As we already know : A block chain is used to record all transactions ever made with Bitcoin. This block chain allows anyone’s current balance to be checked.
It also ensures that any transactions that are being made are definitely authorized by the individual sending the bitcoins. Cryptography is used to ensure the block chain cannot be interfered with or become corrupted. In addition, Private Keys (like very long randomly generated passwords) are used on every transaction to act as digital signature for the person spending the bitcoins. This ensures hackers cannot spend other people’s money. The whole system runs on a peer-to-peer network, relying on individuals personal PCs rather than a central data center.
Highly randomized algorithms are used to ensure that any one person can never possibly predict or know whose transactions they might be processing. This further removes the possibility of abuse.mining-for-bitcoin As an incentive to individuals to provide their hardware for performing these services, the mining process also periodically mints new Bitcoins, and rewards them to the owners of mining equipment. Bitcoin has a defined maximum number of coins that will ever be produced. This keeps the scarcity and desirability in check.As at the time of this report there are around 13,000,000 in ciculation this amount will be capped to 24,000,000
Encryption And the Blockchain
Bitcoin is one of many cryptocurrencies available today. Cryptocurrencies are digital currencies that implement cryptography as a central part of the protocol, in order to establish pseudonymous (or anonymous) and decentralized currencies.
Bitcoin uses SHA-256 encryption for both its Proof-of-Work (PoW) system and transaction verification. The security of the bitcoin protocol lies in one of its fundamental characteristics, the transaction blockchain.
The blockchain is basically a chain of multiple “blocks” containing transaction history. The blockchain starts with the initial block, known as the genesis block. Transactions and solved hashes add new blocks after this genesis block, creating a blockchain.
It’s hard to deny that there are indeed security issues with bitcoin. However, a recurring theme is the fact that these security breaches and issues have less to do with the protocol itself, and a lot more to do with the people and serviceshandling and storing these bitcoins.
For instance, the inputs.io bitcoin heist and the Pony botnet took advantage of wallets stored online and on Internet-connected computers. Simply storing Bitcoins in an offline savings wallet, such as a paper or hardware wallet, should eliminate the risk of having bitcoin wallets stolen over the Internet. While some of the money lost in the Mt. Gox fiasco was indeed from offline wallets, there is conjecture that this was a direct result of how Mt. Gox implemented an automated system which pulled from offline wallets when needed.
The dangers of once-trusted sites and exchanges such as Mt. Gox and Silk Road 2.0 either being hacked or imploding and going offline are not so easily dismissed, though. The lack of a central authority that regulates bitcoin can be seen as a strength, but it’s also a weakness. For one, it may be a lot more difficult to hold individuals or companies accountable through legal channels.
More importantly, though, the unregulated bitcoin ecosystem means that there’s no way to ensure that services and exchanges comply to standards of trustworthiness and security. We trust banks because we know that they’re heavily regulated and can’t be established on a whim. This plainly hasn’t been the case with bitcoin exchanges.
Interestingly enough, the fallout from Mt. Gox may just be good for bitcoin. In a joint statement issued by 5 leading bitcoin exchanges, the need for appropriate and independently audited safety measures for custodians, alongside more transparency and accountability, is brought up.
It’s conceivable that such measures are exactly what bitcoin needs if it wants to survive recent events and reestablish its credibility and security. Ironically however, these forms of regulation and auditing may end up going against the original spirit of bitcoin. How this paradox will resolve itself, though, remains to be seen.