THE DAILY ENCRYPT

September 25, 2022

Bitcoin

Bitcoin is a decentralized cryptocurrency that was created in January 2009. It is based on the ideas of Satoshi Nakamoto, a mysterious white paper. Bitcoin promises lower transaction fees than other online payment methods and, unlike government-issued currencies that are issued by governments, it is managed by a decentralized authority.

Bitcoin is a cryptocurrency that uses cryptography to protect it. There are no bitcoins in physical form. Only balances are kept on a public ledger, which everyone can see (although each record is encrypted). Bitcoin transactions can only be verified using a large amount of computing power, a process called “mining”. A massive amount of computing power is used to verify all Bitcoin transactions. Although Bitcoin is not legal tender across most of the world, it is extremely popular and has led to the creation of hundreds of other cryptocurrencies. These cryptocurrencies are collectively called altcoins. When Bitcoin is traded, it is often abbreviated to BTC.

The Bitcoin system is a group of computers, also known as “nodes”, or “miners”, that run Bitcoin’s code. They all store the blockchain. A blockchain is a collection or blocks. Each block contains a set of transactions. Every computer running the blockchain has the same block list and transactions. They can see the new blocks as they are filled with new Bitcoin transactions transparently.

These transactions can be viewed by anyone, regardless of whether they are running a Bitcoin “node”. A bad actor must have 51% of Bitcoin’s computing power to commit a crime. As of mid-November 2021 Bitcoin had around 13,768 full Nodes. This makes it very unlikely that a bad actor could operate 51% of the computing power that makes up Bitcoin. 

However, if there were an attack, Bitcoin miners, the people who participate in the Bitcoin network using their computers, would likely separate to a new Blockchain, rendering the effort of the bad actor to attack the network a waste.

Balances of Bitcoin tokens can be kept using both public and private keys. These are strings of numbers and letters that are linked by the mathematical encryption algorithm. The public key, which is comparable to a bank account number, serves as the address to which Bitcoin can be sent.

The private key, which is similar to an ATM PIN, is intended to be a secret that can only be used to authorize Bitcoin transactions. Bitcoin keys are not to be confused with a Bitcoin vault, which is a physical and digital device that allows for the trade of Bitcoins and allows for users to track their ownership. Because Bitcoin is distributed on a blockchain, the term “wallet” can be misleading.

Peer to Peer Technology

Bitcoin is the first digital currency to utilize peer to peer (P2P), technology to enable instant payments. Independent companies and individuals who control the Bitcoin network’s computing power, called Bitcoin “miners”, are responsible for processing transactions on the blockchain. They are motivated by Bitcoin transaction fees and rewards (the release and use of new Bitcoin).

These miners are the decentralized authority that enforces the credibility of Bitcoin. Miners receive new bitcoins at a fixed, but decreasing, rate. Only 21 million bitcoins can be mined. There are only 21 million bitcoins that can be mined in total.

This is how Bitcoin and other cryptocurrency operate. In centralized banking systems, currency is created at a rate that matches the economic growth. This system is meant to ensure price stability. Decentralized systems, such as Bitcoin, set the release rate in advance and according to an algorithm.

Mining

Bitcoin is the first digital currency to utilize peer to peer (P2P), technology to enable instant payments. Independent companies and individuals who control the Bitcoin network’s computing power, called Bitcoin “miners”, are responsible for processing transactions on the blockchain. They are motivated by Bitcoin transaction fees and rewards (the release and use of new Bitcoin).

These miners are the decentralized authority that enforces the credibility of Bitcoin. Miners receive new bitcoins at a fixed, but decreasing, rate. Only 21 million bitcoins can be mined. There are only 21 million bitcoins that can be mined in total.

This is how Bitcoin and other cryptocurrency operate. In centralized banking systems, currency is created at a rate that matches the economic growth. This system is meant to ensure price stability. Decentralized systems, such as Bitcoin, set the release rate in advance and according to an algorithm.

Security Risk

The majority of people who have Bitcoin and are using it do not acquire their tokens from mining operations. They buy and sell Bitcoins and other digital currencies via any of the popular online marketplaces, also known as cryptocurrency exchanges or Bitcoin exchanges.

Bitcoin exchanges can be accessed digitally and, as with all virtual systems, are at risk of hackers, malware and operational glitches. A thief could gain access to the Bitcoin owner’s computer hard disk and steal their private encryption key to transfer the stolen Bitcoin into another account. Users can stop this from happening by ensuring that their Bitcoin is not stored on the internet. Or, if they choose to use a paper wallet–printing the private keys and addresses of the Bitcoin and not keeping them on any computer.

Hackers could also target Bitcoin exchanges by gaining access to thousands upon thousands of accounts and wallets where Bitcoins are stored. Mt. After millions of Bitcoin had been stolen, Gox, a Japanese Bitcoin exchange, was forced to shut down.

This is especially problematic because all Bitcoin transactions are irreversible and permanent. It’s just like dealing with cash. Any Bitcoin transaction can only be reversed by the person who received them. As with a debit/credit card, there is no third party payment processor. There is therefore no recourse or protection in case of an issue.

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