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BITCOIN FREQUENTLY ASKED QUESTIONS

WHAT IS BITCOIN?

Bitcoin is a global form of digital currency. Unlike traditional currencies, which were frequently backed by gold and silver, bitcoin is based on distributed computing. While traditional currencies are printed by central banks, bitcoins are created or “mined” by distributed computer networks.

Another way bitcoin differs from traditional currencies is that it is decentralized, meaning that it is not controlled by any single institution. As a result, miners around the world create new units of the currency and confirm its transactions.

HOW DOES BITCOIN WORK?

The bitcoin network comprises thousands of computers linked together through a ledger of all bitcoin transactions known as the “block chain” and governed by a uniform bitcoin protocol. Every bitcoin transaction produces a series of letters and numbers, known as a hash, which miners then add to the previous hash to generate a block.

As soon as you start using bitcoin, you receive full access to the block chain. In other words, you will be able to see all the digital currency’s past transactions.

To make a transaction, you provide an amount you want to send and the address you want to send it to, and then sign it with your private key. Both the address and private key are sequences of letters and numbers. While the address’s sequence is broadcast to the network, the details of the private key remain discreet.

After supplying this information, you may have to wait for your transaction to clear. Miners need to verify all transactions, which are combined into blocks in the block chain. Bitcoin protocol dictates that every block requires roughly 10 minutes of mining.

WHO INVENTED BITCOIN?

The mastermind behind the original concept of bitcoin is Satoshi Nakamoto, who registered the domain bitcoin.org on 18 August, 2008, published the white paper “Bitcoin: a Peer-to-Peer Electronic Cash System” on a cryptography mailing list and launched the first bitcoin protocol in 2009. Satoshi Nakamoto is the pseudonym of a programmer (or programmers) whose real identity has remained unknown.

In March 2014, Newsweek claimed that “Satoshi Nakamoto” was really Dorian Satoshi Nakamoto, a 64-year-old engineer and resident of California.2) However, Dorian Nakamoto vehemently denied these claims, even sending Newsweek a statement in which he claimed to have no involvement in bitcoin.

Nonetheless, Satoshi shared his work with a community of developers at a very early stage and published the bitcoin protocol in the public domain. An open-source software since its conception, Bitcoin has been available to anybody who wants to improve upon it or design their own crypto currency.

After a year of mining and developing, Satoshi Nakamoto moved on to other projects in 2010 and left the work on bitcoin to a trusted group of developers. Today, the core developers are Gavin Andresen, Pieter Wuille, Nils Schneider, Jeff Garzik, Wladimir J. van der Laan and Gregory Maxwell. They actively monitor and improve the network, add new tools and intervene to sort out potential vulnerabilities.

Virtually anyone can contribute tools and know-how to bitcoin’s online repository, GitHub. Tech-savvy users are strongly encouraged to flag any security risk or weakness they detect in the system. However, any modification of the bitcoin software requires a wide consensus among users. Therefore, it does not happen overnight.

HOW DO YOU STORE BITCOIN?

ONLINE STORAGE
You can store your bitcoins online, on your computer or on your smartphone, and there is a huge variety of software programs available for setting up either type of wallet. You may also combine different storage options. For example, those interested in keeping their bitcoins offline might consider cold storage, which will keep their digital currency out of the reach of hackers.

  • Online storage means that you trust the operator of a web server to keep your bitcoins safe.
  • You can protect your access to the keys and addresses with strong passwords.
  • Online storage makes access convenient and independent from your hard drive.
  • The security risks are the same as in the case of online banking (hacking, for example).

 

COLD STORAGE
Those wary of storing their bitcoins online might consider cold storage, which will ensure their digital currency is not vulnerable to online hackers. Cold storage is an option available with many software bitcoin wallets.

WHAT IS BITCOIN MINING?

Bitcoin is based on the principle of public verification of transactions: if many users see that a certain number of coins have been given by A to B, then this transaction is verified and recorded in a general ledger.

Bitcoin miners have two crucial roles

  1. To Maintain the security of the system
  2. To create new bitcoins

 

Each bitcoin transaction is encrypted into a mathematical problem that the miner needs to process. This work involves millions of calculations per minute, and therefore requires strong mining hardware. Also, these calculations become increasingly difficult over time, which helps ensure mining speed does not surge along with the constant expansion of computing power.

  • Within the context of one transaction, mining means finding the mathematical proof of a bitcoin transfer and bundling it up with other transactions into a block.
  • One block contains several transactions (all those completed in the past 10 minutes). When all these transactions are confirmed as valid, we say that “a block is mined.”
  • A new block is the result of the decentralized computing effort of many rigs operating around the world.

Miners do this work for two types of rewards:

Block Reward
The block reward is a fixed number of bitcoins created with the mining of a new block. The first miner (or mining pool) to find the block reaps the reward. To date, block rewards are the main income source for miners.

Transaction Fees
Transaction fees are fees that a party of the bitcoin transaction may pay to miners for processing a payment. Transaction fees are low and apply mostly in cases of urgent transactions. Most BTC payments are still free of charge because miners work for the block reward.

Anyone can become a miner if he is prepared to buy a mining rig; join a mining pool; and dedicate some time, money (energy bill) and effort to mining bitcoins.

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