September 1, 2016 at 10:00Bitcoin is money for everyone
- Transfer
Adam Tepper's translation of Bitcoin - The People's Money. The book is an excellent introduction to bitcoin from scratch, but it can be useful to those who are already versed in the topic.
Table of contents
It seems that the preface for such a small book turns out to be a bit much, but somehow I have to write a few words. I took up the translation of this text, firstly, as a tribute to the deceased colleague (and friend), with whom I worked over the past few years; secondly, because this book is really a great introduction to bitcoin for people who are not knowledgeable in information technology. It seems to me that the appearance of this text - quite comprehensive, and at the same time not too long - in Russian will be useful. The more people get acquainted with bitcoin, the less they will be afraid of it - because unfamiliar things scare away, and in the mysterious bitcoin there is absolutely nothing wrong.
Несколько замечаний по поводу собственно перевода. Ряд англицизмов – «майнинг», «блокчейн», «хеширование» и т. п. – широко употребляется в русскоязычных статьях, касающихся биткойна, и попытка избавиться от них, как мне кажется, не сулит ничего хорошего по отношению к смыслу текста; в самом деле, можно, конечно, переводить «майнинг» как «добычу» или «выработку», «блокчейн» как «цепочку блоков» (что звучит несколько неуклюже), но как тогда называть «майнера» – «старатель»? «добытчик»? – это уже чересчур.
Само слово «биткойн» также, очевидно, остается без перевода. В тексте оно употребляется как в единственном числе («биткойн» в субстанциальном смысле, как «деньги»), и во множественном («биткойны» в конкретном виде, как «монеты»).
If the text uses the word "dollar" without further indication, then this refers to the US dollar.
The text of the book is available for download in PDF in English and Russian on the website www.independentreserve.com (registration is required), there you can also order a paper version (only English). Not being a professional translator, I will be happy to accept amendments and clarifications, if any. I want to thank Olga Yurieva for the initial proofreading of the text and Vaclav Egurnov for the titanic editing work.
Alexey Zhikharevich
Adam Tepper was tragically killed in a car accident in February 2015, before he finished this book. As a close friend of Adam and his business partner in countless projects, I had to finish what he began by completing his manuscript and publishing this book.
I would like to emphasize that, although I made some changes and corrections to this book, I am firmly convinced that they correspond to what Adam himself would have done if he had had such an opportunity. This book, therefore, remains the work of Adam Tepper, and is consistent with his author's intention.
Special thanks to those who donated money to the Adam family, and also made a donation through the Bitcoin Association of Australia page to help pay for the publication of this book. Thanks also to the Bitcoin Embassy in Australia and to those who took the time to proofread the book and reviews about it at different stages.
Adam was a kind, smart and passionate young man with a clear vision of the future, in which Bitcoin can change people's lives for the better. Adam's favorite writer was Richard Feynman for his ability to explain complex and seemingly inaccessible ideas in clear and simple words. Such a talent was inherent in Adam himself, and this book is an excellent confirmation of this. I hope you enjoy studying Bitcoin through the words and thoughts of Adam Tepper.
Adrian Przelozhni
Adam Tepper. February 13, 1981 - February 26, 2015
Since I am one of the founders of Independent Reserve, an online currency exchange service specializing in exchanging bitcoin for other currencies, I am often asked to explain what bitcoin is and why it is important. At the very beginning, I probably didn’t explain it well to people, because bitcoin combines many different ideas, most of which are unusual. Albert Einstein once said: “If you cannot explain something simply, then you yourself do not understand it well enough,” and I think that to some extent this was the reason that I initially had difficulty explaining to others what Bitcoin
Today, I still meet people who have never heard of Bitcoin, and they ask me what it is. I usually answer in the shortest possible way, explaining the practical benefits of bitcoin and omitting more interesting details about how it works. If a person is interested, I am ready to answer his questions until he reaches an understanding at a level that suits him. That is the purpose of my book, and I arranged the chapters of the book in a similar way. The intended audience of this book is people who are completely unfamiliar with bitcoin and completely unfamiliar with computer science in general. It is intended for a reader who wants to understand the basics of how Bitcoin works, and at the same time understand the technology. The book begins with a review of bitcoin in a practical sense, then I look at the ideas behind bitcoin,
Adam Tepper
Bitcoin is a currency, and thus, it is money. Money was not always what they are in our understanding today, and essentially bitcoin is another development of the idea of money. One of the key factors that sets Bitcoin apart from other well-known currencies such as the American dollar ($), British pound (£) or Euro (€) is that Bitcoin is an electronic currency, which generally means that bitcoin is stored electronically on computers[1] , and is transmitted electronically via the Internet. The prospect of electronic money can confuse or discourage many people, just as email could confuse someone in the 1980s, when it was described as emails stored and sent electronically over the Internet. Today, e-mail is so widespread that paper letters, especially personal letters, are considered old-fashioned, bulky and, among other things, slow.
The first email users in the late 1980s or early 1990s may remember that at the very beginning it was not very useful, because most of your friends, family members and colleagues did not have an email address, or even internet connection. Friends asked questions like: “What is e-mail and how to use it?”. It was a time when there was no Gmail, there was no Google, there was not even Hotmail. Electronic mailboxes were mainly provided by Internet providers. But soon, most people got email addresses, and today it seems extremely unusual if someone doesn’t have an email address at all, just like if a person doesn’t have a mobile phone.
I'm talking about email because it's a great analogy to bitcoin. E-mail took the process of sending letters, which has been used for many thousands of years, and adapted it for the transmission and storage of letters in electronic form. In a relatively short time, the process of exchanging handwritten letters has become an archaic and unusual method of communication. It would be difficult to imagine that we should again send letters by mail for daily communication and wait a few days or a week for an answer. It is also worth mentioning that over the past twenty or thirty years the ways we use email have also changed somewhat. We have access to the electronic box from all our devices; we can send large attachments and a variety of content; we can use email to schedule appointments that appear on our calendars. All these ideas were not originally laid down in the creation of email, but became its development based on how we use mail. Of course, there are many other forms of electronic communication that developed later. This development refers to the continuous improvement of electronic communication in general. But initially, very few people saw the benefits of using email.
This brings us back to bitcoin. Just as email has become what brought communication into the electronic age, so is Bitcoin what brings our money system into the electronic era. Before we look at how Bitcoin can do this, it's worth taking a look at the history of money in order to build a perspective.
Money today is a very complex system. Most of the time it works, but from time to time it catastrophically breaks down. Although the system is complex, most of the complex things are invisible to us with its daily use. For most of our lives, the monetary system has not changed much - it is something that we all grew up with, and most of us probably did not spend much time thinking about how it works. Money was not always the same. One of the biggest changes in the last hundred years has been the placement of most major currencies in the free market, as opposed to the current government pricing gold or silver. This was a very significant progress in the monetary system, but let's look back even further to see how money has changed over thousands of years of use in various societies.
I remember when I was a child, I asked my father: "What did people do to make money?" My father explained that “in the old days” people used the barter system, using sheep and other animals as a currency. It was difficult for me to imagine as a child how this could work, but in essence that is how money worked several thousand years ago. Sheep and cattle in general had certain disadvantages in this sense. They were difficult to store, difficult to move and not easy to share. Throughout human history, different cultures have used various products for these purposes. Seashells and rice were used as money, and then precious metals, gold or silver, which later became familiar because they had many qualities convenient for the currency: they were durable, portable, divisible, and rare.
To carry out a transaction using a precious metal, such as gold, you can determine the value of an item as the value of a certain amount of gold. This decision was imperfect, because the process of assessing the purity of the metal and its weight did not contribute to the speed of transactions. States later improved this process by minting standardized coins containing a certain amount of precious metal, the weight and authenticity of which were confirmed by the state. This is an interesting moment in the history of money. It is interesting because, although the coins contained the prescribed amount of gold or silver, the sign of the state gave them value, and the merchants did not need to analyze the purity and authenticity of the coins as such. Consequently, trust has now shifted to the state. It didn’t take much time for governments to understand that since the value of the coins lies in the mint mark, it will be cheaper to issue coins containing less precious metal than the indicated coin weight. This step in the history of money was a change that turned a coin from a unit of weight to a unit of value.
As European trade flourished in the Middle Ages, the idea of a bill of exchange spread, through which the merchant could offer a line of credit to a trusted buyer. The goods were delivered to the buyer in exchange for a bill on which he was obligated to make payment on a certain day in the future. Provided that the buyer was a respected person, or the bill was approved by a trustworthy guarantor, the seller could then present it to the bank for redemption at a reduced price before the expected date. These bills were also used by the seller as a form of payment to make additional purchases from their suppliers. Thus, bills of exchange - an early form of credit - became both a medium of exchange and a means of saving.
In the twelfth century, the English monarchy introduced a system based on similar assumptions - mortgages through which the monarchy could make payments based on expected taxes that had not yet been received. They were also known as telly (notched wooden sticks). The Treasury has discovered that they can also be used as money. When the crown ran out of resources, it could use telly, representing future tax payments to the crown, as a form of payment to its own creditors, which in turn could either collect taxes directly from payers or use these telly to pay their own taxes to the government. Thus, telly was adopted as a means of exchange for certain types of transactions and as a means of saving. The Treasury soon realized that it may issue talley not secured by any specific tax payment. By doing this, the Treasury created new money backed by public trust and faith in the state, rather than specific incomes.
Around the same time, banks began issuing paper bills, very correctly called "banknotes", which were circulated in the same way that the currency issued by the state is circulated today. Only banknotes issued by the largest, most creditworthy banks were widely accepted. Papers of smaller, less well-known institutions circulated only locally. Far from home, they were taken at a reduced price, if at all. The proliferation of types of money went hand in hand with the increase in the number of financial institutions.
Banknotes were a form of secured money that could be converted into gold or silver upon presentation to the bank. Since banks issued significantly more securities than they stored gold and silver on deposits, a sudden loss of confidence in the bank could cause a massive redemption of banknotes, which led to bankruptcy.
The use of banknotes issued by private commercial banks as legal tender was gradually superseded by the issuance of banknotes authorized and controlled by national governments. The Bank of England was given the exclusive right to issue banknotes in England in 1694, thus putting an end to the use of private currency in the kingdom. Australia passed a similar law more than two centuries later, in 1910, and the United States followed in 1913.
Currencies authorized by the government were a form of secured money, as they were partially secured by gold or silver and could theoretically be turned into gold or silver. At the time of President Nixon, the US dollar was withdrawn from the "gold-backed" standard in 1971, which caused the collapse of the international Bretton Woods monetary system. Most of the major world currencies were then placed on the open market, completely losing touch with precious metals, now the value of the currency was based solely on the economy and the reliability of its issuing government.
Having understood the history of money, we can also see their weakness. Now, let's take a closer look at the work of bitcoin and its advantages over existing forms of money.
Bitcoin technology is fascinating. The first time I heard about Bitcoin a few years ago, almost immediately, as it appeared in 2009. My friend Joe, a man who likes to advertise the latest technological trends, told me that "one guy figured out how to create Internet money." I did not understand the meaning of this phrase, and I believe that at that time my friend did not understand this either.
I no longer remembered Bitcoin before, some time ago, in November 2012, I noticed an online advertisement in which there was something about Bitcoin, and thought that I should take a look. The first thing I noted is that bitcoin, whatever it was, was selling for $ 10, and it has been like this for some time. I expected that it would cost no more than a few cents, or even a fraction of a cent. Of course, knowing nothing about bitcoin at that time, I could not understand how much bitcoin should cost, but assuming that there were millions of bitcoins in circulation, $ 10 seemed a significant figure, and I became curious to find out more in detail. After reading a lot of the materials I found on the Internet, I was still far from understanding what Bitcoin was or how it worked. Only after carefully re-reading and researching cross-references to various resources did I begin to add a picture in my head. Definitely, I would not call it a deep or thorough understanding, I still had many questions.
However, bitcoin captured my interest, and as a programmer, I decided to write my primitive program that would allow me to send and receive bitcoins (it was never published, it was just an experiment to see how it works and satisfy my curiosity). I never finished this program, but spent two or three weeks developing it, and doing it, in the end, I came to understand how Bitcoin works, and was deeply impressed and amazed at the underlying technology. It was amazing because it elegantly brought together many dissimilar principles of programming into a system that no one could have thought of before, and which could now be effectively used as money.
Not wanting to advertise in vain the idea about which I had doubts whether it would turn out to be another “perpetual motion machine”, I waited for the moment when I understood bitcoin quite deeply before transferring this knowledge to my business partner Adrian Przelozhni. I was met with skepticism of exactly the level that I expected. A month later, he remarked to me: “Bitcoin is really an amazing thing - I just bought a little bit.”
So what was it about bitcoin that we both found amazing, and what later led us on the path to creating a company so strongly tied to bitcoin? In the second part of the book, we will focus on the technologies underlying Bitcoin, but first I need to explain how it works at a high level. Bitcoin is a cross between physical currency and a checkbook. So far, we can only draw this analogy, but at least start with this one.
Using this example, let's say I want to send my friend Joe $ 50 (USD). I can write a check with his name on it, write the amount and put my signature on the bottom of the check. In an ideal world, this is a wonderful system. Joe receives the check and he cannot change the amount. If the check is stolen, this will not help the thief, because the name Joe is on the check. And if they steal my checkbook, then it will not have any value for anyone, because the checks do not yet have my signature. This is a good system in theory, but in practice it has several disadvantages. Firstly, the check itself is not money. A check is essentially a letter to the bank authorizing the bank to give Joe $ 50 out of my money that is stored there. Until Joe brings the check to the bank, he does not know for sure if I have these 50 dollars. It may take several days or a week for the bank to give Joe these funds. Signatures are very easy to fake, so if someone got my checkbook, it will not be especially difficult for him to write a fraudulent check. In Australia, checkbooks have not been used for about a generation, the concept itself is as archaic for us as the trade in gold bullion, but surprisingly this system prevails in many countries, including the United States.
Let's compare this transaction with the transaction that Bitcoin uses - let's say I want to send my friend Joe 50 bitcoins (XBT [2] ). The first key difference between the checkbook and bitcoin example is that in the case of the
checkbook, the bank holds $ 50 for me. Bitcoin, however, is more like cash, and 50 bitcoins can be physically stored on your computer.[3] . Say I have 50 bitcoins in a digital wallet on my mobile phone that I want to send Joe to his mobile phone. First, I ask Joe for his bitcoin address. When I send the money to Joe's address, they can only be spent using the secret key that is stored on Joe's phone. No one else can use this money without access to his phone.
So, using the program on my phone, I start a transaction that sends 50 bitcoins from my personal bitcoin address to Joe's bitcoin address. Then I digitally sign this transaction using the secret key on my phone and send this information to the Internet so that it is visible to the whole world. It’s true, I don’t send anything directly to Joe, I send information to the entire Bitcoin network.
What happens next: when the other computers in the bitcoin network receive information about my transaction, they check that I really have 50 bitcoins in my wallet and that my signature is correct. If everything is in order, they mark the transaction as reliable, and soon it becomes part of the official global Bitcoin ledger, known as the “block chain” or “block chain,” and is stored in it (we will discuss this in more detail below).
Meanwhile, the program on Joe’s phone, along with the rest of the world, confirms the transaction I started. Almost instantly, this transaction is displayed on his phone as an arrival in 50 bitcoins.
If I sent money to Joe, I can no longer spend these 50 bitcoins, since the bitcoin network no longer recognizes these 50 bitcoins as mine, and they can be spent only if you use Joe's secret key. Let's take a look at this situation from a different angle: the transaction that I started was essentially a “letter” to the bitcoin network, transferring Joe my right to spend 50 bitcoins. It's that simple!
Fig. 1. Adam sends Joe bitcoins through the bitcoin network
Let's take a closer look at this model and analyze some of the differences between bitcoin and checkbook. In the case of a checkbook, there is a central bank that processes transactions. In the case of bitcoin, there is no central transaction processor or boss - a decentralized model is used in which each network member, including the recipient, can authenticate the transaction. This is a quick process. For less risky transactions with small amounts, this process takes no more than a few seconds. For more risky transactions with large amounts, a transaction can be safely recognized as completed in about half an hour. Compare this to a bank check or SWIFT transfer, which usually takes 1 to 5 days.
Another similar detail that you should have noticed is that bitcoin transactions are signed, just like old-fashioned checks. However, the difference is that a six-year-old child can cope with a fake signature on paper, while faking a digital signature used in a bitcoin transaction is practically impossible[4] .
Another interesting point is that the transaction processing cost and lead time are consistent, and they do not depend on the transaction amount[5] . Using the above example, I could send Joe a share of a cent in bitcoins to pay the royalties he receives for his platinum album, or I could send him two million dollars to acquire his successful company. In any of these cases, the transaction fee will be the same, almost zero, and the execution time almost instant. Thus, an effective free and safe movement of money on an international scale with the speed of email is achieved.
Finally, it is worth noting that since the bitcoin network covers the entire Internet, it does not matter where Joe and I are physically located. We can sit in one room or in different parts of the world - it does not matter. This does not affect the speed or the cost of the transaction.
In the previous chapter, we looked at a daily example of how you can use bitcoin to transfer money between network participants. However, here are the questions that people usually ask me: how bitcoins are generated, how they are introduced into the economy, and where does bitcoin get its value from. Before answering these questions, let's recall the history of money, which we discussed in the second chapter.
Until the twentieth century, money was at least partially backed by precious metals such as gold or silver. Along with other important qualities that made gold and silver suitable as a currency, there was the fact that these metals were relatively rare. There was a stable but slowly increasing influx of gold and silver while they were mined from the ground. Extraction required a lot of time, effort and cost. If gold and silver were abundant, and it would be easy to obtain, then everyone would be engaged in mining, and they would cease to be valuable, respectively, they would cease to be suitable as money.
Although bitcoin mining and gold mining are very different in practice, the principle underlying them is the same, and therefore the generation of bitcoins has become similarly called “bitcoin mining”. Like gold, anyone can mine bitcoin with the appropriate resources. If you wanted to mine gold these days, you could do it, but remember that a significant part of the gold near the surface of the Earth has long been mined. Thus, you would need a bit of luck plus a lot of geological and logistical experience - as a result, most people are consumers of gold, not miners!
The way bitcoin is mined is that the bitcoin network introduces relatively small volumes of bitcoins into the economy at regular intervals. The Bitcoin protocol defines a mathematical problem that is structured in such a way that it can be solved in about ten minutes. When the problem is solved, the person who owns the computer who solved the problem is given a given number of bitcoins. At the very beginning, perhaps, these tasks were solved only by one personal laptop. Therefore, the task was relatively easy so that the available laptop could solve it within ten minutes before repeating the process again. At this point, when bitcoin was in its infancy and no one else used it, one bitcoin was not worth anything. Therefore, such an exercise in mining, which required small amounts of electricity,
However, over time, two, then three, then thousands of laptops and home computers tried to solve a problem that was updated every ten minutes. With a thousand computers trying to solve the problem, the network adjusted the difficulty level so that it became a thousand times higher than at the beginning. Therefore, each participant had about one chance out of a thousand to solve the problem and achieve any reward.
I do not know exactly how much Bitcoin was worth at this point in history, but it began to cost something, even if it was a very small amount. Using a computer twenty-four hours a day is inexpensive in normal conditions, when you just surf the Internet, but if you use a computer twenty-four hours a day to solve a mathematical problem, you will see that the processor is used at almost 100%. This process increases energy consumption and increases electricity costs. People began to calculate the cost of using machines for mining bitcoin and correlate it with the statistical probability of solving the problem for a given period of time. And from that time on, Bitcoin began to possess some value, even if only because of its rarity, and not because of its utility for such a small circle of people.
Then people realized that than using an old laptop or PC for computing, it would be more efficient to design computers designed specifically for bitcoin mining, and for nothing more. People began to launch not one, not two, but entire farms of computers in their apartments and living quarters. These computers mined Bitcoin and consumed electricity. Some smart people later realized that GPUs (graphics processors) on video cards were much more productive for solving the specific type of tasks offered in mining bitcoin, and wrote programs to take advantage of video cards and get bitcoins faster.
As you can see, not only the number of people mining Bitcoin has increased, but also the number of machines used by these people, and the power of these machines. The task for solving every ten minutes was now hundreds of thousands or maybe millions of times more difficult, and a miner with a simple laptop would have very little chance of getting anything.
After the GP mining phase, as it was called, equipment manufacturers began to develop ultrafast boards specifically designed for bitcoin mining, making GP mining slow and outdated. Bitcoin mining today is a full-fledged industry with companies investing millions of dollars in bitcoin mining equipment. Today, like using a small shovel for gold mining, you cannot expect to start mining bitcoin on your home computer and expect to get money, because this will require extensive resources. Several bitcoin mining farms have been launched in Iceland, where geothermal electricity provides a cheap source of energy, which is combined with minimal server cooling requirements due to low temperatures.
Even so, if you cannot afford a gold mine, you can probably buy some share in it. Similarly, companies are now working that provide what is called a mining pool. It works in such a way that you join an association of thousands of users who use home computers to mine bitcoin and are guaranteed to get a small percentage corresponding to the contribution of your personal computer to the total volume of mining - however, do not expect to get rich!
I talked a lot about how bitcoin mining works and the history of bitcoin mining, but the bitcoin mining process has two more important roles in the bitcoin network in addition to generating new bitcoins for miners. First, in addition to solving math problems, bitcoin miners also process transactions. In the third chapter, I gave an example of sending 50 XBTs to my friend Joe, and this transaction was sent to the bitcoin network. The data of this transaction reached many miners actively mining bitcoin, and when one of them successfully solved the math problem, he also processed this transaction, along with all the other bitcoin transactions in the last ten minutes, and included them in the blockchain (Bitcoin ledger). In other words, these miners perform the necessary function in the bitcoin network: in addition to introducing money into the economy,
There is a third key role that the mining process plays. The more miners in the bitcoin network, the more difficult the mathematical problem becomes. The more complex the task, the more secure and robust the network becomes. We will not discuss this point for now, but will return to it later in this book.
Now that you have an elementary understanding of some of the principles underlying Bitcoin, it's time to consider the advantages of Bitcoin over other types of money and understand how you could use it. Bitcoin is more profitable than regular currency in almost all circumstances when an electronic transaction is possible. However, before considering its advantages, it is worth noting the available alternatives. When we talk about alternatives, we not only compare bitcoin with other currencies like dollar, pound or euro, but we also need to consider different types of transactions. The way we use the money depends heavily on the amounts used, the type of goods and services we buy, and the mutual arrangement of the participants.
In the simplest case, we use physical cash transfer when banknotes or coins pass from hand to hand. Cash transfer works best for amounts ranging from about five cents to a thousand dollars. Obviously, it is possible to transfer large amounts, but in most cases people find it more convenient to use other payment methods if the amount exceeds a thousand dollars. As for the smaller (than the lower limit) amounts, here we are limited by the smallest face value of the currency. Cash transfer is of limited use because both participants must be in the same place.
Bank checks are often used to transfer large amounts between individuals. A bank check usually costs about five dollars, so it’s not too economical to use them for amounts less than five hundred dollars. In practice, in most cases the amount of a bank check is not limited, but this is a rather inconvenient process, requiring both participants to appear in a bank branch, so usually the use of bank checks for transactions is limited to one country. Participants must also meet in person to deliver the check, or wait a few days for the check to be delivered by mail.
Convenient means for merchants are electronic payments or credit cards. This is a relatively expensive option for merchants, since they must pay in order to create a trading channel with the bank, and also pay the bank a few percent of the amount of each transaction as a transaction processing fee. Moreover, in the case of a refund, when the transaction is fraudulent, the merchant takes risks and he must return the money. This is especially true for online business merchants, as they only receive credit card information but do not see the card itself. The possibilities of electronic payments and credit cards are usually limited to amounts from ten to ten thousand dollars.
International SWIFT transfers are the main method of transferring money between countries. SWIFT transfers are usually uneconomical for amounts less than a thousand dollars due to the high fees charged by banks. SWIFT transfers are a very slow form of transaction: the recipient receives payment in a few days. Errors also occur during the translation process, resulting in even greater delays.
I have described some of the most common methods of transferring money between people, but, of course, this is not an exhaustive list. There are also large translation companies such as Western Union, as well as a large number of specialized international translation companies that can send small amounts of money faster and more economically than SWIFT or Western Union. Another group of companies includes PayPal and similar companies acting as a processor and insurer of payments between merchants and banks. And, again, that’s not all. You have probably already begun to understand that our understanding of the transaction is highly dependent on what we are trying to do, and that we have a wide variety of loosely coupled systems that have advantages and disadvantages depending on the circumstances.
Back to Bitcoin. Bitcoin allows me to send any amount of money to anywhere in the world instantly and for free . What other transaction method has such wide coverage?
Let's continue. Bitcoin allows merchants to receive payments without risk of return. Putting it differently, if a merchant received a payment in bitcoins, there is no risk that the bank or a third party may later declare this payment fraudulent; payments in bitcoins are final. Of course, sellers and buyers can pay a third party for escrow services if they need it. It is also good for buyers, in particular those who shop online. If you have ever made an online purchase with a credit card, you must be upset when your card is not accepted because you are traveling at that moment or make a purchase that the seller considers risky. For example, if you buy equipment for several thousand dollars, the seller may ask you to confirm your identity and address. This is inconvenient and frustrating for both the seller and the buyer, resulting in undesired delays and transaction processing efforts on both sides. With Bitcoin, transactions are instant, free and pose no risk to the seller.
The benefits are even greater if you are a merchant who often deals with international buyers, for example, in the tourism industry. Imagine you are renting a yacht. The buyer orders a yacht a week before the holidays. Instead of worrying about transfer fees, getting to know foreign currency and waiting a few days for the money to arrive, you can send a deposit in bitcoins - from anywhere, for free and instantly, in a currency that both the buyer and the seller are familiar with. If renting a yacht turns out to be a secret engagement gift to the bride, he will also not be visible in credit card reports.
Another great advantage of bitcoin is that a bitcoin transaction does not require either side to provide important information to the other side. This is the exact opposite of how credit cards or electronic payments work. Each time you make a purchase at the store with a credit card or electronic payment, you must transfer your card details and PIN or signature. It is interesting to think about how important it seems to us to hide the pin code from other people, and at the same time, we are just ready to enter it into a machine belonging to a complete stranger. Pin-stealing devices are known in Australia, but they are much more common in other parts of the world, this is especially true for international travelers. Using bitcoin completely removes this risk. You can shop anywhere in the world,
Another example of circumstances in which Bitcoin has significant advantages over other methods of conducting transactions is the payment of small amounts. A child may want to go to the store and buy chocolate or lollipop for ten cents, or the seller may want to sell the ringtone for his mobile phone for fifty cents online. Without Bitcoin, these kinds of small purchases can only be made in cash, as most other funds require that the payment amount cover transaction fees. Bitcoin provides what is now called micropayments, in the case of such small amounts, or even lower amounts, of less than one cent. Moreover, Bitcoin is not a line of credit, it is the digital equivalent of cash, so you do not need to be an adult to use it.
What about the case of a traveler who urgently needs to send a hundred dollars to his mother in his country? A SWIFT transfer will be expensive for both parties and will take several days. A service like Western Union will be faster, but even more expensive. Bitcoin works instantly and for free.
Bitcoin can be sent between participants anonymously. This anonymity has no restrictions, we will consider it in more detail in the following chapters, and now suffice it to say that when I make a bitcoin transaction, I do not need to worry about who will make the payment: a bank or a credit card company that keep the entire history of my purchases. I do not need to disclose my identity to the seller, and there are many reasonable and reasonable reasons why I might prefer to remain anonymous.
Another big advantage of Bitcoin is that its release is controlled. As we briefly discussed in the previous chapter, bitcoin is generated through the mining process, and the bitcoin generation rate is controlled by the protocol itself. We will consider this in more detail in the future, but we can say that the release of Bitcoin is predictable, controlled, and inaccessible to manipulation by an individual, organization or government. We have observed many times throughout history, including recent history, examples of how governments negatively influence the issue of money, generating more money for the sake of their own momentary economic interests. These interests often represent a complete contrast with the interests of people who hold currency. We have seen how this can lead to an inflationary spiral that can destroy the entire economy.
Earlier, we said that bitcoin has some similarities with cash, but cash is limited when it comes to protecting against accidental loss or theft. Bitcoin is also not immune to this kind of loss, but it has many properties that allow people to protect their money from loss or theft. This makes it a much safer option to carry in your back pocket than a wallet full of cash.
Regular currency is not intended for the electronic era. This is a money system that has been used for hundreds, if not thousands, of years, long before the invention of electricity, not to mention the development of computers and the Internet. It has been used since the time when trade was carried out face to face, when there was not even the thought that you could send a song from one end of the world to another for a small fee between parties that never even spoke to each other. Over the course of the twentieth century, financial institutions adapted their ancient systems to the electronic era and developed new systems that met modern requirements. During the life of these systems, as the requirements of electronic commerce expand, new systems were built on their basis, performing tasks for which they were not originally intended.
Bitcoin was designed for electronic transactions from the very beginning, and this is its strong point. It allows you to carry out instant electronic transactions from anywhere in the world, for any amount, without having to trust the other party or any dependence on a third party. When digital currencies reach a critical mass, our doubts today will seem silly.
At its core, bitcoin is an open protocol. When I say “protocol”, I mean that Bitcoin is a set of rules that Bitcoin programs must comply with. When I say “open,” I mean that the protocol, or set of rules, is publicly available, and anyone can check them. This protocol allows bitcoin programs (which we usually call bitcoin clients) to communicate with each other via the Internet in a standardized way.
Then the first question will be if Bitcoin is an open protocol, or a set of rules that keeps people from writing programs that violate the rules. The answer is nothing. Anyone can write a program that uses the Bitcoin protocol and communicates with other Bitcoin programs via the Internet and tries to “break the rules” in its favor, however, clients that do not comply with the protocol are simply ignored by other clients.
As an analogy, imagine chess players by mail when players are in different places and their moves are sent in letters. Both players know what the whole board looks like, and any of them can walk as he wants if his move complies with the chess rules. Otherwise, the other player ignores or rejects this move. The same principle underlies Bitcoin: any of the “players” (Bitcoin clients) knows exactly what the “board” (blockchain) looks like, and can independently check from other sources that any “move” of the other (transaction) is correct.
If we want to understand bitcoin at a deeper level than analogy, we must understand the idea of asymmetric encryption (also known as public key encryption). Asymmetric encryption is a key element of bitcoin, and without it, bitcoin could not exist. The idea of asymmetric encryption is not new, and in fact it is an integral part of the security of many software systems. We use asymmetric encryption every time we visit a secure (SSL) site, for example, an Internet banking site.
Before I explain what asymmetric encryption is, let's imagine such a task. Let's say Alice in Australia wants to send a letter to Bob in England. The contents of the letter are a big secret. How can Alice send a letter to Bob without the risk of someone reading this letter along the way? Without asymmetric cryptography, this can only be achieved in the only way when Alice and Bob initially understand how to encode a letter. Then the letter will be encrypted, and Bob will know how to decrypt it when he receives it. But what if Alice and Bob do not have a pre-prepared key for the cipher; What if Bob had never met Alice before? In such circumstances, without asymmetric encryption, Alice would not be able to safely send the letter to Bob.
Thus, this leads us to asymmetric cryptography and the way in which it solves this problem. Some time ago, several talented mathematicians developed a method by which it is possible to generate key pairs that are mathematically related to each other. In this context, a key can be represented as a very large number - a number with several hundred digits[6] . These keys are called "public key" and "private key", or together - asymmetric keys. It turns out that these keys have some very useful properties!
Using the public key, you can encrypt the message in such a way that it will be possible to decrypt it only with the private key. Thus, Bob can now generate a key pair and transmit his public key to the whole world, since it is impossible from it[7] get his private secret key. If Alice wants to send Bob a secure message, she just needs to encrypt the contents of her message with Bob's public key using a well-known algorithm, and Bob will be able to decrypt the message with her private key, which he does not show to anyone else.
You use asymmetric cryptography technology every day when you use Wi-Fi, Bluetooth or secure websites where the data is encrypted to prevent what is called a man in the middle attack. In other words, asymmetric cryptography is used to prevent anyone else from intercepting your conversation, letter, or transaction.
So now we know how Alice can safely send a letter to Bob, but when Bob receives the letter, how can he be sure that the letter was sent by Alice, and not someone else? It turns out that asymmetric keys can solve this problem. Alice also generates a key pair: public and private key. Like Bob, Alice reveals her public key to the world. Alice can sign the contents of the letter with a “digital signature” using her private key. Then, using Alice’s public key, Bob can determine that the letter was indeed signed by Alice, since no one else can sign the letter without access to Alice’s private key. Thus, only Bob can read Alice’s letter, and Bob can make sure that it was Alice who wrote the letter.
This is a very useful and powerful idea - it still impresses me today, despite its everyday use. You can appreciate its usefulness for military communications, and, in fact, for many years the United States has tried to stop the export of programs that use strong asymmetric cryptography.
Fig. 2. Asymmetric encryption. Alice sends a signed encrypted message to Bob.
Now that we understand the principle of asymmetric cryptography, how does this relate to bitcoin? Remember, in Chapter Three we made an analogy and said that in some respects, Bitcoin works like a checkbook? We said that one user sent bitcoins to the bitcoin address of another user, and that the transaction was signed by the sender of the transaction. This is the point where everything begins to connect: the fact is that the bitcoin address is a derivative of the public key.
Let's look at our initial checkbook example in more detail, since we now understand the idea of a public key. I have 50 bitcoins on my mobile phone and I would like to send them to my friend Joe's mobile phone. First, Joe presses a button on his phone to generate a new bitcoin address. Although, in fact, it creates a pair of asymmetric keys. The private key is stored on Joe's phone, and the derivative of the public key (bitcoin address) is displayed on the screen and then sent to me. Using Joe's bitcoin address, I start a transaction on my phone, indicating the amount I want to send to him. Then I digitally sign this transaction using my private key and send the transaction to the Internet. Remember, we said that writing a check is the same as writing a letter to the bank, allowing the bank to allocate funds from my account to the specified person. In the case of bitcoin, the transaction is essentially a public announcement of the transfer of control over the XBT 50s registered to my address to the bitcoin address that I specify. Only my private key allows me to allow the transfer of bitcoins to Joe's address, and I give this permission when I sign the transaction with a digital signature.
When the transaction is sent, Joe can confirm on the bitcoin network that he has the right to spend these bitcoins - the transaction is final. Of course, despite all these technical steps, all this happens automatically, behind the scenes, by pressing a few buttons on the phone.
Fig. 3. Adam sends Joe bitcoins through the bitcoin network
In Chapter Four, we looked at how bitcoins are generated and introduced into the economy. We explained that bitcoins are generated approximately every ten minutes in the course of solving a mathematical problem. In this chapter, we will examine in more detail how this works. To understand Bitcoin mining, we need to get acquainted with another idea from the computer sciences: this is hashing, or a cryptographic hash.
Hashing is a very interesting concept, which, like asymmetric cryptography, is one of the key ideas in the field of software security. As we did earlier, let's start by presenting the task. If I have a computer system, how could I safely store the password of each user in such a way that if the system is compromised, then user passwords will not? In other words, for obvious reasons, it is a bad idea to keep a database containing thousands or millions of user passwords.
The solution to this problem includes a cryptographic hash. The hashing process receives something as an input, for example, a password, and passes this input data through an algorithm that outputs a large number called a “hash”. A hash is defined by two distinctive features. First, the hash process always returns the same result for the same input. For example, if you enter a password that is passed through a hashing algorithm that generates a certain number, then the same number will be generated each time. Secondly, hashing is a one-way process. It is impossible to take the value of the hash and, using reverse engineering, reveal what was at the input. These two properties determine the cryptographic hash. If the process were reversible, it would be called not hashing, but good old encryption / decryption,
It turns out that the process of hashing values has many useful features when applied to computer science. One of the tasks that we proposed above was the task of safely storing user passwords in the system. Instead of storing the user's password, we first hash the user's password[8] and store the hash value. The next time a user tries to log in using a password, we don’t need to know what his password was, we only need to know that the password matches the one that was entered last time. In other words, if the hash of the entered password matches the hash stored in the database, we know that the user entered the correct password - although we do not know and do not want to know what the password was. If our system is later compromised, the attacker will receive only a list of password hashes that are irreversible and have no value.
If you are like me, this process will seem charming to you, but you probably ask yourself - if passwords are hashed, how is it that if you forget the password to a certain system, the company can send it to you by e-mail. This is a very good question. This means that passwords are not hashed, and this system is extremely insecure. Sadly, many systems today allow this. This is one of the reasons why you need to use different passwords for each of the systems that you have access to. When it is discovered in the news that the system has been hacked and thousands of passwords have been compromised, this is because the system designers were unable to secure user passwords using hashing techniques, which are universally considered the best approach.
For the sake of interest, we note that if you forget the password for a system that properly hashes user passwords, the correct approach is to reset the password by the system when the password is replaced with some temporary value, which allows you to change it to something else when you log in. However, it should be noted that this approach does not guarantee that the system actually hashes passwords.
Now, how does all this relate to bitcoin mining? Well, we said that reverse hash development is not possible. Technically speaking, it is theoretically possible through what is called an “brute force” attack - iterating over all possible input combinations until you get the same hash. However, in practice, the number of combinations is astronomically large, which makes such an attack impossible for practical purposes. It should also be noted that different input values can produce the same hash value as a result, this phenomenon is called collision and it happens extremely rarely if you use the correct hashing algorithm, so this is not important for our discussion.
Now let's assume that there are only a million possible hash values, a number between zero and a million. In reality, of course, we know that much more than a million hash values are possible, but let's continue with a million to illustrate my point. Thus, the chances of correctly guessing the correct input for this hash will be one in a million. Having enough attempts and enough time, in the end I will find the source data, which after hashing will give the value that I am trying to pick up.
Let's assume the trial and error process takes twenty-four hours to find a match (a modern home computer will do a million iterations in less than a second, but let's leave twenty-four hours for our example). Remembering that in our example, we said that all hash values are numbers between zero and a million, let's assume that instead of finding the input data that will give a specific hash value, we would like to find input data whose hashing will give a number less than or equal to 10. That is, we want to find any input that results in a hash value of 1, 2, 3, 4, 5, 6, 7, 8, 9, or 10. In this case, it’s ten times more likely that what we got the hash value is suitable, so our computer will find a match on average ten times faster - now s take approximately 2.4 hours instead of 24 hours.
If I wanted to create a task that would be solved faster, say, be solved in 10 minutes, I would raise the limit to any hash between 1 and 150. The task is now 150 times easier than in the first example, and a quick calculation will show that such the task should be solved by our (slow) computer in about 10 minutes. What will happen if a second, equally powerful computer connects to trying to find a solution to the problem? Now it can be solved twice as fast. If I want the solution to take 10 minutes anyway, I will have to make the task twice as difficult by setting the condition that the hash value should now be less than 75, not 150. As more and more computers connect to solve the problem , and they are increasingly starting to solve the problem, we are making it more complicated by setting a smaller range of acceptable hash values.
And, if you still haven’t guessed, this is the task that the Bitcoin network offers Bitcoin miners. The difference, of course, is that there are far more than a million combinations, the numbers are so large that they simply can not be called. All the bitcoin miners in the world while I am writing this text collectively process approximately 350,000,000,000,000,000 input values per second in an attempt to find the very value whose hash falls into a certain range of hash values.
The Bitcoin network regularly evaluates the complexity of the task, and if the task is solved faster or slower than the set interval of 10 minutes, then the task is adjusted accordingly by expanding or reducing the range of acceptable hash values. Of all the computers in the world trying to solve a problem, only the first one who decides receives bitcoins “as a reward”, and the process starts anew. The next question then is: how does the rest of the bitcoin network confirm that the problem has been solved, and how are bitcoins generated in this process? The first question is simple. The computer that solved the problem announces this solution to the bitcoin network, and other computers check the solution. Although reverse engineering the input value for a given range of hash values is a slow trial and error process, but once the solution is found, it’s easy to verify just by passing the proposed solution through the hash algorithm and making sure that the resulting hash value falls within the specified range. Then, the extracted bitcoins are issued to the address specified by the miner, introducing new bitcoins into the economy. Just as monarchs in the old days issued telly for taxes that would never be collected, and banks issued banknotes for funds that they did not have, the bitcoin network slowly generates new bitcoins. The key difference between Bitcoin and other systems, however, is that in all previous systems, the frequency of currency generation was set at the whim of the monarch, government, bank, or, in recent times, controlled by the government of the central bank. The bitcoin generation frequency is set algorithmically, and cannot be the subject of manipulation by market participants - it is predetermined. The generation frequency is determined by the Bitcoin protocol, and decreases over time, until in the end the bitcoins cease to be generated at all. For any date in the past or future, you can calculate the approximate number of bitcoins in circulation.
Fig. 4. Bitcoin time distribution
Let us briefly take a pause on the previous line of thought, and turn to decentralization. Decentralization is a relatively recent concept in computer knowledge that is finding more and more applications over the past decade. One of the first examples of decentralization was peer-to-peer (P2P) file sharing. Over the years there have been many of its implementations, the most common of which is now a torrent network. If you are unfamiliar with torrents, let me give you a brief introduction. The traditional method of downloading files from the Internet is quite simple. One computer (server) stores the file that you need, and another computer (client) requests this file from the server, and the server transfers the file to the client. This model still prevails today, and most of the time you spend on the Internet works as described. By the way this model is called client-server. However, she has some limitations. One of these limitations is that the file cannot be downloaded faster than the server allows. This is usually not a problem, but what if there are a million people who want to download the same file from the server? Server bandwidth is limited, so this limited channel must be shared between all people downloading the file. By the way, a separate server cannot support a million connections, so you will need a farm of servers containing the file, which will lead to high costs for the server owner, or low speed for clients downloading the file. but what if there are a million people who want to download the same file from the server? Server bandwidth is limited, so this limited channel must be shared between all people downloading the file. By the way, a separate server cannot support a million connections, so you will need a farm of servers containing the file, which will lead to high costs for the server owner, or low speed for clients downloading the file. but what if there are a million people who want to download the same file from the server? Server bandwidth is limited, so this limited channel must be shared between all people downloading the file. By the way, a separate server cannot support a million connections, so you will need a farm of servers containing the file, which will lead to high costs for the server owner, or low speed for clients downloading the file.
A distributed peer-to-peer network can help here. It works as follows: let's say I have a file that I want to make available to other people. Using a P2P program, this file is divided into hundreds of parts (the exact size and number of parts depends on many factors). Now people can download a file from my computer one piece at a time, in any order. The bandwidth on my part is small, so initially it will be rather slow for those few people who try to download this file from my computer. If someone else received one of the parts of the file from me, other people can now download this part either from me or from another member of the network. Over time, more and more people download some parts of the file from my computer, and others from other people's computers, until until the original file is distributed among the computers of many people. If someone new comes and wants to download this file, the program will simultaneously download the file from many different computers, possibly never connecting to my computer on which the file was originally - in essence, at this moment I can turn off my computer altogether , and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. If someone new comes and wants to download this file, the program will simultaneously download the file from many different computers, possibly never connecting to my computer on which the file was originally - in essence, at this moment I can turn off my computer altogether , and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. If someone new comes and wants to download this file, the program will simultaneously download the file from many different computers, possibly never connecting to my computer on which the file was originally - in essence, at this moment I can turn off my computer altogether , and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. on which the file was originally located - in fact, at that moment I can turn off my computer altogether, and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. on which the file was originally located - in fact, at that moment I can turn off my computer altogether, and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain.
We reviewed and discussed the three main ideas in the field of computer science that underlie bitcoin: asymmetric cryptography, cryptographic hash, and peer-to-peer networks. Although these ideas are interesting, they are not revolutionary in the context of bitcoin. All these things have already been used in various ways for a long time. However, what connects them together is a fundamentally new idea, which is the basis of bitcoin. This idea is known as blockchain.
Blockchain is a decentralized open ledger: let's try to figure it out. In the case of a regular business, or, better to say, a bank, a ledger is a set of records that contains details of user transactions and account balances. In modern banks, these records are stored in large software systems. As you can probably guess, these are large, stable systems that must support millions of users who make millions of transactions every day. You may already be familiar with some of the symptoms of the difficulties that banks with the reliable management of such large data sets experience. For example, you could not download transaction history from a bank’s Internet portal earlier than a certain period in the past. Or, you may have noticed that some transactions do not immediately appear in the history, until they are processed at night. All of these and other similar oddities are trade-offs necessary for banks to be able to manage these (often ancient) systems containing huge amounts of data.
We said blockchain is a decentralized open ledger. We know what ledger is: a set of records containing details of user transactions and account balances. Now let's explain what we mean by “decentralized” and “open”. Unlike a bank, this ledger is not stored on a central server controlled by any person or organization. The blockchain ledger is publicly available and stored locally by many clients, it can be freely downloaded from the Internet. It can be hard to believe, but you understood correctly: the whole history of any bitcoin transactions made by anyone around the world since the appearance of bitcoin (January 12, 2009) is publicly available for viewing by anyone, moreover, on most computers or laptops that have bitcoin programs keep copies of this ledger. You probably had a lot of questions, for example, how is this possible, or why is it a good idea at all. Let's start with how this is possible. Of course, this is a large amount of data, but not impossibly large. Financial records take up very little space, and looking objectively, all records of bitcoin transactions from the very beginning at the time of writing this text occupy the same amount of space as a dozen, or so, films in HD quality. If you download a bitcoin client that stores a local copy of the blockchain, it will take a long time to start the first time you launch it, since it downloads a full copy of the blockchain. Another thing is that the storage of a full copy of the blockchain on all computers in the world is not absolutely necessary. This is definitely not possible on mobile devices, and now Bitcoin clients are trending, which store only important things locally, and not the entire blockchain. However, this illustrates my claim that the blockchain is publicly available to the whole world, and in fact there are many sites that simplify navigation through the history of all bitcoin transactions made by anyone and anytime.
You may be somewhat concerned about the moment that if you use Bitcoin, the entire history of the transactions you have ever made will be publicly available. This is only partially true, and we will discuss this point later in the chapter on anonymity. The public ledger only contains bitcoin addresses and amounts. It does not contain any personal or identifiable information. In other words, if I send 50 bitcoins from address A to my friend Joe with address B, the whole world sees that 50 bitcoins are sent from address A to address B, but no one can determine that address A belongs to me and address B belongs to Joe. So when I look at the blockchain, all I see is balances of addresses and transactions from one address to another - none of this information compromises the confidentiality of the people who carry out these transactions.
Another point that needs to be understood, and which we have not yet discussed, is that unlike email, where you can have only one address, or at least a small number of addresses, the number of bitcoin addresses that can to be with a person is not limited. This is actually encouraged, and most Bitcoin clients are configured by default so that each transaction uses a new address. Let's take another look at an example of sending 50 bitcoins to my friend Joe, now we already know a little more. When I ask Joe to tell me his bitcoin address, he usually does not give me an address containing the entire amount of his wealth, but creates a completely new address where there are no bitcoins at all, and I send 50 bitcoins to this new address. Bitcoin programs do not require you to manage the balance of each address individually, they can show you the overall balance of all the addresses you have ever created. If I look at the matter on my part, I hardly have an address containing the exact amount of money that I want to send to Joe. For example, I may have a bitcoin address A, on which there are 30 bitcoins, and a bitcoin address B, with 35 bitcoins. In our example, the program will automatically generate a transaction that will take 30 bitcoins from address A, then 20 from address B, send these 50 bitcoins to Joe's address, and also send the remaining 15 bitcoins to new address B, which it automatically generated for me. Both Joe and I can have hundreds or thousands of addresses containing small amounts of money that together make up our complete Bitcoin state.
An exception to this rule is the case when I receive one transaction for a large amount of money, say, a million dollars in bitcoins. If after that I want to spend 1 bitcoin from this address, the recipient will be able to see that I have at my disposal about a million dollars in bitcoins, which I would not want to disclose. Suffice it to say that for the lucky ones who find themselves in this position, there are techniques that allow you to hide this wealth, scatter money at many addresses - modern programs make this process trivial.
Now that we know what blockchain is, how does it actually work? The question, perhaps, should be formulated as follows: how can we ensure a consistent record of transactions in a decentralized environment? The first thing you need to understand about blockchain is that it is called blockchain because it consists of a chain of consecutive blocks. A block is a group of transactions. Guess how often blocks are generated? About once every 10 minutes. You probably began to understand that there is a connection between blockchain and bitcoin mining, and if you assumed this, you are right.
Remember, in Chapter Four we said that the extraction of bitcoin, in addition to introducing bitcoins into the economy, also has two other goals. It provides payment processing and network security. Let's now look at how these tasks are performed in the process of mining bitcoin. We mentioned above that when a transaction is started, it is sent to the bitcoin network. What does this really mean? Bitcoin clients (i.e., programs) try to connect with many other bitcoin clients called peers. Typically, each individual client is connected to 10-20 other peers. Some of these peers are ordinary transactional users, and a small number of these peers can be miners. When a bitcoin client receives information about a bitcoin transaction, it is transmitted from client to client until
Bitcoin miners do something else besides solving a hash problem and introducing bitcoins into the economy: they provide an important function of creating a blockchain, one block at a time. When a bitcoin miner receives information about a transaction, its authenticity is checked first, and then it is written to the block locally, on the bitcoin miner's computer. If the bitcoin miner successfully solved the problem, the solution to the problem is included in the block as part of it, together with all transactions created in the past 10 minutes. Then the block is closed and distributed over the Internet, and the process begins anew. Anyone else on the network can independently verify that the transactions in the block are genuine and that the solution to the hash problem, also known as “proof of work”, is true. Any subsequent miners who have solved the problem are ignored, their blocks are no longer suitable, and the process starts anew. Thus, a blockchain is a sequence of blocks containing transactions for a given ten-minute period. Each block is mathematically connected with the previous block, so it is possible in a trivial (for a computer!) Way to check the entire blockchain for reliability, without analyzing individual transactions.
And this leads us to the third goal that bitcoin miners achieve: network security. The actions taken to solve the cryptographic hash problem serve not only the interests of the miner, they are also needed to protect against dishonest miners spending money twice, which is called "double waste." If you take an earlier example where I send 50 bitcoins to Joe, let Joe send me a book in return that I bought from him (at today's prices it would be a rather expensive book). At the same time, what if I try to send the same 50 bitcoins to another person before the first transaction has time to become processed and verified? Assuming that I have already received the goods from Joe, it will be problematic if the bitcoin network somehow accepts my payment to another participant and later rejects the original payment that I sent to Joe.
Когда я отправляю транзакцию для Джо в биткойн-сеть, Джо почти мгновенно сможет ее увидеть (обычно через несколько секунд). В это время транзакция видна, но еще не включена в блок майнером. Если это транзакция с небольшой суммой, или транзакция между участниками, которые доверяют друг другу, видимость транзакции в сети будет обычно считаться приемлемой, однако, при определенных усилиях с моей стороны, все еще возможно дважды потратить средства, отправив в сеть другую транзакцию, которая использует те же самые средства – но для транзакций с небольшой суммой требуемые усилия, вероятно, не будут стоить затраченного времени (к тому же, разумеется, есть еще и риск быть пойманным). По прошествии приблизительно 10 минут мы можем ожидать, что моя транзакция будет теперь официально включена биткойн-майнером в последний блок блокчейна. В этом момент транзакция имеет «одно подтверждение». Теперь, если вы примете во внимание, что в мире тысячи специальных компьютеров, добывающих биткойн, вероятность, что я сумею обмануть Джо и дважды потратить свои средства, и успешно добыть блок, который отвергнет транзакцию для Джо, очень мала. Для транзакций со средними или большими суммами обычно считается благоразумным подождать 3-6 подтверждений, или, другими словами, подождать, когда будут добыты 3-6 последовательных блоков (от 30 до 60 минут), чтобы быть абсолютно уверенным в транзакции. Чтобы успешно осуществить двойную трату, в этом случае нужно будет успешно добыть подряд 6 блоков, отклоняющих транзакцию. И чтобы достичь этого, нужно контролировать примерно 50 % от общей вычислительной мощности биткойн-сети. Как вы можете видеть, это делает попытку двойной траты крайне сложной и дорогой, что прежде всего перевешивает, в общем случае, любые преимущества двойной траты. Вы также можете видеть, что по мере того, как растет биткойн-сеть, увеличивается количество майнеров и возрастает трудность хеш-задачи, двойная трата становится еще более сложной для нечестного майнера. Именно так биткойн-майнеры обеспечивают безопасность сети.
In summary, bitcoin mining provides three things: transaction processing, network security, and the introduction of bitcoins into the economy. This is an elegant system.
It is time to point out the fact that the miner has a choice to include or not include the transaction in the block. The miner can reject all transactions if he wants, and just solve the hash problem. This is called “empty block mining” and happens from time to time. Then the question is, why did the miner even have to worry about including transactions in the block? There are several reasons. Firstly, compared to the work that the miner does in trying to solve a hash problem, including transactions in a block is a trivial operation that requires almost nothing from his computer. Secondly, transactions are included in the blockchain in the interests of the bitcoin community. If miners do not include transactions in the blockchain, Bitcoin will not work, and if it does not work, then Bitcoins will not cost anything. If bitcoin doesn't cost anything, then the miners will spend all their efforts on mining something that costs nothing. You may argue that it’s good for the community that miners include transactions in the block, but for an individual miner it is unprofitable to spend resources on transaction processing. This is partly true, but, as I noted at the beginning of the paragraph, the necessary effort is negligible. There is also a third point. Miners cannot charge a commission for including a transaction in a block, but people who make transactions can voluntarily offer a commission. Miners can then reject transactions that do not include commissions at all, or reject transactions with commissions below a certain amount. What is the usual commission today? In most cases, it is zero. In today's economy, the miner’s incentive is primarily the bitcoins that he receives for a successfully mined block. Transactions are included in the block of the free will of the miners in the interests of the growth of the Bitcoin economy and the growth of Bitcoin. In some cases, bitcoin clients automatically include a small commission (not more than a few cents) to make sure that transactions are not rejected by miners and are more likely to be included in the next block mined.
Over time, the number of bitcoins received for a successfully mined block will gradually decrease until, around 2140, the reward for block mining is zero. It is expected that over this long period of time, while the block reward as an incentive for bitcoin mining is gradually decreasing, this incentive will be gradually partially replaced and, in the end, will be replaced by the incentive in the form of transaction fees.
Due to the fact that the Bitcoin economy is an open market and that transaction fees are voluntary, the size of the commission will always be determined by supply and demand, which will create a competitive market with low transaction fees.
TL; DR: a well-known slang expression meaning “too long; do not read". This is a short summary at the end of a long text, containing an abridged version. However, unfortunately, if you opened this chapter without reading the previous chapters of the second part, which outlines the key principles of computer science that underpin Bitcoin, then it will be difficult for you to understand this chapter, and in your understanding of Bitcoin in the future you will remain at the level of comparisons by analogy. If you read Part II, then this chapter is needed to bring all these ideas together into a clear understanding of bitcoin.
We first learned that asymmetric cryptography is the technology behind private and public keys; using this relation, we can mathematically verify the authenticity of a bitcoin transaction signed by the sender's private key. Then we learned about the cryptographic hash, which is an irreversible algorithm applied to some data. By trial and error (more than quadrillion attempts per second), miners in the bitcoin network try to calculate the cryptographic hash for random data until the resulting hash value falls into the predetermined range - a task designed in such a way as to be solved on average in ten minutes the entire bitcoin network. The difficulty of this task on the one hand protects the network from double spending, and on the other hand controls the supply of bitcoin. In addition, bitcoin miners also process transactions that form a block. If the miner successfully obtains the block (having solved the cryptographic hash problem), this block will be recognized by the bitcoin network and forever included in the blockchain - the open decentralized ledger of bitcoin. This is the shortest description of how this complex and elegant system works.
If you did not know anything about Bitcoin before reading this book, you could still hear the name “Mt. Gox ”thanks to major media. Mt. Gox made up an interesting part of the history of Bitcoin, so it's worth figuring out what happened. Mt. Gox is a bankrupt Japanese bitcoin exchange launched by a Frenchman named Marc Carpeles.
Until 2013, bitcoin was little known outside a handful of people scattered around the world. Then it did not become mainstream and was not the subject of discussion of the governments of large states. If in those days you wanted to buy bitcoin, you had a very limited choice. In those years, Mt. Gox was by far the largest Bitcoin exchanger in the world, claiming to hold more than 80% of the Bitcoin trading market. I believe this was close to the truth, since there were few alternatives at that time.
Since Mt. Gox controlled the vast majority of bitcoin trading, and most people understood very little in bitcoin, the name “Mt. Gox ”has become almost synonymous with bitcoin as such. By the way, there is a famous story about why Mt. Gox became known as “Mt. Gox. " Apparently, when the site was being created, the original owner already bought the mtgox .com domain name for another project he was working on related to the Magic: The Gathering card game. Therefore, the domain name meant “Magic The Gathering Online eXchange”. He later abandoned the idea of this site, and the domain name was used for the bitcoin exchange known as “Mt. Gox. " After some time, the first owner sold most of his company to Marc Carpeles.
Now I think in the early days of Mt. Gox, perhaps no one expected the site to grow that much - maybe yes, but I doubt that they could have predicted an incredible rise in bitcoin in early 2013. For various reasons, bitcoin began to flourish, pulling the price of one bitcoin from about $ 10 to about $ 250 in just a few months. Subsequently, the price rose to almost $ 1,000 by the end of the year. And where did people go to buy bitcoin? One of the few places where they could do this was the Mt. exchanger. Gox.
I want to emphasize that I do not have any insider information about what Mt did or didn’t do. Gox; I know about Mt. Gox only as their client, as well as from discussions with industry colleagues. In early 2013, my business partner Adrian and I used Mt. Gox to buy yourself Bitcoin. Since most of our careers we have been developing software systems for financial institutions, the Mt. platform Gox seemed unprofessional and amateurish. The opening and verification of our accounts took them several weeks, their customer service did not work well, and the site did not update for a long time. In addition, there were tales of Mt. system failures. Gox is under a relatively heavy load and reports that they were “hacked” and people lost money. It was definitely a type of financial system that I would not trust my money. At the same time, we were going to buy bitcoin. Our strategy was this: we deposited relatively small amounts of money, bought bitcoin, immediately withdrawed it, and repeated this cycle again. Thus, in case of any problems with Mt. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. we deposited relatively small amounts of money, bought bitcoin, immediately withdrawed it, and repeated this cycle again. Thus, in case of any problems with Mt. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. we deposited relatively small amounts of money, bought bitcoin, immediately withdrawed it, and repeated this cycle again. Thus, in case of any problems with Mt. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation.
On any scale, this event was a disaster for bitcoin as a whole. This was a disaster for everyone who had bitcoin accounts, and a disaster for the reputation of bitcoin, which many saw as a failure in itself due to the poor management of Mt. Gox. I do not know why Mt. Gox lost money. In one of their ads, they suspected that the money was stolen, but in the end it was just speculation about how it happened - the bottom line is that people lost a lot of money because of this.
Regretting those affected by the collapse of Mt. Gox, it should be noted that the announcement of their bankruptcy was somewhat desirable. Their delays and the suspension of the withdrawal of money, which lasted for many months, caused new problems for the bitcoin community, and a very bad reputation in the press. Mt. Gox was a ticking time bomb. Their collapse allowed other companies to start from scratch, much more reliable than Mt. Gox, and drive bitcoin forward.
You can also notice that to some extent it is the poorly organized Mt. platform. Gox led us to create our own Bitcoin exchange, the Independent Reserve. We knew that in order for Bitcoin to ultimately be successful, a stable, sustainable platform was needed on which people can buy Bitcoin, and Mt. Gox was not.
If you have not heard about the collapse of Mt. Gox in 2014, you may have heard of Silkroad. By the way, the name "Silk Road" originally refers to the sequence of trade routes connecting Asia and Europe over many periods of history. They were called so thanks to the profitable trade in Chinese silk, carried out along the routes, and significantly contributed to the development of trade between the two parts of the world.
The Silk Road, which we are talking about, however, was a special type of site. It was special because it was not accessible from a regular browser. Access to it could only be obtained using a special program called “Tor”[9] , which made the user anonymous, allowing people to access the site so that they could not be tracked. Silkroad was essentially a marketplace where you could buy and sell products. Due to the fact that it was set up with the explicit goal of anonymizing users, the products for sale were mostly black market items that were not on regular sites where authorities could track activity. Therefore, the predominant types of products available on Silkroad were illegal drugs, prescription drugs, firearms, and other illegal products.
Silkroad used Bitcoin as a currency, since Bitcoin could be transferred between market participants anonymously[10] . Unfortunately, this worsened the reputation of Bitcoin, as the media made a false conclusion that since Silkroad uses Bitcoin as a currency, then all Bitcoin users are pirates and drug dealers with Silkroad. In October 2013, the FBI was able to track down the site administrators, and the site was stopped[11] . What happened to the price of bitcoin? There was a slight decline, and then it continued to grow. The reason for this is that the vast majority of Bitcoin users were not pirates and drug dealers, and the fact that Bitcoin continued to grow despite the absence of Silkroad is proof of this.
We can learn a few lessons from this. Firstly, all currencies are used to a certain extent and will be used for illegal purposes - this is a proof of their suitability as a currency. In November 2013, in response to a request from the United States Senate, the Financial Crimes Agency emphasized that any illegal use of bitcoin was negligible compared to $ 1.6 trillion in "global criminal income" in 1999.
It is also worth noting that any transactions made on Silkroad between anonymous participants, at least did not lead to an increase in violence in society, as opposed to violence, which is sometimes associated with cash transactions carried out on the street.
Bitcoin is not the only digital currency, although it was the first and most successful at the international level, and occupies an overwhelming market share (98%) in terms of capitalization compared to other digital currencies. Bitcoin was first launched in 2009, and until 2011 there were no alternative digital currencies, like Litecoin, which is largely a bitcoin clone with minor changes to several settings.
I believe that the developers of some of these early currencies had good intentions, but today in the world there are more than 500 “alternative to bitcoin” digital currencies that most people (including me) have never heard of, and I believe that a good part of them, is nothing more than a scheme designed to generate profit for the developer.
Another thing is that despite the fact that Bitcoin has become a huge evolutionary step in the history of money, it is still imperfect, and it is inevitable that the Bitcoin protocol will improve over time (as has already happened), and that potentially new digital currencies can be viable at the same time. with bitcoin, or will ultimately replace bitcoin. The idea of the blockchain is essentially robust, and most digital currencies, if not all, are based on the same basic principles as bitcoin.
We have already mentioned that bitcoin and physical money have common properties. However, Bitcoin has a number of features that protect it from accidental loss or theft in a way that is inaccessible to ordinary money.
For starters, you can back up your wallet. This means exactly what is said: just like you back up photos or letters, you can create a copy of your digital wallet and store it in different places. This is the easiest way to protect your bitcoins from accidental loss. If you lose your phone with a Bitcoin wallet, or if the computer drive fails, you can restore all your money from the backup. Even better, you don’t even need to back up after each transaction. Most modern Bitcoin wallets are designed in such a way that if you made a copy, even if there were no funds at the time the copy was made, money received in the future will still be restored, so you need to make a backup of the wallet only once.[12] .
Backups protect your wallet from accidental data loss, but they do not protect you from thieves. However, wallets are easily encrypted and can be password protected. Then, if someone steals your wallet with bitcoins on it, he will not be able to spend it without your password. In the meantime, you can restore your wallet from a backup and, for security, transfer money to a new wallet. Then, even if thieves can guess your password, bitcoins will already be sent to a new address, and your old wallet will become completely useless to them. All these things do not require special skills, they are usually an integral part of most bitcoin programs and they are very easy to use even for a beginner.
These features are great for protecting funds in reasonable amounts, however, when dealing with large amounts of bitcoins, say equivalent to a million dollars, we might want to take extra precautions. In the end, what if an attacker gains access to our computer and installs a spyware program that secretly records the passwords that you typed? History shows that there is no limit to the cunning and dishonest techniques that thieves can invent when it comes to stealing money. Suffice it to recall some of the famous robberies in a casino in Las Vegas and the things that people went to when large amounts of money were at stake. However, Bitcoin provides great opportunities when it comes to security. One way to protect a large amount of bitcoins is called “freezing.” The idea of freezing in this context means storing bitcoins on a computer or other device that is not connected to the Internet in any way. A computer or mobile phone connected to the Internet could potentially be hacked by anyone from anywhere in the world if a vulnerability is found. But by storing bitcoins on a computer that is not connected to the Internet, you immediately limit potential threats only to those that come from people who have physical access to this computer. Of course, the wallet on this computer must be encrypted and protected with a strong password. Modern programs easily provide the ability to store bitcoins in the freeze. if a vulnerability is found. But by storing bitcoins on a computer that is not connected to the Internet, you immediately limit potential threats only to those that come from people who have physical access to this computer. Of course, the wallet on this computer must be encrypted and protected with a strong password. Modern programs easily provide the ability to store bitcoins in the freeze. if a vulnerability is found. But by storing bitcoins on a computer that is not connected to the Internet, you immediately limit potential threats only to those that come from people who have physical access to this computer. Of course, the wallet on this computer must be encrypted and protected with a strong password. Modern programs easily provide the ability to store bitcoins in the freeze.
Bitcoin has even more advanced security features, such as multiple-signature addresses (colloquially known as multisig addresses). In all the examples we have given so far, we have described how I send 50 bitcoins to my friend Joe in a transaction signed by the corresponding private key that I have. In the case of multisig addresses, the transaction can be configured in such a way that two different people, or three people, or two out of three people, or any combination of signatures that you can submit, will be needed for the signature. For example, you may have a bitcoin wallet that requires both signatures - yours and your business partner to send a transaction, or only one ofsignatures. Or maybe you have a board of directors and the transaction should be signed by any three of the seven directors. These are very powerful tools that allow you to secure bitcoin in ways inaccessible to physical money.
The last method of securing a bitcoin wallet, which we will talk about, is called a “paper wallet”, and this is the most primitive of all devices to ensure the security of bitcoin. You can simply print your private key on paper, and in the case of EMP[13] , which will destroy all your electronic devices, you can recover funds using a printed private key. Of course, you can go even further, and print half the private key on one sheet, and the other half on the other, and store them in various safe places - the possibilities are endless.
So far in this book, we have discussed the most common and simplest type of transaction - participant A sends money to participant B. We examined how this process is carried out using bitcoin, as well as some of the great advantages of bitcoin compared to regular currency. However, using this example, we just scratched the surface of what Bitcoin and blockchain technology can really achieve. We introduce the idea of smart contracts. Bitcoin is capable of creating complex transactions involving many participants. Let's look at an example.
Let, say, a car manufacturer make a new car. In the process of its creation, a new bitcoin address is generated, to which a symbolic amount of bitcoins is deposited (i.e., 0.0001), and this transaction is recorded on the blockchain. The manufacturer assigns this public address to the machine. The private key is then issued to the seller, who can store it on his mobile phone, so that his phone also serves as the key to the car, allowing him to open and start the car.
When the seller intends to sell the car to the buyer, the transaction is recorded in such a way that money is transferred to the seller, and the car is transferred to the buyer as an address to which he can access from a mobile phone. Both participants must sign the transaction in order for it to become valid and be included in the blockchain. When the transaction is completed, the buyer can "present" his phone to the machine via NFC[14] , and the car will recognize the new owner and turn on the ignition. In this example, a transaction between two participants occurs simultaneously, and thus, neither of the participants should trust the other. Moreover, the buyer can view the entire transaction history for the machine on the blockchain to make sure that it is real, and make sure that the seller really owns the machine.
Let's expand this example. What if the buyer can not afford to buy a car, and he needs to borrow money to make a purchase. A Bitcoin transaction can be constructed in such a way that the creditor has ownership of the car until either the agreed amount is paid to him within a certain period of time, and then the car is transferred to the debtor, or the debtor loses the security deposit, and the creditor remains the owner of the car .
The idea of a multilateral agreement is not new; banks borrowed money at all times. However, when using bitcoin and blockchain technology, the process becomes much more efficient, and participants have to trust each other to a lesser extent in order to fulfill the contract conditions, which are automatically observed by the bitcoin network. It is interesting to see what new possibilities people will open for using bitcoin and blockchain tomorrow.
One of the big questions that arose regarding Bitcoin is whether transactions are anonymous and, if they are anonymous, will Bitcoin contribute to money laundering and other crimes. The answer here is both yes and no. Let's look at this issue more closely.
Suppose, let’s say, I’m buying something worth millions of dollars from a stranger, and he will give me a new bitcoin address to which I must transfer 10,000 bitcoins. At this point, the transaction is anonymous. Assuming that another participant generated a completely new address, I have no way to determine who he is, and no one can connect the receipt of 10,000 bitcoins with this person. If this person keeps these funds and never spends them, then he will remain anonymous. At some point, however, the stranger will most likely want to spend his 10,000 bitcoins, or perhaps exchange them for fiat currency[15] . Now if our stranger finds another stranger on the street and sells his 10,000 bitcoins for a million dollars in cash, everything will still remain very anonymous. However, usually, especially in the case of large amounts, this person will need to spend this money with the help of a legitimate business or exchange it in a trustworthy exchanger. At these points, in particular during currency exchange, in the process of opening an account, a strict identity check is required to comply with AML / CTF standards[16] applied in the traditional financial sector. As soon as the money begins to flow through regular channels, it becomes possible for the researcher to connect the dots and trace the history of transactions. So is Bitcoin anonymous? It can be as much as cash is anonymous. Cash may also be anonymous, but if one day you come to a bank with a million dollars in cash, the authorities can raise eyebrows in surprise.
Many world governments are now asking themselves whether Bitcoin should be considered legal tender, and if so, should it be regulated, and if so, to what extent.
In my opinion, the answer is that bitcoin needs balanced and carefully thought out regulation. A regulation that does not suppress a new industry, but at the same time protects consumers from illegal activities. Another point to take into account is that we cannot take yesterday's laws that applied to a completely different financial paradigm and use them for bitcoin. Bitcoin works in a fundamentally different way from regular currencies, and it is necessary to develop such a regulation that supports a decentralized digital model.
The question then becomes, what should such regulation look like? I believe that it is absolutely necessary to allow bitcoin and other digital currencies as legal tender, the idea of a currency issued by the state, one day may be a relic of the past. Governments and economies should use this new world currency and watch trade flourish as people can transact around the world in no time, without delay due to outdated and creaking banking systems. Even without considering bitcoin, as a software systems developer who spent many years creating programs for financial institutions, I can say that most of the systems that I have seen are truly ancient. These are large computers created over thirty years ago, who need special (really old) engineers to service them. This is one of the reasons why banks are slowly adopting new technologies because their systems are not ready for an upgrade.
The adoption of bitcoin can lead to increased trade around the world, perhaps even lift entire states out of poverty, turning them into flourishing economies.
Where, in my opinion, regulation is necessary, so it is in financial institutions that store bitcoin for other people, like banks. We have already witnessed the first great financial crash of Bitcoin with the fall of Mt. Gox, and not more than a week before I write these lines, we saw how Bitstamp, the European bitcoin exchange, lost $ 5 million in bitcoins from its digital repositories. To their credit, most of their funds were stored safely in the freeze, and they replenished the balances of account holders. This emphasizes, however, that without some oversight of the security measures taken by these organizations, consumers will not be able to trust the institutions responsible for storing their bitcoins.
It is important to emphasize that this is not a vulnerability of Bitcoin in itself, it is only a sign of the immaturity of the financial sector of Bitcoin. In the twelve months since the collapse of Mt. Gox, we could see the whole industry take big steps to improve security, and will undoubtedly continue to do so. The strong, stable and secure financial sector of Bitcoin is in the interest of all - and a balanced level of regulatory oversight in this area will not do anything wrong.
For regulators, it is important to remember that since Bitcoin is a new industry, it is moving at very fast paces and new methods are being developed all the time. It would be a step back for regulators if, with a limited understanding of the developing industry, they would require the impossible to execute instructions, or create instructions harmful to the growth of bitcoin. The best move for them so far will be to stay one step behind and observe carefully, taking the necessary steps as the industry matures. This principle is probably applicable to many areas.
Many events have significantly changed the face of Bitcoin, from its original starting point at the end of 2008, to the flourishing industry that it has now become. The following are some of the key points in this timeline.
October 2008 An anonymous article entitled “Bitcoin: A Peer-to-Peer Electronic Money System” has been published, describing essentially what Bitcoin has become. The article was published by a person using the pseudonym Satoshi Nakamoto .
January 2009The first blockchain block, also called the genesis block, was obtained, version 0.1 of the bitcoin program (including the source code) became publicly available. The program was written anonymously, and due to a rather non-standard style of programming, combined with rigorous theoretical know-how and completeness, speculation on whether it was written by an academic scientist with little programming experience, or perhaps a team of such people, was popular for a long time.
Then, on January 12, 2009 , the first bitcoin transaction took place - from Satoshi Nakamoto to Hal Finney in
October 2009.The New Liberty Standard website published a seemingly appropriate bitcoin exchange rate at that time, based on a formula that included the cost of electricity needed to run a bitcoin mining computer. The exchange rate they proposed was USD 1 = XBT 1309.03.
February 2010 The first bitcoin exchange called “The Bitcoin Market” has appeared. This exchange did not last long, and closed due to fraud problems a little over a year later.
May 2010 A U.S. programmer named Laszlo bought several pizzas at Jercos for 10,000 bitcoins. The price of pizza was $ 25 (the equivalent of a Bitcoin price of $ 0.0025).
July 2010Bitcoin was mentioned on the well-known IT website Slashdot, which caused a tenfold increase in price in less than a week. The price rose from 0.008 to 0.08 dollars. In the same month, Jed McCaleb launched Mt. Gox after reading about Bitcoin on Slashdot. It is interesting to note that Jed McCaleb said later, in 2011, after the sale of Mt. Gox:
« I created Mt . Gox for fun, after reading about Bitcoin last summer. It was interesting and fun to do. I'm still sure Bitcoin has a great future. But to really make Mt . Gox as it may be, takes more time than I have now. So I decided to pass the baton to someone who has more options to take the site to the next level."
In other words, McCaleb worked on Mt. Gox alone for several weeks or months in his spare time - everything turned out thanks to the fact that he had a hobby and Bitcoin did not have real value at that time. He admitted this fact at the moment when he sold the site. Compare this with a modern exchange such as the Independent Reserve, the development of which by a team of professional programmers took more than 18 months, including the measures provided for in the system to ensure its security, scalability, stability and reliability. Unsurprisingly, without extensive processing of Mt. Gox was not able to support the multi-million dollar industry in the future.
Another interesting thing that happened in July 2010 was that this month someone came up with a way to use the GPU (GPU) to mine bitcoin faster than was possible using the conventional mining method on the central processor.
The global frequency of processing hashes with the Bitcoin network has now reached 1 gigachesh (GH), or 1,000,000,000 (1 billion) hashes per second.
August 2010A vulnerability was discovered and then used in the Bitcoin protocol. This has led to the creation of more than 184 billion bitcoins generated in a single transaction. Within a few hours, the problem was discovered and the vulnerability was fixed. The transaction history from this transaction was further permanently deleted. It was the only major security flaw found and used in the entire history of Bitcoin.
November 2010 Bitcoin market capitalization for the first time exceeded one million US dollars. Bitcoin price on Mt. Gox reached 50 cents.
December 2010 The global frequency of processing hashes with the Bitcoin network for the first time exceeded 100 GH.
February 2011Silkroad has opened, a networked black market using bitcoin as a form of payment. In the same month, the Bitcoin exchange rate on Mt. Gox first achieved parity with the dollar.
March 2011 Jed McCaleb sold Mt. Gox to Marc Carpeles.
April 2011 For the first time, traditional media wrote about Bitcoin, TIME published an article entitled “Online Currency Can Challenge Governments and Banks.”
June 2011 Bitcoin price on Mt. Gox for the first time exceeded $ 10. In the same month, Mt. Gox began to show signs of problems, a serious security breach was found in their system, which led to the compromise of personal data of more than 60,000 users, as well as to fraudulent applications for hundreds of thousands of bitcoins, which caused a sharp drop in price to 1 cent.
In June, the largest Bitcoin theft in history also occurred. More than a quarter million US dollars worth of bitcoins were stolen.
In the same month, WikiLeaks began accepting donations in bitcoins.
July 2011 Just a month after Mt.'s security concerns. Gox Polish Bitcoin Exchange, at that time the third largest in the world, lost 17,000 Bitcoins to its customers.
August 2011 Another Bitcoin company that processed bitcoin transactions, lost more than 150,000 bitcoins worth at that time more than $ 2 million.
At that time, there were many similar incidents. As you can see, this was an unpleasant story for Bitcoin, so you should take the time to analyze what “loss” means and why it continued to happen. It should be noted that in all these cases (except for the vulnerability discovered in August 2010), the problem was not in Bitcoin in itself, but in the incompetence of the people who managed the companies that were responsible for storing bitcoins for other people. At that time, as to a large extent now, these companies were not regulated in any way, but people trusted them with millions of dollars in bitcoins.
At the heart of a bitcoin wallet, in which someone’s bitcoins are stored, is a file or a set of files on a computer. To protect these files, you need to backup them and encrypt them as described in the chapter “How to secure your bitcoin”. The organization responsible for millions of dollars worth of bitcoins should essentially accomplish the same task, but the methods used should be somewhat more reliable (compare the protection of money in your wallet with a bank vault, with gold in Fort Knox - as responsibility is increasing, security should also increase). If the files in which the private keys for the Bitcoin wallet are stored are damaged or changed (for example, due to a hardware failure), or the thief gained access to the computer and stole the files, then the bitcoins are lost.
There are fewer such security incidents today, but the threat still exists, which is why companies and individuals should keep this in mind.
October 2011 Former Google employee creates Litecoin, an alternative to Bitcoin currency.
May 2012 More than half of the bitcoin transactions per month were triggered by the SatoshiDICE online game.
June 2012 In San Francisco, USA, the famous online wallet Coinbase is founded.
November 2012 The Bitcoin mining reward was halved for the first time - the block mining reward dropped from 50 XBT to 25 XBT (this happened when mining 210,000).
The popular Wordpress online blogging platform is starting to accept payments in bitcoins.
December 2012Bitcoin Central, the first Bitcoin exchange licensed as a European bank, begins work in the European regulatory segment.
January 2013 The first ASIC (Application Specific Integration Circuit - Integrated Circuit for Special Purpose) - Bitcoin mining machines was released. Just as the GPU was ahead of the CPU, ASIC is now the most powerful and efficient machine available - it is special equipment designed only for mining bitcoin.
BitPay, a US-based Bitcoin payment processing company, announced that the number of transactions to its merchants exceeded 10,000.
February 2013. The price of bitcoin reached its highest height, exceeding the value of $ 31.91 recorded on Mt. Gox 601 days earlier in June 2011.
March 2013 There was a split in the blockchain caused by the different behavior of two different versions of bitcoin programs. This meant that users with the old version of the program saw one transaction, while users with the new version saw a different set of transactions. The split was quickly fixed by bitcoin miners, who returned to an earlier version of the program. The price of bitcoin temporarily fell during this period, but it quickly regained its strength again before the fork.
By the end of the month, the price rose even more, and the total capitalization of the Bitcoin market for the first time exceeded a billion US dollars.
April 2013The price continued its impressive growth in April, reaching $ 250. A potential catalyst for unprecedented growth called the Cyprus financial crisis. After the peak, the price stabilized at $ 120 for the next few months.
May 2013 Something that aroused my interest during my research - ESEA, a computer games company in the United States, used users' computers with a carefully designed malware program to secretly mine bitcoin. They were caught and received a lawsuit in the millions of dollars. This, of course, is not the only example of such activity. In one of the places where I used to work, an employee was fired for secretly using the company's powerful computers to mine bitcoin.
Probably less interesting, but more importantly, that same month the first Bitcoin ATM was opened in San Diego, USA.
Coinbase also received in May more than $ 5 million from investor funds, the largest investment in the bitcoin industry at that time.
June 2013 Our company, Independent Reserve, was founded in Sydney, Australia, before which we spent six months analyzing the bitcoin and bitcoin markets to understand how best to integrate into the new economy. We decided that Australia needed a reliable bitcoin exchange to create a solid foundation that other bitcoin-related businesses could use as a basis for their own offers.
August 2013A U.S. federal judge has classified Bitcoin as legal tender. At the same time, the German government legalized Bitcoin, declaring digital currencies a "unit of calculation." Also in August, Bitcoin appeared on Bloomberg terminals with the XBT currency code.
September 2013 The global computing power of the bitcoin network for the first time reached 1 pentache or 1,000,000,000,000,000 (1 quadrillion) hashes per second.
October 2013 The infamous Silkroad site was shut down by the FBI. Instead of the market collapse predicted by skeptics, the price of Bitcoin fell for a short time, but then continued to grow, since it became obvious that most of the transactions were not related to Silkroad, and Silkroad was a relatively small player in the Bitcoin economy.
In the same month, global investment bank Merill Lynch named Bitcoin potentially “the main means of payment in e-commerce, which can become a serious competitor to traditional money transfer systems .”
In October, Baidu, the largest Chinese search engine, became the first service of its kind to accept Bitcoin.
November 2013
The head of the US Federal Reserve, Ben Bernanke, has publicly announced that Bitcoin “ can have a long-term perspective, especially if innovations offer a faster, safer and more efficient payment system.”". The US Senate, which had a hearing on Bitcoin, also cautiously spoke out in favor of digital currencies, and the Financial Crimes Network announced Bitcoin as innovative and useful, warning that premature regulation could stifle innovation. They also pointed out to critics that any illegal use of bitcoin was negligible compared to the $ 1.6 trillion “global criminal income” in 1999. The positive results of the Senate hearings in November caused a rise in the price of bitcoin to $ 1,242.
At the same time, billionaire entrepreneur Sir Richard Branson announced on CNBC that his company, Virgin Galactic, a commercial space mission company, will accept payments in bitcoins. He called Bitcoin "an exciting new currency." The company has already received the first payment of approximately $ 250,000.
At this point in Bitcoin's history, it is used to transfer more money than Western Union, about $ 245 million per month.
December 2013 One of the Tesla Model S electric vehicles Ilona Mask (PayPal, SpaceX, Tesla, SolarCity) was sold in the USA for bitcoins. The price of the car at that time was approximately 103,000 dollars.
However, while Bitcoin flourished in the west, in the east, the Central Bank of China forbade financial institutions to process bitcoin transactions, which caused the price to drop to about $ 500. This ruling forced Baidu to stop accepting payments in bitcoins.
January 2014 For the first time, global computing power has reached 10 pentaches.
March 2014 The British tax office said that Bitcoin should be considered as a currency for transactions.
June 2014 Expedia, one of the largest travel agencies in the world, is beginning to accept bitcoin payments.
The global computing power of the network reaches 100 pentaches.
July 2014Dell, one of the largest computer manufacturers in the world, is starting to accept bitcoin payments.
September 2014 PayPal, one of the largest payment processing companies, gives merchants the ability to accept payments in bitcoins.
October 2014 The Independent Reserve, the most advanced and secure at that time bitcoin exchange in Australia, was launched in Sydney.
November 2014 The Australian Senate begins to study the use of bitcoin and digital currencies in Australia.
December 2014 Microsoft, one of the largest software makers in the world, is starting to accept bitcoin for some online purchases.
January 2015The New York Stock Exchange and a consortium of international banks are investing $ 75 million in the bitcoin industry.
August 2015 The Senate of Australia issues recommendations on the study of the issue of digital currencies, requiring Bitcoin to be considered as ordinary money for tax purposes, and to apply anti-money laundering laws to digital currencies. This result was perceived by the bitcoin industry in Australia as a very positive step towards the legitimization of the young currency.
I hope you enjoyed reading Adam’s book, just as I enjoyed the time spent editing and completing his manuscript. For the past 14 years, Adam and I have worked together on so many different projects that it often seemed to me that he, here next to me, was working on this book, arguing about some formulations or trying to convince me that his interpretation of an unclear grammatical rule was more correct, than mine.
While I was working on the book, I wondered whether to include additional chapters and expand some sections. I know that Adam would probably write more if he had a chance, but I decided that it would be better to keep the book close to the original in order to demonstrate the work and thoughts of Adam himself. This seemed to me more important than adding another chapter, say, “Side Chains” or “The Future of Bitcoin,” and, in my opinion, this book is strong enough as it is, it does not need additional content.
I am sorry that Adam cannot see his ambitions realized, and his book published. I know that he would be proud to see this project completed. It was the culmination of many hours of work on the text, many years of research and hard work in the IT and bitcoin industry, which gave him the knowledge and understanding to write this book.
I know that this publication, which would leave his mark in history for many years, would have brought him joy.
Adrian Przelozhni
[1] Bitcoins can be stored in non-electronic form, for example, on paper, but this is more an exception than a rule. Transactions, however, are always electronic.
[2] XBT is accepted as the standard currency designation for bitcoin. In other currency notations, the first character usually means the country that issued the currency. In some places, the alternative designation BTC is still used.
[3] When I say “computer,” I actually mean any electronic device where the corresponding program is installed. It can be a mobile phone, laptop or similar device.
[4] Technically, the “impossibility” of hacking has not been proven for any form of software encryption or digital signature, but it can reasonably be said that forging a digital signature is so difficult that it is almost impossible in all practical applications.
[5] Below we will see that as a precaution against fraud, it is reasonable to wait half an hour to confirm a transaction with a significant amount, but usually all transactions can be seen in a few seconds.
[6] It is worth stopping and thinking how astronomically large a number is, consisting of several hundred digits. This is many orders of magnitude greater than the number of atoms in the observable universe.
[7] As we already noted in the third chapter, there is nothing truly “impossible” in the world of cryptography, however, in practice, some things are considered complex enough so that we consider them impossible for all practical purposes.
[8] The process of hashing a user password is a bit more complicated, and involves adding a random value known as “salt” to the password. Thus, if two people have the same password, this provides different hash values, making the system more secure.
[9] “Tor” is an abbreviation for “The Onion Router” (an onion router), this project was originally developed for the US Navy, and was designed for encrypted and anonymous online communication. This software is now widely used on the Internet to ensure anonymity for people who want to keep privacy online.
[10] For a more serious discussion of this topic, see Chapter Eighteen - “Anonymity”
[11] Silkroad has since been replaced by other anonymous black markets that have grown due to its fall
[12] Such wallets are called “hierarchically determined” or “HD wallets”.
[13] An “EMP” or “electromagnetic pulse” is a short strong surge of energy that can cause the loss of data stored on computer disks without the possibility of recovery. It can occur naturally, for example, due to a lightning strike, or due to a person, as a form of weapon.
[14] NFC (Near Field Communication) is a near-field communication technology that is increasingly used in modern telephones and which enables the exchange of data between devices located in close proximity to each other.
[15] “Fiat currency” is money that the state declares legal tender, but which is not provided with physical values. The value of fiat money is derived from the relationship between supply and demand, and not from the value of the material from which it is made.
[16] AML / CTF (Anti Money Laundering / Counter Terrorism Financing) - combating money laundering and terrorist financing is a set of legal requirements that banks and other financial institutions must follow to make sure their clients do not use money for illegal purposes. Since bitcoin exchanges, along with bitcoin, deal with traditional currencies, they are also usually required to follow various procedures to verify the identity of their customers and notify of suspicious transactions.
Adam Tepper. BITCOIN - MONEY FOR EVERYONE
Table of contents
Foreword by the translator
Foreword by Adrian Przelozhno.
Preface
Part I. What is Bitcoin
Chapter One. Introduction to Bitcoin
Chapter Two. The History of Money
Chapter Three. A Working Example
Chapter Four. How Bitcoin is mined
Chapter Five. Why Use Bitcoin
Part II. How Bitcoin Works
Chapter Six. Asymmetric keys
Chapter Seven. Hashing
Chapter Eight. Decentralization
Chapter Nine. Blockchain
Chapter Ten. Bitcoin mining
Chapter eleven. Stimulus Miner
Chapter Twelve. TL; DR
Part III. A Wider Look
Chapter Thirteen. Mt. Gox
Chapter Fourteen. Silkroad
Chapter Fifteen Other digital currencies.
Chapter Sixteen How To Secure Your Bitcoin
Chapter Seventeen. Smart contracts.
Chapter eighteen. Anonymity
Chapter Nineteen. Regulation
Chapter Twenty. Timeline
Afterword Adrian Przelozheny.
Translator's Preface
It seems that the preface for such a small book turns out to be a bit much, but somehow I have to write a few words. I took up the translation of this text, firstly, as a tribute to the deceased colleague (and friend), with whom I worked over the past few years; secondly, because this book is really a great introduction to bitcoin for people who are not knowledgeable in information technology. It seems to me that the appearance of this text - quite comprehensive, and at the same time not too long - in Russian will be useful. The more people get acquainted with bitcoin, the less they will be afraid of it - because unfamiliar things scare away, and in the mysterious bitcoin there is absolutely nothing wrong.
Несколько замечаний по поводу собственно перевода. Ряд англицизмов – «майнинг», «блокчейн», «хеширование» и т. п. – широко употребляется в русскоязычных статьях, касающихся биткойна, и попытка избавиться от них, как мне кажется, не сулит ничего хорошего по отношению к смыслу текста; в самом деле, можно, конечно, переводить «майнинг» как «добычу» или «выработку», «блокчейн» как «цепочку блоков» (что звучит несколько неуклюже), но как тогда называть «майнера» – «старатель»? «добытчик»? – это уже чересчур.
Само слово «биткойн» также, очевидно, остается без перевода. В тексте оно употребляется как в единственном числе («биткойн» в субстанциальном смысле, как «деньги»), и во множественном («биткойны» в конкретном виде, как «монеты»).
If the text uses the word "dollar" without further indication, then this refers to the US dollar.
The text of the book is available for download in PDF in English and Russian on the website www.independentreserve.com (registration is required), there you can also order a paper version (only English). Not being a professional translator, I will be happy to accept amendments and clarifications, if any. I want to thank Olga Yurieva for the initial proofreading of the text and Vaclav Egurnov for the titanic editing work.
Alexey Zhikharevich
Foreword by Adrian Przelozhno
Adam Tepper was tragically killed in a car accident in February 2015, before he finished this book. As a close friend of Adam and his business partner in countless projects, I had to finish what he began by completing his manuscript and publishing this book.
I would like to emphasize that, although I made some changes and corrections to this book, I am firmly convinced that they correspond to what Adam himself would have done if he had had such an opportunity. This book, therefore, remains the work of Adam Tepper, and is consistent with his author's intention.
Special thanks to those who donated money to the Adam family, and also made a donation through the Bitcoin Association of Australia page to help pay for the publication of this book. Thanks also to the Bitcoin Embassy in Australia and to those who took the time to proofread the book and reviews about it at different stages.
Adam was a kind, smart and passionate young man with a clear vision of the future, in which Bitcoin can change people's lives for the better. Adam's favorite writer was Richard Feynman for his ability to explain complex and seemingly inaccessible ideas in clear and simple words. Such a talent was inherent in Adam himself, and this book is an excellent confirmation of this. I hope you enjoy studying Bitcoin through the words and thoughts of Adam Tepper.
Adrian Przelozhni
Foreword
Since I am one of the founders of Independent Reserve, an online currency exchange service specializing in exchanging bitcoin for other currencies, I am often asked to explain what bitcoin is and why it is important. At the very beginning, I probably didn’t explain it well to people, because bitcoin combines many different ideas, most of which are unusual. Albert Einstein once said: “If you cannot explain something simply, then you yourself do not understand it well enough,” and I think that to some extent this was the reason that I initially had difficulty explaining to others what Bitcoin
Today, I still meet people who have never heard of Bitcoin, and they ask me what it is. I usually answer in the shortest possible way, explaining the practical benefits of bitcoin and omitting more interesting details about how it works. If a person is interested, I am ready to answer his questions until he reaches an understanding at a level that suits him. That is the purpose of my book, and I arranged the chapters of the book in a similar way. The intended audience of this book is people who are completely unfamiliar with bitcoin and completely unfamiliar with computer science in general. It is intended for a reader who wants to understand the basics of how Bitcoin works, and at the same time understand the technology. The book begins with a review of bitcoin in a practical sense, then I look at the ideas behind bitcoin,
Adam Tepper
money - metal and paper signs, which are a measure of the value of the purchase and sale, a means of payment and the subject of accumulation of
currency - the country's monetary system, as well as the monetary units of this system
Part I. What is bitcoin? Chapter one. Introduction to Bitcoin
Bitcoin is a currency, and thus, it is money. Money was not always what they are in our understanding today, and essentially bitcoin is another development of the idea of money. One of the key factors that sets Bitcoin apart from other well-known currencies such as the American dollar ($), British pound (£) or Euro (€) is that Bitcoin is an electronic currency, which generally means that bitcoin is stored electronically on computers[1] , and is transmitted electronically via the Internet. The prospect of electronic money can confuse or discourage many people, just as email could confuse someone in the 1980s, when it was described as emails stored and sent electronically over the Internet. Today, e-mail is so widespread that paper letters, especially personal letters, are considered old-fashioned, bulky and, among other things, slow.
The first email users in the late 1980s or early 1990s may remember that at the very beginning it was not very useful, because most of your friends, family members and colleagues did not have an email address, or even internet connection. Friends asked questions like: “What is e-mail and how to use it?”. It was a time when there was no Gmail, there was no Google, there was not even Hotmail. Electronic mailboxes were mainly provided by Internet providers. But soon, most people got email addresses, and today it seems extremely unusual if someone doesn’t have an email address at all, just like if a person doesn’t have a mobile phone.
I'm talking about email because it's a great analogy to bitcoin. E-mail took the process of sending letters, which has been used for many thousands of years, and adapted it for the transmission and storage of letters in electronic form. In a relatively short time, the process of exchanging handwritten letters has become an archaic and unusual method of communication. It would be difficult to imagine that we should again send letters by mail for daily communication and wait a few days or a week for an answer. It is also worth mentioning that over the past twenty or thirty years the ways we use email have also changed somewhat. We have access to the electronic box from all our devices; we can send large attachments and a variety of content; we can use email to schedule appointments that appear on our calendars. All these ideas were not originally laid down in the creation of email, but became its development based on how we use mail. Of course, there are many other forms of electronic communication that developed later. This development refers to the continuous improvement of electronic communication in general. But initially, very few people saw the benefits of using email.
This brings us back to bitcoin. Just as email has become what brought communication into the electronic age, so is Bitcoin what brings our money system into the electronic era. Before we look at how Bitcoin can do this, it's worth taking a look at the history of money in order to build a perspective.
Chapter Two Money story
Money today is a very complex system. Most of the time it works, but from time to time it catastrophically breaks down. Although the system is complex, most of the complex things are invisible to us with its daily use. For most of our lives, the monetary system has not changed much - it is something that we all grew up with, and most of us probably did not spend much time thinking about how it works. Money was not always the same. One of the biggest changes in the last hundred years has been the placement of most major currencies in the free market, as opposed to the current government pricing gold or silver. This was a very significant progress in the monetary system, but let's look back even further to see how money has changed over thousands of years of use in various societies.
I remember when I was a child, I asked my father: "What did people do to make money?" My father explained that “in the old days” people used the barter system, using sheep and other animals as a currency. It was difficult for me to imagine as a child how this could work, but in essence that is how money worked several thousand years ago. Sheep and cattle in general had certain disadvantages in this sense. They were difficult to store, difficult to move and not easy to share. Throughout human history, different cultures have used various products for these purposes. Seashells and rice were used as money, and then precious metals, gold or silver, which later became familiar because they had many qualities convenient for the currency: they were durable, portable, divisible, and rare.
To carry out a transaction using a precious metal, such as gold, you can determine the value of an item as the value of a certain amount of gold. This decision was imperfect, because the process of assessing the purity of the metal and its weight did not contribute to the speed of transactions. States later improved this process by minting standardized coins containing a certain amount of precious metal, the weight and authenticity of which were confirmed by the state. This is an interesting moment in the history of money. It is interesting because, although the coins contained the prescribed amount of gold or silver, the sign of the state gave them value, and the merchants did not need to analyze the purity and authenticity of the coins as such. Consequently, trust has now shifted to the state. It didn’t take much time for governments to understand that since the value of the coins lies in the mint mark, it will be cheaper to issue coins containing less precious metal than the indicated coin weight. This step in the history of money was a change that turned a coin from a unit of weight to a unit of value.
As European trade flourished in the Middle Ages, the idea of a bill of exchange spread, through which the merchant could offer a line of credit to a trusted buyer. The goods were delivered to the buyer in exchange for a bill on which he was obligated to make payment on a certain day in the future. Provided that the buyer was a respected person, or the bill was approved by a trustworthy guarantor, the seller could then present it to the bank for redemption at a reduced price before the expected date. These bills were also used by the seller as a form of payment to make additional purchases from their suppliers. Thus, bills of exchange - an early form of credit - became both a medium of exchange and a means of saving.
In the twelfth century, the English monarchy introduced a system based on similar assumptions - mortgages through which the monarchy could make payments based on expected taxes that had not yet been received. They were also known as telly (notched wooden sticks). The Treasury has discovered that they can also be used as money. When the crown ran out of resources, it could use telly, representing future tax payments to the crown, as a form of payment to its own creditors, which in turn could either collect taxes directly from payers or use these telly to pay their own taxes to the government. Thus, telly was adopted as a means of exchange for certain types of transactions and as a means of saving. The Treasury soon realized that it may issue talley not secured by any specific tax payment. By doing this, the Treasury created new money backed by public trust and faith in the state, rather than specific incomes.
Around the same time, banks began issuing paper bills, very correctly called "banknotes", which were circulated in the same way that the currency issued by the state is circulated today. Only banknotes issued by the largest, most creditworthy banks were widely accepted. Papers of smaller, less well-known institutions circulated only locally. Far from home, they were taken at a reduced price, if at all. The proliferation of types of money went hand in hand with the increase in the number of financial institutions.
Banknotes were a form of secured money that could be converted into gold or silver upon presentation to the bank. Since banks issued significantly more securities than they stored gold and silver on deposits, a sudden loss of confidence in the bank could cause a massive redemption of banknotes, which led to bankruptcy.
The use of banknotes issued by private commercial banks as legal tender was gradually superseded by the issuance of banknotes authorized and controlled by national governments. The Bank of England was given the exclusive right to issue banknotes in England in 1694, thus putting an end to the use of private currency in the kingdom. Australia passed a similar law more than two centuries later, in 1910, and the United States followed in 1913.
Currencies authorized by the government were a form of secured money, as they were partially secured by gold or silver and could theoretically be turned into gold or silver. At the time of President Nixon, the US dollar was withdrawn from the "gold-backed" standard in 1971, which caused the collapse of the international Bretton Woods monetary system. Most of the major world currencies were then placed on the open market, completely losing touch with precious metals, now the value of the currency was based solely on the economy and the reliability of its issuing government.
Having understood the history of money, we can also see their weakness. Now, let's take a closer look at the work of bitcoin and its advantages over existing forms of money.
Chapter Three Working example
Bitcoin technology is fascinating. The first time I heard about Bitcoin a few years ago, almost immediately, as it appeared in 2009. My friend Joe, a man who likes to advertise the latest technological trends, told me that "one guy figured out how to create Internet money." I did not understand the meaning of this phrase, and I believe that at that time my friend did not understand this either.
I no longer remembered Bitcoin before, some time ago, in November 2012, I noticed an online advertisement in which there was something about Bitcoin, and thought that I should take a look. The first thing I noted is that bitcoin, whatever it was, was selling for $ 10, and it has been like this for some time. I expected that it would cost no more than a few cents, or even a fraction of a cent. Of course, knowing nothing about bitcoin at that time, I could not understand how much bitcoin should cost, but assuming that there were millions of bitcoins in circulation, $ 10 seemed a significant figure, and I became curious to find out more in detail. After reading a lot of the materials I found on the Internet, I was still far from understanding what Bitcoin was or how it worked. Only after carefully re-reading and researching cross-references to various resources did I begin to add a picture in my head. Definitely, I would not call it a deep or thorough understanding, I still had many questions.
However, bitcoin captured my interest, and as a programmer, I decided to write my primitive program that would allow me to send and receive bitcoins (it was never published, it was just an experiment to see how it works and satisfy my curiosity). I never finished this program, but spent two or three weeks developing it, and doing it, in the end, I came to understand how Bitcoin works, and was deeply impressed and amazed at the underlying technology. It was amazing because it elegantly brought together many dissimilar principles of programming into a system that no one could have thought of before, and which could now be effectively used as money.
Not wanting to advertise in vain the idea about which I had doubts whether it would turn out to be another “perpetual motion machine”, I waited for the moment when I understood bitcoin quite deeply before transferring this knowledge to my business partner Adrian Przelozhni. I was met with skepticism of exactly the level that I expected. A month later, he remarked to me: “Bitcoin is really an amazing thing - I just bought a little bit.”
So what was it about bitcoin that we both found amazing, and what later led us on the path to creating a company so strongly tied to bitcoin? In the second part of the book, we will focus on the technologies underlying Bitcoin, but first I need to explain how it works at a high level. Bitcoin is a cross between physical currency and a checkbook. So far, we can only draw this analogy, but at least start with this one.
Using this example, let's say I want to send my friend Joe $ 50 (USD). I can write a check with his name on it, write the amount and put my signature on the bottom of the check. In an ideal world, this is a wonderful system. Joe receives the check and he cannot change the amount. If the check is stolen, this will not help the thief, because the name Joe is on the check. And if they steal my checkbook, then it will not have any value for anyone, because the checks do not yet have my signature. This is a good system in theory, but in practice it has several disadvantages. Firstly, the check itself is not money. A check is essentially a letter to the bank authorizing the bank to give Joe $ 50 out of my money that is stored there. Until Joe brings the check to the bank, he does not know for sure if I have these 50 dollars. It may take several days or a week for the bank to give Joe these funds. Signatures are very easy to fake, so if someone got my checkbook, it will not be especially difficult for him to write a fraudulent check. In Australia, checkbooks have not been used for about a generation, the concept itself is as archaic for us as the trade in gold bullion, but surprisingly this system prevails in many countries, including the United States.
Let's compare this transaction with the transaction that Bitcoin uses - let's say I want to send my friend Joe 50 bitcoins (XBT [2] ). The first key difference between the checkbook and bitcoin example is that in the case of the
checkbook, the bank holds $ 50 for me. Bitcoin, however, is more like cash, and 50 bitcoins can be physically stored on your computer.[3] . Say I have 50 bitcoins in a digital wallet on my mobile phone that I want to send Joe to his mobile phone. First, I ask Joe for his bitcoin address. When I send the money to Joe's address, they can only be spent using the secret key that is stored on Joe's phone. No one else can use this money without access to his phone.
So, using the program on my phone, I start a transaction that sends 50 bitcoins from my personal bitcoin address to Joe's bitcoin address. Then I digitally sign this transaction using the secret key on my phone and send this information to the Internet so that it is visible to the whole world. It’s true, I don’t send anything directly to Joe, I send information to the entire Bitcoin network.
What happens next: when the other computers in the bitcoin network receive information about my transaction, they check that I really have 50 bitcoins in my wallet and that my signature is correct. If everything is in order, they mark the transaction as reliable, and soon it becomes part of the official global Bitcoin ledger, known as the “block chain” or “block chain,” and is stored in it (we will discuss this in more detail below).
Meanwhile, the program on Joe’s phone, along with the rest of the world, confirms the transaction I started. Almost instantly, this transaction is displayed on his phone as an arrival in 50 bitcoins.
If I sent money to Joe, I can no longer spend these 50 bitcoins, since the bitcoin network no longer recognizes these 50 bitcoins as mine, and they can be spent only if you use Joe's secret key. Let's take a look at this situation from a different angle: the transaction that I started was essentially a “letter” to the bitcoin network, transferring Joe my right to spend 50 bitcoins. It's that simple!
Let's take a closer look at this model and analyze some of the differences between bitcoin and checkbook. In the case of a checkbook, there is a central bank that processes transactions. In the case of bitcoin, there is no central transaction processor or boss - a decentralized model is used in which each network member, including the recipient, can authenticate the transaction. This is a quick process. For less risky transactions with small amounts, this process takes no more than a few seconds. For more risky transactions with large amounts, a transaction can be safely recognized as completed in about half an hour. Compare this to a bank check or SWIFT transfer, which usually takes 1 to 5 days.
Another similar detail that you should have noticed is that bitcoin transactions are signed, just like old-fashioned checks. However, the difference is that a six-year-old child can cope with a fake signature on paper, while faking a digital signature used in a bitcoin transaction is practically impossible[4] .
Another interesting point is that the transaction processing cost and lead time are consistent, and they do not depend on the transaction amount[5] . Using the above example, I could send Joe a share of a cent in bitcoins to pay the royalties he receives for his platinum album, or I could send him two million dollars to acquire his successful company. In any of these cases, the transaction fee will be the same, almost zero, and the execution time almost instant. Thus, an effective free and safe movement of money on an international scale with the speed of email is achieved.
Finally, it is worth noting that since the bitcoin network covers the entire Internet, it does not matter where Joe and I are physically located. We can sit in one room or in different parts of the world - it does not matter. This does not affect the speed or the cost of the transaction.
Chapter Four How bitcoin is mined
In the previous chapter, we looked at a daily example of how you can use bitcoin to transfer money between network participants. However, here are the questions that people usually ask me: how bitcoins are generated, how they are introduced into the economy, and where does bitcoin get its value from. Before answering these questions, let's recall the history of money, which we discussed in the second chapter.
Until the twentieth century, money was at least partially backed by precious metals such as gold or silver. Along with other important qualities that made gold and silver suitable as a currency, there was the fact that these metals were relatively rare. There was a stable but slowly increasing influx of gold and silver while they were mined from the ground. Extraction required a lot of time, effort and cost. If gold and silver were abundant, and it would be easy to obtain, then everyone would be engaged in mining, and they would cease to be valuable, respectively, they would cease to be suitable as money.
Although bitcoin mining and gold mining are very different in practice, the principle underlying them is the same, and therefore the generation of bitcoins has become similarly called “bitcoin mining”. Like gold, anyone can mine bitcoin with the appropriate resources. If you wanted to mine gold these days, you could do it, but remember that a significant part of the gold near the surface of the Earth has long been mined. Thus, you would need a bit of luck plus a lot of geological and logistical experience - as a result, most people are consumers of gold, not miners!
The way bitcoin is mined is that the bitcoin network introduces relatively small volumes of bitcoins into the economy at regular intervals. The Bitcoin protocol defines a mathematical problem that is structured in such a way that it can be solved in about ten minutes. When the problem is solved, the person who owns the computer who solved the problem is given a given number of bitcoins. At the very beginning, perhaps, these tasks were solved only by one personal laptop. Therefore, the task was relatively easy so that the available laptop could solve it within ten minutes before repeating the process again. At this point, when bitcoin was in its infancy and no one else used it, one bitcoin was not worth anything. Therefore, such an exercise in mining, which required small amounts of electricity,
However, over time, two, then three, then thousands of laptops and home computers tried to solve a problem that was updated every ten minutes. With a thousand computers trying to solve the problem, the network adjusted the difficulty level so that it became a thousand times higher than at the beginning. Therefore, each participant had about one chance out of a thousand to solve the problem and achieve any reward.
I do not know exactly how much Bitcoin was worth at this point in history, but it began to cost something, even if it was a very small amount. Using a computer twenty-four hours a day is inexpensive in normal conditions, when you just surf the Internet, but if you use a computer twenty-four hours a day to solve a mathematical problem, you will see that the processor is used at almost 100%. This process increases energy consumption and increases electricity costs. People began to calculate the cost of using machines for mining bitcoin and correlate it with the statistical probability of solving the problem for a given period of time. And from that time on, Bitcoin began to possess some value, even if only because of its rarity, and not because of its utility for such a small circle of people.
Then people realized that than using an old laptop or PC for computing, it would be more efficient to design computers designed specifically for bitcoin mining, and for nothing more. People began to launch not one, not two, but entire farms of computers in their apartments and living quarters. These computers mined Bitcoin and consumed electricity. Some smart people later realized that GPUs (graphics processors) on video cards were much more productive for solving the specific type of tasks offered in mining bitcoin, and wrote programs to take advantage of video cards and get bitcoins faster.
As you can see, not only the number of people mining Bitcoin has increased, but also the number of machines used by these people, and the power of these machines. The task for solving every ten minutes was now hundreds of thousands or maybe millions of times more difficult, and a miner with a simple laptop would have very little chance of getting anything.
After the GP mining phase, as it was called, equipment manufacturers began to develop ultrafast boards specifically designed for bitcoin mining, making GP mining slow and outdated. Bitcoin mining today is a full-fledged industry with companies investing millions of dollars in bitcoin mining equipment. Today, like using a small shovel for gold mining, you cannot expect to start mining bitcoin on your home computer and expect to get money, because this will require extensive resources. Several bitcoin mining farms have been launched in Iceland, where geothermal electricity provides a cheap source of energy, which is combined with minimal server cooling requirements due to low temperatures.
Even so, if you cannot afford a gold mine, you can probably buy some share in it. Similarly, companies are now working that provide what is called a mining pool. It works in such a way that you join an association of thousands of users who use home computers to mine bitcoin and are guaranteed to get a small percentage corresponding to the contribution of your personal computer to the total volume of mining - however, do not expect to get rich!
I talked a lot about how bitcoin mining works and the history of bitcoin mining, but the bitcoin mining process has two more important roles in the bitcoin network in addition to generating new bitcoins for miners. First, in addition to solving math problems, bitcoin miners also process transactions. In the third chapter, I gave an example of sending 50 XBTs to my friend Joe, and this transaction was sent to the bitcoin network. The data of this transaction reached many miners actively mining bitcoin, and when one of them successfully solved the math problem, he also processed this transaction, along with all the other bitcoin transactions in the last ten minutes, and included them in the blockchain (Bitcoin ledger). In other words, these miners perform the necessary function in the bitcoin network: in addition to introducing money into the economy,
There is a third key role that the mining process plays. The more miners in the bitcoin network, the more difficult the mathematical problem becomes. The more complex the task, the more secure and robust the network becomes. We will not discuss this point for now, but will return to it later in this book.
Chapter Five Why use bitcoin
Now that you have an elementary understanding of some of the principles underlying Bitcoin, it's time to consider the advantages of Bitcoin over other types of money and understand how you could use it. Bitcoin is more profitable than regular currency in almost all circumstances when an electronic transaction is possible. However, before considering its advantages, it is worth noting the available alternatives. When we talk about alternatives, we not only compare bitcoin with other currencies like dollar, pound or euro, but we also need to consider different types of transactions. The way we use the money depends heavily on the amounts used, the type of goods and services we buy, and the mutual arrangement of the participants.
In the simplest case, we use physical cash transfer when banknotes or coins pass from hand to hand. Cash transfer works best for amounts ranging from about five cents to a thousand dollars. Obviously, it is possible to transfer large amounts, but in most cases people find it more convenient to use other payment methods if the amount exceeds a thousand dollars. As for the smaller (than the lower limit) amounts, here we are limited by the smallest face value of the currency. Cash transfer is of limited use because both participants must be in the same place.
Bank checks are often used to transfer large amounts between individuals. A bank check usually costs about five dollars, so it’s not too economical to use them for amounts less than five hundred dollars. In practice, in most cases the amount of a bank check is not limited, but this is a rather inconvenient process, requiring both participants to appear in a bank branch, so usually the use of bank checks for transactions is limited to one country. Participants must also meet in person to deliver the check, or wait a few days for the check to be delivered by mail.
Convenient means for merchants are electronic payments or credit cards. This is a relatively expensive option for merchants, since they must pay in order to create a trading channel with the bank, and also pay the bank a few percent of the amount of each transaction as a transaction processing fee. Moreover, in the case of a refund, when the transaction is fraudulent, the merchant takes risks and he must return the money. This is especially true for online business merchants, as they only receive credit card information but do not see the card itself. The possibilities of electronic payments and credit cards are usually limited to amounts from ten to ten thousand dollars.
International SWIFT transfers are the main method of transferring money between countries. SWIFT transfers are usually uneconomical for amounts less than a thousand dollars due to the high fees charged by banks. SWIFT transfers are a very slow form of transaction: the recipient receives payment in a few days. Errors also occur during the translation process, resulting in even greater delays.
I have described some of the most common methods of transferring money between people, but, of course, this is not an exhaustive list. There are also large translation companies such as Western Union, as well as a large number of specialized international translation companies that can send small amounts of money faster and more economically than SWIFT or Western Union. Another group of companies includes PayPal and similar companies acting as a processor and insurer of payments between merchants and banks. And, again, that’s not all. You have probably already begun to understand that our understanding of the transaction is highly dependent on what we are trying to do, and that we have a wide variety of loosely coupled systems that have advantages and disadvantages depending on the circumstances.
Back to Bitcoin. Bitcoin allows me to send any amount of money to anywhere in the world instantly and for free . What other transaction method has such wide coverage?
Let's continue. Bitcoin allows merchants to receive payments without risk of return. Putting it differently, if a merchant received a payment in bitcoins, there is no risk that the bank or a third party may later declare this payment fraudulent; payments in bitcoins are final. Of course, sellers and buyers can pay a third party for escrow services if they need it. It is also good for buyers, in particular those who shop online. If you have ever made an online purchase with a credit card, you must be upset when your card is not accepted because you are traveling at that moment or make a purchase that the seller considers risky. For example, if you buy equipment for several thousand dollars, the seller may ask you to confirm your identity and address. This is inconvenient and frustrating for both the seller and the buyer, resulting in undesired delays and transaction processing efforts on both sides. With Bitcoin, transactions are instant, free and pose no risk to the seller.
The benefits are even greater if you are a merchant who often deals with international buyers, for example, in the tourism industry. Imagine you are renting a yacht. The buyer orders a yacht a week before the holidays. Instead of worrying about transfer fees, getting to know foreign currency and waiting a few days for the money to arrive, you can send a deposit in bitcoins - from anywhere, for free and instantly, in a currency that both the buyer and the seller are familiar with. If renting a yacht turns out to be a secret engagement gift to the bride, he will also not be visible in credit card reports.
Another great advantage of bitcoin is that a bitcoin transaction does not require either side to provide important information to the other side. This is the exact opposite of how credit cards or electronic payments work. Each time you make a purchase at the store with a credit card or electronic payment, you must transfer your card details and PIN or signature. It is interesting to think about how important it seems to us to hide the pin code from other people, and at the same time, we are just ready to enter it into a machine belonging to a complete stranger. Pin-stealing devices are known in Australia, but they are much more common in other parts of the world, this is especially true for international travelers. Using bitcoin completely removes this risk. You can shop anywhere in the world,
Another example of circumstances in which Bitcoin has significant advantages over other methods of conducting transactions is the payment of small amounts. A child may want to go to the store and buy chocolate or lollipop for ten cents, or the seller may want to sell the ringtone for his mobile phone for fifty cents online. Without Bitcoin, these kinds of small purchases can only be made in cash, as most other funds require that the payment amount cover transaction fees. Bitcoin provides what is now called micropayments, in the case of such small amounts, or even lower amounts, of less than one cent. Moreover, Bitcoin is not a line of credit, it is the digital equivalent of cash, so you do not need to be an adult to use it.
What about the case of a traveler who urgently needs to send a hundred dollars to his mother in his country? A SWIFT transfer will be expensive for both parties and will take several days. A service like Western Union will be faster, but even more expensive. Bitcoin works instantly and for free.
Bitcoin can be sent between participants anonymously. This anonymity has no restrictions, we will consider it in more detail in the following chapters, and now suffice it to say that when I make a bitcoin transaction, I do not need to worry about who will make the payment: a bank or a credit card company that keep the entire history of my purchases. I do not need to disclose my identity to the seller, and there are many reasonable and reasonable reasons why I might prefer to remain anonymous.
Another big advantage of Bitcoin is that its release is controlled. As we briefly discussed in the previous chapter, bitcoin is generated through the mining process, and the bitcoin generation rate is controlled by the protocol itself. We will consider this in more detail in the future, but we can say that the release of Bitcoin is predictable, controlled, and inaccessible to manipulation by an individual, organization or government. We have observed many times throughout history, including recent history, examples of how governments negatively influence the issue of money, generating more money for the sake of their own momentary economic interests. These interests often represent a complete contrast with the interests of people who hold currency. We have seen how this can lead to an inflationary spiral that can destroy the entire economy.
Earlier, we said that bitcoin has some similarities with cash, but cash is limited when it comes to protecting against accidental loss or theft. Bitcoin is also not immune to this kind of loss, but it has many properties that allow people to protect their money from loss or theft. This makes it a much safer option to carry in your back pocket than a wallet full of cash.
Regular currency is not intended for the electronic era. This is a money system that has been used for hundreds, if not thousands, of years, long before the invention of electricity, not to mention the development of computers and the Internet. It has been used since the time when trade was carried out face to face, when there was not even the thought that you could send a song from one end of the world to another for a small fee between parties that never even spoke to each other. Over the course of the twentieth century, financial institutions adapted their ancient systems to the electronic era and developed new systems that met modern requirements. During the life of these systems, as the requirements of electronic commerce expand, new systems were built on their basis, performing tasks for which they were not originally intended.
Bitcoin was designed for electronic transactions from the very beginning, and this is its strong point. It allows you to carry out instant electronic transactions from anywhere in the world, for any amount, without having to trust the other party or any dependence on a third party. When digital currencies reach a critical mass, our doubts today will seem silly.
Part II How Bitcoin Works
Chapter Six Asymmetric keys
At its core, bitcoin is an open protocol. When I say “protocol”, I mean that Bitcoin is a set of rules that Bitcoin programs must comply with. When I say “open,” I mean that the protocol, or set of rules, is publicly available, and anyone can check them. This protocol allows bitcoin programs (which we usually call bitcoin clients) to communicate with each other via the Internet in a standardized way.
Then the first question will be if Bitcoin is an open protocol, or a set of rules that keeps people from writing programs that violate the rules. The answer is nothing. Anyone can write a program that uses the Bitcoin protocol and communicates with other Bitcoin programs via the Internet and tries to “break the rules” in its favor, however, clients that do not comply with the protocol are simply ignored by other clients.
As an analogy, imagine chess players by mail when players are in different places and their moves are sent in letters. Both players know what the whole board looks like, and any of them can walk as he wants if his move complies with the chess rules. Otherwise, the other player ignores or rejects this move. The same principle underlies Bitcoin: any of the “players” (Bitcoin clients) knows exactly what the “board” (blockchain) looks like, and can independently check from other sources that any “move” of the other (transaction) is correct.
If we want to understand bitcoin at a deeper level than analogy, we must understand the idea of asymmetric encryption (also known as public key encryption). Asymmetric encryption is a key element of bitcoin, and without it, bitcoin could not exist. The idea of asymmetric encryption is not new, and in fact it is an integral part of the security of many software systems. We use asymmetric encryption every time we visit a secure (SSL) site, for example, an Internet banking site.
Before I explain what asymmetric encryption is, let's imagine such a task. Let's say Alice in Australia wants to send a letter to Bob in England. The contents of the letter are a big secret. How can Alice send a letter to Bob without the risk of someone reading this letter along the way? Without asymmetric cryptography, this can only be achieved in the only way when Alice and Bob initially understand how to encode a letter. Then the letter will be encrypted, and Bob will know how to decrypt it when he receives it. But what if Alice and Bob do not have a pre-prepared key for the cipher; What if Bob had never met Alice before? In such circumstances, without asymmetric encryption, Alice would not be able to safely send the letter to Bob.
Thus, this leads us to asymmetric cryptography and the way in which it solves this problem. Some time ago, several talented mathematicians developed a method by which it is possible to generate key pairs that are mathematically related to each other. In this context, a key can be represented as a very large number - a number with several hundred digits[6] . These keys are called "public key" and "private key", or together - asymmetric keys. It turns out that these keys have some very useful properties!
Using the public key, you can encrypt the message in such a way that it will be possible to decrypt it only with the private key. Thus, Bob can now generate a key pair and transmit his public key to the whole world, since it is impossible from it[7] get his private secret key. If Alice wants to send Bob a secure message, she just needs to encrypt the contents of her message with Bob's public key using a well-known algorithm, and Bob will be able to decrypt the message with her private key, which he does not show to anyone else.
You use asymmetric cryptography technology every day when you use Wi-Fi, Bluetooth or secure websites where the data is encrypted to prevent what is called a man in the middle attack. In other words, asymmetric cryptography is used to prevent anyone else from intercepting your conversation, letter, or transaction.
So now we know how Alice can safely send a letter to Bob, but when Bob receives the letter, how can he be sure that the letter was sent by Alice, and not someone else? It turns out that asymmetric keys can solve this problem. Alice also generates a key pair: public and private key. Like Bob, Alice reveals her public key to the world. Alice can sign the contents of the letter with a “digital signature” using her private key. Then, using Alice’s public key, Bob can determine that the letter was indeed signed by Alice, since no one else can sign the letter without access to Alice’s private key. Thus, only Bob can read Alice’s letter, and Bob can make sure that it was Alice who wrote the letter.
This is a very useful and powerful idea - it still impresses me today, despite its everyday use. You can appreciate its usefulness for military communications, and, in fact, for many years the United States has tried to stop the export of programs that use strong asymmetric cryptography.
Now that we understand the principle of asymmetric cryptography, how does this relate to bitcoin? Remember, in Chapter Three we made an analogy and said that in some respects, Bitcoin works like a checkbook? We said that one user sent bitcoins to the bitcoin address of another user, and that the transaction was signed by the sender of the transaction. This is the point where everything begins to connect: the fact is that the bitcoin address is a derivative of the public key.
Let's look at our initial checkbook example in more detail, since we now understand the idea of a public key. I have 50 bitcoins on my mobile phone and I would like to send them to my friend Joe's mobile phone. First, Joe presses a button on his phone to generate a new bitcoin address. Although, in fact, it creates a pair of asymmetric keys. The private key is stored on Joe's phone, and the derivative of the public key (bitcoin address) is displayed on the screen and then sent to me. Using Joe's bitcoin address, I start a transaction on my phone, indicating the amount I want to send to him. Then I digitally sign this transaction using my private key and send the transaction to the Internet. Remember, we said that writing a check is the same as writing a letter to the bank, allowing the bank to allocate funds from my account to the specified person. In the case of bitcoin, the transaction is essentially a public announcement of the transfer of control over the XBT 50s registered to my address to the bitcoin address that I specify. Only my private key allows me to allow the transfer of bitcoins to Joe's address, and I give this permission when I sign the transaction with a digital signature.
When the transaction is sent, Joe can confirm on the bitcoin network that he has the right to spend these bitcoins - the transaction is final. Of course, despite all these technical steps, all this happens automatically, behind the scenes, by pressing a few buttons on the phone.
Chapter Seven. Hashing
In Chapter Four, we looked at how bitcoins are generated and introduced into the economy. We explained that bitcoins are generated approximately every ten minutes in the course of solving a mathematical problem. In this chapter, we will examine in more detail how this works. To understand Bitcoin mining, we need to get acquainted with another idea from the computer sciences: this is hashing, or a cryptographic hash.
Hashing is a very interesting concept, which, like asymmetric cryptography, is one of the key ideas in the field of software security. As we did earlier, let's start by presenting the task. If I have a computer system, how could I safely store the password of each user in such a way that if the system is compromised, then user passwords will not? In other words, for obvious reasons, it is a bad idea to keep a database containing thousands or millions of user passwords.
The solution to this problem includes a cryptographic hash. The hashing process receives something as an input, for example, a password, and passes this input data through an algorithm that outputs a large number called a “hash”. A hash is defined by two distinctive features. First, the hash process always returns the same result for the same input. For example, if you enter a password that is passed through a hashing algorithm that generates a certain number, then the same number will be generated each time. Secondly, hashing is a one-way process. It is impossible to take the value of the hash and, using reverse engineering, reveal what was at the input. These two properties determine the cryptographic hash. If the process were reversible, it would be called not hashing, but good old encryption / decryption,
It turns out that the process of hashing values has many useful features when applied to computer science. One of the tasks that we proposed above was the task of safely storing user passwords in the system. Instead of storing the user's password, we first hash the user's password[8] and store the hash value. The next time a user tries to log in using a password, we don’t need to know what his password was, we only need to know that the password matches the one that was entered last time. In other words, if the hash of the entered password matches the hash stored in the database, we know that the user entered the correct password - although we do not know and do not want to know what the password was. If our system is later compromised, the attacker will receive only a list of password hashes that are irreversible and have no value.
If you are like me, this process will seem charming to you, but you probably ask yourself - if passwords are hashed, how is it that if you forget the password to a certain system, the company can send it to you by e-mail. This is a very good question. This means that passwords are not hashed, and this system is extremely insecure. Sadly, many systems today allow this. This is one of the reasons why you need to use different passwords for each of the systems that you have access to. When it is discovered in the news that the system has been hacked and thousands of passwords have been compromised, this is because the system designers were unable to secure user passwords using hashing techniques, which are universally considered the best approach.
For the sake of interest, we note that if you forget the password for a system that properly hashes user passwords, the correct approach is to reset the password by the system when the password is replaced with some temporary value, which allows you to change it to something else when you log in. However, it should be noted that this approach does not guarantee that the system actually hashes passwords.
Now, how does all this relate to bitcoin mining? Well, we said that reverse hash development is not possible. Technically speaking, it is theoretically possible through what is called an “brute force” attack - iterating over all possible input combinations until you get the same hash. However, in practice, the number of combinations is astronomically large, which makes such an attack impossible for practical purposes. It should also be noted that different input values can produce the same hash value as a result, this phenomenon is called collision and it happens extremely rarely if you use the correct hashing algorithm, so this is not important for our discussion.
Now let's assume that there are only a million possible hash values, a number between zero and a million. In reality, of course, we know that much more than a million hash values are possible, but let's continue with a million to illustrate my point. Thus, the chances of correctly guessing the correct input for this hash will be one in a million. Having enough attempts and enough time, in the end I will find the source data, which after hashing will give the value that I am trying to pick up.
Let's assume the trial and error process takes twenty-four hours to find a match (a modern home computer will do a million iterations in less than a second, but let's leave twenty-four hours for our example). Remembering that in our example, we said that all hash values are numbers between zero and a million, let's assume that instead of finding the input data that will give a specific hash value, we would like to find input data whose hashing will give a number less than or equal to 10. That is, we want to find any input that results in a hash value of 1, 2, 3, 4, 5, 6, 7, 8, 9, or 10. In this case, it’s ten times more likely that what we got the hash value is suitable, so our computer will find a match on average ten times faster - now s take approximately 2.4 hours instead of 24 hours.
If I wanted to create a task that would be solved faster, say, be solved in 10 minutes, I would raise the limit to any hash between 1 and 150. The task is now 150 times easier than in the first example, and a quick calculation will show that such the task should be solved by our (slow) computer in about 10 minutes. What will happen if a second, equally powerful computer connects to trying to find a solution to the problem? Now it can be solved twice as fast. If I want the solution to take 10 minutes anyway, I will have to make the task twice as difficult by setting the condition that the hash value should now be less than 75, not 150. As more and more computers connect to solve the problem , and they are increasingly starting to solve the problem, we are making it more complicated by setting a smaller range of acceptable hash values.
And, if you still haven’t guessed, this is the task that the Bitcoin network offers Bitcoin miners. The difference, of course, is that there are far more than a million combinations, the numbers are so large that they simply can not be called. All the bitcoin miners in the world while I am writing this text collectively process approximately 350,000,000,000,000,000 input values per second in an attempt to find the very value whose hash falls into a certain range of hash values.
The Bitcoin network regularly evaluates the complexity of the task, and if the task is solved faster or slower than the set interval of 10 minutes, then the task is adjusted accordingly by expanding or reducing the range of acceptable hash values. Of all the computers in the world trying to solve a problem, only the first one who decides receives bitcoins “as a reward”, and the process starts anew. The next question then is: how does the rest of the bitcoin network confirm that the problem has been solved, and how are bitcoins generated in this process? The first question is simple. The computer that solved the problem announces this solution to the bitcoin network, and other computers check the solution. Although reverse engineering the input value for a given range of hash values is a slow trial and error process, but once the solution is found, it’s easy to verify just by passing the proposed solution through the hash algorithm and making sure that the resulting hash value falls within the specified range. Then, the extracted bitcoins are issued to the address specified by the miner, introducing new bitcoins into the economy. Just as monarchs in the old days issued telly for taxes that would never be collected, and banks issued banknotes for funds that they did not have, the bitcoin network slowly generates new bitcoins. The key difference between Bitcoin and other systems, however, is that in all previous systems, the frequency of currency generation was set at the whim of the monarch, government, bank, or, in recent times, controlled by the government of the central bank. The bitcoin generation frequency is set algorithmically, and cannot be the subject of manipulation by market participants - it is predetermined. The generation frequency is determined by the Bitcoin protocol, and decreases over time, until in the end the bitcoins cease to be generated at all. For any date in the past or future, you can calculate the approximate number of bitcoins in circulation.
Fig. 4. Bitcoin time distribution
Chapter Eight. Decentralization
Let us briefly take a pause on the previous line of thought, and turn to decentralization. Decentralization is a relatively recent concept in computer knowledge that is finding more and more applications over the past decade. One of the first examples of decentralization was peer-to-peer (P2P) file sharing. Over the years there have been many of its implementations, the most common of which is now a torrent network. If you are unfamiliar with torrents, let me give you a brief introduction. The traditional method of downloading files from the Internet is quite simple. One computer (server) stores the file that you need, and another computer (client) requests this file from the server, and the server transfers the file to the client. This model still prevails today, and most of the time you spend on the Internet works as described. By the way this model is called client-server. However, she has some limitations. One of these limitations is that the file cannot be downloaded faster than the server allows. This is usually not a problem, but what if there are a million people who want to download the same file from the server? Server bandwidth is limited, so this limited channel must be shared between all people downloading the file. By the way, a separate server cannot support a million connections, so you will need a farm of servers containing the file, which will lead to high costs for the server owner, or low speed for clients downloading the file. but what if there are a million people who want to download the same file from the server? Server bandwidth is limited, so this limited channel must be shared between all people downloading the file. By the way, a separate server cannot support a million connections, so you will need a farm of servers containing the file, which will lead to high costs for the server owner, or low speed for clients downloading the file. but what if there are a million people who want to download the same file from the server? Server bandwidth is limited, so this limited channel must be shared between all people downloading the file. By the way, a separate server cannot support a million connections, so you will need a farm of servers containing the file, which will lead to high costs for the server owner, or low speed for clients downloading the file.
A distributed peer-to-peer network can help here. It works as follows: let's say I have a file that I want to make available to other people. Using a P2P program, this file is divided into hundreds of parts (the exact size and number of parts depends on many factors). Now people can download a file from my computer one piece at a time, in any order. The bandwidth on my part is small, so initially it will be rather slow for those few people who try to download this file from my computer. If someone else received one of the parts of the file from me, other people can now download this part either from me or from another member of the network. Over time, more and more people download some parts of the file from my computer, and others from other people's computers, until until the original file is distributed among the computers of many people. If someone new comes and wants to download this file, the program will simultaneously download the file from many different computers, possibly never connecting to my computer on which the file was originally - in essence, at this moment I can turn off my computer altogether , and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. If someone new comes and wants to download this file, the program will simultaneously download the file from many different computers, possibly never connecting to my computer on which the file was originally - in essence, at this moment I can turn off my computer altogether , and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. If someone new comes and wants to download this file, the program will simultaneously download the file from many different computers, possibly never connecting to my computer on which the file was originally - in essence, at this moment I can turn off my computer altogether , and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. on which the file was originally located - in fact, at that moment I can turn off my computer altogether, and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain. on which the file was originally located - in fact, at that moment I can turn off my computer altogether, and provided that the Internet has a full copy of the file, people will continue to download it without hindrance. This system has proven very successful for files in high demand. Recently, we can see that a decentralized approach is used in software products for which it was not originally conceived, and the most recent example is the blockchain.
Chapter Nine. Blockchain
We reviewed and discussed the three main ideas in the field of computer science that underlie bitcoin: asymmetric cryptography, cryptographic hash, and peer-to-peer networks. Although these ideas are interesting, they are not revolutionary in the context of bitcoin. All these things have already been used in various ways for a long time. However, what connects them together is a fundamentally new idea, which is the basis of bitcoin. This idea is known as blockchain.
Blockchain is a decentralized open ledger: let's try to figure it out. In the case of a regular business, or, better to say, a bank, a ledger is a set of records that contains details of user transactions and account balances. In modern banks, these records are stored in large software systems. As you can probably guess, these are large, stable systems that must support millions of users who make millions of transactions every day. You may already be familiar with some of the symptoms of the difficulties that banks with the reliable management of such large data sets experience. For example, you could not download transaction history from a bank’s Internet portal earlier than a certain period in the past. Or, you may have noticed that some transactions do not immediately appear in the history, until they are processed at night. All of these and other similar oddities are trade-offs necessary for banks to be able to manage these (often ancient) systems containing huge amounts of data.
We said blockchain is a decentralized open ledger. We know what ledger is: a set of records containing details of user transactions and account balances. Now let's explain what we mean by “decentralized” and “open”. Unlike a bank, this ledger is not stored on a central server controlled by any person or organization. The blockchain ledger is publicly available and stored locally by many clients, it can be freely downloaded from the Internet. It can be hard to believe, but you understood correctly: the whole history of any bitcoin transactions made by anyone around the world since the appearance of bitcoin (January 12, 2009) is publicly available for viewing by anyone, moreover, on most computers or laptops that have bitcoin programs keep copies of this ledger. You probably had a lot of questions, for example, how is this possible, or why is it a good idea at all. Let's start with how this is possible. Of course, this is a large amount of data, but not impossibly large. Financial records take up very little space, and looking objectively, all records of bitcoin transactions from the very beginning at the time of writing this text occupy the same amount of space as a dozen, or so, films in HD quality. If you download a bitcoin client that stores a local copy of the blockchain, it will take a long time to start the first time you launch it, since it downloads a full copy of the blockchain. Another thing is that the storage of a full copy of the blockchain on all computers in the world is not absolutely necessary. This is definitely not possible on mobile devices, and now Bitcoin clients are trending, which store only important things locally, and not the entire blockchain. However, this illustrates my claim that the blockchain is publicly available to the whole world, and in fact there are many sites that simplify navigation through the history of all bitcoin transactions made by anyone and anytime.
You may be somewhat concerned about the moment that if you use Bitcoin, the entire history of the transactions you have ever made will be publicly available. This is only partially true, and we will discuss this point later in the chapter on anonymity. The public ledger only contains bitcoin addresses and amounts. It does not contain any personal or identifiable information. In other words, if I send 50 bitcoins from address A to my friend Joe with address B, the whole world sees that 50 bitcoins are sent from address A to address B, but no one can determine that address A belongs to me and address B belongs to Joe. So when I look at the blockchain, all I see is balances of addresses and transactions from one address to another - none of this information compromises the confidentiality of the people who carry out these transactions.
Another point that needs to be understood, and which we have not yet discussed, is that unlike email, where you can have only one address, or at least a small number of addresses, the number of bitcoin addresses that can to be with a person is not limited. This is actually encouraged, and most Bitcoin clients are configured by default so that each transaction uses a new address. Let's take another look at an example of sending 50 bitcoins to my friend Joe, now we already know a little more. When I ask Joe to tell me his bitcoin address, he usually does not give me an address containing the entire amount of his wealth, but creates a completely new address where there are no bitcoins at all, and I send 50 bitcoins to this new address. Bitcoin programs do not require you to manage the balance of each address individually, they can show you the overall balance of all the addresses you have ever created. If I look at the matter on my part, I hardly have an address containing the exact amount of money that I want to send to Joe. For example, I may have a bitcoin address A, on which there are 30 bitcoins, and a bitcoin address B, with 35 bitcoins. In our example, the program will automatically generate a transaction that will take 30 bitcoins from address A, then 20 from address B, send these 50 bitcoins to Joe's address, and also send the remaining 15 bitcoins to new address B, which it automatically generated for me. Both Joe and I can have hundreds or thousands of addresses containing small amounts of money that together make up our complete Bitcoin state.
An exception to this rule is the case when I receive one transaction for a large amount of money, say, a million dollars in bitcoins. If after that I want to spend 1 bitcoin from this address, the recipient will be able to see that I have at my disposal about a million dollars in bitcoins, which I would not want to disclose. Suffice it to say that for the lucky ones who find themselves in this position, there are techniques that allow you to hide this wealth, scatter money at many addresses - modern programs make this process trivial.
Now that we know what blockchain is, how does it actually work? The question, perhaps, should be formulated as follows: how can we ensure a consistent record of transactions in a decentralized environment? The first thing you need to understand about blockchain is that it is called blockchain because it consists of a chain of consecutive blocks. A block is a group of transactions. Guess how often blocks are generated? About once every 10 minutes. You probably began to understand that there is a connection between blockchain and bitcoin mining, and if you assumed this, you are right.
Chapter Ten. Bitcoin mining
Remember, in Chapter Four we said that the extraction of bitcoin, in addition to introducing bitcoins into the economy, also has two other goals. It provides payment processing and network security. Let's now look at how these tasks are performed in the process of mining bitcoin. We mentioned above that when a transaction is started, it is sent to the bitcoin network. What does this really mean? Bitcoin clients (i.e., programs) try to connect with many other bitcoin clients called peers. Typically, each individual client is connected to 10-20 other peers. Some of these peers are ordinary transactional users, and a small number of these peers can be miners. When a bitcoin client receives information about a bitcoin transaction, it is transmitted from client to client until
Bitcoin miners do something else besides solving a hash problem and introducing bitcoins into the economy: they provide an important function of creating a blockchain, one block at a time. When a bitcoin miner receives information about a transaction, its authenticity is checked first, and then it is written to the block locally, on the bitcoin miner's computer. If the bitcoin miner successfully solved the problem, the solution to the problem is included in the block as part of it, together with all transactions created in the past 10 minutes. Then the block is closed and distributed over the Internet, and the process begins anew. Anyone else on the network can independently verify that the transactions in the block are genuine and that the solution to the hash problem, also known as “proof of work”, is true. Any subsequent miners who have solved the problem are ignored, their blocks are no longer suitable, and the process starts anew. Thus, a blockchain is a sequence of blocks containing transactions for a given ten-minute period. Each block is mathematically connected with the previous block, so it is possible in a trivial (for a computer!) Way to check the entire blockchain for reliability, without analyzing individual transactions.
And this leads us to the third goal that bitcoin miners achieve: network security. The actions taken to solve the cryptographic hash problem serve not only the interests of the miner, they are also needed to protect against dishonest miners spending money twice, which is called "double waste." If you take an earlier example where I send 50 bitcoins to Joe, let Joe send me a book in return that I bought from him (at today's prices it would be a rather expensive book). At the same time, what if I try to send the same 50 bitcoins to another person before the first transaction has time to become processed and verified? Assuming that I have already received the goods from Joe, it will be problematic if the bitcoin network somehow accepts my payment to another participant and later rejects the original payment that I sent to Joe.
Когда я отправляю транзакцию для Джо в биткойн-сеть, Джо почти мгновенно сможет ее увидеть (обычно через несколько секунд). В это время транзакция видна, но еще не включена в блок майнером. Если это транзакция с небольшой суммой, или транзакция между участниками, которые доверяют друг другу, видимость транзакции в сети будет обычно считаться приемлемой, однако, при определенных усилиях с моей стороны, все еще возможно дважды потратить средства, отправив в сеть другую транзакцию, которая использует те же самые средства – но для транзакций с небольшой суммой требуемые усилия, вероятно, не будут стоить затраченного времени (к тому же, разумеется, есть еще и риск быть пойманным). По прошествии приблизительно 10 минут мы можем ожидать, что моя транзакция будет теперь официально включена биткойн-майнером в последний блок блокчейна. В этом момент транзакция имеет «одно подтверждение». Теперь, если вы примете во внимание, что в мире тысячи специальных компьютеров, добывающих биткойн, вероятность, что я сумею обмануть Джо и дважды потратить свои средства, и успешно добыть блок, который отвергнет транзакцию для Джо, очень мала. Для транзакций со средними или большими суммами обычно считается благоразумным подождать 3-6 подтверждений, или, другими словами, подождать, когда будут добыты 3-6 последовательных блоков (от 30 до 60 минут), чтобы быть абсолютно уверенным в транзакции. Чтобы успешно осуществить двойную трату, в этом случае нужно будет успешно добыть подряд 6 блоков, отклоняющих транзакцию. И чтобы достичь этого, нужно контролировать примерно 50 % от общей вычислительной мощности биткойн-сети. Как вы можете видеть, это делает попытку двойной траты крайне сложной и дорогой, что прежде всего перевешивает, в общем случае, любые преимущества двойной траты. Вы также можете видеть, что по мере того, как растет биткойн-сеть, увеличивается количество майнеров и возрастает трудность хеш-задачи, двойная трата становится еще более сложной для нечестного майнера. Именно так биткойн-майнеры обеспечивают безопасность сети.
In summary, bitcoin mining provides three things: transaction processing, network security, and the introduction of bitcoins into the economy. This is an elegant system.
Chapter Eleven Miner incentive
It is time to point out the fact that the miner has a choice to include or not include the transaction in the block. The miner can reject all transactions if he wants, and just solve the hash problem. This is called “empty block mining” and happens from time to time. Then the question is, why did the miner even have to worry about including transactions in the block? There are several reasons. Firstly, compared to the work that the miner does in trying to solve a hash problem, including transactions in a block is a trivial operation that requires almost nothing from his computer. Secondly, transactions are included in the blockchain in the interests of the bitcoin community. If miners do not include transactions in the blockchain, Bitcoin will not work, and if it does not work, then Bitcoins will not cost anything. If bitcoin doesn't cost anything, then the miners will spend all their efforts on mining something that costs nothing. You may argue that it’s good for the community that miners include transactions in the block, but for an individual miner it is unprofitable to spend resources on transaction processing. This is partly true, but, as I noted at the beginning of the paragraph, the necessary effort is negligible. There is also a third point. Miners cannot charge a commission for including a transaction in a block, but people who make transactions can voluntarily offer a commission. Miners can then reject transactions that do not include commissions at all, or reject transactions with commissions below a certain amount. What is the usual commission today? In most cases, it is zero. In today's economy, the miner’s incentive is primarily the bitcoins that he receives for a successfully mined block. Transactions are included in the block of the free will of the miners in the interests of the growth of the Bitcoin economy and the growth of Bitcoin. In some cases, bitcoin clients automatically include a small commission (not more than a few cents) to make sure that transactions are not rejected by miners and are more likely to be included in the next block mined.
Over time, the number of bitcoins received for a successfully mined block will gradually decrease until, around 2140, the reward for block mining is zero. It is expected that over this long period of time, while the block reward as an incentive for bitcoin mining is gradually decreasing, this incentive will be gradually partially replaced and, in the end, will be replaced by the incentive in the form of transaction fees.
Due to the fact that the Bitcoin economy is an open market and that transaction fees are voluntary, the size of the commission will always be determined by supply and demand, which will create a competitive market with low transaction fees.
Chapter Twelve. TL; DR
TL; DR: a well-known slang expression meaning “too long; do not read". This is a short summary at the end of a long text, containing an abridged version. However, unfortunately, if you opened this chapter without reading the previous chapters of the second part, which outlines the key principles of computer science that underpin Bitcoin, then it will be difficult for you to understand this chapter, and in your understanding of Bitcoin in the future you will remain at the level of comparisons by analogy. If you read Part II, then this chapter is needed to bring all these ideas together into a clear understanding of bitcoin.
We first learned that asymmetric cryptography is the technology behind private and public keys; using this relation, we can mathematically verify the authenticity of a bitcoin transaction signed by the sender's private key. Then we learned about the cryptographic hash, which is an irreversible algorithm applied to some data. By trial and error (more than quadrillion attempts per second), miners in the bitcoin network try to calculate the cryptographic hash for random data until the resulting hash value falls into the predetermined range - a task designed in such a way as to be solved on average in ten minutes the entire bitcoin network. The difficulty of this task on the one hand protects the network from double spending, and on the other hand controls the supply of bitcoin. In addition, bitcoin miners also process transactions that form a block. If the miner successfully obtains the block (having solved the cryptographic hash problem), this block will be recognized by the bitcoin network and forever included in the blockchain - the open decentralized ledger of bitcoin. This is the shortest description of how this complex and elegant system works.
Часть III. Более широкий взгляд
Глава тринадцатая. Mt. Gox
If you did not know anything about Bitcoin before reading this book, you could still hear the name “Mt. Gox ”thanks to major media. Mt. Gox made up an interesting part of the history of Bitcoin, so it's worth figuring out what happened. Mt. Gox is a bankrupt Japanese bitcoin exchange launched by a Frenchman named Marc Carpeles.
Until 2013, bitcoin was little known outside a handful of people scattered around the world. Then it did not become mainstream and was not the subject of discussion of the governments of large states. If in those days you wanted to buy bitcoin, you had a very limited choice. In those years, Mt. Gox was by far the largest Bitcoin exchanger in the world, claiming to hold more than 80% of the Bitcoin trading market. I believe this was close to the truth, since there were few alternatives at that time.
Since Mt. Gox controlled the vast majority of bitcoin trading, and most people understood very little in bitcoin, the name “Mt. Gox ”has become almost synonymous with bitcoin as such. By the way, there is a famous story about why Mt. Gox became known as “Mt. Gox. " Apparently, when the site was being created, the original owner already bought the mtgox .com domain name for another project he was working on related to the Magic: The Gathering card game. Therefore, the domain name meant “Magic The Gathering Online eXchange”. He later abandoned the idea of this site, and the domain name was used for the bitcoin exchange known as “Mt. Gox. " After some time, the first owner sold most of his company to Marc Carpeles.
Now I think in the early days of Mt. Gox, perhaps no one expected the site to grow that much - maybe yes, but I doubt that they could have predicted an incredible rise in bitcoin in early 2013. For various reasons, bitcoin began to flourish, pulling the price of one bitcoin from about $ 10 to about $ 250 in just a few months. Subsequently, the price rose to almost $ 1,000 by the end of the year. And where did people go to buy bitcoin? One of the few places where they could do this was the Mt. exchanger. Gox.
I want to emphasize that I do not have any insider information about what Mt did or didn’t do. Gox; I know about Mt. Gox only as their client, as well as from discussions with industry colleagues. In early 2013, my business partner Adrian and I used Mt. Gox to buy yourself Bitcoin. Since most of our careers we have been developing software systems for financial institutions, the Mt. platform Gox seemed unprofessional and amateurish. The opening and verification of our accounts took them several weeks, their customer service did not work well, and the site did not update for a long time. In addition, there were tales of Mt. system failures. Gox is under a relatively heavy load and reports that they were “hacked” and people lost money. It was definitely a type of financial system that I would not trust my money. At the same time, we were going to buy bitcoin. Our strategy was this: we deposited relatively small amounts of money, bought bitcoin, immediately withdrawed it, and repeated this cycle again. Thus, in case of any problems with Mt. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. we deposited relatively small amounts of money, bought bitcoin, immediately withdrawed it, and repeated this cycle again. Thus, in case of any problems with Mt. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. we deposited relatively small amounts of money, bought bitcoin, immediately withdrawed it, and repeated this cycle again. Thus, in case of any problems with Mt. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation. Gox our losses would be limited to the amount of the last deposit. Unfortunately for many other Mt. customers Gox, they did not use a similar approach. By mid-2013, it became apparent that Mt. Gox got into trouble because they suspended the withdrawal of money, and shortly afterwards, the company filed for bankruptcy, recognizing the loss of almost all of the bitcoins they held for customers, which at the time of their bankruptcy amounted to approximately half a billion U.S. dollars, or about 7% of all bitcoins in circulation.
On any scale, this event was a disaster for bitcoin as a whole. This was a disaster for everyone who had bitcoin accounts, and a disaster for the reputation of bitcoin, which many saw as a failure in itself due to the poor management of Mt. Gox. I do not know why Mt. Gox lost money. In one of their ads, they suspected that the money was stolen, but in the end it was just speculation about how it happened - the bottom line is that people lost a lot of money because of this.
Regretting those affected by the collapse of Mt. Gox, it should be noted that the announcement of their bankruptcy was somewhat desirable. Their delays and the suspension of the withdrawal of money, which lasted for many months, caused new problems for the bitcoin community, and a very bad reputation in the press. Mt. Gox was a ticking time bomb. Their collapse allowed other companies to start from scratch, much more reliable than Mt. Gox, and drive bitcoin forward.
You can also notice that to some extent it is the poorly organized Mt. platform. Gox led us to create our own Bitcoin exchange, the Independent Reserve. We knew that in order for Bitcoin to ultimately be successful, a stable, sustainable platform was needed on which people can buy Bitcoin, and Mt. Gox was not.
Chapter Fourteen. Silkroad
If you have not heard about the collapse of Mt. Gox in 2014, you may have heard of Silkroad. By the way, the name "Silk Road" originally refers to the sequence of trade routes connecting Asia and Europe over many periods of history. They were called so thanks to the profitable trade in Chinese silk, carried out along the routes, and significantly contributed to the development of trade between the two parts of the world.
The Silk Road, which we are talking about, however, was a special type of site. It was special because it was not accessible from a regular browser. Access to it could only be obtained using a special program called “Tor”[9] , which made the user anonymous, allowing people to access the site so that they could not be tracked. Silkroad was essentially a marketplace where you could buy and sell products. Due to the fact that it was set up with the explicit goal of anonymizing users, the products for sale were mostly black market items that were not on regular sites where authorities could track activity. Therefore, the predominant types of products available on Silkroad were illegal drugs, prescription drugs, firearms, and other illegal products.
Silkroad used Bitcoin as a currency, since Bitcoin could be transferred between market participants anonymously[10] . Unfortunately, this worsened the reputation of Bitcoin, as the media made a false conclusion that since Silkroad uses Bitcoin as a currency, then all Bitcoin users are pirates and drug dealers with Silkroad. In October 2013, the FBI was able to track down the site administrators, and the site was stopped[11] . What happened to the price of bitcoin? There was a slight decline, and then it continued to grow. The reason for this is that the vast majority of Bitcoin users were not pirates and drug dealers, and the fact that Bitcoin continued to grow despite the absence of Silkroad is proof of this.
We can learn a few lessons from this. Firstly, all currencies are used to a certain extent and will be used for illegal purposes - this is a proof of their suitability as a currency. In November 2013, in response to a request from the United States Senate, the Financial Crimes Agency emphasized that any illegal use of bitcoin was negligible compared to $ 1.6 trillion in "global criminal income" in 1999.
It is also worth noting that any transactions made on Silkroad between anonymous participants, at least did not lead to an increase in violence in society, as opposed to violence, which is sometimes associated with cash transactions carried out on the street.
Chapter Fifteen Other digital currencies
Bitcoin is not the only digital currency, although it was the first and most successful at the international level, and occupies an overwhelming market share (98%) in terms of capitalization compared to other digital currencies. Bitcoin was first launched in 2009, and until 2011 there were no alternative digital currencies, like Litecoin, which is largely a bitcoin clone with minor changes to several settings.
I believe that the developers of some of these early currencies had good intentions, but today in the world there are more than 500 “alternative to bitcoin” digital currencies that most people (including me) have never heard of, and I believe that a good part of them, is nothing more than a scheme designed to generate profit for the developer.
Another thing is that despite the fact that Bitcoin has become a huge evolutionary step in the history of money, it is still imperfect, and it is inevitable that the Bitcoin protocol will improve over time (as has already happened), and that potentially new digital currencies can be viable at the same time. with bitcoin, or will ultimately replace bitcoin. The idea of the blockchain is essentially robust, and most digital currencies, if not all, are based on the same basic principles as bitcoin.
Chapter sixteen. How to secure your bitcoin
We have already mentioned that bitcoin and physical money have common properties. However, Bitcoin has a number of features that protect it from accidental loss or theft in a way that is inaccessible to ordinary money.
For starters, you can back up your wallet. This means exactly what is said: just like you back up photos or letters, you can create a copy of your digital wallet and store it in different places. This is the easiest way to protect your bitcoins from accidental loss. If you lose your phone with a Bitcoin wallet, or if the computer drive fails, you can restore all your money from the backup. Even better, you don’t even need to back up after each transaction. Most modern Bitcoin wallets are designed in such a way that if you made a copy, even if there were no funds at the time the copy was made, money received in the future will still be restored, so you need to make a backup of the wallet only once.[12] .
Backups protect your wallet from accidental data loss, but they do not protect you from thieves. However, wallets are easily encrypted and can be password protected. Then, if someone steals your wallet with bitcoins on it, he will not be able to spend it without your password. In the meantime, you can restore your wallet from a backup and, for security, transfer money to a new wallet. Then, even if thieves can guess your password, bitcoins will already be sent to a new address, and your old wallet will become completely useless to them. All these things do not require special skills, they are usually an integral part of most bitcoin programs and they are very easy to use even for a beginner.
These features are great for protecting funds in reasonable amounts, however, when dealing with large amounts of bitcoins, say equivalent to a million dollars, we might want to take extra precautions. In the end, what if an attacker gains access to our computer and installs a spyware program that secretly records the passwords that you typed? History shows that there is no limit to the cunning and dishonest techniques that thieves can invent when it comes to stealing money. Suffice it to recall some of the famous robberies in a casino in Las Vegas and the things that people went to when large amounts of money were at stake. However, Bitcoin provides great opportunities when it comes to security. One way to protect a large amount of bitcoins is called “freezing.” The idea of freezing in this context means storing bitcoins on a computer or other device that is not connected to the Internet in any way. A computer or mobile phone connected to the Internet could potentially be hacked by anyone from anywhere in the world if a vulnerability is found. But by storing bitcoins on a computer that is not connected to the Internet, you immediately limit potential threats only to those that come from people who have physical access to this computer. Of course, the wallet on this computer must be encrypted and protected with a strong password. Modern programs easily provide the ability to store bitcoins in the freeze. if a vulnerability is found. But by storing bitcoins on a computer that is not connected to the Internet, you immediately limit potential threats only to those that come from people who have physical access to this computer. Of course, the wallet on this computer must be encrypted and protected with a strong password. Modern programs easily provide the ability to store bitcoins in the freeze. if a vulnerability is found. But by storing bitcoins on a computer that is not connected to the Internet, you immediately limit potential threats only to those that come from people who have physical access to this computer. Of course, the wallet on this computer must be encrypted and protected with a strong password. Modern programs easily provide the ability to store bitcoins in the freeze.
Bitcoin has even more advanced security features, such as multiple-signature addresses (colloquially known as multisig addresses). In all the examples we have given so far, we have described how I send 50 bitcoins to my friend Joe in a transaction signed by the corresponding private key that I have. In the case of multisig addresses, the transaction can be configured in such a way that two different people, or three people, or two out of three people, or any combination of signatures that you can submit, will be needed for the signature. For example, you may have a bitcoin wallet that requires both signatures - yours and your business partner to send a transaction, or only one ofsignatures. Or maybe you have a board of directors and the transaction should be signed by any three of the seven directors. These are very powerful tools that allow you to secure bitcoin in ways inaccessible to physical money.
The last method of securing a bitcoin wallet, which we will talk about, is called a “paper wallet”, and this is the most primitive of all devices to ensure the security of bitcoin. You can simply print your private key on paper, and in the case of EMP[13] , which will destroy all your electronic devices, you can recover funds using a printed private key. Of course, you can go even further, and print half the private key on one sheet, and the other half on the other, and store them in various safe places - the possibilities are endless.
Chapter Seventeen. Smart contracts
So far in this book, we have discussed the most common and simplest type of transaction - participant A sends money to participant B. We examined how this process is carried out using bitcoin, as well as some of the great advantages of bitcoin compared to regular currency. However, using this example, we just scratched the surface of what Bitcoin and blockchain technology can really achieve. We introduce the idea of smart contracts. Bitcoin is capable of creating complex transactions involving many participants. Let's look at an example.
Let, say, a car manufacturer make a new car. In the process of its creation, a new bitcoin address is generated, to which a symbolic amount of bitcoins is deposited (i.e., 0.0001), and this transaction is recorded on the blockchain. The manufacturer assigns this public address to the machine. The private key is then issued to the seller, who can store it on his mobile phone, so that his phone also serves as the key to the car, allowing him to open and start the car.
When the seller intends to sell the car to the buyer, the transaction is recorded in such a way that money is transferred to the seller, and the car is transferred to the buyer as an address to which he can access from a mobile phone. Both participants must sign the transaction in order for it to become valid and be included in the blockchain. When the transaction is completed, the buyer can "present" his phone to the machine via NFC[14] , and the car will recognize the new owner and turn on the ignition. In this example, a transaction between two participants occurs simultaneously, and thus, neither of the participants should trust the other. Moreover, the buyer can view the entire transaction history for the machine on the blockchain to make sure that it is real, and make sure that the seller really owns the machine.
Let's expand this example. What if the buyer can not afford to buy a car, and he needs to borrow money to make a purchase. A Bitcoin transaction can be constructed in such a way that the creditor has ownership of the car until either the agreed amount is paid to him within a certain period of time, and then the car is transferred to the debtor, or the debtor loses the security deposit, and the creditor remains the owner of the car .
The idea of a multilateral agreement is not new; banks borrowed money at all times. However, when using bitcoin and blockchain technology, the process becomes much more efficient, and participants have to trust each other to a lesser extent in order to fulfill the contract conditions, which are automatically observed by the bitcoin network. It is interesting to see what new possibilities people will open for using bitcoin and blockchain tomorrow.
Chapter eighteen. Anonymity
One of the big questions that arose regarding Bitcoin is whether transactions are anonymous and, if they are anonymous, will Bitcoin contribute to money laundering and other crimes. The answer here is both yes and no. Let's look at this issue more closely.
Suppose, let’s say, I’m buying something worth millions of dollars from a stranger, and he will give me a new bitcoin address to which I must transfer 10,000 bitcoins. At this point, the transaction is anonymous. Assuming that another participant generated a completely new address, I have no way to determine who he is, and no one can connect the receipt of 10,000 bitcoins with this person. If this person keeps these funds and never spends them, then he will remain anonymous. At some point, however, the stranger will most likely want to spend his 10,000 bitcoins, or perhaps exchange them for fiat currency[15] . Now if our stranger finds another stranger on the street and sells his 10,000 bitcoins for a million dollars in cash, everything will still remain very anonymous. However, usually, especially in the case of large amounts, this person will need to spend this money with the help of a legitimate business or exchange it in a trustworthy exchanger. At these points, in particular during currency exchange, in the process of opening an account, a strict identity check is required to comply with AML / CTF standards[16] applied in the traditional financial sector. As soon as the money begins to flow through regular channels, it becomes possible for the researcher to connect the dots and trace the history of transactions. So is Bitcoin anonymous? It can be as much as cash is anonymous. Cash may also be anonymous, but if one day you come to a bank with a million dollars in cash, the authorities can raise eyebrows in surprise.
Chapter Nineteen. Regulation
Many world governments are now asking themselves whether Bitcoin should be considered legal tender, and if so, should it be regulated, and if so, to what extent.
In my opinion, the answer is that bitcoin needs balanced and carefully thought out regulation. A regulation that does not suppress a new industry, but at the same time protects consumers from illegal activities. Another point to take into account is that we cannot take yesterday's laws that applied to a completely different financial paradigm and use them for bitcoin. Bitcoin works in a fundamentally different way from regular currencies, and it is necessary to develop such a regulation that supports a decentralized digital model.
The question then becomes, what should such regulation look like? I believe that it is absolutely necessary to allow bitcoin and other digital currencies as legal tender, the idea of a currency issued by the state, one day may be a relic of the past. Governments and economies should use this new world currency and watch trade flourish as people can transact around the world in no time, without delay due to outdated and creaking banking systems. Even without considering bitcoin, as a software systems developer who spent many years creating programs for financial institutions, I can say that most of the systems that I have seen are truly ancient. These are large computers created over thirty years ago, who need special (really old) engineers to service them. This is one of the reasons why banks are slowly adopting new technologies because their systems are not ready for an upgrade.
The adoption of bitcoin can lead to increased trade around the world, perhaps even lift entire states out of poverty, turning them into flourishing economies.
Where, in my opinion, regulation is necessary, so it is in financial institutions that store bitcoin for other people, like banks. We have already witnessed the first great financial crash of Bitcoin with the fall of Mt. Gox, and not more than a week before I write these lines, we saw how Bitstamp, the European bitcoin exchange, lost $ 5 million in bitcoins from its digital repositories. To their credit, most of their funds were stored safely in the freeze, and they replenished the balances of account holders. This emphasizes, however, that without some oversight of the security measures taken by these organizations, consumers will not be able to trust the institutions responsible for storing their bitcoins.
It is important to emphasize that this is not a vulnerability of Bitcoin in itself, it is only a sign of the immaturity of the financial sector of Bitcoin. In the twelve months since the collapse of Mt. Gox, we could see the whole industry take big steps to improve security, and will undoubtedly continue to do so. The strong, stable and secure financial sector of Bitcoin is in the interest of all - and a balanced level of regulatory oversight in this area will not do anything wrong.
For regulators, it is important to remember that since Bitcoin is a new industry, it is moving at very fast paces and new methods are being developed all the time. It would be a step back for regulators if, with a limited understanding of the developing industry, they would require the impossible to execute instructions, or create instructions harmful to the growth of bitcoin. The best move for them so far will be to stay one step behind and observe carefully, taking the necessary steps as the industry matures. This principle is probably applicable to many areas.
Chapter Twenty. Chronology
Many events have significantly changed the face of Bitcoin, from its original starting point at the end of 2008, to the flourishing industry that it has now become. The following are some of the key points in this timeline.
October 2008 An anonymous article entitled “Bitcoin: A Peer-to-Peer Electronic Money System” has been published, describing essentially what Bitcoin has become. The article was published by a person using the pseudonym Satoshi Nakamoto .
January 2009The first blockchain block, also called the genesis block, was obtained, version 0.1 of the bitcoin program (including the source code) became publicly available. The program was written anonymously, and due to a rather non-standard style of programming, combined with rigorous theoretical know-how and completeness, speculation on whether it was written by an academic scientist with little programming experience, or perhaps a team of such people, was popular for a long time.
Then, on January 12, 2009 , the first bitcoin transaction took place - from Satoshi Nakamoto to Hal Finney in
October 2009.The New Liberty Standard website published a seemingly appropriate bitcoin exchange rate at that time, based on a formula that included the cost of electricity needed to run a bitcoin mining computer. The exchange rate they proposed was USD 1 = XBT 1309.03.
February 2010 The first bitcoin exchange called “The Bitcoin Market” has appeared. This exchange did not last long, and closed due to fraud problems a little over a year later.
May 2010 A U.S. programmer named Laszlo bought several pizzas at Jercos for 10,000 bitcoins. The price of pizza was $ 25 (the equivalent of a Bitcoin price of $ 0.0025).
July 2010Bitcoin was mentioned on the well-known IT website Slashdot, which caused a tenfold increase in price in less than a week. The price rose from 0.008 to 0.08 dollars. In the same month, Jed McCaleb launched Mt. Gox after reading about Bitcoin on Slashdot. It is interesting to note that Jed McCaleb said later, in 2011, after the sale of Mt. Gox:
« I created Mt . Gox for fun, after reading about Bitcoin last summer. It was interesting and fun to do. I'm still sure Bitcoin has a great future. But to really make Mt . Gox as it may be, takes more time than I have now. So I decided to pass the baton to someone who has more options to take the site to the next level."
In other words, McCaleb worked on Mt. Gox alone for several weeks or months in his spare time - everything turned out thanks to the fact that he had a hobby and Bitcoin did not have real value at that time. He admitted this fact at the moment when he sold the site. Compare this with a modern exchange such as the Independent Reserve, the development of which by a team of professional programmers took more than 18 months, including the measures provided for in the system to ensure its security, scalability, stability and reliability. Unsurprisingly, without extensive processing of Mt. Gox was not able to support the multi-million dollar industry in the future.
Another interesting thing that happened in July 2010 was that this month someone came up with a way to use the GPU (GPU) to mine bitcoin faster than was possible using the conventional mining method on the central processor.
The global frequency of processing hashes with the Bitcoin network has now reached 1 gigachesh (GH), or 1,000,000,000 (1 billion) hashes per second.
August 2010A vulnerability was discovered and then used in the Bitcoin protocol. This has led to the creation of more than 184 billion bitcoins generated in a single transaction. Within a few hours, the problem was discovered and the vulnerability was fixed. The transaction history from this transaction was further permanently deleted. It was the only major security flaw found and used in the entire history of Bitcoin.
November 2010 Bitcoin market capitalization for the first time exceeded one million US dollars. Bitcoin price on Mt. Gox reached 50 cents.
December 2010 The global frequency of processing hashes with the Bitcoin network for the first time exceeded 100 GH.
February 2011Silkroad has opened, a networked black market using bitcoin as a form of payment. In the same month, the Bitcoin exchange rate on Mt. Gox first achieved parity with the dollar.
March 2011 Jed McCaleb sold Mt. Gox to Marc Carpeles.
April 2011 For the first time, traditional media wrote about Bitcoin, TIME published an article entitled “Online Currency Can Challenge Governments and Banks.”
June 2011 Bitcoin price on Mt. Gox for the first time exceeded $ 10. In the same month, Mt. Gox began to show signs of problems, a serious security breach was found in their system, which led to the compromise of personal data of more than 60,000 users, as well as to fraudulent applications for hundreds of thousands of bitcoins, which caused a sharp drop in price to 1 cent.
In June, the largest Bitcoin theft in history also occurred. More than a quarter million US dollars worth of bitcoins were stolen.
In the same month, WikiLeaks began accepting donations in bitcoins.
July 2011 Just a month after Mt.'s security concerns. Gox Polish Bitcoin Exchange, at that time the third largest in the world, lost 17,000 Bitcoins to its customers.
August 2011 Another Bitcoin company that processed bitcoin transactions, lost more than 150,000 bitcoins worth at that time more than $ 2 million.
At that time, there were many similar incidents. As you can see, this was an unpleasant story for Bitcoin, so you should take the time to analyze what “loss” means and why it continued to happen. It should be noted that in all these cases (except for the vulnerability discovered in August 2010), the problem was not in Bitcoin in itself, but in the incompetence of the people who managed the companies that were responsible for storing bitcoins for other people. At that time, as to a large extent now, these companies were not regulated in any way, but people trusted them with millions of dollars in bitcoins.
At the heart of a bitcoin wallet, in which someone’s bitcoins are stored, is a file or a set of files on a computer. To protect these files, you need to backup them and encrypt them as described in the chapter “How to secure your bitcoin”. The organization responsible for millions of dollars worth of bitcoins should essentially accomplish the same task, but the methods used should be somewhat more reliable (compare the protection of money in your wallet with a bank vault, with gold in Fort Knox - as responsibility is increasing, security should also increase). If the files in which the private keys for the Bitcoin wallet are stored are damaged or changed (for example, due to a hardware failure), or the thief gained access to the computer and stole the files, then the bitcoins are lost.
There are fewer such security incidents today, but the threat still exists, which is why companies and individuals should keep this in mind.
October 2011 Former Google employee creates Litecoin, an alternative to Bitcoin currency.
May 2012 More than half of the bitcoin transactions per month were triggered by the SatoshiDICE online game.
June 2012 In San Francisco, USA, the famous online wallet Coinbase is founded.
November 2012 The Bitcoin mining reward was halved for the first time - the block mining reward dropped from 50 XBT to 25 XBT (this happened when mining 210,000).
The popular Wordpress online blogging platform is starting to accept payments in bitcoins.
December 2012Bitcoin Central, the first Bitcoin exchange licensed as a European bank, begins work in the European regulatory segment.
January 2013 The first ASIC (Application Specific Integration Circuit - Integrated Circuit for Special Purpose) - Bitcoin mining machines was released. Just as the GPU was ahead of the CPU, ASIC is now the most powerful and efficient machine available - it is special equipment designed only for mining bitcoin.
BitPay, a US-based Bitcoin payment processing company, announced that the number of transactions to its merchants exceeded 10,000.
February 2013. The price of bitcoin reached its highest height, exceeding the value of $ 31.91 recorded on Mt. Gox 601 days earlier in June 2011.
March 2013 There was a split in the blockchain caused by the different behavior of two different versions of bitcoin programs. This meant that users with the old version of the program saw one transaction, while users with the new version saw a different set of transactions. The split was quickly fixed by bitcoin miners, who returned to an earlier version of the program. The price of bitcoin temporarily fell during this period, but it quickly regained its strength again before the fork.
By the end of the month, the price rose even more, and the total capitalization of the Bitcoin market for the first time exceeded a billion US dollars.
April 2013The price continued its impressive growth in April, reaching $ 250. A potential catalyst for unprecedented growth called the Cyprus financial crisis. After the peak, the price stabilized at $ 120 for the next few months.
May 2013 Something that aroused my interest during my research - ESEA, a computer games company in the United States, used users' computers with a carefully designed malware program to secretly mine bitcoin. They were caught and received a lawsuit in the millions of dollars. This, of course, is not the only example of such activity. In one of the places where I used to work, an employee was fired for secretly using the company's powerful computers to mine bitcoin.
Probably less interesting, but more importantly, that same month the first Bitcoin ATM was opened in San Diego, USA.
Coinbase also received in May more than $ 5 million from investor funds, the largest investment in the bitcoin industry at that time.
June 2013 Our company, Independent Reserve, was founded in Sydney, Australia, before which we spent six months analyzing the bitcoin and bitcoin markets to understand how best to integrate into the new economy. We decided that Australia needed a reliable bitcoin exchange to create a solid foundation that other bitcoin-related businesses could use as a basis for their own offers.
August 2013A U.S. federal judge has classified Bitcoin as legal tender. At the same time, the German government legalized Bitcoin, declaring digital currencies a "unit of calculation." Also in August, Bitcoin appeared on Bloomberg terminals with the XBT currency code.
September 2013 The global computing power of the bitcoin network for the first time reached 1 pentache or 1,000,000,000,000,000 (1 quadrillion) hashes per second.
October 2013 The infamous Silkroad site was shut down by the FBI. Instead of the market collapse predicted by skeptics, the price of Bitcoin fell for a short time, but then continued to grow, since it became obvious that most of the transactions were not related to Silkroad, and Silkroad was a relatively small player in the Bitcoin economy.
In the same month, global investment bank Merill Lynch named Bitcoin potentially “the main means of payment in e-commerce, which can become a serious competitor to traditional money transfer systems .”
In October, Baidu, the largest Chinese search engine, became the first service of its kind to accept Bitcoin.
November 2013
The head of the US Federal Reserve, Ben Bernanke, has publicly announced that Bitcoin “ can have a long-term perspective, especially if innovations offer a faster, safer and more efficient payment system.”". The US Senate, which had a hearing on Bitcoin, also cautiously spoke out in favor of digital currencies, and the Financial Crimes Network announced Bitcoin as innovative and useful, warning that premature regulation could stifle innovation. They also pointed out to critics that any illegal use of bitcoin was negligible compared to the $ 1.6 trillion “global criminal income” in 1999. The positive results of the Senate hearings in November caused a rise in the price of bitcoin to $ 1,242.
At the same time, billionaire entrepreneur Sir Richard Branson announced on CNBC that his company, Virgin Galactic, a commercial space mission company, will accept payments in bitcoins. He called Bitcoin "an exciting new currency." The company has already received the first payment of approximately $ 250,000.
At this point in Bitcoin's history, it is used to transfer more money than Western Union, about $ 245 million per month.
December 2013 One of the Tesla Model S electric vehicles Ilona Mask (PayPal, SpaceX, Tesla, SolarCity) was sold in the USA for bitcoins. The price of the car at that time was approximately 103,000 dollars.
However, while Bitcoin flourished in the west, in the east, the Central Bank of China forbade financial institutions to process bitcoin transactions, which caused the price to drop to about $ 500. This ruling forced Baidu to stop accepting payments in bitcoins.
January 2014 For the first time, global computing power has reached 10 pentaches.
March 2014 The British tax office said that Bitcoin should be considered as a currency for transactions.
June 2014 Expedia, one of the largest travel agencies in the world, is beginning to accept bitcoin payments.
The global computing power of the network reaches 100 pentaches.
July 2014Dell, one of the largest computer manufacturers in the world, is starting to accept bitcoin payments.
September 2014 PayPal, one of the largest payment processing companies, gives merchants the ability to accept payments in bitcoins.
October 2014 The Independent Reserve, the most advanced and secure at that time bitcoin exchange in Australia, was launched in Sydney.
November 2014 The Australian Senate begins to study the use of bitcoin and digital currencies in Australia.
December 2014 Microsoft, one of the largest software makers in the world, is starting to accept bitcoin for some online purchases.
January 2015The New York Stock Exchange and a consortium of international banks are investing $ 75 million in the bitcoin industry.
August 2015 The Senate of Australia issues recommendations on the study of the issue of digital currencies, requiring Bitcoin to be considered as ordinary money for tax purposes, and to apply anti-money laundering laws to digital currencies. This result was perceived by the bitcoin industry in Australia as a very positive step towards the legitimization of the young currency.
Afterword by Adrian Przelozhno
I hope you enjoyed reading Adam’s book, just as I enjoyed the time spent editing and completing his manuscript. For the past 14 years, Adam and I have worked together on so many different projects that it often seemed to me that he, here next to me, was working on this book, arguing about some formulations or trying to convince me that his interpretation of an unclear grammatical rule was more correct, than mine.
While I was working on the book, I wondered whether to include additional chapters and expand some sections. I know that Adam would probably write more if he had a chance, but I decided that it would be better to keep the book close to the original in order to demonstrate the work and thoughts of Adam himself. This seemed to me more important than adding another chapter, say, “Side Chains” or “The Future of Bitcoin,” and, in my opinion, this book is strong enough as it is, it does not need additional content.
I am sorry that Adam cannot see his ambitions realized, and his book published. I know that he would be proud to see this project completed. It was the culmination of many hours of work on the text, many years of research and hard work in the IT and bitcoin industry, which gave him the knowledge and understanding to write this book.
I know that this publication, which would leave his mark in history for many years, would have brought him joy.
Adrian Przelozhni
[1] Bitcoins can be stored in non-electronic form, for example, on paper, but this is more an exception than a rule. Transactions, however, are always electronic.
[2] XBT is accepted as the standard currency designation for bitcoin. In other currency notations, the first character usually means the country that issued the currency. In some places, the alternative designation BTC is still used.
[3] When I say “computer,” I actually mean any electronic device where the corresponding program is installed. It can be a mobile phone, laptop or similar device.
[4] Technically, the “impossibility” of hacking has not been proven for any form of software encryption or digital signature, but it can reasonably be said that forging a digital signature is so difficult that it is almost impossible in all practical applications.
[5] Below we will see that as a precaution against fraud, it is reasonable to wait half an hour to confirm a transaction with a significant amount, but usually all transactions can be seen in a few seconds.
[6] It is worth stopping and thinking how astronomically large a number is, consisting of several hundred digits. This is many orders of magnitude greater than the number of atoms in the observable universe.
[7] As we already noted in the third chapter, there is nothing truly “impossible” in the world of cryptography, however, in practice, some things are considered complex enough so that we consider them impossible for all practical purposes.
[8] The process of hashing a user password is a bit more complicated, and involves adding a random value known as “salt” to the password. Thus, if two people have the same password, this provides different hash values, making the system more secure.
[9] “Tor” is an abbreviation for “The Onion Router” (an onion router), this project was originally developed for the US Navy, and was designed for encrypted and anonymous online communication. This software is now widely used on the Internet to ensure anonymity for people who want to keep privacy online.
[10] For a more serious discussion of this topic, see Chapter Eighteen - “Anonymity”
[11] Silkroad has since been replaced by other anonymous black markets that have grown due to its fall
[12] Such wallets are called “hierarchically determined” or “HD wallets”.
[13] An “EMP” or “electromagnetic pulse” is a short strong surge of energy that can cause the loss of data stored on computer disks without the possibility of recovery. It can occur naturally, for example, due to a lightning strike, or due to a person, as a form of weapon.
[14] NFC (Near Field Communication) is a near-field communication technology that is increasingly used in modern telephones and which enables the exchange of data between devices located in close proximity to each other.
[15] “Fiat currency” is money that the state declares legal tender, but which is not provided with physical values. The value of fiat money is derived from the relationship between supply and demand, and not from the value of the material from which it is made.
[16] AML / CTF (Anti Money Laundering / Counter Terrorism Financing) - combating money laundering and terrorist financing is a set of legal requirements that banks and other financial institutions must follow to make sure their clients do not use money for illegal purposes. Since bitcoin exchanges, along with bitcoin, deal with traditional currencies, they are also usually required to follow various procedures to verify the identity of their customers and notify of suspicious transactions.