Do you know bitcoin? -June 10th

By Markus Gausling

Today’s blog is maybe a little bit off-topic but seems to be a quite interesting topic anyway. Have you ever heard of bitcoin?

Bitcoin is the „first decentralized digital currency“ [2]) which implements a Peer-to-Peer electronic cash system. It was proposed and initially implemented by Satoshi Nakamoto in 2009 ([3]) and was designed as a system which is based on cryptographic proof rather than on trust. As such there is no need for intermediate trusted third parties and as such transactions are free of charge.

A bitcoin itself is a digital coin that is a created by solving complex mathematical issues. Those problems are solved by a network of computers that have the open source bitcoin software installed. You should not expect to be able to generate bitcoins with a standard PC using the bitcoin software.

Newly generated bitcoins are distributed randomly among the contributors of CPU power in the network, depending on how much CPU power and processing time a network node contributed. The amount of bitcoins that is distributed among the contributors is limited and decreases over time which should prevent inflation and furthermore lead to deflation if bitcoins become more popular. In May 2011 more than 6 million bitcoins exist and it is expected that in 2033 the maximum number of bitcoins is generated.

The process of generating bitcoins itself is called “mining”.

Transactions

Users can have their bitcoins stored on a computer in a “wallet file” or can have them stored at a “wallet service” provided by a 3rd party. The wallet contains a public and a private key which is used to sign the bitcoin and identify who owns the bitcoin. Personal user data are not stored in the bitcoins and as such transactions with bitcoin are anonymous.

A transactions with a bitcoin is executed between two peers (hence P2P) that have the bitcoin software installed. In the process of a transaction the digital signature of the new owner of the bitcoin is added to the bitcoin and the formerly store signature is removed which means that the bitcoin has changed ownership. Additionally the timestamp of the transaction is added as hash value to the bitcoin.

The transaction is validated by the network and the bitcoin is then stored in the network. Adding the transaction data to a bitcoin and storing this information in the network guarantees that bitcoins cannot be spent multiple times or by users who don’t own them.

Where can I use bitcoins?

Bitcoins are already in use today and are accepted by some organizations such as the Free Software Foundation. Also there are already shops available in the internet that accept bitcoins, e.g. to buy online games, gifts, server space or the like.

There are even web pages available today that exchange bitcoins into real money. The current market value of a bitcoin can be seen at [5].

Conclusion

So what is bitcoin then? Is it just a used nice idea used by some hackers or is this the new ideal global currency which makes transactions more secure, truly global and independent from the influence of banks and governments? Is it even dangerous and will allow anonymous, untraceable and free transactions also for illegal purposes?

Well I don’t know but maybe it is a little bit of all. A number of security experts have analyzed the bitcoin concept and have found no vulnerabilities. Googling for bitcoin results in more than 3.5 million hits and the fact that you can exchange bitcoins into real money shows that this topic has already some focus.

References

[1] bitcoin.org - http://www.bitcoin.org/

[2] weusecoins - http://www.weusecoins.com/

[3] Satoshi Nakamoto - Bitcoin: A Peer-to-Peer Electronic Cash System - http://bitcoin.org/bitcoin.pdf

[4] Wikipedia on bitcoins - http://en.wikipedia.org/wiki/Bitcoin

[5] Bitcoin Charts - http://bitcoincharts.com/markets/