There has been a lot of talk recently about Bitcoin, and virtual currencies in general. The discussion deals mainly with its dangers and potential, with the use of both business and criminal factors, its high volatility and more. But what is a virtual currency?
Bitcoin was created as a digital means for transferring payments between two parties, regardless of the third party to mediate the transfer of payment, such as a bank, a credit company, etc. It was first described in an article published under the pen name Satoshi Nakamoto at the end of 2008.
Bitcoin is actually a digital ledger that describes how many "coins" are in each digital account. Every computer connected to the Bitcoin network contains a copy of the ledger, so that each transaction is performed in public. The digital coins themselves are not linked to physical objects and their value is determined by people who believe they have value that justifies exchanging goods and services for them. This is also the result of the great volatility in the value of the Bitcoins in the markets.
Protection from crooks
The difficulty in creating a digital currency is that every digital file can be easily copied and duplicated, so a technological solution is needed to prevent fraudsters from paying in more than one currency - what is known as the "double payment problem". Because digital currency is essentially an information file, it can be duplicated. Thus, each person can create another copy of the file that describes the coin and use it again and again.
Usually, when a payment is made online, there is a third factor - for example, PayPal - that the buyer and seller trust, and whose role is to verify the transfer of payment between the parties. For example, when we use a credit card, the transaction is transmitted to the credit card company or to the bank, making sure that the money is in the account and then transferring it to the seller. This may take time and cost us a fee.
A virtual currency like Bitcoin bypasses this route. All users of the currency agree together on the recording of currency transactions, and aggregate all transactions in a book of accounts called Blockchain. Registration of transactions in a publicly agreed blockbuster allows one to know for certain that the currency has changed hands, and that the party that paid with it can not use it more - for example, buying more than once in the same currency. The transaction documentation is distributed in a distributed manner, meaning that the currency user network verifies transactions by itself in a transaction called "mining". There is no need to trust an intermediary, since mathematical equations protect transaction security.
The miners, who use the network that validates the transactions and determine the chronological order, allocate a great deal of energy and energy resources to 0.13 percent of global electricity consumption. The reward for this investment of resources to verify all transactions to the Bitcoin community comes in the form of new Bitcoin coins for miners.
The transactions themselves are grouped together in groups called blocks. Each new block file contains about 2,000 transactions and is linked to the block that preceded it starting with the first Bitcoin transaction. This creates a chronological chain that connects the blocks and is called a block chain, or "blockchain". This link between the blocks is intended to verify the authenticity of the data and transactions in the ledger, using a technology called "stacking".
Stacking function
To prevent cheaters from changing existing documentation or documenting a fictitious transaction, their documentation is done using a "one-way aggregation function" - a complex concept that represents a simple principle. This is a code used as a black box, which turns regular text into short, fixed-length text known as "stacked text". Any small change in input will produce a completely different output.
It is easier to understand this by example. You are welcome to try it yourself here.
If we want to shorten the short sentence "hello world" with a shuffle function called SHA1, the output will be: "2aae6c35c94fcfb415dbe95f408b9ce91ee846ed".
A much longer sentence, such as "This is an example for a very long sentence", will be output to the same length: "87f481d970d74c1c187a7ac05f02ec15b1388317".
And if we change only the first letter in a sentence from T to a small t, we get a completely different output: "22fefffbfa3f7de072eda3f012dad1f303af117e".
The stack function is designed so that any text you insert into it will produce a different output, and it is very difficult to get from the stacked output to the original content.
The link between blocks in BlockChain is done so that each new block contains a mixture of the contents of the block preceding it. Thus, chronological documentation of the book of accounts was created, which also fixes the history of all the previous blocks. If we try to change information in one of the blocks in the chain, the block that will appear in the block after it will change, and since all the blocks are connected to each other, the blockcane will change. Thus, the system ensures that it will be possible to overcome any attempt to falsify transactions retroactively.
In the mining operation (confirmation of the transactions, as stated), the users in the network verify the transactions and assemble them in the blocks. In general, the stack output should contain at the beginning a certain number of reps of the number 0, for example 30. The probability that the block content yields a stacked output with 30 zeros at its beginning is very small. To create such a block, the miners add a single line with a random value that serves as a control bar to the end of the block and checks to see if the contents of the block now produce the appropriate stacked output.
Since the output of the stack function can not be predicted, this process is repeated over and over again, each time the reactors try different values of the control line until a payload finds the appropriate stacked output and transmits it immediately to the grid. When a new block is transmitted, all the miners will try to extend it to receive compensation by issuing a Bitcoin to the miner who has managed to find the appropriate stacked output.
A question of trust
Thus, the big breakthrough in Bitcoin technology lies in the fact that it enables digital payments to be verified between parties, through the public documentation of the transactions in Blockkin and the distributed control among users.
The way to make virtual currencies a daily and safe means of payment is still long, and today most of the banking system and the markets themselves are suspicious of them. The fears are further exacerbated by the lack of stability of the Bitcoin. For example, in 2010, Pizzeria agreed to receive ten thousand Bitcoin coins for two pizza trays. The current value of these currencies is estimated at NIS 244 million (beginning of December 2017). Most businesses still do not receive Bitcoin as a payment method, although some companies are already willing to make deals with it, and individuals are already expressing enough confidence to offer cars, land and real estate for Bitcoin.
