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Bitcoin
Developer(s)	Satoshi Nakamoto

Stable release	0.3.2 / July 17, 2010; 14 years ago (2010-07-17)

Written in	C++
Operating system	Windows, Linux, Mac OS X
Type	Electronic money
License	MIT License
Website	www.bitcoin.org

Bitcoin is an open source peer-to-peer electronic cash system developed by Satoshi Nakamoto. The system is decentralized with no central server or trusted parties. Bitcoin relies on cryptographic principles to create unique, unreproducible, and divisible tokens of value. Users hold the cryptographic keys to their own money and transact directly with each other, with the help of the network to check for double-spending.

Technical basis

Bitcoin is an implementation of Wei Dai's b-money proposal on Cypherpunks in 1998 and Nick Szabo's Bitgold proposal.

Each coin of the Bitcoin system has its owner's public key on it. The owner can transfer it further by adding the recipient's public key on it, signing it with his private key and broadcasting the transaction to the network. This way, each coin contains its cryptographic ownership history from the creator of the coin to its current owner.

To prevent users from double-spending their coins (signing the same coin for many recipients), transactions are timestamped by the network with a proof-of-work system. The network collects and records new transactions into a chain of blocks. Nodes of the network are constantly racing to complete these blocks by finding a value, that summed up with the block and the hash of the previous block, produces an SHA-256 hash containing a certain amount of leading zero bits. The average work required by this operation can be calculated and used to timestamp the block's transactions, so that they cannot be invalidated by later double-spending.

The incentive to use CPU time for running the system is that new coins are created and assigned to the node that manages to complete the new block first. Once a node successfully creates a block, it broadcasts the block to the network. Other nodes receive the block, perform a proof-of-work check, and add it to their chain if it is valid. As more transactions occur, blocks are created and added ad infinitum. The longest proof-of-work block chain is acknowledged to be the oldest and most reliable account of the transaction history.

This mechanism is claimed to be virtually tamper-proof. For an attacker to manipulate the record, he must outpace all of the other nodes on the network to produce the longest proof-of-work. This becomes exponentially more difficult as time passes.

Bitcoin is a completely peer-to-peer network, and every node is able to enter or leave the network at will. When a node joins the network, the longest proof-of-work is automatically accepted as the most reliable one.

Basis of value

Like other monetized commodity currencies, Bitcoin proponents argue that Bitcoin tokens derive their exchange value from two sources:

A base valuation derived from the commodity value of the energy required in CPU cycles to generate Bitcoin tokens.
A monetary valuation arising from the demand for use of Bitcoin tokens as a trade intermediary (a money). Due to its electronic nature, Bitcoin shares many features with traditional precious metal currencies in being suitable as a means of indirect exchange. Namely, ease of transport and storage, relative scarcity, divisibility, and fungibility. Proponents argue that the monetary value of Bitcoin tokens will rise as their use in trade and thus their potential marketability increases.

Useful energy cannot be recaptured from created Bitcoins. Nonetheless, the cost of energy required to produce Bitcoins may serve as an estimate of Bitcoin value - useful in the absence of developed markets to formally price the monetary value of Bitcoins. This estimate is possible because cost considerations in the production of Bitcoins allows for potential node generators to calculate whether they can create Bitcoins profitably. Their calculation of profitability is made against what they subjectively perceive the monetary value of Bitcoins to be. Furthermore, in its current phase, new Bitcoin tokens are created at a constant average rate set by the network. These new tokens are divided amongst the Bitcoin generating nodes by the CPU power they use to help maintain the network. The author argues that this competition for Bitcoin creation will drive the cost of electricity needed for generating a Bitcoin close to the perceived monetary valuation.

The average rate of Bitcoin production is tapered such that over time the total number of Bitcoins will approach 21,000,000. After this point, no further Bitcoin production is possible. In this deflationary environment and in situations where large numbers of Bitcoins are either lost or destroyed, the electronic divisibility of Bitcoins is argued to be conducive to downward price adjustments with no practical limitations in the actual storage or transport of Bitcoin value. Rather than relying on the incentive of newly created Bitcoins to package transactions, nodes in this period will likely depend more heavily on their ability to competitively collect transaction fees to process Bitcoin transactions into blocks.

Monetary and financial benefits

Given the decentralized nature of Bitcoin and the hard coding of monetary rules within the software, Bitcoin proponents suggest various monetary and financial benefits to potential users:

Direct transfer of monetary value via the internet without a trusted middleman or financial processor.
Third parties cannot prevent or control transactions.
Transactions are practically free.
Bitcoin value is unconnected to possible instability caused by fractional reserve banking and poor central bank policy (see Austrian business cycle theory).
Corrupted transactions created by hacked or modified clients are rejected by honest clients.
The limited inflation of the Bitcoin system’s money supply is distributed evenly by CPU power throughout the network and programmatically created at a rate known to all parties in advance. Inflation cannot therefore be centrally manipulated to effect redistribution of Bitcoin value from general users.
Given the predetermined rate of Bitcoin creation, the system is further protected against wild swings in supply due to externalities sometimes seen with traditional commodity currencies (see Fall of the Rupee due to large discoveries of silver reserves in the New World).
Bitcoins are potentially divisible to eight decimal points. There are therefore no practical limitations to downward price adjustments in a deflationary environment.

According to the author, the design also supports a variety of possible transaction types that have yet to be implemented within the currently available client. These include escrow transactions, surety bond contracts, third party arbitration, and multi-party signatures.

Sites that accept Bitcoin

As of July 2010 there are roughly 20 sites accepting Bitcoin, most notably the largest being Link2VoIP.com who offer automated Bitcoin payments, as well as Bitcoin Market, and others. The F.A. Hayek Institute of Canada accepts Bitcoins as a form of donation.

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