Bitcoin (₿) is a decentralized digital currency, without
a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.[7] Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.[8] The currency began use in 2009[9] when its implementation was released as open-source software.[6]:ch. 1
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services,[10] but the real-world value of the coins is extremely volatile.[11] Research produced by the University of Cambridge estimated that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.[12] Users choose to participate in the digital currency for a number of reasons: ideologies such as commitment to anarchism, decentralization and libertarianism, convenience, using the currency as an investment and pseudonymity of transactions. Increased use has led to a desire among governments for regulation in order to tax, facilitate legal use in trade and for other reasons (such as investigations for money laundering and price manipulation).
Bitcoin has been criticized for its use in illegal transactions, the large amount of electricity (and thus carbon footprint) used by mining, price volatility, and thefts from exchanges. Some economists and commentators have characterized it as a speculative bubble at various times. Bitcoin has also been used as an investment, although several regulatory agencies have issued investor alerts about bitcoin.[11][13][14]
The word bitcoin was defined in a white paper published on 31 October 2008.[4][15] It is a compound of the words bit and coin.[16] No uniform convention for bitcoin capitalization exists; some sources use Bitcoin, capitalized, to refer to the technology and network and bitcoin, lowercase, for the unit of account.[17] The Wall Street Journal,[18] The Chronicle of Higher Education,[19] and the Oxford English Dictionary[16] advocate the use of lowercase bitcoin in all cases.
Creation
The domain name bitcoin.org was registered on 18 August 2008.[20] On 31 October 2008, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System[4] was posted to a cryptography mailing list.[21] Nakamoto implemented the bitcoin software as open-source code and released it in January 2009.[22][23][9] Nakamoto's identity remains unknown.[8]
On 3 January 2009, the bitcoin network was created when Nakamoto mined the starting block of the chain, known as the genesis block.[24][25] Embedded in the coinbase of this block was the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".[9] This note references a headline published by The Times and has been interpreted as both a timestamp and a comment on the instability caused by fractional-reserve banking.[26]:18
The receiver of the first bitcoin transaction was cypherpunk Hal Finney, who had created the first reusable proof-of-work system (RPoW) in 2004.[27] Finney downloaded the bitcoin software on its release date, and on 12 January 2009 received ten bitcoins from Nakamoto.[28][29] Other early cypherpunk supporters were creators of bitcoin predecessors: Wei Dai, creator of b-money, and Nick Szabo, creator of bit gold.[24] In 2010, the first known commercial transaction using bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John's pizzas for ₿10,000.[30]
Blockchain analysts estimate that Nakamoto had mined about one million bitcoins[31] before disappearing in 2010 when he handed the network alert key and control of the code repository over to Gavin Andresen. Andresen later became lead developer at the Bitcoin Foundation.[32][33] Andresen then sought to decentralize control. This left opportunity for controversy to develop over the future development path of bitcoin, in contrast to the perceived authority of Nakamoto's contributions.[34][33]
2011–2012
After early "proof-of-concept" transactions, the first major users of bitcoin were black markets, such as Silk Road. During its 30 months of existence, beginning in February 2011, Silk Road exclusively accepted bitcoins as payment, transacting 9.9 million in bitcoins, worth about $214 million.[35]:222
In 2011, the price started at $0.30 per bitcoin, growing to $5.27 for the year. The price rose to $31.50 on 8 June. Within a month, the price fell to $11.00. The next month it fell to $7.80, and in another month to $4.77.[36]
In 2012, bitcoin prices started at $5.27, growing to $13.30 for the year.[36] By 9 January the price had risen to $7.38, but then crashed by 49% to $3.80 over the next 16 days. The price then rose to $16.41 on 17 August, but fell by 57% to $7.10 over the next three days.[37]
The Bitcoin Foundation was founded in September 2012 to promote bitcoin's development and uptake.[38]
On 1 November 2011, the reference implementation Bitcoin-Qt version 0.5.0 was released. It introduced a front end that used the Qt user interface toolkit.[39] The software previously used Berkeley DB for database management. Developers switched to LevelDB in release 0.8 in order to reduce blockchain synchronization time.[citation needed] The update to this release resulted in a minor blockchain fork on 11 March 2013. The fork was resolved shortly afterwards.[citation needed] Seeding nodes through IRC was discontinued in version 0.8.2. From version 0.9.0 the software was renamed to Bitcoin Core. Transaction fees were reduced again by a factor of ten as a means to encourage microtransactions.[citation needed] Although Bitcoin Core does not use OpenSSL for the operation of the network, the software did use OpenSSL for remote procedure calls. Version 0.9.1 was released to remove the network's vulnerability to the Heartbleed bug.[citation needed]
2013–2016
In 2013, prices started at $13.30 rising to $770 by 1 January 2014.[36]
In March 2013 the blockchain temporarily split into two independent chains with different rules due to a bug in version 0.8 of the bitcoin software. The two blockchains operated simultaneously for six hours, each with its own version of the transaction history from the moment of the split. Normal operation was restored when the majority of the network downgraded to version 0.7 of the bitcoin software, selecting the backwards-compatible version of the blockchain. As a result, this blockchain became the longest chain and could be accepted by all participants, regardless of their bitcoin software version.[40] During the split, the Mt. Gox exchange briefly halted bitcoin deposits and the price dropped by 23% to $37[40][41] before recovering to the previous level of approximately $48 in the following hours.[42]
The US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin, classifying American bitcoin miners who sell their generated bitcoins as Money Service Businesses (MSBs), that are subject to registration or other legal obligations.[43][44][45]
In April, exchanges BitInstant and Mt. Gox experienced processing delays due to insufficient capacity[46] resulting in the bitcoin price dropping from $266 to $76 before returning to $160 within six hours.[47] The bitcoin price rose to $259 on 10 April, but then crashed by 83% to $45 over the next three days.[37]
On 15 May 2013, US authorities seized accounts associated with Mt. Gox after discovering it had not registered as a money transmitter with FinCEN in the US.[48][49] On 23 June 2013, the US Drug Enforcement Administration listed ₿11.02 as a seized asset in a United States Department of Justice seizure notice pursuant to 21 U.S.C. § 881. This marked the first time a government agency had seized bitcoin.[50] The FBI seized about ₿30,000[51] in October 2013 from the dark web website Silk Road, following the arrest of Ross William Ulbricht.[52][53][54] These bitcoins were sold at blind auction by the United States Marshals Service to venture capital investor Tim Draper.[51] Bitcoin's price rose to $755 on 19 November and crashed by 50% to $378 the same day. On 30 November 2013, the price reached $1,163 before starting a long-term crash, declining by 87% to $152 in January 2015.[37]
On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins.[55] After the announcement, the value of bitcoins dropped,[56] and Baidu no longer accepted bitcoins for certain services.[57] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[58]
In 2014, prices started at $770 and fell to $314 for the year.[36] On 30 July 2014, the Wikimedia Foundation started accepting donations of bitcoin.[59]
In 2015, prices started at $314 and rose to $434 for the year. In 2016, prices rose and climbed up to $998 by 1 January 2017.[36]
Release 0.10 of the software was made public on 16 February 2015. It introduced a consensus library which gave programmers easy access to the rules governing consensus on the network. In version 0.11.2 developers added a new feature which allowed transactions to be made unspendable until a specific time in the future.[60] Bitcoin Core 0.12.1 was released on 15 April 2016, and enabled multiple soft forks to occur concurrently.[61] Around 100 contributors worked on Bitcoin Core 0.13.0 which was released on 23 August 2016.
In July 2016, the CheckSequenceVerify soft fork activated.[62]
In October 2016, Bitcoin Core's 0.13.1 release featured the "Segwit" soft fork that included a scaling improvement aiming to optimize the bitcoin blocksize.[citation needed] The patch which was originally finalised in April, and 35 developers were engaged to deploy it.[citation needed] This release featured Segregated Witness (SegWit) which aimed to place downward pressure on transaction fees as well as increase the maximum transaction capacity of the network.[63][non-primary source needed] The 0.13.1 release endured extensive testing and research leading to some delays in its release date.[citation needed] SegWit prevents various forms of transaction malleability.[64][non-primary source needed]
2017–2019
On 15 July 2017, the controversial Segregated Witness [SegWit] software upgrade was approved ("locked-in"). Segwit was intended to support the Lightning Network as well as improve scalability.[65] SegWit was subsequently activated on the network on 24 August 2017. The bitcoin price rose almost 50% in the week following SegWit's approval.[65] On 21 July 2017, bitcoin was trading at $2,748, up 52% from 14 July 2017's $1,835.[65] Supporters of large blocks who were dissatisfied with the activation of SegWit forked the software on 1 August 2017 to create Bitcoin Cash, becoming one of many forks of bitcoin such as Bitcoin Gold.[66]
Prices started at $998 in 2017 and rose to $13,412.44 on 1 January 2018,[36] after reaching its all-time high of $19,783.06 on 17 December 2017.[67]
China banned trading in bitcoin, with first steps taken in September 2017, and a complete ban that started on 1 February 2018. Bitcoin prices then fell from $9,052 to $6,914 on 5 February 2018.[37] The percentage of bitcoin trading in the Chinese renminbi fell from over 90% in September 2017 to less than 1% in June 2018.[68]
Throughout the rest of the first half of 2018, bitcoin's price fluctuated between $11,480 and $5,848. On 1 July 2018, bitcoin's price was $6,343.[69][70] The price on 1 January 2019 was $3,747, down 72% for 2018 and down 81% since the all-time high.[69][71]
In September 2018, an anonymous party discovered and reported an invalid-block denial-of-server vulnerability to developers of Bitcoin Core, Bitcoin ABC and Bitcoin Unlimited. Further analysis by bitcoin developers showed the issue could also allow the creation of blocks violating the 21 million coin limit and CVE-2018-17144 was assigned and the issue resolved.[72][non-primary source needed]
Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges, including thefts from Coincheck in January 2018, Bithumb in June, and Bancor in July. For the first six months of 2018, $761 million worth of cryptocurrencies was reported stolen from exchanges.[73] Bitcoin's price was affected even though other cryptocurrencies were stolen at Coinrail and Bancor as investors worried about the security of cryptocurrency exchanges.[74][75][76] In September 2019 the Intercontinental Exchange (the owner of the NYSE) began trading of bitcoin futures on its exchange called Bakkt.[77] Bakkt also announced that it would launch options on bitcoin in December 2019.[78] In December 2019, YouTube removed bitcoin and cryptocurrency videos, but later restored the content after judging they had "made the wrong call."[79]
In February 2019, Canadian cryptocurrency exchange Quadriga Fintech Solutions failed with approximately $200 million missing.[80] By June 2019 the price had recovered to $13,000.[81]
2020–present
On 13 March 2020, bitcoin fell below $4000 during a broad market selloff, after trading above $10,000 in February 2020.[82] On 11 March 2020, 281,000 bitcoins were sold, held by owners for only thirty days.[81] This compared to ₿4,131 that had laid dormant for a year or more, indicating that the vast majority of the bitcoin volatility on that day was from recent buyers. During the week of 11 March 2020, cryptocurrency exchange Kraken experienced an 83% increase in the number of account signups over the week of bitcoin's price collapse, a result of buyers looking to capitalize on the low price.[81] These events were attributed to the onset of the COVID-19 pandemic.
In August 2020, MicroStrategy invested $250 million in bitcoin as a treasury reserve asset.[83] In October 2020, Square, Inc. placed approximately 1% of total assets ($50 million) in bitcoin.[84] In November 2020, PayPal announced that US users could buy, hold, or sell bitcoin.[85] On 30 November 2020, the bitcoin value reached a new all-time high of $19,860, topping the previous high of December 2017.[86] Alexander Vinnik, founder of BTC-e, was convicted and sentenced to five years in prison for money laundering in France while refusing to testify during his trial.[87] In December 2020 Massachusetts Mutual Life Insurance Company announced a bitcoin purchase of USD $100 million, or roughly 0.04% of its general investment account.[88]
On 19 January 2021, Elon Musk placed the handle #Bitcoin in his Twitter profile, tweeting "In retrospect, it was inevitable", which caused the price to briefly rise about $5000 in an hour to $37,299.[89] On 25 January 2021 Microstrategy announced that it continued to buy bitcoin and as of the same date it had holdings of ₿70,784 worth $2.38 billion.[90] On 8 February 2021 Tesla's announcement of a bitcoin purchase of USD $1.5 billion and the plan to start accepting bitcoin as payment for vehicles, pushed the bitcoin price to $44,141.[91] On 18 February 2021, Elon Musk stated that "owning bitcoin was only a little better than holding conventional cash, but that the slight difference made it a better asset to hold".[92]
In September 2020, the Canton of Zug, Switzerland, announced to start to accepting tax payments in bitcoin by February 2021.[93][94]
In June 2021, the Legislative Assembly of El Salvador voted legislation to make Bitcoin legal tender in El Salvador.[a][101][98][102] The law will take effect on September 7.[103]
In the same month, a bitcoin network software upgrade called "Taproot", which adds support for Schnorr signatures, and improved functionality of Smart contracts and Lightning Network, was approved with the actual change to the network scheduled for November 2021.[104]
Transactions
Transactions are defined using a Forth-like scripting language.[6]:ch. 5 Transactions consist of one or more inputs and one or more outputs. When a user sends bitcoins, the user designates each address and the amount of bitcoin being sent to that address in an output. To prevent double spending, each input must refer to a previous unspent output in the blockchain.[120] The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. Since transactions can have multiple outputs, users can send bitcoins to multiple recipients in one transaction. As in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer.[120] Any input satoshis not accounted for in the transaction outputs become the transaction fee.[120]
Though transaction fees are optional, miners can choose which transactions to process and prioritize those that pay higher fees.[120] Miners may choose transactions based on the fee paid relative to their storage size, not the absolute amount of money paid as a fee. These fees are generally measured in satoshis per byte (sat/b). The size of transactions is dependent on the number of inputs used to create the transaction, and the number of outputs.[6]:ch. 8
The blocks in the blockchain were originally limited to 32 megabytes in size. The block size limit of one megabyte was introduced by Satoshi Nakamoto in 2010. Eventually the block size limit of one megabyte created problems for transaction processing, such as increasing transaction fees and delayed processing of transactions.[121] Andreas Antonopoulos has stated Lightning Network is a potential scaling solution and referred to lightning as a second layer routing network.[6]:ch. 8
Mining
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Mining is a record-keeping service done through the use of computer processing power.[g] Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes.[114] Each block contains a SHA-256 cryptographic hash of the previous block,[114] thus linking it to the previous block and giving the blockchain its name.[6]:ch. 7[114]
To be accepted by the rest of the network, a new block must contain a proof-of-work (PoW).[114] The system used is based on Adam Back's 1997 anti-spam scheme, Hashcash.[130][failed verification][4] The PoW requires miners to find a number called a nonce, such that when the block content is hashed along with the nonce, the result is numerically smaller than the network's difficulty target.[6]:ch. 8 This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try many different nonce values (usually the sequence of tested values is the ascending natural numbers: 0, 1, 2, 3, ...[6]:ch. 8) before meeting the difficulty target.
Every 2,016 blocks (approximately 14 days at roughly 10 min per block), the difficulty target is adjusted based on the network's recent performance, with the aim of keeping the average time between new blocks at ten minutes. In this way the system automatically adapts to the total amount of mining power on the network.[6]:ch. 8 Between 1 March 2014 and 1 March 2015, the average number of nonces miners had to try before creating a new block increased from 16.4 quintillion to 200.5 quintillion.[131]
The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely hard, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted.[132] As new blocks are mined all the time, the difficulty of modifying a block increases as time passes and the number of subsequent blocks (also called confirmations of the given block) increases.[114]
Computing power is often bundled together by a Mining pool to reduce variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block. This payment depends on the amount of work an individual miner contributed to help find that block.[133]
Decentralization
Bitcoin is decentralized thus:[7]
- Bitcoin does not have a central authority.[7]
- There is no central server; the bitcoin network is peer-to-peer.[9]
- There is no central storage; the bitcoin ledger is distributed.[152]
- The ledger is public; anybody can store it on their computer.[6]:ch. 1
- There is no single administrator;[7] the ledger is maintained by a network of equally privileged miners.[6]:ch. 1
- Anybody can become a miner.[6]:ch. 1
- The additions to the ledger are maintained through competition. Until a new block is added to the ledger, it is not known which miner will create the block.[6]:ch. 1
- The issuance of bitcoins is decentralized. They are issued as a reward for the creation of a new block.[116]
- Anybody can create a new bitcoin address (a bitcoin counterpart of a bank account) without needing any approval.[6]:ch. 1
- Anybody can send a transaction to the network without needing any approval; the network merely confirms that the transaction is legitimate.[153]:32
Conversely, researchers have pointed out at a "trend towards centralization". Although bitcoin can be sent directly from user to user, in practice intermediaries are widely used.[35]:220–222 Bitcoin miners join large mining pools to minimize the variance of their income.[35]:215, 219–222[154]:3[155] Because transactions on the network are confirmed by miners, decentralization of the network requires that no single miner or mining pool obtains 51% of the hashing power, which would allow them to double-spend coins, prevent certain transactions from being verified and prevent other miners from earning income.[156] As of 2013 just six mining pools controlled 75% of overall bitcoin hashing power.[156] In 2014 mining pool Ghash.io obtained 51% hashing power which raised significant controversies about the safety of the network. The pool has voluntarily capped their hashing power at 39.99% and requested other pools to act responsibly for the benefit of the whole network.[157] Around the year 2017, over 70% of the hashing power and 90% of transactions were operating from China.[158]
According to researchers, other parts of the ecosystem are also "controlled by a small set of entities", notably the maintenance of the client software, online wallets and simplified payment verification (SPV) clients.[156]
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