An anonymous decentralized local marketplace built on Bitcoin.
fyi - the use of the word "scheme" is not used negatively! BASIC FEATURES
Bitcoin is probably the most successful — and probably most controversial — virtual currency scheme to date. Designed and implemented by the Japanese programmer Satoshi Nakamoto in 2009, the scheme is based on a peer-to-peer network similar to BitTorrent, operating at a global level and used as a currency for all kinds of transactions (for both virtual and real goods and services). It thereby competes with official currencies like the euro or US dollar. The scheme maintains a database that lists product and service providers which currently accept Bitcoins. These products and services range from intemet services and online products to material goods and professional or travel/tourism services. Bitcoins are divisible to eight decimal places
enabling their use in any kind of transaction, regardless of the value. Although Bitcoin is a virtual currency scheme, it has certain innovations that make its use more similar to conventional money.
Bitcoins are not pegged to any real-world currency
. The exchange rate is determined by supply and demand in the market. There are several exchange platforms for buying Bitcoins that operate in real time. Mt.Gox is the most widely used currency exchange platform and allows users to trade US dollars for Bitcoins and vice versa. As previously stated, Bitcoin is based on a decentralised, peer- to-peer (P2P) network, i.e. it does not have a central clearing house, nor are there any ﬁnancial or other institutions involved in the transactions. Bitcoin users perform these tasks themselves. In the same vein, there is no central authority in charge of the money supply.
In order to start using Bitcoins, users need to download the free and open-source software. Purchased Bitcoins are thereafter stored in a digital wallet on the user’s computer. Users have several incentives to use Bitcoins. Firstly, transactions are anonymous, as accounts are not registered and Bitcoins are sent directly from one computer to another. Also, users have the possibility of generating multiple Bitcoin addresses to differentiate or isolate transactions. Secondly, transactions are carried out faster and more cheaply than with traditional means of payment. Transactions fees, if any, are very low and no bank account fee is charged. ECONOMIC FOUNDATIONS OF BITCOIN
The theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current ﬁat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inﬂation.
The following ideas are generally shared by Bitcoin and its supporters:
— They see Bitcoin as a good starting point to end the monopoly central banks have in the issuance of money.
— They strongly criticise the current fractional-reserve banking system whereby banks can extend their credit supply above their actual reserves and, simultaneously, depositors can withdraw their funds in their current accounts at any time.
— The scheme is inspired by the former gold standard. TECHNICAL DESCRIPTION OF BITCOIN
The technical aspects of this system are complex and not easy to understand without a sound technical background. Therefore, a comprehensive explanation of the underlying technical mechanism of Bitcoin lies outside the scope of this report. This section aims simply to provide a basic description of the functioning of this virtual currency scheme. According to the founder, Nakamoto (2009), an electronic coin can be deﬁned as a chain of digital signatures. Each owner of the currency (P') has a pair of keys, one public and one private. These keys are saved locally in a ﬁle and, consequently, a loss or deletion of the ﬁle would mean that all Bitcoins associated with it are lost as well.
A simpliﬁed illustration of a chain of transactions from one node to another can be found here
. The virtual coin shown in the picture is the same one, but at different points in time. To initiate the transaction, the future owner P‘ has to ﬁrst send his public key to the original owner P0. This owner transfers the Bitcoins by digitally signing a hash6 of the previous transaction and the public key of the future owner. Every single Bitcoin carries the entire history of the transactions it has undergone, and any transfer from one owner to another becomes part of the code. The Bitcoin is stored in such a way that the new owner is the only person allowed to spend it.
All signed transactions are then sent to the network, which means that all transactions are public transactions, although no information is given regarding the involved parties. The key issue to be addressed by the system is the avoidance of double spending, i.e. how to prevent a coin being copied or forged, especially considering there is no intermediary validating the transactions. The solution implemented is based on the concept of a “time stamp”, which is an online mechanism used to ensure that a series of data have existed and have not been altered since a speciﬁc point in time, in order to get into the hash. Each time stamp includes the previous time stamp in its hash, forming a chain of ownership. By broadcasting the new transactions, the network can verify them. The systems that validate the transactions are called “miners” — essentially these are extremely fast computers in the Bitcoin network which are able to perform complex mathematical calculations that aim to verify the validity of transactions. The people who use their systems to undertake this mining activity do so on a voluntary basis, but they are rewarded with 50 newly created Bitcoins every time their system ﬁnds a solution.
“Mining” is therefore the process of validating transactions by using computing power to ﬁnd valid blocks (i.e. to solve complicated mathematical problems) and is the only way to create new money in the Bitcoin scheme.
According to Nakamoto (2009): “if a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or by using it to generate new coins. He ought to ﬁnd it more proﬁtable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth”
. MONETARY ASPECTS OF BITCOIN
The Bitcoin scheme is designed as a decentralised system where no central monetary authority is involved. Bitcoins can be bought on different platforms. However, new money is created and introduced into the system only via the above-mentioned mining activity, i.e. by rewarding the “miners” who perform the crucial role of validating all transactions made, with new Bitcoins. Therefore, the supply of money does not depend on the monetary policy of any virtual central bank, but rather evolves based on interested users performing a speciﬁc activity. According to Bitcoin, the scheme has been technically designed in such a way that the money supply will develop at a predictable pace
The algorithms to be solved (i.e. the new blocks to be discovered) in order to receive newly created Bitcoins become more and more complex (more computing resources are needed). As explained on its website} the rate of block creation is approximately constant over time: six per hour, one every ten minutes. However, the number of Bitcoins generated per block is set to decrease geometrically, with a 50% reduction every four years. The result is that the number of Bitcoins in existence will reach 21 million in around 2040. From this point onwards, miners are expected to ﬁnance themselves via transaction fees. In f