Category: Bitcoin

Bitcoin – Applications The following is a list of applications of bitcoins Bitcoins are being used to buy goods and services as more and more stores across the world are accepting bitcoin payments. Bitcoin transactions provide a customized level of anonymity and it is relatively difficult to trace their trail. So bitcoins are being used to transact anonymously. International payments can be made easily and cheaply as bitcoins are not related to any country or subject to any government regulation. There is the freedom of the fact that there is no need of permission from any authority for your transactions. Bitcoins provide a way to transact securely online as they use very strong cryptographic algorithms. Users and businesses like bitcoin payments because there are no credit card fees to pay. Bitcoins can be as an investment, expecting that their value will appreciate significantly in future. Bitcoins can be used to gamble on online sites like SatoshiDice, RoyalBitcoin, Bitzino, Peerbet, etc. Bitcoins are being used to shop online as increasing numbers of vendors are allowing bitcoin transactions. Users now can make payments in bitcoins on their smartphones through bitcoin wallet apps. Unlike credit card or bank payments, there is no need to provide personal information to complete the transactions. So the hassle of providing identity can be avoided.

Discuss Bitcoin The tutorial begins by introducing what bitcoins are, then proceeds with the installation of the bitcoin client software and wallets to make bitcoins transactions possible. It also discusses bitcoin mining, exchanges, and trading. Finally, it moves on to applications and future of bitcoins. After reading this tutorial, you will have learned all the basics of bitcoins; enough to use bitcoins and make money by trading and investing in bitcoins.

Bitcoin – Useful Resources The following resources contain additional information on Bitcoin. Please use them to get more in-depth knowledge on this topic. Useful Links on Bitcoin − Wiki page giving brief description about Bitcoin. Useful Books on Bitcoin To enlist your site on this page, please drop an email to [email protected]

Bitcoin – Quick Guide Bitcoin – Introduction Bitcoin emerged out of the 2008 global economic crisis when big banks were caught misusing borrowers” money, manipulating the system, and charging exorbitant fees. To address such issues, Bitcoin creators wanted to put the owners of bitcoins in-charge of the transactions, eliminate the middleman, cut high interest rates and transaction fees, and make transactions transparent. They created a distributed network system, where people could control their funds in a transparent way. Bitcoin has grown rapidly and spread far in a relatively short period of time. Across the world, companies from a large jewelry chain in the US, to a private hospital in Poland, accept bitcoin currency. Multi-billion dollar corporations such as Dell, PayPal, Microsoft, Expedia, etc., are dealing in bitcoins. Websites promote bitcoins, magazines are publishing bitcoin news, and forums are discussing cryptocurrencies and trading in bitcoins. Bitcoin has its own Application Programming Interface (API), price index, trading exchanges and exchange rate. However, there are issues with bitcoins such as hackers breaking into accounts, high volatility of bitcoins, and long transaction delays. Elsewhere, particularly people in third world countries find Bitcoins as a reliable channel for transacting money bypassing pesky intermediaries. How to use Bitcoins? We can make bitcoin transactions as we do with our familiar fiat currencies. While we use Bitcoin, the purchaser is actually referenced to our digital signature, which is a security code encrypted with sixteen different symbols. The purchaser decrypts the code with his device to get the cryptocurrency. Therefore we can say that cryptocurrency is an exchange of digital information that permits us to buy or sell goods and services. The transaction is secured and made trustworthy by running it on a peer-to-peer network that is akin to a file-sharing system. How does Bitcoin handle double spending problem? For digital cash system, a payment network necessarily should have valid accounts, balances and transaction records. The biggest bottleneck common to every payment network is the double spending problem which is the case when same money is used multiple times to do transactions. To prevent double spending, all transactions have to be recorded and validated every time in a central server where all the balance records are kept. However, in a decentralized network, every node on the network has to do the job of a server; it has to maintain list of transactions and balance records. Thus, it is compulsory for all nodes/entities in the network to keep a consensus about all these records. This was achieved by using the blockchain technology in bitcoins. So we can say that bitcoins like other cryptocurrencies are mere token entries stored in the decentralized databases that keep consensus of all balance and account records. It is to be noted that cryptography is used extensively to secure the consensus records. Bitcoins and other cryptocurrencies are secured by math and logic more than anything else. Bitcoins and cyptocurrencies have gained recognition and adoption based on their perceived value by their creators and users. Bitcoin works on the same concept, the more people participate; the more value is created. History of Bitcoins The first Bitcoin protocol and proof of concept was published in a Whitepaper in 2009 by a shadowy individual or group under the pseudonym Satoshi Nakamoto. Eventually Nakamoto, who remained mysterious, left the project in late 2010. Other developers took over and the Bitcoin community has since grown exponentially. While Satoshi Nakamoto”s real identity remains shrouded in mystery, it is on record that he communicated extensively in Bitcoin”s early days. Let us speculate on questions like when he started working on Bitcoin, to what extent he was inspired by similar ideas and what was the motivation for bitcoin. Creation of the first bitcoin domain It is believed that Satoshi started coding Bitcoin around May 2007. He is said to have registered the domain bitcoin.org in August 2008. Around that time, he started sending emails to a few individuals he thought might be interested in the idea of bitcoins. In October 2008, he publicly published a white paper that dwelt on the Bitcoin protocol, and released the Bitcoin code as well. Then he stayed in contact for about two years, during which he interacted actively in forums, communicated with several developers and later he also submitted patches to the initial code. He maintained the source code along with other developers, tackling issues as they happened. By December 2010, as others had slowly taken over, he quietly left the scene. Entities The entities involved in the implementation and maintenance of Bitcoins are − The Blockchain platform Cryptographic algorithms Bitcoin miners which are computers or specialized machines that mint the currency and make possible transactions People who participate in the transactions and thus help to move the payment system The philosophy of Bitcoin, and in general, of all cryptocurrencies is that they are distributed systems where there is no central entity that manages the activities such as transactions, among others. It is a peer-to-peer (p2p) system that operates at the level of participants. Bitcoin Transactions We shall now see how a new block of bitcoin transaction is created. A bitcoin miner creates a block by using the following steps − Gathering pending transactions, preferentially those with transaction fees first, and then the free ones Verifying the transactions for their validity Solving a hashing problem According to the statistics, in October, 2015, blockchain.info site stated that, the average number of transactions per block was 411, and as of May 2018, the current number of pending unconfirmed transactions is around 2495. Reward and cost per bitcoin transaction Assuming that one bitcoin is worth $400, the reward of 25 bitcoins per block is worth around $10,000, ignoring negligible amount of transaction fees. Taking average number of transactions per second as 2, and the number of transactions per block as 1200, the reward per transaction works out to $8.33. It is found that the cost of electricity consumed in mining is close to the reward which makes mining bitcoins not

Bitcoin – How do they work? The process of creating or minting bitcoins is difficult to hack and this gives security to bitcoins. Another layer of security is the provision that every transaction has to be verified before being validated. This verification is effected through “mining”. Mining is a process where some high-level computing like SHA256 decoding is done to verify transfers of bitcoins. Bitcoins are stored in a “digital wallet”, which exists either on a user”s computer or on the cloud. The wallet is a type of virtual bank account that facilitates users to send or receive bitcoins, pay for goods and services or save their money. How do bitcoin transactions work? Every bitcoin account consists of a public key which works like a bitcoin address and a private key. Anyone can send you bitcoins if he/she knows your public key. To spend bitcoins, you have to use your private key for authentication. Every bitcoin transaction appears on the bitcoin network. The miners confirm the transactions after verification to validate them. Addresses An example of a bitcoin address is as follows − 73nRKoXJAUqKYYbzw6Nrqh9gW2p26zerpZ There are 2160 or about 1048possible addresses. The corresponding private key is as given below − 5HuEupY3DNF87UypjFtXDTm4BVuAwZtAgYf94sMALPyakgafVnU Private keys are of 256-bit length. There are about 1077 possible private keys. How to send bitcoins? In the previous section we have seen how a bitcoin transaction works. Now, we shall discuss how to send bitcoins. To buy some merchandise or pay for some services, you will have to send bitcoins to the address of vendor. To receive bitcoins, you will have to share your address with the vendor. Following is the process of sending bitcoins to someone − Copy the vendor”s address and open your bitcoin wallet. Click on the “Send coins” tab and enter the address in the ”Pay to” field to which you want to send bitcoins. If you have to send bitcoins to the same person or a group several times, you can create a label so as to find them in the address book. Enter amount in the next field and click send to complete the operation. Confirmations In the mining process, all transactions are collected in a container called block. A new block is created in about every 10 minutes. In case of small payments or transactions with trusted peers, confirmations may not be necessary. However, for large transactions to be considered safe, the norm is 6 confirmations. Anonymity of Bitcoin transactions The level of anonymity can be customized depending on the requirement. Every transaction from one address to another address is public. The analysis of the transactions through their addresses or public keys whose records are public is called traffic analysis. The larger the transfer the easier the traffic analysis. To increase anonymity, mixing services are used. It is also advisable to create a new public key or new address for every transaction to ramp up security and anonymity. From the point of view of a user, Bitcoin is nothing but a mobile app or software that makes available a personal Bitcoin wallet which allows a user to send and receive bitcoins. However, at the backend, the Bitcoin network shares a humongous public ledger called the “block chain”. This ledger carries the record of every transaction ever processed that makes it possible for a user”s system to verify the validity of each transaction. The need of consensus for compatibility In order to maintain compatibility with each other, all users of Bitcoins have to use the software following the same rules. Bitcoin can only work correctly as long as there is a complete consensus among all the users. Thus, it is imperative that all users and developers maintain and protect this consensus. Securing a blockchain Bitcoins are not stored on your computer unless you host a node on the network. You carry a clone of the ledger which is secure as each block is hashed before being appended to the chain. This means, changing even one bit of any data on the previous blocks changes the hash of the ledger which marks it as counterfeit. Hash function is an irreversible function that is used extensively in cryptography; the output of this function is shorter than the input. Validation of bitcoin transactions is just a process of quickly checking the keys like finding if the sender has the private key that can unlock any record in the ledger/blockchain.

Bitcoin – Introduction Bitcoin emerged out of the 2008 global economic crisis when big banks were caught misusing borrowers” money, manipulating the system, and charging exorbitant fees. To address such issues, Bitcoin creators wanted to put the owners of bitcoins in-charge of the transactions, eliminate the middleman, cut high interest rates and transaction fees, and make transactions transparent. They created a distributed network system, where people could control their funds in a transparent way. Bitcoin has grown rapidly and spread far in a relatively short period of time. Across the world, companies from a large jewelry chain in the US, to a private hospital in Poland, accept bitcoin currency. Multi-billion dollar corporations such as Dell, PayPal, Microsoft, Expedia, etc., are dealing in bitcoins. Websites promote bitcoins, magazines are publishing bitcoin news, and forums are discussing cryptocurrencies and trading in bitcoins. Bitcoin has its own Application Programming Interface (API), price index, trading exchanges and exchange rate. However, there are issues with bitcoins such as hackers breaking into accounts, high volatility of bitcoins, and long transaction delays. Elsewhere, particularly people in third world countries find Bitcoins as a reliable channel for transacting money bypassing pesky intermediaries. How to use Bitcoins? We can make bitcoin transactions as we do with our familiar fiat currencies. While we use Bitcoin, the purchaser is actually referenced to our digital signature, which is a security code encrypted with sixteen different symbols. The purchaser decrypts the code with his device to get the cryptocurrency. Therefore we can say that cryptocurrency is an exchange of digital information that permits us to buy or sell goods and services. The transaction is secured and made trustworthy by running it on a peer-to-peer network that is akin to a file-sharing system. How does Bitcoin handle double spending problem? For digital cash system, a payment network necessarily should have valid accounts, balances and transaction records. The biggest bottleneck common to every payment network is the double spending problem which is the case when same money is used multiple times to do transactions. To prevent double spending, all transactions have to be recorded and validated every time in a central server where all the balance records are kept. However, in a decentralized network, every node on the network has to do the job of a server; it has to maintain list of transactions and balance records. Thus, it is compulsory for all nodes/entities in the network to keep a consensus about all these records. This was achieved by using the blockchain technology in bitcoins. So we can say that bitcoins like other cryptocurrencies are mere token entries stored in the decentralized databases that keep consensus of all balance and account records. It is to be noted that cryptography is used extensively to secure the consensus records. Bitcoins and other cryptocurrencies are secured by math and logic more than anything else. Bitcoins and cyptocurrencies have gained recognition and adoption based on their perceived value by their creators and users. Bitcoin works on the same concept, the more people participate; the more value is created. History of Bitcoins The first Bitcoin protocol and proof of concept was published in a Whitepaper in 2009 by a shadowy individual or group under the pseudonym Satoshi Nakamoto. Eventually Nakamoto, who remained mysterious, left the project in late 2010. Other developers took over and the Bitcoin community has since grown exponentially. While Satoshi Nakamoto”s real identity remains shrouded in mystery, it is on record that he communicated extensively in Bitcoin”s early days. Let us speculate on questions like when he started working on Bitcoin, to what extent he was inspired by similar ideas and what was the motivation for bitcoin. Creation of the first bitcoin domain It is believed that Satoshi started coding Bitcoin around May 2007. He is said to have registered the domain bitcoin.org in August 2008. Around that time, he started sending emails to a few individuals he thought might be interested in the idea of bitcoins. In October 2008, he publicly published a white paper that dwelt on the Bitcoin protocol, and released the Bitcoin code as well. Then he stayed in contact for about two years, during which he interacted actively in forums, communicated with several developers and later he also submitted patches to the initial code. He maintained the source code along with other developers, tackling issues as they happened. By December 2010, as others had slowly taken over, he quietly left the scene. Entities The entities involved in the implementation and maintenance of Bitcoins are − The Blockchain platform Cryptographic algorithms Bitcoin miners which are computers or specialized machines that mint the currency and make possible transactions People who participate in the transactions and thus help to move the payment system The philosophy of Bitcoin, and in general, of all cryptocurrencies is that they are distributed systems where there is no central entity that manages the activities such as transactions, among others. It is a peer-to-peer (p2p) system that operates at the level of participants. Bitcoin Transactions We shall now see how a new block of bitcoin transaction is created. A bitcoin miner creates a block by using the following steps − Gathering pending transactions, preferentially those with transaction fees first, and then the free ones Verifying the transactions for their validity Solving a hashing problem According to the statistics, in October, 2015, blockchain.info site stated that, the average number of transactions per block was 411, and as of May 2018, the current number of pending unconfirmed transactions is around 2495. Reward and cost per bitcoin transaction Assuming that one bitcoin is worth $400, the reward of 25 bitcoins per block is worth around $10,000, ignoring negligible amount of transaction fees. Taking average number of transactions per second as 2, and the number of transactions per block as 1200, the reward per transaction works out to $8.33. It is found that the cost of electricity consumed in mining is close to the reward which makes mining bitcoins not so profitable. The basic

Bitcoin – Exchanges Cryptocurrency exchange is where users can come together and trade in different cryptocurrencies and fiat currencies. Online currency exchanges are websites that are used for trading, that is, buying or selling bitcoins for dollars or any other currencies like Euros, Pounds, Yen, etc. We can transfer money through any online currency transfer services to trade in bitcoins on these exchanges. Exchanges of Bitcoin The following exchanges dominate Bitcoin market − Bitfinex − Bitfinex is the world”s #1 Bitcoin exchange if trading volume in US dollars is considered. Here about 25,000 BTC are traded every day. Bitstamp − Bitstamp, founded in 2011, is one of the oldest exchanges of Bitcoins. It is presently the second largest exchange in the world based on USD volume, with around 10,000 BTC traded per day. OKCoin − This bitcoin exchange is based in China but trades in US Dollars. Coinbase − This was the first regulated Bitcoin exchange in the United States. About 8,000 BTC are traded daily on this exchange. Kraken − Kraken is the #1 trading exchange in Euros handling nearly 6,000 BTC transactions per day.

Bitcoin – Future Since Bitcoin is a new emerging technology which is underway, unforeseen developments can make its existence and continuation difficult. Concerning its security and future, there are numerous questions which no one can answer. How far can we trust Bitcoins? Are they a bubble that is going to burst? Are they a passing phenomenon and a fad that would fizzle out over a period of time? Or are they going to stay put and perhaps dominate other currencies in future? As of now, bitcoins are mostly unregulated, however this may change. Governments are worried about losing taxes and control over the currency. They may bring legislations to regulate bitcoin which may hugely impact the advantages that bitcoins have over other currencies. The volatility of bitcoin prices is one huge issue. The wild fluctuations in its index is sign of such volatility. In recent years, bitcoin prices have risen exponentially and after some corrections have dipped but still they are on the high side. Many expect that the price will further increase. Favoring Growth Factors The things that favor the growth of bitcoin adoption are as follows − There are limited number of bitcoins. The awareness about bitcoins is growing and so their acceptance and adoption. The number of bitcoin transactions is increasing day by day. A large number of wealthy people do not want government”s regulations on their wealth and would rather prefer storing in bitcoins. Next halving is scheduled to occur in 2020. This will further decrease the rate of supply of bitcoins while bitcoin usage would have increased manifold by 2020. As of now, the number of bitcoin transactions is way behind the number of credit card transactions and the former has to significantly increase to realize the full potential of bitcoins. Some of the issues which have to be tackled to help bitcoin”s growth are as follows − Bitcoin transaction time or the time required to get confirmations is still on the high side as compared to credit or debit card transactions. The security of Bitcoins has become a major issue. As the usage of Bitcoin is increasing, hacking of bitcoin wallets and even exchanges has been more widespread. As of now Bitcoins are too technical for common people and are not so user friendly. It is difficult for people to understand why bitcoin prices are so volatile, why transaction time is so high and how they should safeguard their bitcoins. Governments of several countries including India are discouraging legal use of Bitcoins as they understand that Bitcoin is a parallel financial system beyond their control. However, countries like Japan, Australia and several European countries have made Bitcoin legal as they realized that they cannot stop the usage of bitcoins. Some countries have banned bitcoin exchanges. People are using global exchanges to hide their transactions. Meanwhile India and China have been discouraging Bitcoin transactions. China has tried to ban all Bitcoin Exchanges in their country while India has not banned any exchange. Zebpay and Unocoin are Bitcoin Exchanges that are under operation in India. They require submission of KYC documents before executing any Buy or Sell transaction.

Bitcoin – Environmental Setup Satoshi Nakamoto released the first bitcoin software as open source code in January 2009. He later renamed it to “Bitcoin Core” to differentiate it from Bitcoin network. Bitcoin Core is a bitcoin implementation. It is a full Bitcoin client and is backbone of the network which provides high levels of security, stability, and privacy. It also assists network in relaying transactions. It requires at least 50 GB of hard disk space and is not recommended for new Bitcoin users who can opt for lightweight mobile or desktop wallets. What is a Bitcoin full node? A full node is a software program that fully validates transactions and blocks. Most full nodes also assist the network by accepting and validating transactions and blocks from other full nodes, and then relaying them further to other full nodes. Bitcoin Core full nodes need to have certain requirements. If a node is run on weak hardware, it may work − but with a host of issues. It will be an easy-to-use node, if the following requirements are met − Desktop or laptop hardware running latest versions of Windows, Mac OS X, or Linux About 150 Gb of free disk space, accessible at a minimum speed of 100 MB/s 2 GB of RAM memory A broadband internet connection with upload speed of at least 50 kilobytes per second Preferably, an unmetered connection, a connection with high upload limits. It is common for full nodes on high-speed connections to use 200 GB upload or more a month. Download usage is around 20 GB a month, plus an additional 150 GB the first time you start your node 6 hours a day of full node running Bitcoin Core can be downloaded from the site Apart from downloading bitcoin client, we have to set up several accounts. Going further in this tutorial, we will learn how to open accounts in bitcoin sites and to create accounts in bitcoin wallets, bitcoin exchanges, bitcoin mining sites, faucet sites, and sites that offer bitcoin tools and value added services. Java Installation To run a mining software like BitMinter client, we need to have latest compatible version of Java installed. BitMinter client can be downloaded from To install Java, you can follow these steps − Go to www.java.com/download. Click on the button “Free Java Download“. Click on “Agree and Start Free Download” button. Select the version that is compatible with your operating system. Follow the onscreen instructions to continue installing the software. Once the installation is completed, click on Finish button. Continue on to the next step to set up a miner.

Bitcoin – Blockchain Technology It is believed that Blockchain is a new age technology that is solution waiting for a host of problems. There is no doubt that it is a new wonder in the field of computing. What is a blockchain? A blockchain is basically a perpetually growing list of records, called blocks. These blocks are linked and secured by using cryptography. Each block generally contains a cryptographic hash of the previous block along with timestamp and transaction data. By its design, a blockchain does not allow modification of the data. It is an open, distributed ledger that records transactions between different parties efficiently and in a verifiable and permanent way. A blockchain, as shown in figure below is typically managed by a p2p or peer-to-peer network collectively following a protocol for communication between nodes and for validating new blocks. Once recorded, the data in any given block cannot be altered without consensus of the network majority. In case of bitcoins, the blockchain is a public ledger that records bitcoin transactions. It is implemented as a chain of blocks. Each block contains a hash of the previous block up to the genesis block which is the first block of the bitcoin blockchain. This is however achieved without any trusted central authority: the working of the blockchain is performed by a network of communicating nodes running bitcoin software. Transactions of the type payer A sends B bitcoins to payee C are broadcast to this network using existing software applications. Nodes in the network validate new transactions, add them to their copy of the ledger, and then convey these ledger additions to other nodes. Each network node stores its own copy of the blockchain. Roughly every 10 minutes, a new group of validated transactions, a block, is created, and added to the blockchain, and then quickly published to all network nodes. This makes it possible for bitcoin software to determine when a particular bitcoin amount has been spent, and this prevents double-spending in a decentralized environment. It is noted that the blockchain is the only place where bitcoins can be said to exist in the unspent form. Blockchain technology has led to the development of new, digital currencies like Bitcoin and Litecoin that are not issued or managed by government or any central bank of a country. This frees individuals from any kind of control and intermediaries like banking systems that are scam and subject to collapses. It has also led to distributed computing technologies like Ethereum, which has introduced smart contracts. Blockchain is a replicated, shared ledger technology that allows any participant in the network to see ledger and make changes. It is open source, bringing down costs, improving efficiencies, increasing accessibility, addressing exciting and topical business challenges across a broad spectrum. Linux Foundation”s Hyperledger is a project developing an open source, open standards shared ledger technology. Nowadays, consumers demand transparency regarding products and their making. Governments require more information about corporate supply chains, with penalties for non-compliance. In such scenario, blockchain technology promises to deliver such expectations. It enables secure digital transfer of value or property across supply chains. Advantages of Blockchain Technology The following are the advantages of Blockchain Technology − Transactions are now verifiable, disallowing any party from making changes Greater efficiencies are being achieved through greater transparency Consumers have been empowered to make informed purchases Now governments are able to procure reliable information. Many experts believe that blockchain technology can be used in online voting, crowdfunding and other emerging technologies and novel ideas. Major financial institutions such as JP Morgan Chase are confident that cryptocurrencies can lower transaction costs and make payment processing more efficient. Bitcoin is one of the most popular and successful implementations of blockchain technology. It is an open source cryptocurrency that uses distributed peer-to-peer computing. There is no need of a central authority to manage bitcoin network. It was created by a person or group under the pseudonym of Satoshi Nakamoto. The transactions on this network are verified by proof-of-work algorithms on computers running a mining software.