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itcoin 101
What i itcoin?
Chapter 01
What i itcoin?
Aug 20, 2013 at 20:59 UTC Jan 29, 2018 at 15:35 UTC
To cut through ome of the confuion urrounding itcoin, we need to eparate it into two component. On the
one hand, ou have itcoin-the-token, a nippet of code that repreent ownerhip of a digital concept – ort of
like a virtual IOU. On the other hand, ou have itcoin-the-protocol, a ditriuted network that maintain a
ledger of alance of itcoin-the-token. oth are referred to a “itcoin.”
The tem enale pament to e ent etween uer without paing through a central authorit, uch a a
ank or pament gatewa. It i created and held electronicall. itcoin aren’t printed, like dollar or euro –
the’re produced computer all around the world, uing free oftware.
It wa the firt example of what we toda call crptocurrencie, a growing aet cla that hare ome
characteritic of traditional currencie, with verification aed on crptograph.
Who created it?
A peudonmou oftware developer going the name of atohi Nakamoto propoed itcoin in 2008, a an
electronic pament tem aed on mathematical proof. The idea wa to produce a mean of exchange,
independent of an central authorit, that could e tranferred electronicall in a ecure, verifiale and
immutale wa.
itcoin can e ued to pa for thing electronicall, if oth partie are willing. In that ene, it’ like
conventional dollar, euro, or en, which are alo traded digitall.
1 – Decentralization
itcoin’ mot important characteritic i that it i decentralized. No ingle intitution control the itcoin
network. It i maintained a group of volunteer coder, and run an open network of dedicated computer
pread around the world. Thi attract individual and group that are uncomfortale with the control that
ank or government intitution have over their mone.
itcoin olve the “doule pending prolem” of electronic currencie (in which digital aet can eail e
copied and re-ued) through an ingeniou comination of crptograph and economic incentive. In electronic
fiat currencie, thi function i fulfilled ank, which give them control over the traditional tem. With
itcoin, the integrit of the tranaction i maintained a ditriuted and open network, owned no-one.
2 – Limited uppl
Fiat currencie (dollar, euro, en, etc.) have an unlimited uppl – central ank can iue a man a the
want, and can attempt to manipulate a currenc’ value relative to other. Holder of the currenc (and
epeciall citizen with little alternative) ear the cot.
With itcoin, on the other hand, the uppl i tightl controlled the underling algorithm. A mall numer of
new itcoin trickle out ever hour, and will continue to do o at a diminihing rate until a maximum of 21
million ha een reached. Thi make itcoin more attractive a an aet – in theor, if demand grow and the
uppl remain the ame, the value will increae.
3 – Peudonmit
While ender of traditional electronic pament are uuall identified (for verification purpoe, and to
compl with anti-mone laundering and other legilation), uer of itcoin in theor operate in emi-
anonmit. ince there i no central “validator,” uer do not need to identif themelve when ending itcoin
to another uer. When a tranaction requet i umitted, the protocol check all previou tranaction to
confirm that the ender ha the necear itcoin a well a the authorit to end them. The tem doe not
need to know hi or her identit.
In practice, each uer i identified the addre of hi or her wallet. Tranaction can, with ome effort, e
tracked thi wa. Alo, law enforcement ha developed method to identif uer if necear.
Furthermore, mot exchange are required law to perform identit check on their cutomer efore the
are allowed to u or ell itcoin, facilitating another wa that itcoin uage can e tracked. ince the network
i tranparent, the progre of a particular tranaction i viile to all.
Thi make itcoin not an ideal currenc for criminal, terrorit or mone-launderer.
4 – Immutailit
Thi i ecaue there i no central “adjudicator” that can a “ok, return the mone.” If a tranaction i
recorded on the network, and if more than an hour ha paed, it i impoile to modif.
While thi ma diquiet ome, it doe mean that an tranaction on the itcoin network cannot e tampered
with.
5 – Diviiilit
The mallet unit of a itcoin i called a atohi. It i one hundred millionth of a itcoin (0.00000001) – at
toda’ price, aout one hundredth of a cent. Thi could conceival enale microtranaction that traditional
electronic mone cannot.
Read more to find out how itcoin tranaction are proceed and how itcoin are mined, what it can e ued
for, a well a how ou can u, ell and tore our itcoin. We alo explain a few alternative to itcoin, a well
a how it underling technolog – the lockchain – work.
Chapter 02
o ou’ve learned the aic aout itcoin, ou’re excited aout the potential and now ou want to u ome*.
ut how?
(*Pleae, never invet more than ou can afford to loe – crptocurrencie are volatile and the price could go
down a well a up.)
itcoin can e ought on exchange, or directl from other people via marketplace.
You can pa for them in a variet of wa, ranging from hard cah to credit and deit card to wire tranfer, or
even with other crptocurrencie, depending on who ou are uing them from and where ou live.
1 – et up a wallet
The firt tep i to et up a wallet to tore our itcoin – ou will need one, whatever our preferred method of
purchae. Thi could e an online wallet (either part of an exchange platform, or via an independent provider), a
dektop wallet, a moile wallet or an offline one (uch a a hardware device or a paper wallet).
ven within thee categorie of wallet there i a wide variet of ervice to chooe from, o do ome reearch
efore deciding on which verion et uit our need.
You can find more information on ome of the wallet out there, a well a tip on how to ue them, here and
here.
The mot important part of an wallet i keeping our ke (a tring of character) and/or paword afe. If
ou loe them, ou loe acce to the itcoin tored there.
UYING ONLIN
Crptocurrenc exchange will u and ell itcoin on our ehalf. There are hundred currentl operating,
with varing degree of liquidit and ecurit, and new one continue to emerge while other end up cloing
down. A with wallet, it i adviale to do ome reearch efore chooing – ou ma e luck enough to have
everal reputale exchange to chooe from, or our acce ma e limited to one or two, depending on our
geographical area.
The larget itcoin exchange in the world at the moment in term of U$ volume i itfinex, although it i
mainl aimed at pot trader. Other high-volume exchange are Coinae, ittamp and Poloniex, ut for mall
amount, mot reputale exchange hould work well. (Note: at time of writing, the urge of interet in itcoin
trading i placing train on mot retail u and ell operation, o a degree of patience and caution i
recommended.)
With the clampdown on know-our-client (KYC) and anti-mone-laundering (AML) regulation, man
exchange now require verified identification for account etup. Thi will uuall include a photo of our
official ID, and ometime alo a proof of addre.
Mot exchange accept pament via ank tranfer or credit card, and ome are willing to work with Papal
tranfer. And mot exchange charge fee (which generall include the fee for uing the itcoin network).
ach exchange ha a different procedure for oth etup and tranaction, and hould give ou ufficient detail
to e ale to execute the purchae. If not, conider changing the ervice provider.
Once the exchange ha received pament, it will purchae the correponding amount of itcoin on our ehalf,
and depoit them in an automaticall generated wallet on the exchange. Thi can take minute, or ometime
hour due to network ottleneck. If ou wih (recommended), ou can then move the fund to our off-
exchange wallet.
Platform uch a Localitcoin will help ou to find individual near ou who are willing to exchange itcoin
for cah. Alo, LiertX lit retail outlet acro the United tate at which ou can exchange cah for itcoin.
And WallofCoin, Paxful and itQuick will direct ou to a ank ranch near ou that will allow ou to make a
cah depoit and receive itcoin a few hour later.
ATM are machine that will end itcoin to our wallet in exchange for cah. The operate in a imilar wa to
ank ATM – ou feed in the ill, hold our wallet’ QR code up to a creen, and the correponding amount of
itcoin are eamed to our account. Coinatmradar can help ou to find a itcoin ATM near ou.
(Note: pecific uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)
efore owning an itcoin, ou need omewhere to tore them. That place i called a “wallet.” Rather than
actuall holding our itcoin, it hold the private ke that allow ou to acce our itcoin addre (which i
alo our pulic ke). If the wallet oftware i well deigned, it will look a if our itcoin are actuall there,
which make uing itcoin more convenient and intuitive.
Actuall, a wallet uuall hold everal private ke, and man itcoin invetor have everal wallet.
Wallet can either live on our computer and/or moile device, on a phical torage gadget, or even on a
piece of paper. Here we’ll riefl look at the different tpe.
lectronic wallet
lectronic wallet can e downloaded oftware, or hoted in the cloud. The former i impl a formatted file
that live on our computer or device, that facilitate tranaction. Hoted (cloud-aed) wallet tend to have a
more uer-friendl interface, ut ou will e truting a third part with our private ke.
oftware wallet
Intalling a wallet directl on our computer give ou the ecurit that ou control our ke. Mot have
relativel ea configuration, and are free. The diadvantage i that the do require more maintenance in the
form of ackup. If our computer get tolen or corrupted and our private ke are not alo tored
elewhere, ou loe our itcoin.
The alo require greater ecurit precaution. If our computer i hacked and the thief get a hold of our
wallet or our private ke, he alo get hold of our itcoin.
The original oftware wallet i the itcoin Core protocol, the program that run the itcoin network. You can
download thi here (it doen’t mean that ou have to ecome a full operational node), ut ou’d alo have to
download the ledger of all tranaction ince the dawn of itcoin time (2009). A ou can gue, thi take up a
lot of memor – at time of writing, over 145G.
Mot wallet in ue toda are “light” wallet, or PV (implified Pament Verification) wallet, which do not
download the entire ledger ut nc to the real thing. lectrum i a well-known PV dektop itcoin wallet that
alo offer “cold torage” (a totall offline option for additional ecurit). xodu can track multiple aet with
a ophiticated uer interface. ome (uch a Jaxx) can hold a wide range of digital aet, and ome (uch a
Copa) offer the poiilit of hared account.
Online wallet
Online (or cloud-aed) wallet offer increaed convenience – ou can generall acce our itcoin from an
device if ou have the right paword. All are ea to et up, come with dektop and moile app which make
it ea to pend and receive itcoin, and mot are free.
The diadvantage i the lower ecurit. With our private ke tored in the cloud, ou have to trut the hot’
ecurit meaure, and that it won’t diappear with our mone, or cloe down and den ou acce.
ome leading online wallet are attached to exchange (uch a Coinae and lockchain). ome offer
additional ecurit feature uch a offline torage (Coinae and Xapo).
Moile wallet
Moile wallet are availale a app for our martphone, epeciall ueful if ou want to pa for omething in
itcoin in a hop, or if ou want to u, ell or end while on the move. All of the online wallet and mot of the
dektop one mentioned aove have moile verion, while other – uch a Ara, Airitz and read – were
created with moile in mind.
Hardware wallet
Hardware wallet are mall device that occaionall connect to the we to enact itcoin tranaction. The
are extremel ecure, a the are generall offline and therefore not hackale. The can e tolen or lot,
however, along with the itcoin that elong to the tored private ke. ome large invetor keep their
hardware wallet in ecure location uch a ank vault. Trezor, Keepke and Ledger and Cae are notale
example.
Paper wallet
Perhap the implet of all the wallet, thee are piece of paper on which the private and pulic ke of a
itcoin addre are printed. Ideal for the long-term torage of itcoin (awa from fire and water, ovioul), or
for the giving of itcoin a a gift, thee wallet are more ecure in that the’re not connected to a network. The
are, however, eaier to loe.
With ervice uch a WalletGenerator, ou can eail create a new addre and print the wallet on our
printer. Fold, eal and ou’re et. end ome itcoin to that addre, and then tore it afel or give it awa.
(ee our tutorial on paper wallet here.)
That depend on the verion and format ou have choen, and how ou ue them.
The afet option i a hardware wallet which ou keep offline, in a ecure place. That wa there i no rik that
our account can e hacked, our ke tolen and our itcoin whiked awa. ut, if ou loe the wallet, our
itcoin are gone, unle ou have created a clone and/or kept reliale ackup of the ke.
The leat ecure option i an online wallet, ince the ke are held a third part. It alo happen to e the
eaiet to et up and ue, preenting ou with an all-too-familiar choice: convenience v afet.
Man eriou itcoin invetor ue a hrid approach: the hold a core, long-term amount of itcoin offline,
while having a “pending alance” for liquidit in a moile account. Your choice will depend on our itcoin
trateg, and our willingne to get “technical.”
Whatever option ou go for, pleae e careful. ack up everthing, and onl tell our nearet and dearet where
our ackup are tored.
For more information on how to u itcoin, ee here. And for ome example of what ou can pend it on, ee
here.
(Note: pecific uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)
Thee da virtuall all the method availale to u itcoin alo offer the option to ell.
The exception i itcoin ATM – ome do allow ou to exchange itcoin for cah, ut not all. Coinatmradar will
guide ou to itcoin ATM in our area.
All exchange allow ou to ell a well a u. What tpe of exchange ou chooe to ell our itcoin will
depend on what tpe of holder ou are: mall invetor, intitutional holder or trader?
ome platform uch a GDAX and Gemini are aimed more at large order from intitutional invetor and
trader.
Retail client can ell itcoin at exchange uch a Coinae, Kraken, ittamp, Poloniex, etc. ach exchange
ha a different interface, and ome offer related ervice uch a ecure torage. ome require verified
identification for all trade, while other are more relaxed if mall amount are involved.
(Of coure, don’t forget to declare an profit ou make on the ale to our relevant tax authorit!)
You can, if ou wih, exchange our itcoin for other crptoaet rather than for cah. ome exchange uch
a hapehift focu on thi ervice, allowing ou to wap etween itcoin and ether, litecoin, XRP, dah and
everal other.
Another alternative i the direct ale. You can regiter a a eller on platform uch a Localitcoin, itQuick,
ittliciou and itargain, and intereted partie will contact ou if the like our price. Tranaction are
uuall done via depoit or wire to our ank account, after which ou are expected to tranfer the agreed
amount of itcoin to the pecified addre.
Or, ou can ell directl to friend and famil once the have a itcoin wallet et up. Jut end the itcoin,
collect the cah or moile pament, and have a celerator drink together. (Note: it i generall not a good idea
to meet up with tranger to exchange itcoin for cah in peron. e afe.)
(Note: pecific uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)
Chapter 05
imple verion:
If I want to end ome of m itcoin to ou, I pulih m intention and the node can the entire itcoin
network to validate that I 1) have the itcoin that I want to end, and 2) haven’t alread ent it to omeone ele.
Once that information i confirmed, m tranaction get included in a “lock” which get attached to the
previou lock – hence the term “lockchain.” Tranaction can’t e undone or tampered with, ecaue it
would mean re-doing all the lock that came after.
M itcoin wallet doen’t actuall hold m itcoin. What it doe i hold m itcoin addre, which keep a
record of all of m tranaction, and therefore of m alance. Thi addre – a long tring of 34 letter and
numer – i alo known a m “pulic ke.” I don’t mind that the whole world can ee thi equence. ach
addre/pulic ke ha a correponding “private ke” of 64 letter and numer. Thi i private, and it’ crucial
that I keep it ecret and afe. The two ke are related, ut there’ no wa that ou can figure out m private ke
from m pulic ke.
That’ important, ecaue an tranaction I iue from m itcoin addre need to e “igned” with m
private ke. To do that, I put oth m private ke and the tranaction detail (how man itcoin I want to end,
and to whom) into the itcoin oftware on m computer or martphone.
With thi information, the program pit out a digital ignature, which get ent out to the network for
validation.
Thi tranaction can e validated – that i, it can e confirmed that I own the itcoin that I am tranferring to
ou, and that I haven’t alread ent it to omeone ele – plugging the ignature and m pulic ke (which
everone know) into the itcoin program. Thi i one of the geniu part of itcoin: if the ignature wa made
with the private ke that correpond to that pulic ke, the program will validate the tranaction, without
knowing what the private ke i. Ver clever.
The network then confirm that I haven’t previoul pent the itcoin running through m addre hitor,
which it can do ecaue it know m addre (= m pulic ke), and ecaue all tranaction are pulic on the
itcoin ledger.
ven more complicated:
Once m tranaction ha een validated, it get included into a “lock,” along with a unch of other
tranaction.
A rief detour to dicu what a “hah” i, ecaue it’ important for the next paragraph: a hah i produced
a “hah function,” which i a complex math equation that reduce an amount of text or data to 64-character
tring. It’ not random – ever time ou put in that particular data et through the hah function, ou’ll get the
ame 64-character tring. ut if ou change o much a a comma, ou’ll get a completel different 64-
character tring. Thi whole article could e reduced to a hah, and unle I change, remove or add anthing to
the text, the ame hah can e produced again and again. Thi i a ver effective wa to tell if omething ha
een changed, and i how the lockchain can confirm that a tranaction ha not een tampered with.
ack to our lock: each lock include, a part of it data, a hah of the previou lock. That’ what make it
part of a chain, hence the term “lockchain.” o, if one mall part of the previou lock wa tampered with, the
current lock’ hah would have to change (rememer that one tin change in the input of the hah function
change the output). o if ou want to change omething in the previou lock, ou alo have to change
omething (= the hah) in the current lock, ecaue the one that i currentl included i no longer correct.
That’ ver hard to do, epeciall ince the time ou’ve reached half wa, there’ proal another lock on
top of the current one. You’d then alo have to change that one. And o on.
Thi i what make itcoin virtuall tamper-proof. I a virtuall ecaue it’ not impoile, jut ver ver,
ver, ver, ver difficult and therefore unlikel.
Fun
And if ou want to indulge in ome mindle facination, ou can it at our dek and watch itcoin
tranaction float . lockchain.info i good for thi, ut if ou want a hpnoticall fun verion, tr itonker.
(For more detail on how lock are proceed and on how itcoin mining work, ee thi article.)
Chapter 06
When ou hear aout itcoin “mining,” ou enviage coin eing dug out of the ground. ut itcoin in’t
phical, o wh do we call it mining?
ecaue it’ imilar to gold mining in that the itcoin exit in the protocol’ deign (jut a the gold exit
underground), ut the haven’t een rought out into the light et (jut a the gold han’t et een dug up). The
itcoin protocol tipulate that 21 million itcoin will exit at ome point. What “miner” do i ring them out
into the light, a few at a time.
The get to do thi a a reward for creating lock of validated tranaction and including them in the
lockchain.
Node
acktracking a it, let’ talk aout “node.” A node i a powerful computer that run the itcoin oftware and
help to keep itcoin running participating in the rela of information. Anone can run a node, ou jut
download the itcoin oftware (free) and leave a certain port open (the drawack i that it conume energ
and torage pace – the network at time of writing take up aout 145G). Node pread itcoin tranaction
around the network. One node will end information to a few node that it know, who will rela the
information to node that the know, etc. That wa it end up getting around the whole network prett quickl.
ome node are mining node (uuall referred to a “miner”). Thee group outtanding tranaction into
lock and add them to the lockchain. How do the do thi? olving a complex mathematical puzzle that i
part of the itcoin program, and including the anwer in the lock. The puzzle that need olving i to find a
numer that, when comined with the data in the lock and paed through a hah function, produce a reult
that i within a certain range. Thi i much harder than it ound.
(For trivia lover, thi numer i called a “nonce”, which i a concatenation of “numer ued once.” In the cae
of itcoin, the nonce i an integer etween 0 and 4,294,967,296.)
How do the find thi numer? gueing at random. The hah function make it impoile to predict what
the output will e. o, miner gue the mter numer and appl the hah function to the comination of
that gueed numer and the data in the lock. The reulting hah ha to tart with a pre-etalihed numer
of zeroe. There’ no wa of knowing which numer will work, ecaue two conecutive integer will give
wildl varing reult. What’ more, there ma e everal nonce that produce the deired reult, or there ma
e none (in which cae the miner keep tring, ut with a different lock configuration).
The firt miner to get a reulting hah within the deired range announce it victor to the ret of the network.
All the other miner immediatel top work on that lock and tart tring to figure out the mter numer for
the next one. A a reward for it work, the victoriou miner get ome new itcoin.
conomic
At the time of writing, the reward i 12.5 itcoin, which at time of writing i worth almot $200,000.
Although it’ not nearl a cuh a deal a it ound. There are a lot of mining node competing for that
reward, and it i a quetion of luck and computing power (the more gueing calculation ou can perform, the
luckier ou are).
Alo, the cot of eing a mining node are coniderale, not onl ecaue of the powerful hardware needed (if
ou have a fater proceor than our competitor, ou have a etter chance of finding the correct numer
efore the do), ut alo ecaue of the large amount of electricit that running thee proceor conume.
And, the numer of itcoin awarded a a reward for olving the puzzle will decreae. It’ 12.5 now, ut it halve
ever four ear or o (the next one i expected in 2020-21). The value of itcoin relative to cot of electricit
and hardware could go up over the next few ear to partiall compenate thi reduction, ut it’ not certain.
Difficult
The difficult of the calculation (the required numer of zeroe at the eginning of the hah tring) i adjuted
frequentl, o that it take on average aout 10 minute to proce a lock.
Wh 10 minute? That i the amount of time that the itcoin developer think i necear for a tead and
diminihing flow of new coin until the maximum numer of 21 million i reached (expected ome time in
2140).
If ou’ve made it thi far, then congratulation! There i till o much more to explain aout the tem, ut at
leat now ou have an idea of the road outline of the geniu of the programming and the concept. For the firt
time we have a tem that allow for convenient digital tranfer in a decentralized, trut-free and tamper-
proof wa. The repercuion could e huge.
Authored Noelle Acheon. itcoin and itcoin mining image via huttertock.
Chapter 07
A few ear after atohi Nakamoto unleahed hi itcoin paper on the world, the crptocurrenc’ uer
egan to notice a potential prolem: itcoin wan’t ver liquid.
For a tem that man claimed could replace fiat pament, thi wa a ig arrier. While Via handle around
24,000 tranaction a econd, itcoin could proce up to 7. Unle omething could e done aout thi,
itcoin’ utilit wa limited.
Thu egan the “caling deate,” which polarized the communit and unleahed a wave of technological
innovation in the earch of workaround. Yet while ignificant progre ha een made, a utainale olution
i till far from clear.
The prolem arie from itcoin’ deign: atohi programmed the lock to have a ize limit of approximatel
1M each, in order to prevent network pam.
ince each lock take an average of 10 minute to proce, thi work out to a relativel mall numer of
tranaction overall. An increae in demand would inevital lead to an increae in fee, and itcoin’ utilit
would diminih even further.
Don’t think o
A imple olution initiall appeared to e an increae in the lock ize. Yet that idea turned out to e not imple
at all.
Firt, there wa no clear agreement a to how much it hould e increaed . ome propoal advocated for
2M, another for 8M, and one wanted to go a high a 32M.
The core development team argued that increaing the lock ize at all would weaken the protocol’
decentralization concentrating mining power – with igger lock, onl the more powerful miner would e
ucceful, and the race for fater machine could eventuall make itcoin mining unprofitale. Alo, the
numer of node ale to run a much heavier lockchain could decreae, further centralizing a network that
depend on decentralization.
econd, the method of the change wa contentiou. How do ou execute a tem-wide upgrade when
participation i decentralized? hould everone have to update their itcoin oftware? What if ome miner,
node and merchant don’t?
And finall, an exitential argument emerged. itcoin i itcoin, wh me with it? If omeone didn’t like it, the
were welcome to modif the open-ource code and launch their own coin (indeed, ome have done jut that).
What’ more, atohi i no longer around to tell u what he originall intended. And even if he were, would he
care? Did he not deign itcoin to run itelf?
I have an idea
In 2015, developer Pieter Wiulle revealed a olution that, at firt glance, looked like it could appeae all group.
egregated Witne, or egWit, increaed the capacit of the itcoin lock without changing their ize limit,
altering how the tranaction data wa tored. (For a more detailed account, ee our explainer.)
egWit wa deploed on the itcoin network in Augut 2017, via a oft fork (to make it compatile with node
that did not upgrade). In pite of initial excitement aout the enefit, however, uptake ha een low. While
man wallet and other itcoin ervice are graduall adjuting their oftware, other are reticent to do o
ecaue of the perceived rik and cot.
Take two
everal indutr plaer argued that egWit didn’t go far enough – it might help in the hort term, ut ooner
or later itcoin would again e up againt a limit to it growth.
In 2017, coinciding with CoinDek’ Conenu conference in New York, a new approach wa revealed:
egwit2X. Thi idea – acked everal of the ector’ larget exchange – comined egWit with an increae
in the lock ize to 2M, effectivel multipling the pre-egWit tranaction capacit a factor of 8.
Far from olving the prolem, the propoal unleahed a further wave of dicord. The manner of it unveiling
(through a pulic announcement rather than an upgrade propoal) and it lack of repla protection
(tranaction could happen on oth verion, potentiall leading to doule pending) rankled man. And the
perceived reditriution of power awa from developer toward miner and uinee threatened to caue a
fundamental plit in the communit
In the end, the idea wa dropped a few month later, jut week from it target date of implementation
Meanwhile…
Other technological approache are eing developed a a potential wa to increae capacit.
chnorr ignature offer a wa to conolidate ignature data, reducing the pace it take up within a itcoin
lock (and enhancing privac). Comined with egWit, thi could allow a much greater numer of
tranaction, without changing the lock ize limit
And work i proceeding on the lightning network, a econd laer protocol that run on top of itcoin, opening
up channel of fat microtranaction that onl ettle on the itcoin network when the channel participant are
read.
Getting cloer
o where are we now? Adoption of the egWit upgrade i lowl preading throughout the network,
increaing tranaction capacit and lowering fee.
Mot lock are jut over the 1M mark, and tranaction fee – which hot up to over $50 in Decemer 2017 –
have fallen ack down to around $4 at time of writing.
Progre i accelerating on more advanced olution uch a lightning, with tranaction eing ent on
tetnet (a well a ome uing real itcoin). And the potential of chnorr ignature i attracting increaing
attention, with everal propoal working on detailing functionalit and integration.
While itcoin’ ue a a pament mechanim eem to have taken a ack eat to it value a an invetment
aet, the need for a greater numer of tranaction i till preing a the fee charged the miner for
proceing are now more expenive than fiat equivalent. What’ more, taking into account that we are till at
the eginning of crptocurrenc evolution, the development of new feature that enhance functionalit i
crucial for the potential of the underling lockchain technolog to e realied.
Chapter 08
Hailed a one of the mot potent olution to crptocurrenc caling currentl under development, the
lightning network effectivel create a laer on top of itcoin, enaling fat and cheap tranaction which can
net ettle to the itcoin lockchain.
Propoed Thaddeu Drja and Joeph Poon in a 2015 white paper, the idea i aed on a network that it
on top of the itcoin lockchain, and eventuall ettle on it. The network i compried of uer-generated
channel that end pament ack and forth in a ecure and trut-le fahion (trut-le mean that ou don’t
need to trut or even know our counterpart).
a, for intance, that I wanted to pa ou for each minute of video that I watched. We would open up a
lightning channel, and a the minute rolled , periodic pament would e made from m wallet to our.
When I’m done watching, we would cloe the channel to ettle the net amount on the itcoin lockchain.
ecaue the tranaction are jut etween me and ou and don’t need to e roadcat to the whole network,
the are almot intantaneou. And ecaue there are no miner that need incentivizing, tranaction fee are
low or even non-exitent.
How it work
Firt, two partie who wih to tranact with each other et up a multiig wallet (which require more than one
ignature to enact a tranaction). Thi wallet hold ome amount of itcoin. The wallet addre i then aved to
the itcoin lockchain. Thi et up the pament channel.
The two partie can now conduct an unlimited numer of tranaction without ever touching the information
tored on the lockchain. With each tranaction, oth partie ign an updated alance heet to alwa reflect
how much of the itcoin tored in the wallet elong to each.
When the two partie have done tranacting, the cloe out the channel, and the reulting alance i regitered
on the lockchain. In the event of a dipute, oth partie can ue the mot recentl igned alance heet to
recover their hare of the wallet.
It i ueful to note that it i not necear to et up a direct channel to tranact on lightning – ou can end
pament to omeone via channel with people that ou are connected with. The network automaticall find
the hortet route.
Development of the technolog got a ignificant oot with the adoption of egWit on the itcoin and litecoin
network. Without the upgrade’ tranaction malleailit fix, tranaction on the lightning network would have
een too rik to e practical.
Without the ecurit of the lockchain ehind it, the lightning network will not e a ecure, which implie that
it will largel e ued for mall or even micro tranaction which carr a lower rik. Larger tranfer that
require decentralized ecurit are more likel to e done on the original laer.
Although it wa originall deigned for itcoin, the technolog i currentl eing developed for a range of
crptocurrencie, uch a litecoin, tellar, zcah, ether and ripple. Litecoin plan to launch it verion at the
ame time a itcoin’.
In Decemer 2017, tartup ehind the three mot active lightning implementation (ACINQ, locktream and
Lightning La) revealed tet reult, including live tranaction, proving that their oftware i now
interoperale.
Furthermore, verion 1 of the lightning pecification, which et out the rule of the network, ha een
pulihed. Thi will encourage the development of other implementation and application.
However, the network i not et read for launch. ngineer have et to releae oftware with which real uer
can make tranaction. App upporting lightning a a pament method are alread cropping up, ut o far
the’re not ea to ue.
That ha not topped ome of thoe working on project from teting lightning tranaction on the itcoin
network. Lightning developer dicourage thi, however – not onl doe it act a a ditraction to developer,
ut it alo put uer’ fund at rik.
Given the complexit of the code, and the need for rigorou teting (we are talking aout pament, after all),
developer are urging patience. In addition, lightning can’t e implemented at cale until egWit i more widel
extended – o, while ome elieve that there i enough egWit upport to run the network on mainnet now,
other predict that a uale lightning network could e at leat a ear awa.
In March 2018, California tartup Lightning La announced the launch of a eta verion of it oftware,
making availale what invetor and project lead a i the firt thoroughl teted verion of the tech to date.
It i till earl da, however – tranaction ize are limited, and the releae i aimed at developer and
“advanced uer”.
Chapter 09
One of the firt quetion that anone intereted in mining crptocurrencie face i whether to mine olo or
join a ‘pool’. There are a multitude of reaon oth for and againt mining pool. However, if the hah rate
ditriution acro the itcoin network i anthing to go (and it i) then mot miner are opting to join a
pool. Here’ what ou need to know.
It i important to note that it i important for a mining pool to not exceed over 51% of the hahing power of the
network. If a ingle entit end up controlling more than 50% of a crptocurrenc network’ computing power,
it could – theoreticall – wreak havoc on the whole network. In earl 2014, man voiced concern that
the GHah.io itcoin mining pool wa approaching thi threhold, and miner were urged to leave the pool.
Currenc difficult
In itcoin’ cae, the current difficult level i o high that it’ practicall impoile for oloit to make a
profit mining. Unle, of coure, ou happen to have a garage full of AIC itting in Arctic condition. If ou’re
a eginner, joining a mining pool i a great wa to reap a mall reward over a hort period of time. Indeed,
pool are a wa to encourage mall-cale miner to ta involved.
What to mine?
Of coure, itcoin i not the onl currenc out there – it’ ea to
find lit of mining pool for our choen crptocurrenc.
Firt-time miner who lack particularl powerful hardware hould look at altcoin over itcoin – epeciall
currencie aed on the crpt algorithm rather than HA256. Thi i ecaue the difficult of itcoin
calculation i far too high for the proceor found in regular PC.
If ou’re not ure which currenc to mine, there i a pool called ‘Multipool’ which will automaticall witch our
mining hardware etween the mot profitale altcoin. Multipool update ever 30 minute, and over time ou’ll
ee alance grow in multiple altcurrencie. If required, the pool doe allow ou to fix our hardware on jut one
altcurrenc too.
However, Mark from nut2pool.com aid of thi tpe of witching pool: “Loal coin follower hate them
ecaue a oon a the difficult of a coin drop, the profitailit of it rie. Then all the multipool wing
round, puh the difficult through the roof in a few hour, then leave again. It leave the loal coin follower
having to mine the difficult ack down again at ver low profitailit.”
Pool reward
There are man cheme which pool can divide pament. Mot of which concentrate of the amount of
‘hare’ which a miner ha umitted to the pool a ‘proof of work’.
hare are a trick concept to grap. Keep two thing in mind: firtl, mining i a proce of olving
crptographic puzzle; econdl, mining ha a difficult level. When a miner ‘olve a lock’ there i a
correponding difficult level for the olution. Think of it a a meaure of qualit. If the difficult rating of the
miner’ olution i aove the difficult level of the entire currenc, it i added to that currenc’ lock chain and
coin are rewarded.
Additionall, a mining pool et a difficult level etween 1 and the currenc’ difficult. If a miner return a
lock which core a difficult level etween the pool’ difficult level and the currenc’ difficult level, the
lock i recorded a a ‘hare’. There i no ue whatoever for thee hare lock, ut the are recorded a
proof of work to how that miner are tring to olve lock. The alo indicate how much proceing power
the are contriuting to the pool – the etter the hardware, the more hare are generated.
The mot aic verion of dividing pament thi wa i the ‘pa per hare’ (PP) model. Variation on thi
put limit on the rate paid per hare; for example, equalied hared maximum pa per hare (MPP), or
hared maximum pa per hare (MPP). Pool ma or ma not prioritie pament for how recentl miner
have umitted hare: for example, recent hared maximum pa per hare (RMPP). More example can e
found on the itcoin wiki.
The other factor to conider i how much the pool will deduct from our mining pament. Tpical value
range from 1% to 10%. However, ome pool do not deduct anthing.
ilhouette, Pro and con, Coin flip and Check mailox image via huttertock
After an initial flurr of interet among merchant in accepting itcoin in their retail or online tore, interet
ha largel died down a increaing itcoin tranaction fee and volatile price movement made it le
attractive a a mean of exchange
That doen’t mean that there are no outlet to pend our itcoin, however, far from it. It’ jut that itcoin
volume at thee outlet ha generall not met expectation, and the time ou read thi, ome ma have
dicontinued that option.
At time of writing, however, ou can till u a wide range of good and ervice with the crptocurrenc.
Among the advantage of doing o are the eae of cro-order tranaction, and anonmit (unle ou want
phical deliver, of coure). accepting itcoin, merchant get acce to a roader market, and don’t have to
worr o much aout chargeack (where the uer cancel the pament after receiving the product).
If ou want to ue itcoin to u preent, the mot oviou olution i gift card, via Gft or eGifter. The
recipient will then e ale to pend the gift card at one of a wide range of retailer.
You can pa for flight and hotel with itcoin, through xpedia, CheapAir and urf Air. If our amition are
loftier, ou can pa for pace travel with ome of our vat holding, through Virgin Galactic.
Microoft accept itcoin in it app tore, where ou can download movie, game and app-aed ervice.
ome muician (jork, Imogen Heep) will let ou download their muic in exchange for crptocurrenc.
Need to furnih our houe or u a pecial preent for omeone? Overtock wa one of the firt ig retailer
to tart accepting itcoin, ack in 2014, and it founder – Patrick rne – i till one of the technolog’ mot
active proponent.
Fanc ome gold? harp Pixle, APMX and JM ullion will take itcoin off our hand in exchange for
ullion.
And if ou’re hungr and live in the U, PizzaforCoin will get a pizza delivered to our door (depending on
where ou live) in exchange for itcoin.
If it’ knowledge ou’re hungr for, everal private and pulic univeritie a well a a couple of New York
prechool accept itcoin.
ome legal and accounting firm alo accept pament for their ervice in the crptocurrenc.
Of coure, ou could alwa u ourelf ome happine donating to one of the itcoin-accepting
charitie or crowdfunding ite, uch a itHope, itGive or Fidelit Charitale.
For a lit of offline tore near ou that accept itcoin, check an aggregator uch a penditcoin or
CoinMap.
(Note: pecific uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)
Authored Noelle Acheon.
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