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An address is like a bank account into which a user can receive, store, and send bitcoins. Instead of being physically secured in a vault, bitcoins are secured with public-key cryptography. Each address consists of a public key, which is published, and a private key, which the owner must keep secret. Anyone can send bitcoins to any public key, but only the person with the private key can spend them. While addresses are public, nobody knows which addresses belong to which people; Bitcoin addresses are pseudonymous.

After depositing your bitcoins into a “wallet”, the wallet alerts (“broadcasts”) every other user of bitcoins that it contains bitcoins. This information is incorporated into the block chain. The wallet generates a public key accessible to anyone and a private key (unless your wallet is on an exchange, such as Bitstamp) or address that authorizes sending bitcoins to other public addresses. If you want to, say, purchase a flight on Virgin Galactic, you contact them, make a user account (e.g., your name), and then tell them that payment will come from your public key. You then go to your wallet or exchange and broadcast the amount from your public key to their public key. This is published on a peer-to-peer network which validates it against the sender’s public key, checks that the sending address’s balance is sufficient, and propagates it to all of the other nodes on the network. The transaction is eventually received by a miner, who incorporates the transaction into a block. This block is then flooded into the network and is incorporated into the global block chain. The bitcoins now belong to Virgin Galactic’s public key.

• As payment for goods or services.
• Purchase bitcoins at a Bitcoin exchange.
• Exchange bitcoins with someone near you.
• Earn bitcoins through competitive mining

While it may be possible to find individuals who wish to sell bitcoins in exchange for a credit card or PayPal payment, most exchanges do not allow funding via these payment methods. This is due to cases where someone buys bitcoins with PayPal and then reverses their half of the transaction. This is commonly referred to as a chargeback.

• Very low fees – Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. In addition, services exist to assist merchants in processing transactions, converting bitcoins to fiat currency, and depositing funds directly into merchants’ bank accounts daily. As these services are based on Bitcoin, they can be offered for much lower fees than with PayPal or credit card networks.

• Attractive for microtransactions – Because the fees are so low, bitcoins can be used in transactions that are economically unattractive for most merchants, especially in developing countries.

• Fewer risks for merchants – Bitcoin transactions are secure, irreversible, and do not contain customers’ sensitive or personal information. This protects merchants from losses caused by fraud or fraudulent chargebacks, and there is no need for payment card industry compliance. Merchants can easily expand to new markets where either credit cards are not available or fraud rates are unacceptably high. The net results are lower fees, larger markets, and fewer administrative costs.

• Security and control – Bitcoin users are in full control of their transactions; it is impossible for merchants to force unwanted or unnoticed charges as can happen with other payment methods. Bitcoin payments can be made without personal information tied to the transaction. This offers strong protection against identity theft. Bitcoin users can also protect their money with backup and encryption.

• Transparent and neutral – All information concerning the Bitcoin money supply itself is readily available on the block chain for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent, and predictable.

• Smart multi-signature escrow services
• Financial derivatives
• Identity and reputation systems
• Savings wallets
• Crop insurance
• Decentralized (yet managed) data feeds
• Peer-to-peer gambling
• On-chain stock market transactions
• On-chain decentralizedmarketplace
• Decentralized dropboxes
• Sub-currencies

The most ambitious of all cited applications is the concept of DAO’s — autonomous entities that operate on the block chain without any central control, avoiding all dependence on legal contracts and organizational bylaws in favor of having resources and funds autonomously managed by a self-enforcing smart contract on a cryptographic block chain.

There does not seem to be a need to create a new currency, or even a new protocol, when the problem can be solved entirely by using existing technologies. While a planned update to the Bitcoin protocol (Version 0.9) does allow for limited data use within transactions, the scripting systems intrinsic to Bitcoin are currently far too limited to allow the kind of arbitrarily complex computation that DAO’s require.

• Volatility – The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small. Therefore, relatively small events, trades, or business activities can significantly affect the price. In theory, this volatility will decrease as Bitcoin markets and the technology matures. Never before has the world seen a start-up digital currency, so it is difficult to forecast how it will play out.

• Ongoing development – Bitcoin software is still in beta with many incomplete features in active development. New tools, features, and services are being developed to make Bitcoin more secure and accessible to the masses. Some of these are still not ready for everyone. Most Bitcoin businesses are new and still offer no insurance. In general, Bitcoin is still maturing.

ive public records. Various mechanisms exist to protect users’ privacy, and more are in development. However, there is still work to be done before these features are used correctly by most Bitcoin users.

Some concerns have been raised that private transactions could be used for illegal purposes with Bitcoin. However, it is worth noting that Bitcoin will undoubtedly be subjected to similar regulations that are already in place inside existing financial systems. Bitcoin cannot be more anonymous than cash and it is not likely to prevent criminal investigations from being conducted. In addition, Bitcoin is designed to prevent a large range of financial crimes.

Bitcoin is designed to be a huge step forward in making money more secure and could also act as a significant protection against many forms of financial crime. For instance, bitcoins appear to be impossible to counterfeit. Users are in full control of their payments and cannot receive unapproved charges such as with credit card fraud. Bitcoin transactions are irreversible and immune to fraudulent chargebacks. Bitcoin allows money to be secured against theft and loss using very strong and useful mechanisms such as backups, encryption, and multiple signatures.

Some concerns have been raised that Bitcoin could be more attractive to criminals because it can be used to make private and irreversible payments. However, these features already exist with cash and wire transfer, which are widely used and well-established. The use of Bitcoin will undoubtedly be subjected to similar regulations that are already in place inside existing financial systems, and Bitcoin is not likely to prevent criminal investigations from being conducted. In general, it is common for important breakthroughs to be perceived as being controversial before their benefits are well understood. The Internet is a good example among many others to illustrate this.

It is, however, possible to regulate the use of Bitcoin in a similar way to any other instrument. Just like the dollar, Bitcoin can be used for a wide variety of purposes, some of which can be considered legitimate or not as per each jurisdiction’s laws. In this regard, Bitcoin is no different than any other tool or resource and can be subjected to different regulations in each country. Bitcoin use could also be made difficult by restrictive regulations, in which case it is hard to determine what percentage of users would keep using the technology. A government that chooses to ban Bitcoin would prevent domestic businesses and markets from developing, shifting innovation to other countries. The challenge for regulators, as always, is to develop efficient solutions while not impairing the growth of new emerging markets and businesses.

It is also worth noting that while merchants usually depend on their public reputation to remain in business and pay their employees, they don’t have access to the same level of information when dealing with new consumers. The way Bitcoin works allows both individuals and businesses to be protected against fraudulent chargebacks while giving the choice to the consumer to ask for more protection when they are not willing to trust a particular merchant.

New bitcoins are generated by a competitive and decentralized process called “mining”. This process involves individuals being rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialized hardware and are collecting new bitcoins in exchange.

The Bitcoin protocol is designed in such a way that new bitcoins are created at a fixed rate. This makes Bitcoin mining a very competitive business. When more miners join the network, it becomes increasingly difficult to make a profit and miners must seek efficiency to cut their operating costs. No central authority or developer has any power to control or manipulate the system to increase their profits. Every Bitcoin node in the world will reject anything that does not comply with the rules it expects the system to follow.

Bitcoins are created every 10 minutes at a decreasing and predictable rate. The number of new bitcoins created is automatically halved over time until issuance halts when there are 21 million bitcoins in existence. From January 2009 to November 2012, the reward was 50 bitcoins, resulting in 10,500,000 being created (210,000 blocks). The current reward is 25 bitcoins, so that 5,250,000 will be created in years 5-8. That quantity will halve to 12.5, so that it will be 2,625,000 in years 9-12, and so on. At this point, Bitcoin miners will probably be supported exclusively by numerous small transaction fees.

The developers of Bitcoin wrote a computer code designed to release new coins every 10 minutes. This was done by automatically adjusting a “proof of work” problem after every 2,016 blocks, based on the time it took to solve the previous set. In theory, the rate is adjusted every two weeks (20,160 minutes), although this happens faster if processing power is added to the network during the period. Miners originally used the CPU’s in normal PC’s, but it wasn’t long before an arms race began. CPU’s were supplanted by faster Graphics Processing Units, which in turn transitioned to Field Programmable Gate Arrays configured to run the algorithm and, more recently, to Application Specific Integrated Circuits hardwired in the foundry to carry out the algorithm. The brilliance of the original concept is demonstrated by the following chart, showing that the time to mine is staying steady despite an acceleration in computational speed since September2013.

As additional computational power is brought on, the likelihood of any particular miner or group of miners controlling a significant share of the processing power decreases. This, in turn, increases the overall strength of Bitcoin’s decentralized nature.