Introduction to Bitcoin

However, bitcoin has the potential to surpass just being a digital currency. This is possible because the fundamental idea of decentralization, as well as the applied technical concepts of bitcoin, could be transferred to and have implications on various questions of financial market infrastructures – transaction mechanisms, settlement procedures, and clearing processes.

The rather new research field is structured through a distinction of questions from the fields of cryptography and economics. In cryptography, research mainly revolves around the question of how to issue money independent from a central bank without the drawback of moral hazards: how can an unforgeable digital token be issued?

What incentives should be created to transact and clear transactions in a transparent manner? One major recent topic is to increase the possible number of transactions that are conducted in a block of a blockchain without harming the security and reliability of the system.

For this purpose, several bottleneck qualities need to be relieved, and trade-offs have to be considered.

Bitcoin is a decentralized digital currency in which transactions take place in a peer-to-peer network. The consensus is established not by a trusted intermediary, but by consensus of network participants. In our current monetary system, which solely relies on fiat currency issued by central banks, such a decentralized payment system is unknown. The issuance of bitcoins is algorithmically predetermined and conducted through mining. Contrary to conventional fiat currencies, the generation of units happens over time without interacting with an issuer.

The exchange rate of bitcoins results from demands and trades of buyers and sellers. To maintain this newly gathered independence from monetary policy authorities, cryptology is being applied to decision-making procedures and transactions. Originally, bitcoin was proposed by an anonymous group of cryptographers in 2008, and it was implemented in 2009 as open-source code.

In the additional ten years since the implementation, bitcoin grew in importance to become the most important digital currency. While this expresses itself in a market capitalization of ever-increasing dimensions, critics of the bitcoin system call the potential of speculative trading another indication of its inherent risks.

Origins and History of Bitcoin

The objective of Satoshi Nakamoto’s project was to create a method of exchanging electronic money equal to traditional money, but designed to operate in the global digital environment. Additionally, the Bitcoin project incorporated cryptographic procedures into the software to guarantee the security, confidentiality, and authenticity of each operation – making it a mutation to the archival concept of exchange of physical goods.

It is also part of the design of Bitcoin to overcome the typical obstacles of various exchange and money transfer systems, such as geographical, political, and economic limitations. The open and collaborative decentralized model of the Bitcoin network allows it to assume the roles of a bank that keeps the database of checking accounts and that also negotiates/operates time deposits – fixed – and discount-rate transactions – converts money into different units, both in electronic media and in terms of cash – and allows collections of electronic obligations to be made from any source without imposing limits on the place of taxation. On the other hand, its speed, achieved in a few seconds, exceptional compared to other means of international transactions, which generally take between four and six days to materialize through traditional banking, is another of the particularities of the transaction system of Bitcoins.

In the year 2008, under the pseudonym of Satoshi Nakamoto, an article was published in several web pages that are engaged in the debate over the digital economy, in which an electronic payment system is described. From that article, a couple of months later, the source code of the Bitcoin system was published. Soon after, the first block of the Bitcoin blockchain was created, an event that would inaugurate the operation of a system that would make history.