Bitcoin is a cryptocurrency and worldwide payment system.[8]:3 It is the first decentralized digital currency, as the system works without a central bank or single administrator.[8]:1[9] The network is peer-to-peer and transactions take place between users directly, without an intermediary.[8]:4 These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto[10] and released as open-source software in 2009.[11]
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies,[12]products, and services. As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment.[13] Research produced by the University of Cambridge estimates that in 2017, there are 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.
Etmology
The word bitcoin first occurred and was defined in the white paper[5] that was published on 31 October 2008.[15] It is a compound of the words bit and coin.[16]The white paper frequently uses the shorter coin.[5]
There is no uniform convention for bitcoin capitalization. Some sources use Bitcoin, capitalized, to refer to the technology and network and bitcoin, lowercase, to refer to the unit of account.[17] The Wall Street Journal,[18]The Chronicle of Higher Education,[19]and the Oxford English Dictionary[16]advocate use of lowercase bitcoin in all cases, a convention followed throughout this article.
History
On 18 August 2008, the domain name "bitcoin.org" was registered.[26] In November that year, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System[5] was posted to a cryptography mailing list.[26] Nakamoto implemented the bitcoin software as open source code and released it in January 2009 on SourceForge.[27][28][11] The identity of Nakamoto remains unknown.[10]
In January 2009, the bitcoin network came into existence after Satoshi Nakamoto mined the first ever block on the chain, known as the genesis block.[29][30] Embedded in the coinbase of this block was the following text:
This note has been interpreted as both a timestamp of the genesis date and a derisive comment on the instability caused by fractional-reserve banking.[31]
One of the first supporters, adopters, and contributors to bitcoin was the receiver of the first bitcoin transaction, programmer Hal Finney. Finney downloaded the bitcoin software the day it was released, and received 10 bitcoins from Nakamoto in the world's first bitcoin transaction.[32][33] Other early supporters were Wei Dai, creator of bitcoin predecessor b-money, and Nick Szabo, creator of bitcoin predecessor bit gold.[34]
In the early days, Nakamoto is estimated to have mined 1 million bitcoins.[35] In 2010, Nakamoto handed the network alert key and control of the Bitcoin Core code repository over to Gavin Andresen, who later became lead developer at the Bitcoin Foundation.[36][37] Nakamoto subsequently disappeared from any involvement in bitcoin.[38] Andresen stated he then sought to decentralize control, saying: "As soon as Satoshi stepped back and threw the project onto my shoulders, one of the first things I did was try to decentralize that. So, if I get hit by a bus, it would be clear that the project would go on."[38] This left opportunity for controversy to develop over the future development path of bitcoin.[39]
The value of the first bitcoin transactions were negotiated by individuals on the bitcointalk forums with one notable transaction of 10,000 BTC used to indirectly purchase two pizzas delivered by Papa John's.[29]
On 6 August 2010, a major vulnerability in the bitcoin protocol was spotted. Transactions were not properly verified before they were included in the blockchain, which let users bypass bitcoin's economic restrictions and create an indefinite number of bitcoins.[40][41] On 15 August, the vulnerability was exploited; over 184 billion bitcoins were generated in a single transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the bitcoin protocol.[42][40][41]
On 1 August 2017, a hard fork of bitcoin was created, known as Bitcoin Cash. Bitcoin Cash has a larger blocksize limit and had an identical blockchain at the time of fork.[43][44] On November 12 another hard fork, Bitcoin Gold, was created. Bitcoin Gold changes the proof-of-work algorithm used in mining.[45][4
Design
Blockchain
Number of unspent transaction outputs
The blockchain is a public ledger that records bitcoin transactions.[47] A novel solution accomplishes this without any trusted central authority: the maintenance of the blockchain is performed by a network of communicating nodes running bitcoin software.[8] Transactions of the form payer X sends Y bitcoins to payee Z are broadcast to this network using readily available software applications.[48]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.[49]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.
Economics
Classification
Bitcoin is a digital asset[96] designed by its inventor, Satoshi Nakamoto, to work as a currency.[5][97] It is commonly referred to with terms like digital currency,[8]:1 digital cash,[98] virtual currency,[3] electronic currency,[17] or cryptocurrency.[99]
The question whether bitcoin is a currency or not is still disputed.[99]Bitcoins have three useful qualities in a currency, according to The Economist in January 2015: they are "hard to earn, limited in supply and easy to verify".[100]Economists define money as a store of value, a medium of exchange, and a unit of account and agree that bitcoin has some way to go to meet all these criteria.[101] It does best as a medium of exchange; as of February 2015 the number of merchants accepting bitcoin had passed 100,000.[13] As of March 2014, the bitcoin market suffered from volatility, limiting the ability of bitcoin to act as a stable store of value, and retailers accepting bitcoin use other currencies as their principal unit of account.[101]
General use
According to research produced by Cambridge University, there were between 2.9 million and 5.8 million unique users using a cryptocurrency wallet, as of 2017, most of them using bitcoin. The number of users has grown significantly since 2013, when there were 300,000 to 1.3 million users.
Legal status and regulation
Because of bitcoin's decentralized nature, nation-states cannot shut down the network or alter its technical rules.[174] However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a "de facto ban".[175] 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. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.
Criminal activity
The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement, and the media.[180] The FBI prepared an intelligence assessment,[181] the SEC has issued a pointed warning about investment schemes using virtual currencies,[180]and the US Senate held a hearing on virtual currencies in November 2013.[79]
Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods.[97][182] In 2014, researchers at the University of Kentucky found "robust evidence that computer programming enthusiasts and illegal activity drive interest in bitcoin, and find limited or no support for political and investment motives."
Energy consumption
Bitcoin has been criticized for the amounts of electricity consumed by mining. As of 2015, The Economist estimated that even if all miners used modern facilities, the combined electricity consumption would be 166.7 megawatts (1.46 terawatt-hours per year).[100][177] As of November 2017, the global bitcoin mining activity was estimated[by whom?] to consume 3.4 gigawatts (30 TWh a year).[178]
To lower the costs, bitcoin miners have set up in places like Iceland where geothermal energy is cheap and cooling Arctic air is free.[80] Chinese bitcoin miners are known to use hydroelectric power in Tibet to reduce electricity costs.
Notes
- As of 2014, BTC is a commonly used code.[20] It does not conform to ISO 4217 as BT is the country code of Bhutan, and ISO 4217 requires the first letter used in global commodities to be 'X'.
- ^ As of 2014, XBT, a code that conforms to ISO 4217 though is not officially part of it, is used by Bloomberg L.P.,[21] CNNMoney,[22] and xe.com.[23]
- ^ Relative mining difficulty is defined as the ratio of the difficulty target on 9 January 2009 to the current difficulty target.
- ^ It is misleading to think that there is an analogy between gold mining and bitcoin mining. The fact is that gold miners are rewarded for producing gold, while bitcoin miners are not rewarded for producing bitcoins; they are rewarded for their record-keeping services.[54]
- ^ The exact number is 20,999,999.9769 bitcoins.[4]:ch. 8
- ^ a b The price of 1 bitcoin in US dollars.
- ^ Volatility is calculated on a yearly basis.
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