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itcoin 101 How do itcoin Tranaction Work?

itcoin 101
What i itcoin?

How Can I u itcoin?

How to tore Your itcoin

How to ell itcoin

How do itcoin Tranaction Work?

Chapter 01

What i itcoin?
Aug 20, 2013 at 20:59 UTC Jan 29, 2018 at 15:35 UTC

Lat updated: 26th Januar 2018

To cut through ome of the confuion urrounding itcoin, we need to eparate it into two component. On the
one hand, ou have itcoin-the-token, a nippet of code that repreent ownerhip of a digital concept – ort of
like a virtual IOU. On the other hand, ou have itcoin-the-protocol, a ditriuted network that maintain a
ledger of alance of itcoin-the-token. oth are referred to a “itcoin.”

The tem enale pament to e ent etween uer without paing through a central authorit, uch a a
ank or pament gatewa. It i created and held electronicall. itcoin aren’t printed, like dollar or euro –
the’re produced  computer all around the world, uing free oftware.

It wa the firt example of what we toda call crptocurrencie, a growing aet cla that hare ome
characteritic of traditional currencie, with verification aed on crptograph.
Who created it?

A peudonmou oftware developer going  the name of atohi Nakamoto propoed itcoin in 2008, a an
electronic pament tem aed on mathematical proof. The idea wa to produce a mean of exchange,
independent of an central authorit, that could e tranferred electronicall in a ecure, verifiale and
immutale wa.

To thi da, no-one know who atohi Nakamoto reall i.

In what wa i it different from traditional currencie?

itcoin can e ued to pa for thing electronicall, if oth partie are willing. In that ene, it’ like
conventional dollar, euro, or en, which are alo traded digitall.

ut it differ from fiat digital currencie in everal important wa:

1 – Decentralization

itcoin’ mot important characteritic i that it i decentralized. No ingle intitution 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 uncomfortale with the control that
ank or government intitution have over their mone.

itcoin olve the “doule pending prolem” of electronic currencie (in which digital aet can eail e
copied and re-ued) through an ingeniou comination of crptograph 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 tranaction i maintained  a ditriuted and open network, owned  no-one.

2 – Limited uppl

Fiat currencie (dollar, euro, en, etc.) have an unlimited uppl – central ank can iue a man a the
want, and can attempt to manipulate a currenc’ value relative to other. Holder of the currenc (and
epeciall citizen with little alternative) ear the cot.

With itcoin, on the other hand, the uppl i tightl controlled  the underling algorithm. A mall numer of
new itcoin trickle out ever hour, and will continue to do o at a diminihing rate until a maximum of 21
million ha een reached. Thi make itcoin more attractive a an aet – in theor, if demand grow and the
uppl remain the ame, the value will increae.

3 – Peudonmit

While ender of traditional electronic pament are uuall identified (for verification purpoe, and to
compl with anti-mone laundering and other legilation), uer of itcoin in theor operate in emi-
anonmit. ince there i no central “validator,” uer do not need to identif themelve when ending itcoin
to another uer. When a tranaction requet i umitted, the protocol check all previou tranaction to
confirm that the ender ha the necear itcoin a well a the authorit to end them. The tem doe not
need to know hi or her identit.

In practice, each uer i identified  the addre of hi or her wallet. Tranaction can, with ome effort, e
tracked thi wa. Alo, law enforcement ha developed method to identif uer if necear.

Furthermore, mot exchange are required  law to perform identit check on their cutomer efore the
are allowed to u or ell itcoin, facilitating another wa that itcoin uage can e tracked. ince the network
i tranparent, the progre of a particular tranaction i viile to all.

Thi make itcoin not an ideal currenc for criminal, terrorit or mone-launderer.

4 – Immutailit

itcoin tranaction cannot e revered, unlike electronic fiat tranaction.

Thi i ecaue there i no central “adjudicator” that can a “ok, return the mone.” If a tranaction i
recorded on the network, and if more than an hour ha paed, it i impoile to modif.

While thi ma diquiet ome, it doe mean that an tranaction on the itcoin network cannot e tampered
with.
5 – Diviiilit

The mallet unit of a itcoin i called a atohi. It i one hundred millionth of a itcoin (0.00000001) – at
toda’ price, aout one hundredth of a cent. Thi could conceival enale microtranaction that traditional
electronic mone cannot.

Read more to find out how itcoin tranaction are proceed and how itcoin are mined, what it can e ued
for, a well a how ou can u, ell and tore our itcoin. We alo explain a few alternative to itcoin, a well
a how it underling technolog – the lockchain – work.

Authored  Noelle Acheon. Network image via huttertock.

DICLOUR Read More

Chapter 02

How Can I u itcoin?


Aug 20, 2013 at 20:59 UTC Jan 31, 2018 at 17:32 UTC

Lat updated: 26th Januar 2018

o ou’ve learned the aic aout itcoin, ou’re excited aout the potential and now ou want to u ome*.
ut how?

(*Pleae, never invet more than ou can afford to loe – crptocurrencie 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 cah to credit and deit card to wire tranfer, or
even with other crptocurrencie, depending on who ou are uing them from and where ou live.
1 – et up a wallet

The firt tep i to et up a wallet to tore our itcoin – ou will need one, whatever our preferred method of
purchae. Thi could e an online wallet (either part of an exchange platform, or via an independent provider), a
dektop wallet, a moile wallet or an offline one (uch a a hardware device or a paper wallet).

ven within thee categorie of wallet there i a wide variet of ervice to chooe from, o do ome reearch
efore deciding on which verion et uit our need.

You can find more information on ome of the wallet out there, a well a tip on how to ue them, here and
here.

The mot important part of an wallet i keeping our ke (a tring of character) and/or paword afe. If
ou loe them, ou loe acce to the itcoin tored there.

UYING ONLIN

2 – open an account at an exchange

Crptocurrenc exchange will u and ell itcoin on our ehalf. There are hundred currentl operating,
with varing degree of liquidit and ecurit, and new one continue to emerge while other end up cloing
down. A with wallet, it i adviale to do ome reearch efore chooing – ou ma e luck enough to have
everal reputale exchange to chooe from, or our acce ma e limited to one or two, depending on our
geographical area.

The larget 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 Coinae, ittamp and Poloniex, ut for mall
amount, mot reputale exchange hould work well. (Note: at time of writing, the urge of interet in itcoin
trading i placing train on mot 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 uuall include a photo of our
official ID, and ometime alo a proof of addre.

Mot exchange accept pament via ank tranfer or credit card, and ome are willing to work with Papal
tranfer. And mot exchange charge fee (which generall include the fee for uing the itcoin network).

ach exchange ha a different procedure for oth etup and tranaction, and hould give ou ufficient detail
to e ale to execute the purchae. If not, conider changing the ervice provider.

Once the exchange ha received pament, it will purchae the correponding amount of itcoin on our ehalf,
and depoit them in an automaticall generated wallet on the exchange. Thi can take minute, or ometime
hour due to network ottleneck. If ou wih (recommended), ou can then move the fund to our off-
exchange wallet.

UYING WITH CAH

2 – chooe a purchae method

Platform uch a Localitcoin will help ou to find individual near ou who are willing to exchange itcoin
for cah. Alo, LiertX lit retail outlet acro the United tate at which ou can exchange cah for itcoin.
And WallofCoin, Paxful and itQuick will direct ou to a ank ranch near ou that will allow ou to make a
cah depoit and receive itcoin a few hour later.

ATM are machine that will end itcoin to our wallet in exchange for cah. 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 correponding amount of
itcoin are eamed to our account. Coinatmradar can help ou to find a itcoin ATM near ou.

(Note: pecific uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)

Authored  Noelle Acheon. itcoin image via huttertock.

DICLOUR Read More


Chapter 03

How to tore Your itcoin


Aug 20, 2013 at 20:59 UTC Fe 27, 2019 at 13:49 UTC

Lat updated: 20th Januar 2018

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
alo our pulic ke). If the wallet oftware i well deigned, it will look a if our itcoin are actuall there,
which make uing itcoin more convenient and intuitive.

Actuall, a wallet uuall hold everal private ke, and man itcoin invetor have everal wallet.

Wallet can either live on our computer and/or moile device, on a phical torage gadget, or even on a
piece of paper. Here we’ll riefl look at the different tpe.

lectronic wallet

lectronic wallet can e downloaded oftware, or hoted in the cloud. The former i impl a formatted file
that live on our computer or device, that facilitate tranaction. Hoted (cloud-aed) wallet tend to have a
more uer-friendl interface, ut ou will e truting a third part with our private ke.

oftware wallet

Intalling a wallet directl on our computer give ou the ecurit that ou control our ke. Mot have
relativel ea configuration, and are free. The diadvantage 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 alo tored
elewhere, ou loe our itcoin.

The alo require greater ecurit precaution. If our computer i hacked and the thief get a hold of our
wallet or our private ke, he alo 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 doen’t mean that ou have to ecome a full operational node), ut ou’d alo have to
download the ledger of all tranaction ince the dawn of itcoin time (2009). A ou can gue, thi take up a
lot of memor – at time of writing, over 145G.

Mot wallet in ue toda are “light” wallet, or PV (implified Pament Verification) wallet, which do not
download the entire ledger ut nc to the real thing. lectrum i a well-known PV dektop itcoin wallet that
alo offer “cold torage” (a totall offline option for additional ecurit). xodu can track multiple aet with
a ophiticated uer interface. ome (uch a Jaxx) can hold a wide range of digital aet, and ome (uch a
Copa) offer the poiilit of hared account.

Online wallet

Online (or cloud-aed) wallet offer increaed convenience – ou can generall acce our itcoin from an
device if ou have the right paword. All are ea to et up, come with dektop and moile app which make
it ea to pend and receive itcoin, and mot are free.

The diadvantage i the lower ecurit. With our private ke tored in the cloud, ou have to trut the hot’
ecurit meaure, and that it won’t diappear with our mone, or cloe down and den ou acce.

ome leading online wallet are attached to exchange (uch a Coinae and lockchain). ome offer
additional ecurit feature uch a offline torage (Coinae and Xapo).

Moile wallet

Moile wallet are availale a app for our martphone, epeciall ueful 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 mot of the
dektop one mentioned aove have moile verion, while other – uch a Ara, Airitz and read – were
created with moile in mind.

Hardware wallet

Hardware wallet are mall device that occaionall connect to the we to enact itcoin tranaction. The
are extremel ecure, a the are generall offline and therefore not hackale. The can e tolen or lot,
however, along with the itcoin that elong to the tored private ke. ome large invetor keep their
hardware wallet in ecure location uch a ank vault. Trezor, Keepke and Ledger and Cae are notale
example.

Paper wallet

Perhap the implet of all the wallet, thee are piece of paper on which the private and pulic ke of a
itcoin addre are printed. Ideal for the long-term torage of itcoin (awa from fire and water, ovioul), or
for the giving of itcoin a a gift, thee wallet are more ecure in that the’re not connected to a network. The
are, however, eaier to loe.

With ervice uch a WalletGenerator, ou can eail 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.)

Are itcoin wallet afe?

That depend on the verion and format ou have choen, and how ou ue them.

The afet option i a hardware wallet which ou keep offline, in a ecure place. That wa there i no rik that
our account can e hacked, our ke tolen and our itcoin whiked awa. ut, if ou loe the wallet, our
itcoin are gone, unle ou have created a clone and/or kept reliale ackup of the ke.

The leat ecure option i an online wallet, ince the ke are held  a third part. It alo happen to e the
eaiet to et up and ue, preenting ou with an all-too-familiar choice: convenience v afet.

Man eriou itcoin invetor ue a hrid approach: the hold a core, long-term amount of itcoin offline,
while having a “pending alance” for liquidit in a moile account. Your choice will depend on our itcoin
trateg, and our willingne to get “technical.”

Whatever option ou go for, pleae e careful. ack up everthing, and onl tell our nearet and dearet 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 uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)

Authored  Noelle Acheon. Wallet image via huttertock.

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Chapter 04

How to ell itcoin


Jan 25, 2014 at 11:39 UTC Jan 29, 2018 at 16:46 UTC

Lat Updated: 20th Januar 2018

Thee da virtuall all the method availale to u itcoin alo offer the option to ell.

The exception i itcoin ATM – ome do allow ou to exchange itcoin for cah, ut not all. Coinatmradar will
guide ou to itcoin ATM in our area.

All exchange allow ou to ell a well a u. What tpe of exchange ou chooe to ell our itcoin will
depend on what tpe of holder ou are: mall invetor, intitutional holder or trader?

ome platform uch a GDAX and Gemini are aimed more at large order from intitutional invetor and
trader.

Retail client can ell itcoin at exchange uch a Coinae, Kraken, ittamp, 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 coure, don’t forget to declare an profit ou make on the ale to our relevant tax authorit!)

You can, if ou wih, exchange our itcoin for other crptoaet rather than for cah. ome exchange uch
a hapehift focu on thi ervice, allowing ou to wap etween itcoin and ether, litecoin, XRP, dah and
everal other.

Another alternative i the direct ale. You can regiter a a eller on platform uch a Localitcoin, itQuick,
ittliciou and itargain, and intereted partie will contact ou if the like our price. Tranaction are
uuall done via depoit or wire to our ank account, after which ou are expected to tranfer 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. Jut end the itcoin,
collect the cah or moile pament, and have a celerator drink together. (Note: it i generall not a good idea
to meet up with tranger to exchange itcoin for cah in peron. e afe.)

(Note: pecific uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)

Authored  Noelle Acheon. Graph image via huttertock.

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Chapter 05

How do itcoin Tranaction Work?


Aug 20, 2013 at 20:59 UTC Jan 29, 2018 at 14:54 UTC

Lat updated: 29th Januar 2018

imple verion:

If I want to end ome of m itcoin to ou, I pulih 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 ele.
Once that information i confirmed, m tranaction get included in a “lock” which get attached to the
previou lock – hence the term “lockchain.” Tranaction can’t e undone or tampered with, ecaue it
would mean re-doing all the lock that came after.

Getting a it more complicated:

M itcoin wallet doen’t actuall hold m itcoin. What it doe i hold m itcoin addre, which keep a
record of all of m tranaction, and therefore of m alance. Thi addre – a long tring of 34 letter and
numer – i alo known a m “pulic ke.” I don’t mind that the whole world can ee thi equence. ach
addre/pulic ke ha a correponding “private ke” of 64 letter and numer. 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 pulic ke.

That’ important, ecaue an tranaction I iue from m itcoin addre need to e “igned” with m
private ke. To do that, I put oth m private ke and the tranaction 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 tranaction can e validated – that i, it can e confirmed that I own the itcoin that I am tranferring to
ou, and that I haven’t alread ent it to omeone ele –  plugging the ignature and m pulic ke (which
everone know) into the itcoin program. Thi i one of the geniu part of itcoin: if the ignature wa made
with the private ke that correpond to that pulic ke, the program will validate the tranaction, without
knowing what the private ke i. Ver clever.

The network then confirm that I haven’t previoul pent the itcoin  running through m addre hitor,
which it can do ecaue it know m addre (= m pulic ke), and ecaue all tranaction are pulic on the
itcoin ledger.
ven more complicated:

Once m tranaction ha een validated, it get included into a “lock,” along with a unch of other
tranaction.

A rief detour to dicu what a “hah” i, ecaue it’ important for the next paragraph: a hah i produced 
a “hah 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 hah 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 hah, and unle I change, remove or add anthing to
the text, the ame hah 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 tranaction ha not een tampered with.

ack to our lock: each lock include, a part of it data, a hah 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’ hah would have to change (rememer that one tin change in the input of the hah function
change the output). o if ou want to change omething in the previou lock, ou alo have to change
omething (= the hah) in the current lock, ecaue the one that i currentl included i no longer correct.
That’ ver hard to do, epeciall ince  the time ou’ve reached half wa, there’ proal another lock on
top of the current one. You’d then alo have to change that one. And o on.

Thi i what make itcoin virtuall tamper-proof. I a virtuall ecaue it’ not impoile, jut ver ver,
ver, ver, ver difficult and therefore unlikel.

Fun

And if ou want to indulge in ome mindle facination, ou can it at our dek and watch itcoin
tranaction float . lockchain.info i good for thi, ut if ou want a hpnoticall fun verion, tr itonker.

(For more detail on how lock are proceed and on how itcoin mining work, ee thi article.)

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Chapter 06

How itcoin Mining Work


Aug 20, 2013 at 20:59 UTC Jan 31, 2018 at 17:35 UTC

Lat updated: 29th Januar 2018

When ou hear aout itcoin “mining,” ou enviage coin eing dug out of the ground. ut itcoin in’t
phical, o wh do we call it mining?

ecaue it’ imilar to gold mining in that the itcoin exit in the protocol’ deign (jut a the gold exit
underground), ut the haven’t een rought out into the light et (jut a the gold han’t et een dug up). The
itcoin protocol tipulate that 21 million itcoin will exit 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 tranaction and including them in the
lockchain.
Node

acktracking a it, let’ talk aout “node.” A node i a powerful computer that run the itcoin oftware and
help to keep itcoin running  participating in the rela of information. Anone can run a node, ou jut
download the itcoin oftware (free) and leave a certain port open (the drawack i that it conume energ
and torage pace – the network at time of writing take up aout 145G). Node pread itcoin tranaction
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 (uuall referred to a “miner”). Thee group outtanding tranaction 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 anwer in the lock. The puzzle that need olving i to find a
numer that, when comined with the data in the lock and paed through a hah function, produce a reult
that i within a certain range. Thi i much harder than it ound.

(For trivia lover, thi numer i called a “nonce”, which i a concatenation of “numer ued once.” In the cae
of itcoin, the nonce i an integer etween 0 and 4,294,967,296.)

olving the puzzle

How do the find thi numer?  gueing at random. The hah function make it impoile to predict what
the output will e. o, miner gue the mter numer and appl the hah function to the comination of
that gueed numer and the data in the lock. The reulting hah ha to tart with a pre-etalihed numer
of zeroe. There’ no wa of knowing which numer will work, ecaue two conecutive integer will give
wildl varing reult. What’ more, there ma e everal nonce that produce the deired reult, or there ma
e none (in which cae the miner keep tring, ut with a different lock configuration).

The firt miner to get a reulting hah within the deired range announce it victor to the ret of the network.
All the other miner immediatel top work on that lock and tart tring to figure out the mter numer 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 almot $200,000.

Although it’ not nearl a cuh a deal a it ound. There are a lot of mining node competing for that
reward, and it i a quetion of luck and computing power (the more gueing calculation ou can perform, the
luckier ou are).

Alo, the cot of eing a mining node are coniderale, not onl ecaue of the powerful hardware needed (if
ou have a fater proceor than our competitor, ou have a etter chance of finding the correct numer
efore the do), ut alo ecaue of the large amount of electricit that running thee proceor conume.

And, the numer of itcoin awarded a a reward for olving the puzzle will decreae. 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 cot of electricit
and hardware could go up over the next few ear to partiall compenate thi reduction, ut it’ not certain.

Difficult

The difficult of the calculation (the required numer of zeroe at the eginning of the hah tring) i adjuted
frequentl, o that it take on average aout 10 minute to proce a lock.

Wh 10 minute? That i the amount of time that the itcoin developer think i necear for a tead and
diminihing flow of new coin until the maximum numer 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 aout the tem, ut at
leat now ou have an idea of the road outline of the geniu of the programming and the concept. For the firt
time we have a tem that allow for convenient digital tranfer in a decentralized, trut-free and tamper-
proof wa. The repercuion could e huge.

Authored  Noelle Acheon. itcoin and itcoin mining image via huttertock.

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Chapter 07

Can itcoin cale?


Fe 23, 2018 at 18:30 UTC Fe 26, 2018 at 12:43 UTC
Lat updated: 22 Feruar, 2018

A few ear after atohi Nakamoto unleahed hi itcoin paper on the world, the crptocurrenc’ uer
egan to notice a potential prolem: itcoin wan’t ver liquid.

For a tem that man claimed could replace fiat pament, thi wa a ig arrier. While Via handle around
24,000 tranaction a econd, itcoin could proce up to 7. Unle omething could e done aout thi,
itcoin’ utilit wa limited.

Thu egan the “caling deate,” which polarized the communit and unleahed a wave of technological
innovation in the earch of workaround. Yet while ignificant progre ha een made, a utainale olution
i till far from clear.

The prolem arie from itcoin’ deign: atohi 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 numer of
tranaction overall. An increae in demand would inevital lead to an increae in fee, and itcoin’ utilit
would diminih even further.

Don’t think o

A imple olution initiall appeared to e an increae in the lock ize. Yet that idea turned out to e not imple
at all.

Firt, there wa no clear agreement a to how much it hould e increaed . ome propoal advocated for
2M, another for 8M, and one wanted to go a high a 32M.

The core development team argued that increaing the lock ize at all would weaken the protocol’
decentralization  concentrating mining power – with igger lock, onl the more powerful miner would e
ucceful, and the race for fater machine could eventuall make itcoin mining unprofitale. Alo, the
numer of node ale to run a much heavier lockchain could decreae, 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 everone have to update their itcoin oftware? What if ome miner,
node and merchant don’t?

And finall, an exitential 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 jut that).

What’ more, atohi i no longer around to tell u what he originall intended. And even if he were, would he
care? Did he not deign itcoin to run itelf?

I have an idea

In 2015, developer Pieter Wiulle revealed a olution that, at firt glance, looked like it could appeae all group.
egregated Witne, or egWit, increaed the capacit of the itcoin lock without changing their ize limit,
 altering how the tranaction data wa tored. (For a more detailed account, ee our explainer.)

egWit wa deploed on the itcoin network in Augut 2017, via a oft fork (to make it compatile with node
that did not upgrade). In pite of initial excitement aout the enefit, however, uptake ha een low. While
man wallet and other itcoin ervice are graduall adjuting their oftware, other are reticent to do o
ecaue of the perceived rik and cot.

Take two

everal indutr plaer argued that egWit didn’t go far enough – it might help in the hort term, ut ooner
or later itcoin would again e up againt a limit to it growth.

In 2017, coinciding with CoinDek’ Conenu conference in New York, a new approach wa revealed:
egwit2X. Thi idea – acked  everal of the ector’ larget exchange – comined egWit with an increae
in the lock ize to 2M, effectivel multipling the pre-egWit tranaction capacit  a factor of 8.

Far from olving the prolem, the propoal unleahed a further wave of dicord. The manner of it unveiling
(through a pulic announcement rather than an upgrade propoal) and it lack of repla protection
(tranaction could happen on oth verion, potentiall leading to doule pending) rankled man. And the
perceived reditriution of power awa from developer toward miner and uinee threatened to caue a
fundamental plit in the communit
In the end, the idea wa dropped a few month later, jut week from it target date of implementation

Meanwhile…

Other technological approache are eing developed a a potential wa to increae capacit.

chnorr ignature offer a wa to conolidate ignature data, reducing the pace it take up within a itcoin
lock (and enhancing privac). Comined with egWit, thi could allow a much greater numer of
tranaction, without changing the lock ize limit

And work i proceeding on the lightning network, a econd laer protocol that run on top of itcoin, opening
up channel of fat microtranaction that onl ettle on the itcoin network when the channel participant are
read.

Getting cloer

o where are we now? Adoption of the egWit upgrade i lowl preading throughout the network,
increaing tranaction capacit and lowering fee.

Mot lock are jut over the 1M mark, and tranaction fee – which hot up to over $50 in Decemer 2017 –
have fallen ack down to around $4 at time of writing.

Progre i accelerating on more advanced olution uch a lightning, with tranaction eing ent on
tetnet (a well a ome uing real itcoin). And the potential of chnorr ignature i attracting increaing
attention, with everal propoal working on detailing functionalit and integration.

While itcoin’ ue a a pament mechanim eem to have taken a ack eat to it value a an invetment
aet, the need for a greater numer of tranaction i till preing a the fee charged  the miner for
proceing are now more expenive than fiat equivalent. What’ more, taking into account that we are till at
the eginning of crptocurrenc evolution, the development of new feature that enhance functionalit i
crucial for the potential of the underling lockchain technolog to e realied.

Authored  Noelle Acheon. tep image via huttertock.

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Chapter 08

What i itcoin' Lightning Network?


Fe 23, 2018 at 18:42 UTC Mar 18, 2019 at 12:56 UTC
Lat updated: 21 March, 2018

Hailed a one of the mot potent olution to crptocurrenc caling currentl under development, the
lightning network effectivel create a laer on top of itcoin, enaling fat and cheap tranaction which can
net ettle to the itcoin lockchain.

Propoed  Thaddeu Drja and Joeph Poon in a 2015 white paper, the idea i aed on a network that it
on top of the itcoin lockchain, and eventuall ettle on it. The network i compried of uer-generated
channel that end pament ack and forth in a ecure and trut-le fahion (trut-le mean that ou don’t
need to trut or even know our counterpart).

a, for intance, 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 pament would e made from m wallet to our.
When I’m done watching, we would cloe the channel to ettle the net amount on the itcoin lockchain.

ecaue the tranaction are jut etween me and ou and don’t need to e roadcat to the whole network,
the are almot intantaneou. And ecaue there are no miner that need incentivizing, tranaction fee are
low or even non-exitent.

How it work

Firt, two partie who wih to tranact with each other et up a multiig wallet (which require more than one
ignature to enact a tranaction). Thi wallet hold ome amount of itcoin. The wallet addre i then aved to
the itcoin lockchain. Thi et up the pament channel.

The two partie can now conduct an unlimited numer of tranaction without ever touching the information
tored on the lockchain. With each tranaction, 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 tranacting, the cloe out the channel, and the reulting alance i regitered
on the lockchain. In the event of a dipute, oth partie can ue the mot recentl igned alance heet to
recover their hare of the wallet.

It i ueful to note that it i not necear to et up a direct channel to tranact on lightning – ou can end
pament to omeone via channel with people that ou are connected with. The network automaticall find
the hortet route.

Development of the technolog got a ignificant oot with the adoption of egWit on the itcoin and litecoin
network. Without the upgrade’ tranaction malleailit fix, tranaction on the lightning network would have
een too rik 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 ued for mall or even micro tranaction which carr a lower rik. Larger tranfer that
require decentralized ecurit are more likel to e done on the original laer.

Where are we now?

Although it wa originall deigned for itcoin, the technolog i currentl eing developed for a range of
crptocurrencie, uch a litecoin, tellar, zcah, ether and ripple. Litecoin plan to launch it verion at the
ame time a itcoin’.

In Decemer 2017, tartup ehind the three mot active lightning implementation (ACINQ, locktream and
Lightning La) revealed tet reult, including live tranaction, proving that their oftware i now
interoperale.

Furthermore, verion 1 of the lightning pecification, which et out the rule of the network, ha een
pulihed. Thi will encourage the development of other implementation and application.

However, the network i not et read for launch. ngineer have et to releae oftware with which real uer
can make tranaction. App upporting lightning a a pament method are alread cropping up, ut o far
the’re not ea to ue.

That ha not topped ome of thoe working on project from teting lightning tranaction on the itcoin
network. Lightning developer dicourage thi, however – not onl doe it act a a ditraction to developer,
ut it alo put uer’ fund at rik.

Given the complexit of the code, and the need for rigorou teting (we are talking aout pament, 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 uale lightning network could e at leat a ear awa.

In March 2018, California tartup Lightning La announced the launch of a eta verion of it oftware,
making availale what invetor and project lead a i the firt thoroughl teted verion of the tech to date.
It i till earl da, however – tranaction ize are limited, and the releae i aimed at developer and
“advanced uer”.

Authored  Noelle Acheon. Lightning image via huttertock.

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Chapter 09

What are itcoin Mining Pool?


Mar 6, 2014 at 18:32 UTC Apr 21, 2014 at 15:27 UTC

Lat updated 10th March 2014

One of the firt quetion that anone intereted in mining crptocurrencie face i whether to mine olo or
join a ‘pool’. There are a multitude of reaon oth for and againt mining pool. However, if the hah rate
ditriution acro the itcoin network i anthing to go  (and it i) then mot miner are opting to join a
pool. Here’ what ou need to know.

Pro and con


If ou’re deciding whether to join a mining pool or not, it can e
helpful to think of it like a lotter ndicate – the pro and con
are exactl the ame. Going olo mean ou won’t have to hare
the reward, ut our odd of getting a reward are ignificantl
decreaed. Although a pool ha a much larger chance of olving
a lock and winning the reward, that reward will e plit etween
all the pool memer.

Therefore, joining a pool create a tead tream of income, even


if each pament i modet compared to the full lock reward (which currentl tand at 25 XTC).

It i important to note that it i important for a mining pool to not exceed over 51% of the hahing power of the
network. If a ingle entit end up controlling more than 50% of a crptocurrenc network’ computing power,
it could – theoreticall – wreak havoc on the whole network. In earl 2014, man voiced concern that
the GHah.io itcoin mining pool wa approaching thi threhold, and miner were urged to leave the pool.

Currenc difficult
In itcoin’ cae, the current difficult level i o high that it’ practicall impoile for oloit to make a
profit mining. Unle, of coure, ou happen to have a garage full of AIC 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 coure, itcoin i not the onl currenc out there – it’ ea to
find lit of mining pool for our choen crptocurrenc.

One method of mining that itcoin facilitate i “merged mining”.


Thi i where lock olved for itcoin can e ued for other
currencie that ue the ame proof of work algorithm (for
example, namecoin and devcoin). A ueful analog for merged
mining i to think of it like entering the ame et of numer into
everal lotterie.

Firt-time miner who lack particularl powerful hardware hould look at altcoin over itcoin – epeciall
currencie aed on the crpt algorithm rather than HA256. Thi i ecaue the difficult of itcoin
calculation i far too high for the proceor 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 mot profitale 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 jut one
altcurrenc too.

However, Mark from nut2pool.com aid of thi tpe of witching pool: “Loal coin follower hate them
ecaue a oon a the difficult of a coin drop, the profitailit of it rie. Then all the multipool wing
round, puh the difficult through the roof in a few hour, then leave again. It leave the loal coin follower
having to mine the difficult ack down again at ver low profitailit.”

Pool reward

When deciding which mining pool to join, ou need to weigh up


how each pool hare out it pament and what fee (if an) it deduct.

There are man cheme  which pool can divide pament. Mot of which concentrate of the amount of
‘hare’ which a miner ha umitted to the pool a ‘proof of work’.

hare are a trick concept to grap. Keep two thing in mind: firtl, mining i a proce of olving
crptographic puzzle; econdl, mining ha a difficult level. When a miner ‘olve a lock’ there i a
correponding difficult level for the olution. Think of it a a meaure of qualit. If the difficult rating of the
miner’ olution i aove 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 ue whatoever for thee hare lock, ut the are recorded a
proof of work to how that miner are tring to olve lock. The alo indicate how much proceing power
the are contriuting to the pool – the etter the hardware, the more hare are generated.

The mot aic verion of dividing pament thi wa i the ‘pa per hare’ (PP) model. Variation on thi
put limit on the rate paid per hare; for example, equalied hared maximum pa per hare (MPP), or
hared maximum pa per hare (MPP). Pool ma or ma not prioritie pament for how recentl miner
have umitted hare: for example, recent hared maximum pa per hare (RMPP). More example can e
found on the itcoin wiki.

The other factor to conider i how much the pool will deduct from our mining pament. Tpical value
range from 1% to 10%. However, ome pool do not deduct anthing.

tarting to mine with a pool


Having decided which currenc to mine and which pool ou’ll work for, it’ time to get tarted. You need to
create an account on the pool’ weite, which i jut like igning up for an other we ervice. Once ou have
an account, ou’ll need to create a ‘worker’. You can create multiple worker for each piece of mining hardware
ou’ll ue. The default etting on mot pool are for worker to e aigned a numer a their name, and ‘x’ a
their paword, ut ou can change thee to whatever ou like.

ilhouette, Pro and con, Coin flip and Check mailox image via huttertock

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Chapter 10

What Can You u with itcoin?


ep 25, 2013 at 14:00 UTC Jan 26, 2018 at 18:38 UTC

Lat updated: 20th Januar 2018

After an initial flurr of interet among merchant in accepting itcoin in their retail or online tore, interet
ha largel died down a increaing itcoin tranaction fee and volatile price movement made it le
attractive a a mean of exchange

That doen’t mean that there are no outlet to pend our itcoin, however, far from it. It’ jut that itcoin
volume at thee outlet ha generall not met expectation, and  the time ou read thi, ome ma have
dicontinued that option.

At time of writing, however, ou can till u a wide range of good and ervice with the crptocurrenc.
Among the advantage of doing o are the eae of cro-order tranaction, and anonmit (unle ou want
phical deliver, of coure).  accepting itcoin, merchant get acce to a roader market, and don’t have to
worr o much aout chargeack (where the uer cancel the pament after receiving the product).

If ou want to ue itcoin to u preent, the mot oviou olution i gift card, via Gft or eGifter. The
recipient will then e ale 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 amition are
loftier, ou can pa for pace travel with ome of our vat holding, through Virgin Galactic.

Microoft accept itcoin in it app tore, where ou can download movie, game and app-aed ervice.

ome muician (jork, Imogen Heep) will let ou download their muic in exchange for crptocurrenc.

Need to furnih our houe or u a pecial preent for omeone? Overtock wa one of the firt ig retailer
to tart accepting itcoin, ack in 2014, and it founder – Patrick rne – i till one of the technolog’ mot
active proponent.

Fanc ome gold? harp Pixle, APMX 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 pulic univeritie a well a a couple of New York
prechool accept itcoin.

ome legal and accounting firm alo accept pament for their ervice in the crptocurrenc.

Of coure, ou could alwa u ourelf ome happine  donating to one of the itcoin-accepting
charitie or crowdfunding ite, uch a itHope, itGive or Fidelit Charitale.

For a lit of offline tore near ou that accept itcoin, check an aggregator uch a penditcoin or
CoinMap.

(Note: pecific uinee mentioned here are not the onl option availale, and hould not e taken a a
recommendation.)
Authored  Noelle Acheon.

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