
  5. Conclusion

1. What are cryptocurrencies and why do we need them?

Cryptocurrencies are digital money, the main feature of which is absolute decentralization. Unlike Qiwi, Webmoney, Yandex Money, etc., there is no single server for cryptocurrency, blocking which you can “stop” the whole network.

In simple words, cryptocurrencies are absolutely independent of any systems (public, banking, financial, etc.). A similar “superpower” is given to the coins by the technology, based on which they are created – blockchain. With this technology, you can consistently encrypt any data, not necessarily financial transactions. This data register (if we are talking about cryptocurrencies, the transaction list) is stored on tens of thousands of computers all over the world simultaneously. The interaction between the participants is built on absolute equality. Each user is both a user and a server, similar to the peer-to-peer system used in uTorrent.

At this point in time, there is no such technology that could compromise, replace or block blockchain (in case of a large community). You will simply need a titanic amount of processing power to carry out such an action.

Another feature of Bitcoin (BTC) and other coins is their absolute autonomy. Intermediaries are not required for the correct operation of cryptocurrency, so there are pretty much no fees when making transactions

2. What is Bitcoin transaction or how is Bitcoin transferred?

Daily transactions in the Bitcoin (BTC) network only amount to about $4 billion. If you want to sell more than buyers want to bue, the rate of Bitcoin rate, in the opposite case it increases. This mechanism is understandable to the vast majority of people, but not many people understand how the Bitcoin transaction is carried out from a technical point of view. Let us try to explain this issue in simple words.

When transferring Bitcoin from one wallet to another, a section of data confirmed by a unique signature is collected in blocks. Each transaction is unique and there can not be two identical ones. The information stored in the section is mostly information about previous transactions that are encrypted into a special code (hash). Blocks are connected in chains, which are necessary both for checking the implementation of the payment itself and for physically implementing special transaction parameters. Generally speaking, each new transaction stores data about all previous payments from the chain of blocks

3. How does a Bitcoin farm work or where do new coins come from?

Fiat (paper) money is printed on the currency court, precious metals (including gold) are extracted from the depths of our wonderful planet, but where do bitcoins or other digital coins come from?

As we said above, cryptocurrency does not have any single centers and it is logical to assume that coins are produced by the forces of the entire community. Mining (extraction) of cryptocoins is carried out by providing the platform with computing power of the equipment. People who want to start mining bitcoins should install special farms, which consist of video cards or special network equipment for mining (ASIC-miners). Using its computing power, equipment solves complex equations and collects data into blocks. For this, the Bitcoin algorithm awards the miners with a certain number of coins. It was possible to receive 50 BTC for calculating the first block, after 210 thousand blocks are extracted, the reward reduces by half. At the moment it is 12.5 BTC per block.

The emission of Bitcoin is limited to 21 million coins. Despite the fact that more than 17 million coins have already been mined, the last piece will be mined not earlier than in May of 2140. Satoshi Nakamoto (pseudonym of the Bitcoin creator) did this intentionally in order to prevent the inflation of the coin.

4. How to use Bitcoins?

Anyone with access to Internet can use the most popular cryptocurrency. In order to pay with Bitcoins in the Internet, it is enough to have a virtual wallet (such as Blockchain.info). However, it is not practical to store all your savings on such services. If you want to buy Bitcoins and leave them be for several years until the rate grows, then it’s better to use a cold wallet. You can read more about the classification of cryptocurrency wallets in this article.

If you want to get free coins, you can use bitcoin faucets – these are special services that pay tine shares of BTC for performing certain actions (viewing advertisements, clicking, registering in services, etc.)

5. Conclusion

Cryptocurrencies have recently been attracting more and more attention of the public. Bitcoin is considered the leader of the industry. Its operations are based on the technology of blockchain. For this reason, Bitcoin does not need a single center, regulators or intermediaries. All transactions are made directly from wallet A to wallet B. Data on financial transactions are stored in blocks. The work of the system is supported by the miners who provide the computing power of their own network equipment. For this, the system rewards them with a certain number of coins.

There is no need for deep knowledge in the field of cryptography for common use of Bitcoin. You just need to create a wallet and have access to the Internet to carry out transactions.

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Other Side of Blockchain: How Is the Technology Used Today?

blockchain technology

Today when we hear the word “blockchain” we think about Bitcoin, Ethereum and other cryptocurrencies. The distributed ledger technology as it exists now first appeared in 2009 together with the first cryptocurrency. Bitcoin, as well as the vast majority of digital currencies are based on blockchain. Probably the only exception is the project and the coin called IOTA that is based on Tangle technology and does not include blockchain. Anyway, it soon became clear that cryptocurrencies are just one possible way to apply the distributed ledger technology. Blockchain is actually a new and advanced way to store and exchange information, and if we stick to such a broad definition it will become clear how big is the potential of these technology.

Contents:
(please, click the topic to scroll down to it)

  1. What is blockchain technology?
  2. Blockchain and digital currencies
  3. Where is blockchain being applied and what are its prospects?
  4. Conclusion

1. What is blockchain technology?

To put it simply, blockchain is a kind of database, a way of its management. In fact, blockchain comes down to electronic recording of particular information;storage and amendment of this information must be coordinated between independent parties. The method of information storage with the help of blockchain guarantees impossibility of spontaneous information amendments by a user without other users’ concord. Blockchain resembles torrent, both technologies are based on peer to peer principle,where information exchange is carried out directly between equal participants.Every information record is a block. Blocks constitute a chain; so, every other block contains part of information from the previous one. All information of this distributed database stores on  computers of every net user.

2. Blockchain and digital currencies

Nearly all digital currencies are based on the blockchain technology. Cryptocurrency actually exists as a recorded information about transactions just like the real fiat money that we transfer between bank accounts. Digital currencies record, store and change their information using a distributed ledger technology. Many coins are based on the same blockchain. For example such currencies as Namecoin, Litecoin, Dogecoin, etc. are based on bitcoin blockchain. Ethereum blockchain was used to deploy more than 500 other cryptocurrencies, including such popular coins as  Binance Coin and OmniseGo. Some leaders of the cryptocurrency market also used to be based on Ethereum blockchain but later developed or at least started developing their own distributed ledger. These are, for instance, EOS – top-5th digital coin by market capitalization, and TRON. However many cryptocurrencies were not satisfied with what bitcoin and Ethereum could offer and designed their own blockchain. These are Ripple, Zcash, NEO, Dash, Monero, Cardano and others.

So, how blockchain is implemented in cryptocurrencies? A block is a special structure where the information about transactions is recorded. Each block contains the information related to the previous one, so they form a single chain where no one can edit the information on their own discretion. The whole information about what has happened in a decentralized database is recorded into the blocks. Each block includes a header and a list of transactions. Blocks are formed by miners that carry out calculations necessary to find hash. The main function of the distributed ledger is that it ensures cryptographically secured and decentralized storage of the information about transactions.

3. Where is blockchain being applied and what are its prospects?

Blockchain technology is quite cross-functional, because it provides us with the new method of information storage and exchange. In all areas where it is applied, blockchain functions as a universal database that almost cannot be hacked or amended without sanction. However, anyone who has the right can get access to the information. A great interest to blockchain comes from the finance sector.  Traditional banks and fintech startups pay their attention to distributed solutions that blockchain suggests.

Governments treat cryptocurrencies rather negative, but at the same time they realize blockchain potential. Some countries, like Sweden or Arab Emirates, plan switch their register of properties to blockchain.  Estonia develops mechanisms for blockchain-voting at shareholders meetings. Besides,there is e-Residency platform in the country — electronic identification system based on blockchain.

The world’s largest humanitarian organization called World Food Programme uses blockchain to provide refugees with food via existing shops and retail chains instead of directly distributing food or money to buy some.   

Smart contract technology that is realized on Ethereum blockchain is not restricted only to cryptocurrency transactions processing. It is a kind of new method of contractual arrangements where there is no need for lawyers,banks or other mediators.

Today blockchain is already being used for creating distributed cloud storages, where users’ data (including personal data) will be protected by cryptographic means.

4. Conclusion

Anyway, blockchain is definitely an important technology that is likely to increase its impact in the near future. World Economic Forum describes blockchain as a fundamentally new form of computer architecture that brings the opportunities that could be compared to those brought by the development of the Internet in 1990s and smartphones in 2000s. The potential of distributed ledger is obvious for businesses and even state authorities and many of them started applying the technology in a number of areas.

Blockchain appeared 10 years ago, which is actually quite a long time given the speed of scientific and technical progress. However, we can state that the real potential of the technology is being discovered today. Blockchain is actually a new useful way of storing and transferring information, while in the modern society it is perhaps the most important asset.

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An American Businessman Purchased a Bentley with Bitcoins

cars keys bitcoin

As we reported earlier, a luxury American car dealership, Post Oak Motor Cars, offered a new payment options for their clients. Besides USD, you can now pay in Bitcoin and Bitcoin Cash.

We remind you:

Fancy Car Lovers Can Now Purchase Bentleys, Bugattis and Rolls-Royces With Crypto

The first buyer was not long in coming. A business owner from Texas, Ken Bridge, bought a Bentley paying for it with BTC.

Bridge is a long-term Bitcoin investor and also a big supporter of the CEO of Post Oak Motor Cars.

I applaud Tilman for making massive strives in Bitcoin consumerism.” he said.

The businessman also mentioned that the blockchain technology and cryptocurrency have a great potential and he will keep supporting them in every way.

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Mining Complexity: What It Is and Where It Will Get

mining complexity

Not long ago there was a real gold rush around cryptocurrency mining – thousands of people started digging digital rock to get the precious digital gold, while its rate was beating all records and surpassing all expectations. It all started from simple mining on users devices – laptops, personal computers, tablets, etc. – and turned into a complicated industry with a developed infrastructure. Mining pools appeared, specialized equipment (ASIC-miners) was produced, huge mining farms were set up, where mining was conducted on an industrial scale. Mining even partially switched to the cloud – services appeared that offered cloud cryptocurrency mining without any investments, except for financial ones. Although mining has not changed the structure of the world economy, it is nevertheless not an ordinary phenomenon. The fact that currently cryptocurrency mining consumes more electricity than many countries is a case in point.

Today we will talk about what mining complexity, its function, how it changes, what it depends on and how can it set the tone for the entire cryptocurrency mining industry.

Contents:
(please, click the topic to scroll down to it)

  1. Brief review of mining
  2. Complexity: how it changes and what it depends on
  3. What will happen to mining in the future
  4. Conclusion

 1. Brief review of mining

Mining actually means making computational operations to decode a certain algorithm and find its hash. Every mineable cryptocurrency is based on a particular hashing algorithm. When the algorithm is successfully decoded, a new block is added into blockchain, a new coin is issued and miners get their rewards. Many popular digital currencies can be issued only through mining, these are Bitcoin and its forks, Ethereum, Monero, Litecoin, Dash, Zcash, etc. Some, however, are pre-mined and do not provide mining opportunities, like Ripple, NEO, NEM, EOS, Tether, etc.

Depending on hash features, different equipment can be used to mine different digital currencies. Initially all mineable coins, including BTC, were mined on users devices (PCs or laptops) using CPU. Today it is not that common and there are a few popular coins that still provide such type of mining. Soon CPUs became not enough to profitably mine digital coins and miners started using graphic cards to cope with more resource-intensive calculations and growing complexity.

Later the specialized equipment appeared on the market – ASIC-miners that are used today to mine Bitcoin, as well as other coins, such as Litecoin, Ethereum, Dogecoin, Zcash, Bitcoin Cash, Litecoin, etc. ASIC is a specialized microchip that performs calculations much faster than graphic cards. Although ASIC today is mostly associated with mining, the technology itself was developed in early 1980s to advance graphic performance of PCs. Besides, miners create pools where they combine their processing power to make mining more efficient for the whole group. The reward for the created block is then distributed depending on the processing power provided by each pool member.

There is also another mining solution – cloud mining. Graphic cards and ASIC-miners are rather expensive, more and more of them are required to mine profitably. The equipment needs space to be placed, has to be connected to the power grid, cooled, cleaned, repaired, set up, monitored, etc. Cloud mining implies leasing of computing power from companies that manage large mining farms and data centers. In addition, cryptocurrency is mined in other sometimes even illegal ways. For example, your computer can be infected with a hidden virus-miner that uses its resources to mine a particular coin.

2. Complexity: how it changes and what it depends on

Complexity indicates how difficult it is to find hash. The specified hash parameters determine how difficult calculations should be to find it. The more users are there in the network and the more cryptocurrency is mined – the higher complexity is. Bitcoin complexity is reviewed every 2016 blocks (about 2 weeks) and depends on how much time was spent to mine previous 2016 blocks.

What is the function of complexity? Bitcoin is designed to add every new block in  10 minutes on average. This can differ from one cryptocurrency to another (2.5 minutes for Litecoin and up to 20 seconds for Ethereum). The amount of processing power in the network can drastically change over time – when Satoshi Nakamoto mined the first BTC, there was only one device in the network, probably a laptop or a PC. Today we have huge industrial farms with thousands of special mining devices.

To ensure the stability of the generation of new blocks, cryptocurrency software automatically makes it more or less difficult for miners to find hash. So if there are more miners and the computing power of the network increases, it is more difficult to find hash. If the power decreases – it becomes easier to make all necessary calculations. This is the way the system remains sustainable – no matter how much processing power is their in the network it will still take around 10 minutes to generate new Bitcoin block. In early 2010, Bitcoin complexity was just a little bit above 1, while in 2013 it was already 3 million. Today it has already exceeded 7 trillion.


Source: BitcoinEnergyConsumption.com

So, every 2016 blocks (about every two weeks), Bitcoin corrects its complexity, so that each block is generated in approximately 10 minutes, regardless of the number of miners in the system. Other mineable cryptocurrencies has the same role for complexity and it is implemented in a similar way.

3. What will happen to the mining in the future

Mining is no longer the same as it used to be – says… everyone. While some digital currencies can still be mined using PCs, it is rather difficult to join the “extraction” of most of the leading coins. To start mining Bitcoin today you should have… started mining Bitcoin a few years ago. The same thing is happening to other digital currencies, and ASIC-miners are to blame in fact. They are able to make calculations way faster and more efficient and wherever they enter the mining market, the total complexity increases and CPU/GPU-mining retires. However, some still manage to make money out of mining. There are still those coins that are not mined using ASIC-miners, which means one can still mine them on average laptops or PCs.

Anyway, one thing is clear – today, mining is no longer stands for easy money, and the market is being taken over by large, “professional” miners, who mine digital coins on an industrial scale. Industrial mining is associated with a whole range of logistics, legal and resource issues. Until recently, most of Bitcoin miners were located in China, but last year the government banned ICOs, cryptocurrency trade and mining. Another thing is energy consumption. Calculations require a lot of electricity, so the miners are looking for countries with lower power prices.

 

Source: BitcoinEnergyConsumption.com

Another problem is obsolescence of equipment. Many industrial miners have found out, that the hardware they used to mine BTC 2017 cannot ensure the same profit in 2018.

So, mining becomes less profitable and new members have no chance to join the market easily. This lead to the fact that mining of top coins becomes way less popular. Not mineable coins, as well as those who still provide available mining can take advantage of that. For example, in 2017 there was a boom for mining browser extensions (like Coinhive). Of course, browser-mining of Bitcoin or Ethereum sounds rather weird, but there is another relatively popular coin – Monero – that still provides such an opportunity.

4. Conclusion

So, complexity is one of the key categories that form a technical structure of mineable cryptocurrencies. Written in the protocol, it helps blockchain to remain sustainable in terms of the time necessary for the generation of new blocks. Complexity directly depends on the number of miners in the network and, accordingly, on the total processing power. Most of the leading cryptocurrencies have already became much more difficult to mine and this is obviously an ongoing process. There are more users, more special equipment and more professional industrial-scale miners which make mining unavailable for average users.  

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A Ukrainian Startup Launched a Crypto Exchange in Kiev

A real cryptocurrency exchange has recently started functioning in the capital of Ukraine. Such an innovation was implemented by the project Buy Your crypto bank.

The exchange can be found near the subway station Olimpiyskaya, its working hours are from 10 till 19 every day. Ukrainians and guests of the capital can now exchange dollars, hryvnias and Bitcoins. The commission fee depends on the exchange rate.

The exchange developers believe that this is a necessary step in introducing cryptocurrencies in Ukraine. According to them:

We all know that the cryptocurrency market in Ukraine has not yet been regulated, but we have found a way to help carry out these [crypto] operations in accordance with our legislation.”

We remind you:

Ukrainians Will Pay a 19.5% Tax on Crypto Income

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You Can Now Buy a Cup of Coffee in a Swiss Cafe Using Bitcoin’s Lightning Network

coffee for btc

While cryptocurrency is leaking into the spheres of entertainment, music and sports, the food industry seems to be falling behind a little. Though McDonald’s did launch its MacCoin, frankly speaking, it had nothing to do with crypto except its name.

A little cafe in the capital of Switzerland managed to outrun the king of fast food. You can now purchase food and beverages there using the Lightning Network of Bitcoin. By the way, the cafe is called energyKitchen.

To come up with this upgrade, the management of the cafe partnered up with a local IT company, and here is the result – Bitcoin holders now orders meals from the online menu or scan QR codes outside the cafe and pay for everything in BTC.

Oliver Grugger, the owner of this cafe, revealed some details on his Twitter.

So if you happen to be in Bern with a couple Bitcoins in your virtual pocket, make sure to stop by energyKitchen and get a cup of coffee.

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MasterCard Will Use Blockchain to Upgrade Business-to-Business Transactions

mastercard will use blockchain to upgrade b2b transactions

A worldwide payment system company MasterCard received an approval from the US Patent and Trademark Office regarding the application submitted in March of this year.

As we reported earlier, MasterCard got green light from the Office and started developing its own blockchain:

Mastercard Received a Patent on a Coupon Authenticating System on Blockchain

Now the company is directing the powers of this technology to improve and secure B2B transaction within its framework. According to their new patent:

There is a need for a technical solution to provide a disruptive, uniform settlement system which can reduce the amount of processing as well as the amount of communications and fund transfers.

This technical solution is the blockchain technology.

We remind you:

Would Ripple Not Be As Successful If It Hadn’t Been for Mastercard?

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