Why Use Bitcoins - Research Paper Example

Why Use Bitcoins? A completely peer-to-peer version of electronic money without going through a financial institution, allows online payments to be sent directly from one party to another. The major rewards are lost if a third party is required to curb double-spending but still, digital signatures provide part of the solution. A solution is proposed to the double-spending problem incorporating peer-to-peer network. Bitcoins involves network timestamps transactions by forming a record that cannot be altered without redoing the proof-of-work. The longest chain clearly proves that it originated from one of the largest pool of CPU strength, and also serves as proof of the sequence of events witnessed. Although as long as most of CPU strength is under the control of nodes which are not collaborating to attack the network, they will spawn the longest chain and outpace attackers. Minimal structure is required by the network itself. Leaving and rejoining of the network by nodes at will also happens, while messages are broadcast on a best effort basis; also the nodes allow the lengthiest proof-of-work chain as evidence of what happened in its absence (Andy). Introduction Commerce on the Internet has come to over relay on financial institutions serving as third parties relied upon to process electronic payments. The system still suffers from the inherent weaknesses of the trust based model, though it works well enough for many transactions. Since financial institutions cannot keep away from mediating disputes, completely non-reversible transactions cannot be deemed possible. While limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, the cost of mediation increases transaction costs, and there is a wider scope regarding the cost in the loss of ability to make non-reversible payments for nonreversible services. There is also the need for trust spreads due to the likelihood of reversal. While interviewing customers for more information than they would otherwise need, Bitcoin merchants must be wary of them (Angry). Although Bitcoins have been proved to be vital in the distribution of currency, they are sometimes associated with various risks which aid dealers in the black markets. A certain degree of fraud is allowed as unavoidable. These expenses and expense uncertainties can be evaded in person, through the use of physical currency, though no such mechanisms are present to carry out payments over a communications channel devoid of a trusted party. An electronic payment system based on cryptographic proof instead of trust is required, making it possible for any two willing parties to transact directly with each other, thus not needing the services of a trusted third party. Routine escrow mechanisms could easily be implemented to protect buyers, since the transactions which are computationally impractical to reverse would shield sellers from fraud. In this paper, we study the use of Bitcoins as solutions to the double-spending problem incorporating peer-to-peer distributed timestamp server in order to spawn computational evidence of the sequential order of transactions. The system facilitating Bitcoin transactions is protected as long as honest nodes as a group run more CPU strength than any group of attacker nodes working together (Chirgwin). Bitcoin for a free society A free society needs a free market while a free market requires a sound form of currency. Bitcoin is a form of currency with good properties like pseudonymous, no likely hood of frozen accounts, there is no charge-backs and there is very cheap and very fast transfer of funds. This is a huge advantage over a barter or cash-only economy. In order to succeed in the long-run, Bitcoin needs the following 3 hypotheses: i. No state control. In short, we should not attempt to gain legality for Bitcoin; the state should not be asked or involved in Bitcoin operations ii. No bank involvement: We should not focus on interoperability with the traditional banking system iii. Over The Counter (OTC) transaction: Expansible availability of over-the-counter (OTC) Bitcoin users is crucial for Bitcoin success, thus more freedom to its users (ShadowLife). Bitcoins operate under public choice theory. This means that in their own self-people will do as they please, this including doctors, actors, managers, bankers and lawyers. One should not assume your interests are their interest since they are not (ShadowLife). Bitcoin prevents inaction and helps tax evasion since the system itself is hard to regulate. Therefore, as stated in Hypothesis 1: Which states that we shouldn’t try to legalize Bitcoin, we should not involve the state, but we should find our own ways to cope independently. Looking back in History, e-gold very much operated like Bitcoins. Between 1996 and 2009, a digital gold currency allowed for instant transfer of gold ownership. The problem arose when they sought compliance with financial regulations. A flourishing ecosystem existed around, thus e-gold exchangers were compelled to exit due to regulatory problems. E-gold was indicted on violation of money laundering regulations, and was ultimately closed down. It is obvious that Bitcoin exchangers will be attacked through the use of state regulations. The main advantage though is that the network of Bitcoin itself is a little bit harder to crack as compared to e-gold. Banks are the beneficiaries of fractional-reserve banking, since they borrow cheaply from Central Bank, thus Bitcoin operates in the most heavily regulated industry with huge barriers to entry. Bitcoin does not have much competition since there are no large profits for the banks, since there are no transaction fees, credit card fees, PayPal, Western Union, Money Gram and the like. Bitcoin is a major threat to these profits and poses a regulatory risk. Thus, Bitcoin exchangers will be attacked by competing financial institutions. A largely successful Bitcoin system is not for the selfish-interests of the already established financial industry, and it is not sensible for them to deal with regulatory challenges in the long-run. Thus, if the Bitcoin economy attempts to depend on an out dated banking system, it is likely to fail. People spearheading Bitcoin should not focus on interoperability with the traditional banking system. In the case for OTC, it is obvious that the existing financial industry which is quite traditional is opposed to Bitcoin. A completely separate system of exchange is necessary. A network of over-the-counter (OTC) users is necessary. This is when two people meet face-to-face trading Bitcoin for liquid currency. OTC is not sending cash in the mail, wire-transfer, or the like; a widespread network of OTC exchangers is the system strongest against state attacks since banking is skipped. For Bitcoin to thrive, its OTCs deal should be secure and professional. Widespread availability of OTC Bitcoin users is highly necessary for Bitcoin success in the long-run and thus more freedom. For secure and professional OTC, we have to analyze two enemies. These are the state and evil customers (like fraudsters). Secure IT infrastructure and tradecraft are the two techniques that can be applied in dealing with such. For Secure IT for OTCs, one should use email encryption (PGP), disk encryption, IP address anonymization (for example with TOR), and use (multiple) pseudonyms OTC deal basics. He or she should also arrange OTC to completely deal with electronics, for example the use of Bitcoin-otc.com or localbitcoins.com, where you can agree on price and amount beforehand, thus limit transaction size and put yourself in a position where you expose only what you could afford to lose. Thus, it is only the actual meeting only which finalizes the deal, therefore there is no deviation. The use of digital arrangement shield Bitcom customers from state authorities, since there is less evidence and the existing is hard to prove. For the long-term success of Bitcoin, a large OTC ecosystem is needed. Now, we are going to asses in details the importance of Bitcoins (Jason 4). No Third-Party Seizure Due to the numerous redundant copies of the transactions database, no one can get hold of Bitcoins. The most someone can do is compel the user by other avenues, to forward the Bitcoins to someone else. This means that the government is not able to freeze someone’s wealth, therefore the users of Bitcoins have absolute freedom to do as they desire with their money (Fergal & Martin). No Taxes Bitcoin transactions cannot be intercepted by a third party; therefore, there is no possible way to impose taxation system on Bitcoin. The only way to pay a tax is voluntarily, and that would be when someone sends a percentage of the amount being sent as tax (Koch 5). No Tracking No one can trace transactions back to the Bitcoin user, unless the users make their wallet addresses public. The number of Bitcoins is known only to the wallet owners. In the case where the wallet address is made public, a new wallet address is easily generated. Compared to traditional currency systems where third parties have access to personal financial data, Bitcoins greatly increases privacy (Lowenthal 4). No Transaction Costs Bitcoin clients should be kept on motion and connected to other nodes in order to facilitate the sending and receiving of Bitcoins for users. Users will be contributing to the network, and thus there will be sharing of authorizing transactions burden by using Bitcoins. Sharing this work greatly reduces transaction costs, and thus greatly reducing transaction costs (Madrigal). No Risk of “Charge-backs” The transaction cannot be reversed once Bitcoins are sent. This is because the ownership address of Bitcoins will be changed to the new owner, and once changed, it will be impossible to revert. Because it is only the new owner who has the linked private key, only he/she can alter ownership of the coins. This is what makes sure that there is no risk contained during Bitcoin transactions. Bitcoins cannot be stolen It is only the owner who can alter his/her Bitcoins’ ownership address. Bitcoins cannot be stolen unless the culprit has physical access to a user’s computer, thus sending the Bitcoins to their account. As opposed to conventional currency systems, where only a few verification details are needed to get the right of entry to finances, this system requires physical access, thus making it much harder to steal (O'Leary). Whenever discussing Bitcoin, one should always bear in mind these important aspects. During this study of Bitcoins, we should always ensure that we cover each point and avoid residing on any one topic unless the other person is involved. Belief systems are created from a lot of ideas and concepts and in order to express the importance of Bitcoin, it is necessary to illustrate that the system does not present any one incremental advantage, but a genuine smorgasbord of new concepts which have never come across before in history. Bitcoins system is decentralized and free from control No regulations: Consider that a decentralized structure consists of an incorruptible means. This is the first time we have such kind of technology even though the advantages of decentralization might not seem apparent at first. Bitcoins system is always in motion There are neither bank holidays nor weekend breaks. Bitcoin is always in motion as long as the internet is up. Bitcoins is international It has no borders. Bitcoins does not discriminate against or categorize or regulate its users on the basis of nationality or location. Bitcoins have no fees At this very moment, Bitcoin users can send thousands of dollars wherever in the world without incurring any expense. Bitcoins incorporate new privacy models It provides secrecy with merchant sites. It does this only in cases where platforms of trading are presented with a merit or the Bitcoin user voluntarily offers his/her identification for one’s personal information to be viewed. Bitcoin is a 100% transparent system Even though Bitcoin users don’t have to disclose which wallet belongs to them, each and every transaction made in the system is public record open to the world. Bitcoin is divisible Currently, Bitcoin is divisible to about 8 decimal places and perhaps more in the future. Bitcoin makes micro transactions a possibility. In this way, it is not only advancing modern methods but also coming up with new markets which are likely to have a strong impact on society. Bitcoin is secure If for example you had your credit card details been stolen, a malicious hacker is able to withdraw money from your account. However, if you are a Bitcoins user, this is impossible. Yes, there are services which offer fraud protection, but Bitcoins are subsidized by the commercial gains from the client. It uses the most recent encryption technology. Even though underdeveloped merchant sites may not be safe, as a client, you would not blame Visa or Master card for putting your card number in an unsafe site. The concrete Bitcoin procedure is very safe. Bitcoin transfers are fast A Bitcoin user has a payment go through in under an hour, regardless of geographical distance. Bitcoins have no chargebacks Sale of digital goods currently is impossible because of friendly fraud. Since there is no chargeback with Bitcoin, friendly fraud is impossible. Bitcoins is environmentally friendly/efficient Such a market driven infrastructure as Bitcoin guarantees cost savings since users are compelled to compete via algorithmic alteration. Users find many competent ways to process transactions because of monetary incentives from the system. This drives down power usage. Bitcoin mining Most Bitcoin users don't mine, since it is a very competitive business. To get Bitcoins, one has to enter into a mining contract, which is usually relatively expensive (Developers DevZone 10). Hardware Bitcoin mining is done with a graphics card (GPU). Modern graphics cards enable one to use their power to work out certain types of high performance computing problems such as Bitcoin mining (Developers DevZone 18). Software Two basic ways to mine are either as a pool or individually. If on your own, you need to set up your Bitcoin client for JSON-RPC. In the mining pool option, profits are shared amongst pool members and this enables a steadier income (Developers DevZone 22). Bitcoin Exchange The exchange rate of Bitcoins is very sensitive in terms of volatility, which is evident from its fall in June 2011 from about $29 to less than $3 for each BTC in around October the same year (Developers DevZone 25). Conclusion Bitcoin is a system for electronic transactions devoid of counting on trust. It started with the usual framework of coins made from digital signatures, providing strong ownership control, though incomplete and lacking a way of preventing double-spending. Peer-to-peer network which is the use of proof-of-work to record a public history of transactions was proposed to solve this aspect of double-spending; this at once becomes computationally not practical for an attacker to change if honest nodes have power over a majority of CPU strength. The network is vigorous in its amorphous plainness (Storm). With little coordination, these nodes are capable of working all at once. Therefore, because messages are not routed to any specific place and only needs to be sent on a best effort basis, they do not require to be branded. We have provided a preliminary but broad study of the importance of the crypto-monetary phenomenon Bitcoin, whose popularity has overtaken the e-cash systems by far. Bitcoin’s appeal lies in its simplicity, flexibility and decentralization, making it easy to grasp and at the same time hard to sabotage. My conclusion is nuanced: while the instantiation is marred due to its poor parameters, the main design as we have seen is highly capable of sustaining a robust decentralized currency if done right. Works Cited Andy, Greenberg. “Crypto Currency.” Forbes Magazine. Angry, Timothy. Google Engineer Releases Open Source Bitcoin Client. Slashdot, 2011. Web. 20th Nov. 2012. Chirgwin, Richard. US senators draw a bead on Bitcoin. The Register, 2011. Web. 20th Nov. 2012. Developers DevZone. Building eCommerce Applications. Cambridge: O'Reilly Media, Inc., 2011. Print. Fergal, Reid, and Martin Harrigan. An Analysis of Anonymity in the Bitcoin System. Web. 20th Nov. 2012. Jason, Mick. “Inside the Mega-Hack of Bitcoin: the Full Story.” DailyTech. Koch, Rudiger. Bitcoin - a Means for Redistribution of Wealth. Institute for Ethics & Emerging Technologies, 2012. Web. 20th Nov. 2012. Lowenthal, Thomas. Bitcoin: inside the encrypted, peer-to-peer digital currency. Ars Technica, 2011. Web. 20th Nov. 2012. Madrigal, Alexis. “Libertarian Dream? A Site Where You Buy Drugs with Digital Dollars.” The Atlantic Monthly. Web. 20th Nov. 2012. O'Leary, Naomi. Bitcoin, the City traders' anarchic new toy. Reuters, 2011. Web. 20th Nov. 2012. ShadowLife. Necessary conditions for the long-term success of Bitcoin. ShadowLife, 2012. Web. 2nd Dec. 2012. Storm, Darlene. "Bitcoin miners busted? Police confuse Bitcoin power usage for pot farm". Computer World, 2012. Web. 20th Nov. 2012. Read More