Bitcoin

Official logo of Bitcoin
Denominations
Plural	Bitcoins
Symbol	₿ (Unicode: U+20BF ₿ BITCOIN SIGN)[1]
Code	BTC,[a] XBT[b]
Precision	10−8
Subunits
1⁄1000	Millibitcoin
1⁄1000000	Microbitcoin
1⁄100000000	Satoshi[2]
Development
Original author(s)	Satoshi Nakamoto
White paper	"Bitcoin: A Peer-to-Peer Electronic Cash System"
Implementation(s)	Bitcoin Core
Initial release	0.1.0 / 9 January 2009 (15 years ago) (2009-01-09)
Latest release	25.1 / 19 October 2023 (7 months ago) (2023-10-19)[3]
Code repository	github.com/bitcoin/bitcoin
Development status	Active
Written in	C++
Source model	Free and open-source software
License	MIT License
Ledger
Ledger start	3 January 2009 (15 years ago) (2009-01-03)
Timestamping scheme	Proof-of-work (partial hash inversion)
Hash function	SHA-256 (two rounds)
Issuance schedule	Decentralized (block reward) Initially ₿50 per block, halved every 210,000 blocks
Block reward	₿6.25 (As of 2023)
Block time	10 minutes
Circulating supply	₿18,925,000 (As of 10 January 2022)
Supply limit	₿21,000,000[c]
Valuation
Exchange rate	Floating
Demographics
Official user(s)	El Salvador[4]
Website
Website	bitcoin.org

Bitcoin (abbreviation: BTC^[a] or XBT;^[b] sign: ₿) is a decentralized cryptocurrency. Nodes in the bitcoin network verify transactions through cryptography and record them in a public distributed ledger called a blockchain. Based on a free market ideology, bitcoin was invented in 2008 by Satoshi Nakamoto, an unknown person.^[5]

Use of bitcoin as a currency began in 2009,^[6] with the release of its open-source implementation.^{[7]: ch. 1} In 2021, El Salvador adopted it as legal tender.^[4] Still, bitcoin is rarely used for transactions with merchants and is mostly seen as an investment. For this reason, it has been widely described as an economic bubble.^[8]

As bitcoin is pseudonymous, its use by criminals has attracted the attention of regulators, leading to its ban by 51 countries as of 2021^[update].^[9] The environmental effects of bitcoin are also substantial.^[10] Its proof-of-work algorithm for bitcoin mining is computationally difficult and requires increasing quantities of electricity,^[11] so that, as of 2022^[update], bitcoin is estimated to be responsible for 0.2% of world greenhouse gas emissions.^[12]

Design

Units and divisibility

The unit of account of the bitcoin system is the bitcoin. Currency codes for representing bitcoin are BTC^[a] and XBT.^[b] Its Unicode character is ₿.^[1] One bitcoin is divisible to eight decimal places.^{[7]: ch. 5} Units for smaller amounts of bitcoin are the millibitcoin (mBTC), equal to 1⁄1000 bitcoin, and the satoshi (sat), which is the smallest possible division, named in homage to bitcoin's creator, representing 1⁄100000000 (one hundred millionth) bitcoin.^[2] 100,000 satoshis are one mBTC.^[16]

No uniform capitalization convention exists; some sources use Bitcoin, capitalized, to refer to the technology and network, and bitcoin, lowercase, for the unit of account.^[17] The Oxford English Dictionary advocates the use of lowercase bitcoin in all cases.^[18]

Blockchain

As a decentralized system, bitcoin is designed to operate without a central authority or single administrator.^[19] This is accomplished through a specialized distributed ledger called a blockchain that records bitcoin transactions.^[20]

The blockchain is implemented as an ordered list of blocks. Each block contains a SHA-256 hash of the previous block,^[20] "chaining" them in chronological order.^{[7]: ch. 7 [20]} The blockchain is maintained by a peer-to-peer network.^{[21]: 215–219} Individual blocks, public addresses, and transactions within blocks are public information, and can be examined using a blockchain explorer.^[22]

Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast them to other nodes. To achieve independent verification of the chain of ownership, each network node stores its own copy of the blockchain.^[23] Every 10 minutes on average, a new block is created, added to the blockchain, and quickly shared with all nodes without central oversight. This allows bitcoin software to determine if and when a particular bitcoin was spent, ensuring it is spent only once. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but as a digital ledger, bitcoins only exist by virtue of the blockchain – they are represented by the unspent outputs of transactions.^{[7]: ch. 5}

Addresses and transactions

In the blockchain, bitcoins are linked to specific addresses that are hashes of a public key. Creating an address involves generating a random private key and then computing the corresponding address. This process is almost instant, but the reverse (finding the private key for a given address) is nearly impossible.^{[7]: ch. 4} Publishing a bitcoin address does not risk its private key, and it is extremely unlikely to accidentally generate a used key with funds. To use bitcoins, owners need their private key to digitally sign transactions, which are verified by the network using the public key, keeping the private key secret.^{[7]: ch. 5}

Transactions are defined using a Forth-like scripting language.^{[7]: ch. 5} Transactions consist of one or more inputs and one or more outputs. When a user sends bitcoins, they designate each address and the amount of bitcoin being sent to that address in an output, allowing users to send bitcoins to multiple recipients in one transaction. To prevent double-spending, each input must refer to a previous unspent output in the blockchain.^{[24][better source needed]} The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. As in a cash transaction, the sum of inputs can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer.^[24] Any input satoshis not accounted for in the transaction outputs become the transaction fee.^[24]

Losing a private key means losing access to the bitcoins, with no other proof of ownership accepted by the network.^[21] For instance, in 2013, a user lost ₿7,500, valued at $7.5 million, by accidentally discarding a hard drive with the private key.^[25] It is estimated that around 20% of all bitcoins are lost.^[26] The private key must also be kept secret as its exposure, such as through a data breach, can lead to theft of the associated bitcoins.^{[7]: ch. 10 [27]} As of December 2017^[update], approximately ₿980,000 had been stolen from cryptocurrency exchanges.^[28]

Mining

The mining process in Bitcoin involves maintaining the blockchain through computer processing power. Miners group and broadcast new transactions into blocks, which are then verified by the network.^[20] Each block must contain a proof-of-work (PoW) to be accepted,^[20] involving finding a nonce number that, combined with the block content, produces a hash numerically smaller than the network's difficulty target.^{[7]: ch. 8} This PoW is simple to verify but hard to generate, requiring many attempts.^{[7]: ch. 8}

The difficulty of generating a block is deterministically adjusted based on the mining power on the network by changing the difficulty target, which is recalibrated every 2,016 blocks (approximately two weeks) to maintain an average time of ten minutes between new blocks. The process requires significant computational power and specialized hardware.^{[7]: ch. 8 [29]}

Miners who successfully find a new block can collect transaction fees from the included transactions and a set reward in bitcoins.^[30] To claim this reward, a special transaction called a coinbase is included in the block, with the miner as the payee. All bitcoins in existence have been created through this type of transaction.^{[7]: ch. 8} This reward is halved every 210,000 blocks until ₿21 million^[c], with new bitcoin issuance slated to end around 2140. Afterward, miners will only earn from transaction fees. These fees are determined by the transaction's size and the amount of data stored, measured in satoshis per byte.^{[31][24][7]: ch. 8}

The proof-of-work system and the chaining of blocks make blockchain modifications very difficult, as altering one block requires changing all subsequent blocks. As more blocks are added, modifying older blocks becomes increasingly challenging.^[32][20]

Privacy and fungibility

Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public. In addition, transactions can be linked to individuals and companies through "idioms of use" (e.g., transactions that spend coins from multiple inputs indicate that the inputs may have a common owner) and corroborating public transaction data with known information on owners of certain addresses.^[33] Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, may be required by law to collect personal information.^[34] To heighten financial privacy, a new bitcoin address can be generated for each transaction.^[35]

While the Bitcoin network treats each bitcoin the same, thus establishing the basic level of fungibility, applications and individuals who use the network are free to break that principle. For instance, wallets and similar software technically handle all bitcoins equally, none is different from another. Still, the history of each bitcoin is registered and publicly available in the blockchain ledger, and that can allow users of chain analysis to refuse to accept bitcoins coming from controversial transactions.^{[citation needed]} For example, in 2012, Mt. Gox froze accounts of users who deposited bitcoins that were known to have just been stolen.^[36]

Wallets

Screenshot of Bitcoin Core.

A paper wallet with the address as a QR code while the private key is hidden.

A hardware wallet which processes bitcoin transactions without exposing private keys.

Bitcoin wallets were the first cryptocurrency wallets, enabling users to store the information necessary to transact bitcoins.^{[37][7]: ch. 1, glossary} The first wallet program, simply named Bitcoin, and sometimes referred to as the Satoshi client, was released in 2009 by Nakamoto as open-source software.^[6] Bitcoin Core is among the best known clients. Forks of Bitcoin Core exist such as Bitcoin Unlimited.^[38] Wallets can be full clients, with a full copy of the blockchain to check the validity of mined blocks,^{[7]: ch. 1} or lightweight clients, just to send and receive transactions without a local copy of the entire blockchain.^[39] Third-party internet services called online wallets store users' credentials on their servers, making them susceptible of hacks.^[40] "Cold storage" protects bitcoins from such hacks by keeping private keys offline, either through specialized hardware wallets or paper printouts.^{[41][7]: ch. 4}

History

Background

Before bitcoin, several digital cash technologies were released, starting with David Chaum's ecash in the 1980s.^[42] The idea that solutions to computational puzzles could have some value was first proposed by cryptographers Cynthia Dwork and Moni Naor in 1992.^[42] The concept was independently rediscovered by Adam Back who developed Hashcash, a proof-of-work scheme for spam control in 1997.^[42] The first proposals for distributed digital scarcity-based cryptocurrencies came from cypherpunks Wei Dai (b-money) and Nick Szabo (bit gold) in 1998.^[43] In 2004, Hal Finney developed the first currency based on reusable proof-of-work.^[44] These various attempts were not successful:^[42] Chaum's concept required centralized control and no banks wanted to sign on, Hashcash had no protection against double-spending, while b-money and bit gold were not resistant to Sybil attacks.^[42]

2008–2009: Creation

External image
Cover page of The Times 3 January 2009 showing the headline used in the genesis block

Bitcoin logos made by Satoshi Nakamoto in 2009 (left) and 2010 (right) depict bitcoins as gold tokens.

The domain name bitcoin.org was registered on 18 August 2008.^[45] On 31 October 2008, a link to a white paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list.^[46] Nakamoto implemented the bitcoin software as open-source code and released it in January 2009.^[6] Nakamoto's identity remains unknown.^[5] All individual components of bitcoin originated in earlier academic literature.^[42] Nakamoto's innovation was their complex interplay resulting in the first decentralized, Sybil resistant, Byzantine fault tolerant digital cash system.^[42] Nakamoto's paper was not peer-reviewed and initially ignored by academics, who argued that it could not work, based on theoretical models, even though it was working in practice.^[42]

On 3 January 2009, the bitcoin network was created when Nakamoto mined the starting block of the chain, known as the genesis block.^[47] Embedded in this block was the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks", which is the date and headline of an issue of The Times newspaper.^[6] Nine days later, Hal Finney received the first bitcoin transaction: ten bitcoins from Nakamoto.^[48] Wei Dai and Nick Szabo were also early supporters.^[47] In 2010, the first known commercial transaction using bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John's pizzas for ₿10,000.^[49]

2010–2012: Early growth

Blockchain analysts estimate that Nakamoto had mined about one million bitcoins^[50] 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,^[51][52] an organization founded in September 2012 to promote bitcoin.^[53]

After early "proof-of-concept" transactions, the first major users of bitcoin were black markets, such as the dark web Silk Road. During its 30 months of existence, beginning in February 2011, Silk Road exclusively accepted bitcoins as payment, transacting ₿9.9 million, worth about $214 million.^[21]: 222

2013–2014: First regulatory actions

In March 2013, 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 services businesses, subject to registration and other legal obligations.^[54] In May 2013, US authorities seized the exchange Mt. Gox after discovering it had not registered.^[55]

In June 2013, the US Drug Enforcement Administration seized ₿11.02 from a man attempting to use them to by illegal substances. This marked the first time a government agency had seized bitcoins.^[56] The FBI seized about ₿30,000 in October 2013 from Silk Road, following the arrest of its founder Ross Ulbricht.^[57]

In December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoin.^[58] After the announcement, the value of bitcoin dropped,^[59] and Baidu no longer accepted bitcoins for certain services.^[60] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.^[61]

2015–2019

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.^[62] In August 2017, the SegWit software upgrade was activated. Segwit was intended to support the Lightning Network as well as improve scalability. The bitcoin price rose almost 50% in the week following SegWit's approval.^[63] SegWit opponents, who supported larger blocks as a scalability solution, forked to create Bitcoin Cash, one of many forks of bitcoin.^[64]

In February 2018, China imposed a complete ban on Bitcoin trading. Bitcoin price then crashed.^[65] The percentage of bitcoin trading in the Chinese renminbi fell from over 90% in September 2017 to less than 1% in June 2018.^[66] During the same year, Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges.^[67] In September 2019, the Intercontinental Exchange began trading of bitcoin futures on its exchange Bakkt.^[68]

2020–present

In 2020, some major companies and institutions started to acquire bitcoin: MicroStrategy invested US$250 million in bitcoin as a treasury reserve asset,^[69] Square, Inc. invested US$50 million,^[70] and the Massachusetts Mutual Life Insurance Company purchased US$100 million worth of bitcoin.^[71] In November 2020, PayPal announced that US users could buy, hold, or sell bitcoin.^[72]

In November 2021, the Taproot network software upgrade was activated, adding support for Schnorr signatures, improved functionality of smart contracts and Lightning Network.^[73] Before, Bitcoin only used a custom elliptic curve with the ECDSA algorithm to produce signatures.^[74]: 101 In September 2021, Bitcoin became legal tender in El Salvador, alongside the US dollar.^[4] In October 2021, the SEC approved the first cash-settled futures exchange-traded fund (ETF).^[75][76]

In May and June 2022, the bitcoin price fell following the collapses of Terra, a stablecoin experiment^[77] and the Celsius Network, a decentralized finance loan company.^[78][79]

Ordinals, non-fungible tokens (NFTs) on Bitcoin, went live in 2023.^[80]

Economics and usage

Use as a currency

Bitcoin is a digital asset designed to work in peer-to-peer transactions as a currency.^[81] Bitcoins have three qualities useful in a currency, according to The Economist in January 2015: they are "hard to earn, limited in supply and easy to verify".^[82] Per some researchers, as of 2015^[update], bitcoin functions more as a payment system than as a currency.^[21]

Economists define money as serving the following three purposes: a store of value, a medium of exchange, and a unit of account.^[83] According to The Economist in 2014, bitcoin functions best as a medium of exchange.^[83] However, a 2018 assessment by The Economist stated that cryptocurrencies met none of these three criteria.^[84] In 2014, Yale economist Robert J. Shiller wrote that bitcoin has potential as a unit of account for measuring the relative value of goods, as with Chile's Unidad de Fomento, but that "Bitcoin in its present form ... doesn't really solve any sensible economic problem".^[85] François R. Velde, Senior Economist at the Chicago Fed, described bitcoin as "an elegant solution to the problem of creating a digital currency".^[86] David Andolfatto, Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for the Federal Reserve System and other central banks, because it prompts these institutions to operate sound policies.^[87]

As of 2018^[update], the overwhelming majority of bitcoin transactions took place on cryptocurrency exchanges, rather than being used in transactions with merchants.^[88] Prices are not usually quoted in units of bitcoin and many trades involve one, or sometimes two, conversions into conventional currencies.^[21] Commonly cited reasons for not using Bitcoin include high costs, the inability to process chargebacks, high price volatility, long transaction times, transaction fees (especially for small purchases).^[88][89] Still, Bloomberg reported that bitcoin was being used for large-item purchases on the site Overstock.com, and for cross-border payments to freelancers.^[90] As of 2015^[update], there was little sign of bitcoin use in international remittances despite high fees charged by banks and Western Union who compete in this market.^[21] The South China Morning Post, however, mentions the use of bitcoin by Hong Kong workers to transfer money home.^[91]

In September 2021, the Bitcoin Law made bitcoin legal tender in El Salvador, alongside the US dollar.^[4] The adoption has been criticized both internationally and within El Salvador.^[4][92] In particular, in 2022, the International Monetary Fund (IMF) urged El Salvador to reverse its decision.^[93] As of 2022^[update], the use of Bitcoin in El Salvador remains low: 80% of businesses refused to accept it despite being legally required to.^[94] In April 2022, the Central African Republic (CAR) adopted Bitcoin as legal tender alongside the CFA franc,^[95] but repealed the reform one year later.^[96]

Use as an investment

Bitcoins can be bought on digital currency exchanges. Other methods of investment are bitcoin funds. The first regulated bitcoin fund was approved in Jersey in July 2014.^[97] In December 2017, the Chicago Board Options Exchange and the Chicago Mercantile Exchange started trading bitcoin futures.^[98]

Individuals such as Winklevoss twins have purchased large amounts of bitcoin. In 2013, The Washington Post reported a claim that they owned 1% of all the bitcoins in existence at the time.^[99] Similarly, Elon Musk's companies SpaceX and Tesla,^[100][101] and Michael Saylor's company MicroStrategy have invested massively in bitcoin.^[102]

The price of bitcoins has gone through cycles of appreciation and depreciation referred to by some as bubbles and busts.^{[103][better source needed]} According to Mark T. Williams, as of 2014^[update], bitcoin had volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the US dollar.^{[104][better source needed]} hodl is a term created in December 2013 for holding Bitcoin rather than selling it during periods of volatility. It has been described as a mantra of the Bitcoin community.^[105][106]

Use by governments

In 2020, Iran announced pending regulations that would require bitcoin miners in Iran to sell bitcoin to the Central Bank of Iran, and the central bank would use it for imports.^[107] Iran, as of October 2020, had issued over 1,000 bitcoin mining licenses.^[107] The Iranian government initially took a stance against cryptocurrency, but later changed it after seeing that digital currency could be used to circumvent sanctions.^[108]

Some constituent states accept tax payments in bitcoin, including Colorado (US)^[109] and Zug (Switzerland).^[110]

Ideology

External videos
The Declaration Of Bitcoin's Independence, BraveTheWorld, 4:38

According to the European Central Bank, the decentralization of money offered by bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek's book The Denationalization of Money, in which he advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.^[111]: 22 Sociologist Nigel Dodd, citing the crypto-anarchist Declaration of Bitcoin's Independence, argues that the essence of the bitcoin ideology is to remove money from social, as well as governmental, control.^[112] The Economist describes bitcoin as "a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks".^[84] These philosophical ideas initially attracted libertarians and anarchists.^[113] Economist Paul Krugman argues that cryptocurrencies like bitcoin are "something of a cult" based in "paranoid fantasies" of government power.^[114]

Economic, legal and environmental concerns

Legal status

The legal status of bitcoin varies substantially from one jurisdiction to another, and is still undefined or changing in many of them.^{[citation needed]} Because of its decentralized nature and its global presence, regulating bitcoin is difficult. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a de facto ban.^[115] As of 2021^[update], nine countries applied an "absolute ban" on trading or using cryptocurrencies (Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, Vietnam, and the United Arab Emirates) while another 42 countries had an "implicit ban".^[9] Bitcoin is only legal tender in El Salvador.^[4]

Alleged bubble and Ponzi scheme

Bitcoin, along with other cryptocurrencies, has been described as an economic bubble by several economists, including at least eight Nobel Prize in Economics laureates, such as Robert Shiller,^[85] Joseph Stiglitz,^[116] Richard Thaler,^[8] and Paul Krugman.^[114] On the other hand, another recipient of the prize, Robert Shiller, argues that bitcoin is not a bubble. He describes Bitcoin's price growth as an "epidemic", driven by contagious ideas and narratives, where its media-fueled price volatility perpetuates its value and popularity.^[117]

Economists, investors, and the central bank of Estonia have voiced concerns that bitcoin is a Ponzi scheme.^{[118][119][120]} However, according to law professor Eric Posner "a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion."^[121] A 2014 World Bank report concluded that bitcoin was not a deliberate Ponzi scheme.^[122] Also in 2014, the Swiss Federal Council concluded that bitcoin was not a pyramid scheme as "the typical promises of profits are lacking".^[123] Bitcoin wealth is highly concentrated, with 0.01% holding 27% of in-circulation currency, as of 2021.^[124]

Price manipulation investigations

In May 2018, the United States Department of Justice investigated bitcoin traders for possible price manipulation,^[125] focusing on practices like spoofing and wash trades.^[126] The investigation, which involved key exchanges like Bitstamp, Coinbase, and Kraken, led to subpoenas from the Commodity Futures Trading Commission after these exchanges failed to comply with information requests.^[127]

In 2018, research published in the Journal of Monetary Economics concluded that price manipulation occurred during the Mt. Gox bitcoin theft and that the market remained vulnerable to manipulation.^[128] Research published in The Journal of Finance also suggested that trading associated with increases in the amount of the Tether cryptocurrency and associated trading at the Bitfinex exchange accounted for about half of the price increase in bitcoin in late 2017.^[129][130] Bitfinex and Tether denied the claims of price manipulation.^[131]

Use in illegal transactions

The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, and law enforcement.^[132] Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods.^[81][133] Nobel-prize winning economist Joseph Stiglitz says that bitcoin's anonymity encourages money laundering and other crimes.^[134]

Environmental effects

This section is an excerpt from Environmental effects of bitcoin.[edit]

The environmental effects of bitcoin are significant. Bitcoin mining, the process by which bitcoins are created and transactions are finalized, is energy-consuming and results in carbon emissions, as about half of the electricity used is generated through fossil fuels.^[135] Moreover, bitcoins are mined on specialized computer hardware with a short lifespan, resulting in electronic waste.^[136] The amount of e-waste generated by bitcoin mining is comparable to the one of the Netherlands.^[136] Scholars argue that bitcoin mining could support renewable energy development by utilizing surplus electricity from wind and solar.^[137] Bitcoin's environmental impact has attracted the attention of regulators, leading to incentives or restrictions in various jurisdictions.^[138]

Transaction throughput

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.^{[139][citation needed]} Eventually, the block size limit of one megabyte created problems for transaction processing, such as increasing transaction fees and delayed processing of transactions.^[140] Andreas Antonopoulos has stated Lightning Network is a potential scaling solution and referred to lightning as a second-layer routing network.^{[7]: ch. 8}

Trend towards centralization

Researchers have pointed out a "trend towards centralization" in bitcoin. Although bitcoin can be sent directly from user to user, in practice intermediaries are widely used. Bitcoin miners join large mining pools to minimize the variance of their income.^{[21]: 215, 219–222 [141]: 3} 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.^[19] 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 its hashing power at 39.99% and requested other pools to act responsibly for the benefit of the whole network.^[142] 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.^[19]

See also

• Alternative currency

Notes

References

Further reading

• Nakamoto, Satoshi (31 October 2008). "Bitcoin: A Peer-to-Peer Electronic Cash System" (PDF). bitcoin.org. Archived (PDF) from the original on 20 March 2014. Retrieved 28 April 2014.

External links

• Official website