Cryptocurrency Bitcoin. The history of creation, the principle of operation, the main features
10.02.2022 | mnalilovich
The term Bitcoin comes from two words — bit (minimal computer unit of information) and coin. The bitcoin network itself is a peer-to-peer payment system, the calculation of which takes place using the same monetary unit. The operation and protection is provided by advanced methods of cryptography, however, all information about transfers and wallet balances is publicly available. The minimum unit of account in the network is Satoshi, which received its name in honor of its creator and is 10-8 bitcoins.
The main feature of bitcoin is the irreversibility of transactions and conducting transactions without intermediaries. It is impossible to withdraw a payment to an erroneous, even non-existent address, it is impossible to challenge a transfer from a compromised address and in all other cases. However, this also gives its advantage. So no one can block or arrest bitcoins even for a while, and only someone who owns a private key from the wallet can spend or use it for other purposes.
It is worth saying that some semblance of reversible transactions still exists. The first implementation is multi-signature transactions, where a third party acts as an arbitrator and it is impossible to receive funds from any of the parties without his signature. The second is smart contracts, however, they do not have the fullness of Turing and do not compare with a later implementation in, for example, Ethereum.
If we talk about the use of bitcoin, then it can be exchanged for goods or services from anyone who is willing to accept cryptocurrency as payment. It is also possible to make a direct exchange for cash through a specialized system, either directly between participants on exchange, or within OTC agreements. At the same time, the price of bitcoin directly depends on the balance of supply and demand, and no one has the right to oblige the seller to accept it as payment.
The commission for transactions in the bitcoin network is assigned by the user independently and is not mandatory. However, if there is no transfer fee or its amount is too small, the transaction may be processed for an unacceptably long time. Currently, most customers automatically recommend the commission amount depending on the network load and the desired processing time. Also, most software clients currently do not assume zero commission.
The history of Bitcoin
If we talk about the appearance of bitcoin, then this was followed by a whole series of events:
- 1983 — David Chaum and Stefan Brands propose the first electronic cash protocol,
- 1997 — Adam Beck proposes the concept of Hashcash to prevent spam and DoS attacks,
- 1998 — independently of each other, Wei Dai and Nick Szabo propose the ideas of b-money and bit-gold cryptocurrencies,
- In the same year, Hal Finney (who is the second participant in the bitcoin network) implements a chain of hash blocks for HashCash.
And only in 2008 Satoshi Nakamoto (under this name is hiding one person or a whole group of people) published a file with a detailed description of the principles of the peer-to-peer payment network. The development itself was completed in early 2009, at the same time the source code of the client program was published, and the first block in the bitcoin network was mined on January 3, 2009. The first transaction on the network occurred on January 12, 2009, when Satoshi Nakamoto transferred 10 bitcoins to Hal Finney.
If we talk about the first interaction of cryptocurrencies with the real world, then September 2009 can be considered such a time, when Marty Malmi sold 5050 bitcoins for $ 5.02 to NewLibertyStandard. The latter also suggested using the electricity spent on its extraction, or rather its cost, to form the price of the first cryptocurrency. And the first use of bitcoin as a means of payment can be attributed to May 22, when Laszlo Hane exchanged his 10,000 coins of the first cryptocurrency for two pizzas with home delivery. Although, in fairness, it is worth noting that it was not a pure sale of goods for bitcoins, but still an exchange through an intermediary who paid for two pizzas, receiving bitcoins for it. But it was May 22 that became a holiday and was called “Bitcoin Pizza Day”.
What is Bitcoin
The problem of transferring money at a remote sale has existed for more than one millennium. In the earliest times of the origin of international trade, it became necessary to transport “money”, which most often were gems and precious metals, while the seller had a problem with verifying the authenticity of the means of payment, and the buyer had a confirmation of receipt of payment.
Over time, networks of intermediaries appeared, trusted by both sides of the trade. They no longer needed to constantly move money, it was enough to use their own stock of funds. Also, when using intermediary services, it was possible to freeze money before receiving the goods or cancel the payment in case of violation of the terms of the contract. Modern banks gradually emerged from such intermediaries, having also absorbed the functions of money changers in the markets and moneylenders.
In the age of computer technology development, it has gradually become possible to abandon physical forms of money not only in cross-border settlements, but also in ordinary retail trade. However, the use of banks as intermediaries has a significant drawback — it is a low degree of confidentiality. If in the case of the state and regulatory authorities, the problem is not so acute, yet the social contract assumes not only the existence of rights, but also obligations, in particular, and the payment of taxes, but the receipt by commercial organizations of personal data, including information about purchases, for marketing purposes for analysis, already carries huge risks to the freedom of everyone’s personality.
To solve the mentioned problems, attempts have been repeatedly made to develop such a system of remote payments, where the role of an intermediary would be minimized. However, such electronic payment systems turned out to be unviable due to reliability and security problems. Due to the peculiarities of computer technology, when the same information can be copied to the nearest bit, all remote payment solutions made it possible to pay, under certain circumstances, with the same coin several times. That is why in any such system, a trusted intermediary is needed, who will provide confirmation of the payment and the availability of funds on the payer’s account.
Knowing this, it can be understood that bitcoin is a means of payment that can ensure the trust of the participants in the transaction in situations where this trust cannot be obtained objectively. Also, the first cryptocurrency solved another problem of payment systems — this is the absence of the need to use secure communication channels to transmit information about payments. Thus, bitcoin became the means that made it possible to transfer ownership of an asset directly, without intermediaries, through ordinary communication channels, which were used by the world Wide Web.
How Bitcoin works
Bitcoin is a registry of records stored in the form of a distributed registry called [blockchain] (/blog/tools/technologies/blockchain-kak-poyavilis-cepochki-blokov/). Although information is stored in the open in the blockchain, however, there are no records of the actual owner of an address. Also, in contrast to banking and classical payment systems, information about the wallet balance is not recorded, but calculated each time when accessing the distributed registry. Simply put, if there is a cell in the bank database with data on available funds, then bitcoin passes through the chain, where, for example, there is information that 5 bitcoins were received to a specific address in two transactions, and only two were spent, will reflect the available balance of three coins in the client program.
The main components of using bitcoin are keys, private and public. We discussed this implementation in more detail in articles about cryptography here and here. In simple words about bitcoin, we can say this: by generating an access key to the wallet, the user automatically receives the address to which payments will be made. At the same time, there is no need to have access to the Internet, the program can generate a pair offline, which makes it possible to organize secure storage cryptocurrencies.
To send funds from one address to another, it is enough to initiate a transfer in the client program and sign it with your private key. After being sent to the network, the miners involved in maintaining the bitcoin network’s operability include information about the transaction in the distributed registry, and the transfer can be considered completed. You can read more about the implementation of blockchain in cryptocurrency in this article.
Although bitcoin has become a breakthrough in the world of digital finance, many other cryptocurrencies have appeared after it. Some simply copied the source code and the block chain when they saw the development of the coin in a different direction from most. Others have been developing an entirely new model, giving users new features or increased privacy. In any case, it was bitcoin that launched a new milestone in the world of digital money, and understanding what it is will be useful if you want to use a reliable means of saving or payment.