The Working of Bitcoins - Essay Example

Insert sur Bitcoin Bitcoin is a virtual digital currency that is designed for public with everyone taking part and uses peer to peer technology for transactions without the involvement of banks. The transactions and issuing of Bitcoins are managed solely by the network of clients that run the Bitcoin software. Bitcoin concept was developed by Satoshi Nakamoto in 2008. He based his idea on the b-money developed by Wei Dai and the Bit gold developed by Nick Szabo (Bradbury 5). This paper discusses Bitcoin and its use in business and personal transactions. The working of Bitcoins The need for e-commerce has led to the development of online payments including the well established card networks and alternate payments including money transfer systems, e-wallets and direct debit systems. These systems are defined in fiat currencies and are centrally administered contrary to the use of Bitcoins. Bitcoins are used to make online transactions anonymously between two parties without the need for third parties such as the banks or visa. Bitcoins can be used for the payment of goods or services and are available in the exchange market. Bitcoin relies on three consensuses that the participants must agree including the agreement on the rules that determine the validity of transactions, agreement of the transactions that have happened in the system and the agreement on the currency that has value (Jackman 13-19) After the Bitcoin software, a wallet program, is installed onto a computer or in a mobile phone, it generates an address for the creation of Bitcoins. They are generated with the use of open-source computer software that solves complex math problems through mining. Mining refers to receiving newly solved blocks and validating them to accept and them to the chain. Solving the blocks requires several trials and error to find a solution with the needed characteristics. The address is used for the transactions including paying and getting paid, but the address is only used once to prevent duplication and double spending. The system prevents double spending, whereby a user may attempt to transfer used Bitcoins, by grouping the transactions into groups known as blocks. They are grouped according to the time of the transaction and the blocks from chains which are available to all users on the system (Bronleewe) The address and private key, which is a long string of numbers and letters give each Bitcoin a unique identity, define each Bitcoin. Transactions are done with the use of the keys and the identities of the transacting parties are availed to each other and also recorded publicly. The Bitcoins have a distinctive digital fingerprint and are characterized by their position in a ledger of all the Bitcoin transactions. The ledger for the transactions is referred to as Blockchain where the Bitcoins are bought as a spot, and their purchase is recorded publicly and permanently. Bitcoin transactions are grouped as chains whereby a previous owner signs using his/her public key and the key that belongs to the next owner. The signatures show the validity of each Bitcoin. Illustration of the Bitcoin transaction retrieved from http://cs.stanford.edu/people/eroberts/cs201/projects/2010-11/DigitalCurrencies/technology/index.html A decentralized system of computer network maintains the block chain and transactions are done digitally without the control of the state or a third party. Transferred is done in person for transaction purposes reducing and eliminating the fees that are involved in traditional money transfers. If a user wishes to transfer Bitcoins, he/she broadcasts a transaction that shows the availability of Bitcoins and the recipients address to the peers who also broadcast the transaction to their peers before reaching the miner. The miner collects the transactions into a block and finds the data needed to hit the target hash before including a coin generating transaction with his/her address for crediting of rewards and fees. He/she then broadcasts the transaction to the peers who also broadcast it their peers. One of the features of Bitcoins is that the transactions are not traceable and thus may be used for illicit payments such as the drugs business. Diagram showing the decentralized system of computer network retrieved from https://bitcoin.org/en/how-it-works. Advantages of using Bitcoins a. Freedom The use of Bitcoin currency for business and personal transactions provides business freedom. Bitcoin has no imposed limits, boundaries or bank holidays and allows Individuals and businesses to be in complete control of their money since there are no third parties involved in the transaction. The freedom and full control of Bitcoin money enable both companies and individuals to send and receive money from anywhere across the globe at any time. b. Tax free Processing of Bitcoin transactions requires the companies or individuals to pay little or no fees though they may include a small fee to receive priority processing that is needed for quick confirmations of transactions by the Bitcoin network. Quick confirmations are needed if urgent payments are to made, a feature that is not available with the traditional money systems such as the banks. Also, there are merchant processors who are available on a daily basis to help merchants process their transactions, convert Bitcoins to fiat currency and deposit the funds to each merchants bank account. Merchant processors transact and deposit on behalf of the merchants at relatively lower fees than it is available with the credit card payment systems or PayPal. c. Reduced risks for merchants Bitcoin transactions are secure since they are required to be PCI compliant (Payment Industry Card Data Security Standard) and do not include individuals or business sensitive information. The anonymity protects the companies and individuals from losses that may cause by fraudulent chargebacks. They are also irreversible; once the transaction has been made, the ownership address is transferred to the new owner who now has the private key that is required to change the ownership of the coins. The use of a private key ensures that there are minimal or no risks involved in the transaction and businesses or individuals can advance to new markets where fraudulent rates are high or credit cards are not used. d. Security and control The control of transactions lies within the owner including the companies and individuals. The unlimited control protects users from forced and unwanted transactions by the merchants. The transactions do not attract unwanted charges that are common with other payment methods such as maintenance fees. Transactions can also be made without the need for personal information that can be used to steal money. Traditional money systems require only a few verification details that are needed to gain access and control the finances. Physical access is required to gain control of Bitcoin finances, which makes it hard to steal. Bitcoin transactions are not traceable unless the individuals or business publicize their Bitcoin addresses which make it hard for third parties or governments to track the transactions. After a wallet address has been publicized, new address can be generated improving the privacy and security of the transaction as compared to the traditional payment systems. Information about a users worth is not readily available, and governments are not in a position to freeze an individuals or businesses wealth. e. Transparency Bitcoin transactions are transparent and vital information regarding the supply of the Bitcoin money is readily available in the block chain for individuals and business to confirm and use it at their convenience. The security of Bitcoin is cryptographic, and no organization or merchant can manipulate the transactions (Davidson). Disadvantages of using Bitcoins a. Volatility The number of Bitcoins that are in circulation and the percentage of individuals and businesses using Bitcoins is relatively small compared to necessary proportions. The companies have little business activity to effect a change in the price of the Bitcoin currency. The currency is new and is yet to be fully adopted in all business transactions. The currency fluctuates with demand causing sites that accept Bitcoins to continuously change prices, which causes confusions especially when refunds are to be issued. Its volatility will reduce with the Bitcoin markets as the technology grows. There is no central authority to govern the minimum valuation of Bitcoins and thus offers no valuation degree. b. Low degree of acceptance Bitcoin currency is not yet widely accepted as a medium of exchange although companies and individuals are continuously accepting it for the benefits involved. The currency has only been adopted by small numbers of online merchants reducing the feasibility to completely rely on it as a currency. Governments may force merchants not to use Bitcoins to ensure that transactions can be tracked since illegal companies have resorted to using the Bitcoin currency for its benefits of being untraceable. The currency is not available in physical form, and there is not available a universal system for conversion of Bitcoin currency to other currencies, which makes it hard to be used in physical stores (Gregory 105). c. An ongoing development The Bitcoin exchange system is an ongoing development, which is at its beta phase with most of its features still in active development. New features and tools are continuously being added to improve the accessibility and security in using the currency. It poses the risks of uncertainty since the system may have unexploited flaws that merchants take advantage of when such flaws are found (Barty). There is a risk of losing Bitcoins if the hard drive crashes or the wallet file gets corrupted by a virus leading to bankruptcy of a person or business. Also, there is the lack of awareness and understanding of Bitcoins and how they work. Many people and companies are unaware of the existence of digital currencies including Bitcoins and thus networking, and education is needed on the use of Bitcoins in transactions. The future of Bitcoin use in business and personal transactions is uncertain though the currency holds the potential to uplift the lives of people globally if adopted by all nations. The adoption would lower the barriers of trade and create a common international market whereby individuals would trade without the need to exchange currency. Lose of Bitcoins due to crashing of the hard drive or data corruption by a virus may be eliminated by creating regular backups of the wallet and storing in multiple locations including removable media and online backup. Also, wide use of Bitcoin currency for business and personal transactions creates a potential for the rise of illegal markets and thus systems need to be developed for tracking of transactions that would then make Bitcoin similar to the traditional currencies. The alleged benefits of privacy rely on the fact that the government has not set up tools for spying on the Bitcoin users (Bradbury 6-8) Works cited Barty, Andrew. Bitcoin the currency of the future: Collection of useful information, secrets and strategies. Michigan: CM, 2014.Web. 24 Apr. 2014. Bradbury, Danny. "The problem with Bitcoin." Computer Fraud & Security 2013.11 (2013): 5-8. Science direct. Web. 24 Apr. 2014. < http://dx.doi.org/10.1016/S1361-3723(13)70101-5> Bronleewe, David A. Bitcoin NFC. Austin, Tex.: University of Texas, 2011. Web. 24 Apr. 2014. < http://repositories.lib.utexas.edu/bitstream/handle/2152/ETD-UT-2011-08- 4150/BRONLEEWE-MASTERS-REPORT.pdf?sequence=1> Davidson, John, and Elda Watulo. How to Make Money Online With Digital Currency Bitcoins. : JD-Biz Corp Publishing, 2013.Web. 24 Apr. 2014. < http://books.google.com> Gregory, Mark A., and David Glance. "Internet." Security and the networked society. Cham: Springer, 2013.103-105.Web. 24 Apr. 2014. Hobson, Dominic. "What is Bitcoin?." XRDS: Crossroads, The ACM Magazine for Students 20.1 (2013): 40. Digital library. Web. 24 Apr. 2014. Jackman, J.T. "How they work." Bitcoin for Beginners: How to Buy Bitcoins, Sell Bitcoins, and Invest in Bitcoins. London: Minoan Marketing, 2014.13-19.Web. < http://books.google.com> Kula, P. "What is Bitcoin" Getting started with Bitcoins. London: John Stevenson, 2013.1- 12.Web. 24 Apr. 2014. < http://books.google.com>  Read More