The official Bitcoin client |
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| Developer(s) | Satoshi Nakamoto (inactive, possibly a pseudonym),[1] Con Kolivas, Gavin Andresen, Amir Taaki, Jeff Garzik, David Francois, Luke Dashjr, Pavel Karoukin, Nils Schneider, John Tobey, Daniel Folkinshteyn, Patrick McFarland, Patrick Strateman, Matt Corallo, Pieter Wuille, and others |
| Initial release | January 9, 2009[2] |
| Preview release | 0.5.1 / December 15, 2011 |
| Development status | Beta |
| Written in | C++ |
| Operating system | Windows, GNU/Linux, Mac OS X, FreeBSD |
| Available in | Dutch, English, French, Italian, German, Portuguese, Russian and Spanish. |
| Type | Electronic money |
| License | MIT License (open-source) |
| Website | www.bitcoin.org |
Bitcoin is a decentralized electronic cash system using peer-to-peer networking, digital signatures and cryptographic proof to enable irreversible payments between parties without relying on trust. Payments are made in bitcoins (abbreviated BTC), a digital currency issued and transferred by the Bitcoin network. Nodes broadcast transactions to the network, which records them in a public history after validating them with a proof-of-work system.[3]
The Bitcoin network began on January 3, 2009, with the issue of the first bitcoins,[4] and in the same month the creator, Satoshi Nakamoto, released the official Bitcoin client as open-source software.[5][6]
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Owners transfer bitcoins by digitally signing the previous transaction and the public key of the next owner. Nodes record all data necessary to make any valid transaction in a publicly distributed database called the block chain. Nodes build the block chain using a proof-of-work system that prevents double-spending and confirms transactions. Bitcoin transactions require no centralized payment processing, allowing them to be made at low cost.[1]
Bitcoin uses public-key cryptography using Elliptic Curve DSA.[7] Any user in the Bitcoin network has a digital wallet containing a number of cryptographic keypairs. The wallet's public keys are transformed into Bitcoin addresses, which act as the receiving endpoints for all payments. Addresses in human-readable form appear as strings of numbers and letters around 33 characters in length, always beginning with the digit 1 or 3, as in the example of 175tWpb8K1S7NmH4Zx6rewF9WQrcZv245W.[8] The wallet's private keys are used to authorize transactions from that user's wallet.
Any Bitcoin contains its current owner's wallet address. Users can create as many wallets as they wish. When user A transfers a bitcoin to user B, A relinquishes ownership over that bitcoin by adding B’s address to it and signing the result with the private key associated with A’s address.[9] Because of the asymmetric cryptographic method, nobody else can grant this signature, and the private key cannot be determined based on the signed bitcoin.[Notes 1] The owner's node broadcasts the resulting bitcoin in a message, the transaction, on the peer-to-peer network. The rest of the network nodes validate the cryptographic signatures and the amounts of the transaction before accepting it.[10]
To prevent double-spending, the network implements what Nakamoto describes as a peer-to-peer distributed timestamp server, which assigns sequential identifiers to each transaction, which are then hardened against modification using the idea of chained proofs of work (shown in the Bitcoin client as confirmations). In his white paper, Nakamoto wrote: "we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions."[3]
Whenever a node broadcasts a transaction, the network immediately labels it as unconfirmed. The confirmation status reflects the likelihood that an attempt to reverse the transaction could succeed. Any transaction broadcast to other nodes does not become confirmed until the network acknowledges it in a collectively maintained timestamped-list of all known transactions, the block chain.
Every generating node in the Bitcoin network collects all the unacknowledged transactions it knows of in a file called a block,[11] which also contains a reference to the previous valid block known to that node. It then appends a nonce value to this previous block and computes the SHA-256 cryptographic hash of the block and the appended nonce value. The node repeats this process until it adds a nonce that allows for the generation of a hash with a value lower than a specified target. Because computers cannot practically reverse the hash function, finding such a nonce is hard and requires on average a predictable amount of repetitious trial and error. When a node finds such a solution, it announces it to the rest of the network. Peers receiving the new solved block validate it by computing the hash and checking that it really starts with the given number of zero bits (i.e., that the hash is within the target). Then they accept it and add it to the chain.
The network confirms a transaction when it records it in a block. Further blocks generated further confirm it. After six confirmations, the official Bitcoin client considers a transaction confirmed beyond reasonable doubt. After this, it is overwhelmingly likely that the transactions are part of the main block chain rather than an orphaned one, and impossible to reverse.
Eventually, the block chain contains the cryptographic ownership history of all coins from their creator-address to their current owner-address.[12] Therefore, if a user attempts to reuse coins he already spent, the network rejects the transaction.
The network must store the whole transaction history inside the block chain, which grows constantly as new records are added and never removed. Nakamoto conceived that as the database became larger, users would desire applications for Bitcoin that didn't store the entire database on their computer. To enable this, the system uses a Merkle tree to organize the transaction records in such a way that a future Bitcoin client can locally delete portions of its own database it knows it will never need, such as earlier transaction records of bitcoins that have changed ownership multiple times, while keeping the cryptographic integrity of the remaining database intact. Some users will only need the portion of the block chain that pertains to the coins they own or might receive in the future. At the present time however, all users of the Bitcoin software receive the entire database over the peer-to-peer network after running the software the first time.
Every 2016 blocks, the Bitcoin protocol reassigns the target. As the target changes, the difficulty of finding a suitable nonce changes. The network adjusts the difficulty so the distribution mean is λ = 2016 blocks per two weeks, so that there are roughly ten minutes between the creation of new blocks on average (the wait times between events in a Poisson process follow an exponential distribution). The difficulty updates happen every 2016 blocks. The network sets the difficulty to the value that would have most likely caused the prior 2016 blocks to take two weeks to complete, given the same computational effort (according to the timestamps recorded in the blocks).[13] All nodes perform and enforce the same difficulty calculation.
In addition to the pending transactions confirmed in the block, a generating node adds a "generate" transaction, which awards new bitcoins to the operator of the node that generated the block. The system sets the payout of this generated transaction according to its defined inflation schedule. Nakamoto compared the generation of new coins by expending CPU time and electricity to gold miners expending resources to add gold to circulation.[3] The "miner" that generates a block also receives the surplus from any transactions that have input value in excess of the output value, effectively a transaction fee that provides an incentive to give a transaction priority for faster confirmation.
The proof-of-work problems are especially suitable to GPUs and specialized hardware. Because of the growing computing power behind the system driving the difficulty to high levels, individual contributors with typical CPUs are no longer likely to solve a block on their own but can still receive small portion of the bitcoins generated in a new block by contributing their processing power to a mining pool.[14] This increased difficulty makes it cost prohibitive for an attacker to perform double-spending attacks, benefiting network integrity.
The network never creates more than 50 BTC per block, and this will decrease over time towards zero, such that no more than 21 million will ever exist.[15] As this payout decreases, the incentive for users to run block-generating nodes will change to earning transaction fees, funding from supporting auxiliary block chains,[16] and simply to improve the security of the public Bitcoin infrastructure they depend on.
Miners have no obligation to include transactions in the blocks they try to solve. The client can associate a transaction fee with any transaction, giving miners an incentive to put the transaction in a block, as miners collect the transaction fees associated with all transactions included in blocks they solve. Very small transactions, or those that use relatively new coins, have low "priority" and the network may require a transaction fee to reduce spam. The official bitcoin client, as of version 0.5.1 (beta), enforces a minimum fee for low priority transactions of 0.0005 BTC.
Because transactions are broadcast to the entire network, they are inherently public. Unlike regular banking, which preserves customer privacy by keeping transaction records private, transactional anonymity is accomplished in Bitcoin by keeping the ownership of addresses private, while at the same time publishing all transactions. As an example, if Alice sends 123.45 BTC to Bob, the network creates a public record that allows anyone to see she sent 123.45 from one address to another. However, unless Alice or Bob make their ownership of these addresses publicly known, it is difficult for anyone else to connect the transaction with them. However, if someone connects an address to a user at any point they could follow back a series of transactions as each participant likely knows who paid them and may disclose that information on request or under duress.[17][18][19]
Jeff Garzik, one of the Bitcoin developers, explained as such in an interview and concluded that "attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb".[20][21] He also said "We are working with the government to make sure indeed the long arm of the government can reach Bitcoin... the only way bitcoins are gonna be successful is working with regulation and with the government"[22]
People interact with bitcoin using a "wallet," which they may either store on their computer with the bitcoin client or on a third-party website. The wallet does not actually contain any bitcoins; the network stores these in the distributed block chain database. What it does contain are the owner's public and private keys, which are used to prove title to specific bitcoins. The wallet shows users their available bitcoin balance, transaction history, and the collection of bitcoin addresses they may use to send and receive bitcoins with other users. Because all transactions are added to the transaction log in the bitcoin block chain, which is a distributed database formed by all the bitcoin participants, a user's bitcoin software does not need to be running for that user to receive bitcoins.
Bitcoin payments are normally displayed to the receiver near-instantly, but the client initially displays them as unconfirmed, because the bitcoin system cannot yet assure that the transaction is permanent. The network may invalidate a transaction because of a conflict (such as the client sending the same bitcoins to two different receivers). This may happen if a sender malfunctions, or if a sender intentionally attempts to defraud a receiver. When the network processes the transaction, it adds an increasing number of confirmations every time the network extends the block-chain.
The process of confirming a transaction is accomplished by solving a computationally difficult proof-of-work problem.[23] The problem is based on data from the transactions that must be confirmed, as well as the entire previous transaction history. This process makes it infeasible for an attacker to rewrite the transaction history without having more computing power than the rest of the bitcoin system. Nodes that process blocks of transactions are rewarded by receiving a programmed amount of bitcoin, which arises "out of thin air," as well as any transaction fees associated with the transactions they process. This compensates the operators of these systems for their computational work used to secure bitcoin transactions against reversal, and also accomplishes the initial wealth distribution for the bitcoin system as a whole. The network automatically adjusts the difficulty of the proof-of-work problem to maintain the average time between new blocks at ten minutes. All participating systems check the validity of every transaction and of every block and ignore any that violate the rules, such as blocks that bring the wrong amount of new bitcoin into existence, or transactions that would involve one sender spending the same bitcoin twice.
Implementations include the original C++ Bitcoin client and an open source implementation in Java called BitCoinJ.[24]
Alternative user interfaces include bitcoin-js-remote, a JavaScript web user interface for Bitcoin wallets,[25] as well as Spesmilo, a PySide interface more open to a diversity of users, which can run independently of an external wallet.[26]
As of 2012[update], over 8 million bitcoins exist.[27] An algorithm determines this number as described in Nakamoto's whitepaper. Because the block chain database represents the only bitcoins in existence, the number is not only easy to determine, but all participants can quickly determine it with precision.[3]
Anyone can view the block chain and observe transactions in real-time.[28] Currency exchanges also exist between bitcoins and other real and virtual currencies, such as the US dollar and the Linden Dollar.[29] By June 2011, the market had priced 1 bitcoin at more than twenty-nine USD. By October 2011, the price had fallen to less than three USD.[1]
Unlike conventional fiat currency, Bitcoin has no centralized issuing authority.[10][30][31] The Bitcoin software hardcodes a limited controlled expansion of the monetary base.
Transactions are facilitated directly without the use of a centralized financial processor between nodes, which makes reversal unlikely.[32] Bitcoin transactions can represent many kinds of operations such as pure peer-to-peer escrow and deposits but currently developers have not developed user interface software for this advanced functionality. The Bitcoin client broadcasts transactions to surrounding nodes, which propagate them across the network. Corrupted or invalid transactions are rejected by legitimate clients. Transactions are free; however, clients may pay an optional, often necessary, to other nodes to prioritize transaction processing.
The network is programmed to grow the money supply as a geometric series until the total number of bitcoins reaches 21 million.[10]
By 2013 half of the total supply will be generated, and by 2017, 3/4 will be generated. To ensure sufficient granularity of the money supply, clients can divide bitcoins down to eight decimal places (a total of 2.1 × 1015 or 2.1 quadrillion units).[15]
The diminishing geometric expansion combined with the expansion of Bitcoin users provides an incentive for early adopters, who can obtain bitcoin at preferential exchange rates.
Bitcoin's design allows for pseudonymous ownership and transfers. Because of this, Bitcoin has anonymity properties weaker than cash but stronger than traditional electronic payment systems. Although the network makes the complete history of every bitcoin transaction public, it is difficult [17] to associate bitcoin identities with real-life identities. This property makes bitcoin transactions attractive to some sellers of illegal products.[33][34]
People can convert to and from other currencies in person at local exchangers, as well as online through sites such as Mt. Gox, Intersango (formerly Britcoin), and TradeHill exchange services.[35]
Wikileaks,[36][37][38] Freenet,[39] Pioneer One,[40] and several others[41] accept donations in Bitcoin. The Electronic Frontier Foundation did for a while but stopped doing so, citing concerns about a lack of legal precedent about new currency systems, and because they "generally don't endorse any type of product or service – and Bitcoin is no exception."[42] Gavin Andresen, one of the main developers, is explicitly advising people "not to make heavy investments in bitcoins", called it "kind of like a high risk investment".[43] Jered Kenna, CEO of TradeHill, a major Bitcoin Exchange, also cautions eager investors and stated to the The New York Observer that "Bitcoin is still an experiment and not to bet the house".[44] As of July 2011, few users have adopted Bitcoin, while many small businesses have started to do it.[45] LaCie, a public company, accepts Bitcoin for its Wuala service.[46] A frequent problem faced by retailers willing to accept Bitcoin is the high volatility of its exchange rate to the US dollar and the absence of futures and options permitting to hedge this volatility yet. Further, it has been suggested that hoarding by speculators could impede the adoption of bitcoins.[47]
Bitcoins are awarded to Bitcoin miners for the solution to a difficult proof-of-work problem which confirms transactions and prevents double-spending. This incentive, as the Nakamoto white paper describes it, encourages "nodes to support the network, and provides a way to initially distribute coins into circulation, since no central authority issues them."[3]
The network currently requires over 1,000,000 times more work for confirming a block and receiving an award (50 bitcoins as of December 2011) than when the first blocks were confirmed.[48] The network adjusts the difficulty every 2016 blocks based on the time taken to find the previous 2016 blocks such that blocks are confirmed every 10 minutes.[49] Thus the more computing power that is directed toward mining, the more computing power the network requires to complete a block confirmation and to receive the award. The network will also halve the award every 210,000 blocks, designed to occur about every four years.[50]
Those who chose to put computational and electrical resources toward mining early on had a greater chance at receiving awards for block generations. This served to make available enough processing power available to process blocks. Indeed, without miners there are no transactions and the Bitcoin economy comes to a halt.
Some criticize Bitcoin for being a Ponzi scheme in that it rewards early adopters.[51] While early Bitcoin miners may benefit more than later ones, the returns on their investments do not come at the expense of others participating in the Bitcoin economy. The return (on invested computing power and electricity) is the award for doing useful work in the Bitcoin network by verifying blocks.
Prices fluctuate relative to goods and services more than more widely accepted currencies, since the price of a bitcoin is not yet sticky.[52] Also, different exchanges quote different prices, implying the market is not yet efficient.[53] On 19 June 2011, a security breach of the Mt. Gox Bitcoin Exchange caused the leaking of usernames, emails and MD5 hashed passwords of over 60,000 users onto the Web. The price of a bitcoin briefly dropped to $0.01 on the Mt. Gox exchange (but remained unaffected on other exchanges) after a hacker allegedly used credentials from a Mt. Gox auditor's compromised computer to illegally transfer a large number of bitcoins to himself and sell them all, creating a massive "ask" order at any price. Within minutes the price rebounded to over $15 before Mt. Gox shut down their exchange and canceled all trades that happened during the hacking period.[54] The exchange rate of bitcoins quickly returned to near pre-crash values.[55][56][57][58]
If an attacker can compromise the machine storing a particular Bitcoin wallet, then they can easily transfer any bitcoins to their own wallet. On June 16, 2011, computer security companies started publishing the discovery of malicious software that locates the wallet file on Windows computers and uploads it to a remote server.[59][60][61][62] Users could prevent this attack by encrypting the wallet file; however, the official Bitcoin client did not build this functionality in until version 0.4.0.[63]
Dan Kaminsky, a leading Internet technology security researcher, investigated Bitcoin. His examination reached various conclusions on bitcoin, anonymity and its future scalability. In the area of security the basic model he concluded Nakamoto designed bitcoin well. This relates to the underlying bitcoin model rather than any particular attack against a specific client, such as described above.[64]
In June 2011, Symantec warned about the possibility of botnets engaging in covert "mining" of bitcoins (unauthorized use of computer resources to generate bitcoins),[65][66] consuming computing cycles, using extra electricity and possibly increasing the temperature of the computer. Later that month, the Australian Broadcasting Corporation caught an employee using the company's servers to generate bitcoins without permission.[67] Some malware also uses the parallel processing capabilities of the GPUs built into many modern-day video cards.[68] In mid August 2011, bitcoin miner botnets were found;[69] trojans infecting Mac OS X have also been uncovered.[70]
Silk Road, an online anonymous marketplace uses Bitcoin.[20][71] In a 2011 letter to Attorney General Eric Holder and the Drug Enforcement Administration, senators Charles Schumer of New York and Joe Manchin of West Virginia called for an investigation into Bitcoin and Silk Road.[71] Schumer described the use of bitcoins at Silk Road as a form of money laundering.[10] Consequently Amir Taaki from Intersango (formerly Britcoin), the UK exchange, put out a statement calling for regulation of Bitcoin exchanges by law enforcement.[72][73] The hacking organization "LulzSec" accepted donations in Bitcoin, having said that the group "needs bitcoin donations to continue their hacking efforts".[74][75]
Satoshi Nakamoto designed the Bitcoin system[1] and worked on the software in 2007.[76] In 2008, Nakamoto self-published a paper[3][77] outlining his work on the cryptography mailing list[78] and then in January 3, 2009 founded the open source project called Bitcoin.
The philosophical underpinnings of Bitcoin come from a distrust of government-controlled central banks. "The root problem with conventional currency is all the trust that's required to make it work," Nakamoto wrote. "The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve."[1]
Digital money systems: