BITCOINS

Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto. It is a cryptocurrency so-called because it uses cryptography to control the creation and transfer of money.!"# $onventionally %&itcoin% capitali'ed refers to the technology and network whereas lowercase %bitcoins% refers to the currency itself.!(# &itcoins are created by a process called mining in which participants verify and record payments in e)change for transaction fees and newly minted bitcoins.!*# +sers send and receive bitcoins using wallet software on a personal computer mobile device or a web application. &itcoins can be obtained by mining or in e)change for products services or other currencies.!,# &itcoin has been a sub-ect of scrutiny due to ties with illicit activity. In 20./ the 0&I shut down the Silk 1oad online black market and sei'ed .22 000 bitcoins worth +S32,." million at the time.!9# 4he +S is considered &itcoin-friendly compared to other governments however.!.0# In $hina new rules restrict bitcoin e)change for local currency !..# and the 5uropean &anking 6uthority has warned that &itcoin lacks consumer protections.!.2# &itcoins can be stolen and chargebacks are impossible.!./# $ommercial use of &itcoin illicit or otherwise is currently small compared to its use by speculators which has fueled price volatility.!.2# &itcoin as a form of payment for products and services has seen growth however and merchants have an incentive to accept the currency because transaction fees are lower than the 27/8 typically imposed by credit card processors.!."#

4ransactions
Further information: Bitcoin protocol +sers send payments by broadcasting digitally signed messages to the network. 4ransactions do not e)plicitly identify the payer and payee by name. Instead a transaction transfers ownership from one &itcoin address to another. 6ppro)imately every ten minutes a block of transactions is confirmed to a shared public record called the block chain. 4his competitive confirmation process known as %mining% carries a reward of 2" bitcoins per block!to whom?#.!.(#

Software

5lectrum - sample &itcoin client

&itcoin wallet software sometimes called a &itcoin client allows a user to transact bitcoins. 4he first was released in 2009 by Satoshi Nakamoto asopen source code. 4his so-called Satoshi client &itcoin-9t has since been maintained and enhanced by a group of core developers and other contributors. &itcoin-9t can be used as a desktop wallet for regular payments or as a server utility for merchants and other payment services. &itcoin-9t is sometimes referred to as the reference client because it serves to define the &itcoin protocol and acts as a standard for other implementations.!.*# &itcoin wallet software has been implemented in several programming languages for personal computers and mobile devices and as web applications. 4he most basic a wallet program generates and stores private keys and communicates with peers on the &itcoin network. :hen making a purchase with a mobile device the use of 91 codes to simplify transactions is ubi;uitous. 4here are also now several server software implementations of the &itcoin protocol. So-called %full% nodes on the network validate transactions and blocks they receive and relay them to connected peers.!.*# 6longside the full version a portable version is offered which does not re;uire installation.!citation needed#

Wallets
&itcoin uses public-key cryptography in which pairs of cryptographic keys one public and one private are generated.!.9# 6 collection of keys is called a wallet. Note that sometimes this term is used to mean the software itself in the sense of digital wallet. 6 &itcoin transaction transfers ownership to a new address an alphanumeric string of the form .0fmb<fnpa=->0vyi.ok4-??usN2""pa@< derived from public keys by application of a hash function and encodingscheme. 4he corresponding private keys act as a safeguardA a valid payment message from an address must contain the associated public key and a digital signature proving possession of the associated private key. &ecause anyone with a private key can spend all of the bitcoins sent to the corresponding address the essence of &itcoin security is protection of private keys. 4heft of bitcoins has occurred on numerous occasions !20# and the practical day-to-day security of &itcoin wallets remains an on-going concern.!2.# 1isk of theft can be reduced by generating keys offline on an uncompromised computer and saving them on e)ternal storage or paper printouts.!22# Barious vendors produce physical bitcoins collectibles that store a private key on paper metal !2/# wood !22# or plastic. Images of physical bitcoins are ubi;uitous in media coverage of &itcoin.

Block chain
Integral to &itcoin is a public database and se;uential record of all transactions known as the block chain that records current bitcoin ownership as well as at all points in the past. &y keeping a record of all transactions the block chain prevents double-spending.!.(# 4hose who maintain the block chain are called miners and are rewarded with newly created bitcoins as well as transaction fees. @ayment processing work done by miners verifies each transaction as valid and adds it to the block chain.!2"# &itcoin payment processing fees are optional and generally substantially lower than those of credit cards or money transfers. !2(# $urrently doing the work of payment processing is rewarded with newly created bitcoins 2" per block. 4he block reward will be halved to .2." bitcoins in 20.* and again appro)imately every four years thereafter. &y 2.20 there will be appro)imately 2. million bitcoins in e)istence and transaction processing will be solely incentivi'ed by transaction fees.!2*# 4oday transactions that pay a fee may be processed more ;uickly than those that donCt.!citation needed#

Exchanges
Further information: Digital currency exchanger This section requires expansion.(December 2013) 4hrough various e)changes bitcoins are bought and sold at a variable price against the value of other currencies.!2,# :hile there may be a seemingly large number e)changes regularly fail taking client bitcoins with them.!29# 6 published research study showed that of 20 &itcoin e)change markets studied ., ended up closing over a period of / years.!20# &itcoin prices are fragmented and vary widely across e)changes.!/0# 6n alternative to e)changes &itcoin 64Ds allow cash-for-bitcoins transactions to be made.!/.#

Lack of anonymity
4he block chain provides a certain level of anonymityA it identifies receivers by &itcoin addresses not individualsC names. 4racking the flow of bitcoins can give clues as to who owns them however.!/2# 6nd while &itcoin uses cryptography it does not do so to protect the identities of its users. In addition &itcoin intermediaries such as e)changes are re;uired by law in many -urisdictions to collect personal customer data.!//#