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What is Bitcoin

What is Bitcoin

Bitcoin is a virtual currency that utilizes blockchain technology. The genesis of this idea occurred in 2009 by an anonymous group of developers.

At its core, a Bitcoin is a peer-to-peer virtual currency that is essentially an online communication protocol to transfer value using blockchain technology. It is important to understand that Bitcoins are not blockchain technology. Instead, they use blockchain technology to transfer virtual value.

An account can be opened to transact in Bitcoins without a vetting process, including identity verification. A Bitcoin user will download free software that creates an encrypted digital wallet where their Bitcoins are stored. At the same time, it creates an individual node on Bitcoins peer-to-peer blockchain network. This network can be accessed from any internet connection in the world, and transactions generated from the user’s wallet will be entered into the blockchain data structure after they have been verified and validated. The encryption used is similar to “HTTPS” websites, which use a private key-public key combination to conduct secure transactions. As of December 2016, there are over 10 million wallets active.

How does Bitcoin work?

Consider a fictitious transaction where Party A wants to transfer five Bitcoins to Party B to pay for a good or service provided by Party B. Party A will enter a payment into his digital wallet using Party B’s encrypted account number as the intended recipient. Several miners will receive notification of Party As desired transaction and begin the process of verification. They will search through the existing blockchain to find Party As history of transactions to verify that he actually owns at least five Bitcoins. Once this has been verified, the miners then need to search for a digital key to verify the transaction (block) and link it to all other Bitcoin transactions in the blockchain. The first miner to do this will receive a fee. Multiple miners competing to verify the same transaction theoretically adds validity to the process. In this way, Bitcoins can be traced back through the blockchain all the way to its origin. Adept users can trace every wallet that a Bitcoin has been in since it was created. Albeit, every wallet is anonymous and the information has little use, other than for audit trail purposes.

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Bitcoin Fraud Firewall

The primary incentive to keep Bitcoin transactions as honest as possible is the fee received by the miners. The miners are the only police in the blockchain process. The miner’s reward for successfully locating keys and verifying transactions is received in Bitcoins. It helps to put Bitcoin in circulation and enables Bitcoin to be used in other transactions.

Once 21 million Bitcoins have been mined, no more will be created. This means that this fee will eventually go away. The fees were once 50 Bitcoins, but as more were created and the 21 million threshold grew closer, the fee was cut in half and then cut in half again. It continues to be reduced over time until it is completely eliminated. There is also a voluntary transaction fee that parties desiring to transact in Bitcoins can elect to offer to attract faster action from miners.

To be a successful miner, one must have very fast computer hardware and access to low-cost electricity because the processors spin at a very fast rate during this process. This real cost means that only serious miners will invest the effort. What about people setting up fake miner accounts to validate their own fraudulent transactions? The system is setup such that you cannot choose your own validators. The first miner to solve the puzzle and validate your transaction gets the fee. If real miners find that a transaction is fake before a fake miner could validate their own fake transaction, then the fraudulent process would be terminated and the perpetrators of fraud would have simply spent time and money only to be shut down by a fast miner. At least, in theory, this is how it should work.