WHAT IS A BITCOIN AND HOW IT WORKS
Bitcoin is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. Bitcoin was the first practical implementation and is currently the most prominent triple entry bookkeeping system in existence. Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who 'mine' them by lending computing power to verify other users' transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with U.S. dollars and other currencies.
How much is it worth?
One bitcoin recently traded for $1,734.65, according to Coinbase, a company that helps users exchange bitcoins. That makes it more valuable than an ounce of gold, which trades at less than $1,230. The value of bitcoins can swing sharply, though. A year ago, one was worth $457.04, which means that it's nearly quadrupled in the last 12 months. But its price doesn't always go up. A bitcoin's value plunged by 23 percentage. Who's using bitcoin? Some businesses have jumped on the bitcoin bandwagon amid a flurry of media coverage. Overstock.com accepts payments in bitcoin, for example. The currency has become popular enough that more than 300,000 daily transactions have been occurring recently, according to bitcoin wallet site blockchain.info. A year ago, activity was closer to 230,000 transactions per day. In order to know how the system works read the entire process and the flow as below:
Balances - block chain The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.
Transactions - private keys A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.
Processing - mining Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.
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Mining Bitcoins is like finding solutions to complicated math problems that become progressively more difficult. Coins are awarded to computers that verify transactions with an algorithm that gets more complex over time. In the early days of the currency in 2009 — with few computers, few transactions, and a price of $2 per coin — this was something you could do on your home computer.
Now with a global market cap of more than $167 billion, it requires specialized hardware called Application Specific Integrated Circuit miners, and mining operations now use tens of thousands of these devices in expansive warehouses to extract more coins.
As a result, the largest mining operations are springing up in parts of the world with cheap electricity, like China. It also means Bitcoin mining is a growing contributor to climate change.
A study from the University of Cambridge earlier this year found that 58 percent of Bitcoin mining comes from China, describing “an arms race amongst miners to use the cheapest energy sources and the most efficient equipment to keep operators profitable.” Cheap power often means dirty power, and in China, miners draw on low-cost coal and hydroelectric generators. De Vries analyzed one mine in China whose carbon footprint was “simply shocking,” emitting carbon dioxide at the same rate as a Boeing 747.
However, figuring out exactly how much electricity Bitcoin mines use is tricky, since computing hardware is becoming more efficient all the time.
Marc Bevand, an investor and entrepreneur, was skeptical of de Vries’ tally of Bitcoin’s energy use and argued that the real global energy footprint of mining was likely closer to 15 terawatt-hours, which is still a huge amount of electricity, but half of the estimate on Digiconomist. The key difference between their numbers is that de Vries assumes that 60 percent of mining revenues goes toward energy costs in tabulating the total energy use. Bertrand suspects it’s closer to 30 percent.