The principle of Bitcoin functioning. The basics

2017-02-20 00:00:00:

Since the appearance of the first digital currency, many users of the virtual world have begun to study this financial phenomenon, which has no analogues. However, some of them do not fully understand the principle of the Bitcoin network, although there are no fewer interested in this issue. In the Internet space, you can find a huge number of thematic articles written in different languages, while the technical and scientific terms used in them are extremely incomprehensible. In this material, we will outline the features of the functioning of the network in a more accessible language. To learn how Bitcoin works, you need to familiarize yourself with the history of its creation and its features and benefits.

What is Bitcoin?

Unlike fiat currencies, virtual digital funds have no material embodiment. That is why they exist and develop only within the virtual network. Bitcoin is an open electronic payment resource that can be used to carry out financial transactions with the currency of the same name.

Unlike fiduciary title units, the issue of which is controlled by the government regulator of a particular country, Bitcoin is issued according to completely different rules.

The process of mining a block (mining) brings the miner a reward in the form of digital coins. This procedure becomes more complicated every four years, however, you can join the multi-million dollar army of miners, as a participant, at any time. To do this, you need to purchase powerful expensive equipment designed to solve complex computing problems, install specialized software on your PC and study thematic information.

The first electronic money, functioning exclusively within the Internet, is called "Cryptocurrency". Their reliability is ensured by cryptographic protection, while there is no control over their release and circulation by a centralized regulator (for example, the Central Bank).

Differences between Bitcoin and other banknotes

As you know, fiduciary monetary units such as the dollar, ruble, euro and other currencies are intended to pay for purchases made in public outlets. Similarly, the product can be purchased in the online store and paid for it with Bitcoins or Satoshi (the indivisible one hundred millionth part of a whole coin). The main similarity between traditional and digital currencies is that they can circulate freely on the web. Let us clarify that this statement is only partially correct. Fiduciary monetary units can be applied remotely by converting them into title units of different EPS or applying the principles of cashless settlements.

One of the distinguishing features of Bitcoin from traditional currencies is the presence of the property of decentralization. In simple terms, all financial transactions carried out with its help are concluded in the absence of intermediary organizations. For example, in order to use regular money in electronic form, you will need to create a wallet in a suitable EPS. Sending a transfer is carried out with deduction of commission fees in favor of intermediaries (payment systems and financial and credit institutions). The size of the commission is set by the owner of the EPS and the bank administration according to the established rules, which are occasionally amended. It is no secret that such an electronic account can be frozen and then funds confiscated from it.

It is noteworthy that no state owns the right to control Bitcoin, this is the main advantage of the decentralization standard. So, all the crypto coins on the users digital account belong only to the wallet owner, so neither the authorities nor business competitors will be able to freeze the account, block or cancel the completed transfer.

Who came up with the idea of creating Bitcoin?

Digital currency has many advantages over fiduciary title units, which will be discussed below. A unique financial phenomenon known as "Bitcoin" is the creation of a talented programmer or group of specialists under the pseudonym Satoshi Nakamoto . So, in 2008 he published a scientific article where he proposed a project for a new electronic payment service developed on the basis of cryptography and based on distributed ledger technology (blockchain), and also described the process of its functioning, from a mathematical point of view.

The idea behind the creation of Bitcoin was to implement a currency independent of the central regulator, with which it is possible to carry out electronic transfers, at the same time almost instantly and with a meager amount of commission fees. The developer of the innovative creation knew that the government would not appreciate his efforts, so the real name of the author of the article remained unknown. Mr. Nakamoto has not taken any part in the development of the system for a long time and chose to watch the success of his own brainchild from the shadow of the unknown. Due to the fact that its code is completely open, a group of programmers working on a non-commercial basis is working on the promotion of the project.

Who Issues Cryptocurrency?

No matter how strange it may sound, no one prints digital currency. Everyone knows that the issue of official money is carried out by central banks, which are not accountable to the government of the state, which uses them to pursue an appropriate monetary policy. In addition, they control the amount of funds issued. However, Bitcoin is generated digitally by the joint efforts of its adherents (miners), which anyone can become. That is, there are no restrictions on gender, age and vocational education.

The crypto community is presented as a distributed computer network that unites computing power into a single system. Each computing node is engaged in checking the legality and confirming the performed and ongoing transactions. Today this network is the largest on the planet. Its power exceeds the computing power of the 500 most innovative computing devices combined. The participants of the Bitcoin network work according to certain rules: they provide it with their own computing power, and for this it charges a reward in the form of generated coins. At the same time, the speed of creating new Bitcoins directly depends on the pre-programmed algorithm of actions, so every user can track this process.

Can an unlimited number of crypto coins be created?

The software code that controls the release of Bitcoins allows a certain number of coins to be generated every 60 minutes. It is worth considering that the amount of the award is halved every four years, this process is called "Halving". Thus, the maximum allowed number of coins that will be created up to 2140 is exactly 21 million pieces. Some users may claim that this figure is extremely small. However, the creators also took care of this and divided one unit of currency into its constituent parts (for example, one hundred millionth share of the coin is called "Satoshi").

What is Bitcoin based on?

Tens of years ago, the title units in circulation were tied to real assets in the form of precious metals (gold or silver). In fact, each owner of a certain amount of funds could potentially exchange them in a bank for an equal amount of metal. In practice, this has not always been the case. Today, national currencies have no security behind them, except for the authority of the authorities of the states involved in their printing, and confidence in the dollar, euro, hryvnia and ruble is formed on the basis of the mercy of the Central Bank.

The population hopes that the regulator will not print a large amount of new money, therefore, it will not allow a situation in which inflation will depreciate its value. Otherwise, the increasing amount of funds can cause hyperinflation - a familiar phenomenon for residents of the post-Soviet space that took place in the early 90s of the last century.

An alternative currency, which is Bitcoin, does not depend on the availability of precious metals and the decision of the Central Banks. It is based on mathematical formulas that are not subject to change by either government agencies or central banks. At the same time, all formulas and program code are still freely available, so anyone can make sure they work. In addition, a talented programmer can write his own client program based on the mathematics of Bitcoin and even create a new cryptocurrency.

The virtues of Bitcoin

Digital currency has many advantages over all printed banknotes. Lets consider them in more detail:

1. Decentralization. Bitcoin is not controlled by any global government or private organization. Computing machines with an application installed on them and functioning in accordance with Bitcoin rules are connected to a network where two-way transactions are carried out. Failure of one or more units will not affect the performance of the system. Therefore, it is impossible to influence the functioning of the network, freeze accounts (as the Savings Bank did in the 90s) or embezzle other peoples money (the situation that took place in Cyprus in 2013).
2. Limit availability. The maximum supply of Bitcoins is limited to 21 million coins. This factor has a positive effect on the value of the cryptocurrency.
3. Availability. To become the owner of a Bitcoin e-wallet, you need to install a client application on your computer, and then create a storage address. At the same time, you do not need to pay entrance fees or ask permission to perform a certain transfer. Bitcoins can be used to pay for purchases made around the world online.
4. Confidentiality. Thus, system users can create an unlimited number of Bitcoin addresses. It is noteworthy that they are not connected in any way with the names, addresses and other personal information of the client.
5. Publicity of transactions. The details of the payment made are visible to each network user (senders address and amount). The history of all committed transactions (blockchain) is stored on all nodes of the system. If you publicly declare that the Bitcoin address belongs to a specific person, then unauthorized persons will be able to find out the number of coins in his digital account, and what operations were performed on it.
6. Scanty commissions. To send an international transfer through a bank, you will have to pay about 500 rubles on top as a commission. However, you can send cryptocurrency in any quantity and to any part of the planet, and for free. It should be borne in mind that the speed of execution of such a translation may be delayed. To speed up the process, you need to set the minimum commission value in the program settings (usually equivalent to a ruble).
7. The speed of making payments. You can send a transfer at any time of the day, in a matter of minutes and to the name of the addressee who lives in any country in the world. At the same time, the size of the payment does not matter.
8. The impossibility of canceling the transfer. The payment made cannot be canceled, since the sent digital money already belongs to another person.

And in conclusion, this article outlined the principles of the functioning of Bitcoin (cryptocurrency and the payment system of the same name). Thanks to the prospects and the gradual increase in the value of the cryptocurrency, every day there are more and more adherents of it.