About Bitcoin

THE NEXT GENERATION OF MONEY AND PAYMENTS

· There are various innovative money payment systems in the market today,

o many of which are built on platforms.

§ like the mobile phone, the Internet, and the digital storage card.

· These alternative payment systems have seen encouraging or even continued growth,

o PayPal, Apple Pay, Google Wallet, Alipay, Tenpay, Venmo, M-Pesa, BitPay, Moven, BitPesa, PayLah!, Dash, FAST, Transferwise, and others.

· Beyond payment systems that are based on fiat currency,

o the growing use of digital currency allows

§ for faster, more flexible, and more innovative payments and

§ ways in financing goods and services.

· Bitcoin is one of the most well-known digital currencies today.

o To be specific, Bitcoin is a cryptocurrency, which is a subset of what is generally known as a digital currency.

o Bitcoin is a unique cryptocurrency that is widely considered to be the first of its kind.

o Like many created after it, Bitcoin uses the power of the Internet to process its transactions.

THE NATURE OF CRYPTOCURRENCY

· Cryptocurrency in its purest form is a peer-to-peer version of electronic cash. It allows online payments to be sent directly from one party to another without going through a financial institution.

· The network time-stamps transactions using cryptographic proof of work. The proof-of-work Bitcoin protocol is basically a contest for decoding and an incentive to reward those who participate.

· For Bitcoin, first participant to crack the code will be rewarded with the newly created coins. This contest will form a record of the transactions that cannot be changed without redoing the proof of work.

· Cryptocurrency is a subset of digital currency. Examples of the many digital currencies are air miles issued by airlines, game tokens for computer games and online casinos.

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OVERVIEW OF BITCOIN

Before BitCoin invention in 2008 by the unidentified programmer known as Satoshi Nakamoto, online transactions always required a trusted third-party intermediary.

o For example, if Rajesh K.L. wanted to send Rs.10,000 to Manish A.B. over the Internet,

o It will rely on a third-party service only, like PayPal or MasterCard.

§ Intermediaries like PayPal keep a ledger of account holders’ balances.

§ When Rajesh K.L. sends Mansih A.B. Rs10,000, PayPal deducts the amount from K.L. account and adds it to A.B.’s account.

o Without such intermediaries entries, digital money could be spent twice.

§ Means, Rajesh K.L. could easily send the same 10,000 to Manoj C.D.

o In computer science, this is known as the “double-spending” problem.

o Until Bitcoin it could only be solved by employing a ledger-keeping trusted third party.

· Bitcoin’s invention is revolutionary because for the first time the double-spending problem can be solved without the need for a third party.

· Bitcoin does this by distributing the necessary ledger among all the users of the system via a peer-to-peer network.

· Every transaction that occurs in the bitcoin economy is registered in a public, distributed ledger, which is called the block chain.

· New transactions are checked against the block chain to ensure that the same bitcoins haven’t been previously spent, thus eliminating the double-spending problem.

· The global peer-to-peer network, composed of thousands of users, takes the place of an intermediary; Rajesh K.L. and Manish A.B. can transact without PayPal.

· One thing to note right away is that transactions on the Bitcoin network are not denominated in dollars or euros or yen as they are on PayPal, but are instead denominated in bitcoins.

· This makes it a virtual currency in addition to a decentralized payments network.

· The value of the currency is not derived from gold or government fiat, but from the value that people assign to it.

· The dollar value of a bitcoin is determined on an open market, just as is the exchange rate between different world currencies.

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The cryptocurrency invented by Satoshi Nakamoto, called bitcoins, is run using open-source software.

· It can be downloaded by anyone, and the system runs on a decentralized peer-to-peer network.

· It is not only decentralized but also supposedly fully distributed. That means that every node or computer terminal is connected to each other.

· Every node can leave and rejoin the network at will and will later accept the longest proof of work known as the blockchain as the authoritative record.

· This longest blockchain is proof of what has happened while these nodes were gone.

Cryptocurrency is mysterious and misunderstood for a few reasons.

· First, no one knows who is really behind some of these cryptocurrency systems.

o It was designed so that third-party trust is not needed and sometimes there is no legal entity behind it but open-source software.

· Second, cryptocurrency involves mining or proof of work.

o There are rewards for mining and the reward is given to the first who can solve a cryptography problem.

o The degree of difficulty of the problem will ensure that the timing to solve the problem is approximately 10 min for Bitcoin.

o Cryptocurrency cleverly solves the double spending problem so that every cryptocurrency can be spent only once.

o It is a financial technology and it involves financial regulation but therein lies the difficulty in execution and understanding even for the professionals.

o That is why it is an area of great interest to researchers, regulators, investors, and merchants and it is hitting the headlines regularly.

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The general arguments for a successful distributed cryptocurrency are as follows:

1. Open-source software: A core and trusted group of developers is essential to verify the code and possible changes for adoption by the network.

2. Decentralized: Even if it is not fully distributed, it is essential that it is not controlled by a single group of person or entity.

3. Peer-to-peer: While the idea is not to have intermediaries, there is a possibility of pools of subnetworks forming.

4. Global: The currency is global and this is a very positive point and workable for financial integration with or without smart contracts among the parties.

5. Fast: The speed of transaction can be faster and confirmation time can be shortened.

6. Reliability: The advantage is that there is no settlement risk and it is non repudiable. The savings in cost of a large settlement team for financial activities can be potentially huge.

7. Secure: Privacy architecture can be better designed incorporating proof of identity with encryption. If that is done, the issues surrounding Know Your Customer/Client (KYC) and anti-money laundering and terrorist financing (AML/TF) will be resolved.

8. Sophisticated and flexible: The system will be able to cater to and support all types of assets, financial instruments, and markets.

9. Automated: Algorithm execution for payments and contracts can be easily incorporated.

10. Scalable: The system can be used by millions of users.

11. Platform for integration: It can be designed to integrate digital finance and digital law with an ecosystem to support smart contracts with financial transactions. Customized agreements can be between multiple parties, containing user-defined scripted clauses, hooks, and variables.