Bitcoin System
Bitcoin System
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Bitcoin System
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Bitcoin System
Jan Lánský*
Abstract
Cryptocurrency systems are purely digital and decentralized systems that use cryptographic
principles to confirm transactions. Bitcoin is the first and also the most widespread
cryptocurrency. The aim of this article is to introduce Bitcoin system using a language
understandable also to readers without computer science education. This article captures the
Bitcoin system from three perspectives: internal structure, network and users. Emphasis is
placed on brief and clear definitions (system components) and their mutual relationships.
A new system view of the stated terms constitutes author’s own contribution.
1 Introduction
Cryptocurrencies are an alternative to fiat currencies that are issued and guaranteed by
individual states. Cryptocurrency systems are purely digital and decentralized systems that
use cryptographic principles to confirm transactions. Transactions in cryptocurrency systems
are pseudoanonymous, yet also transparent, non-refundable, fast and cheap. Cryptocurrencies
usually feature a fixed, maximum monetary stock and procedure of its release into circulation.
Bitcoin (Nakamoto, 2008) is the first and also the most widespread cryptocurrency. Currently,
there are more than 600 different cryptocurrencies (Coinmarketcap, 2017), majority of which
is derived from Bitcoin. Cryptocurrencies become a part of life of an increasing number of
people; the number of merchandizers, who accept cryptocurrencies as a payment for their
goods and services, has been expanding (Chokun, 2016). Bank regulatory authorities become
increasingly interested in cryptocurrencies (European Banking Authority, 2014).
Bitcoin system has no central authority to perform transaction clearing. Transactions are
cleared through a decentralized network of computers; each computer is called a node. Each
network node independently verifies the correctness of transactions. Transactions are included
in an accounting book called blockchain, designed by Haber and Stornetta (1997). The same
copy of this book is kept up to date by each network node. In order for all network nodes to
agree on one form of bookkeeping, the proof of work proposed by Back (2002) is used. In the
proof of work, the solution of a difficult mathematical problem, belonging to the category of
NP-complete tasks, is sought. To solve the problem, a large number of calculations are
needed. Verifying the correctness of the solution is easy. The entry of proof of work is a block
of transactions that the node considers to be correct. The node performs a complex
mathematical calculation and publishes the resulting result. The other nodes will verify that
5 Discussion
In the previous three chapters, we have presented three views of the Bitcoin system. In each
view, we have identified system components and their mutual relationships. Within the
discussion we will be seeking publications relating to individual relationships and identify the
types of relationships that are yet to be solved in literature.
In the internal structure of the Bitcoin system their quantity was also provided with respect to
some components and relationships. For example, one block contains on average 1000 - 2000
transactions and one coinbase transaction. Blockchain includes about 450,000 units.
Numerical relationships between the components of the Bitcoin system are well analysed by
publicly available servers, e.g. Blockchain.info (2017).
Miners are trying to mine new blocks and compete for reward for newly mined blocks. Due to
the high value of this reward the competition is tough, which is widely documented in
scientific literature. Vilim et. al. (2016) deals with hardware for mining, which does not
calculate hashes flawlessly, but admits that some hash calculations will be flawed. This
hardware improves earnings from mining by 30%. O'Dwyer and Malone (2014) deal with
environmental aspects of miners’ competition. Cocco and Marchesi, M. (2016) deal with
economic modelling of mining in the Bitcoin system. Eyal and Sirer (2014) deal with the
reliability of mining and warn that the Bitcoin system is vulnerable if the proportion of unfair
miners exceeds 1/3.
Current scientific articles are also interested in the development of cryptocurrency prices and
factors that influence this development. Lansky (2016) analyses, which cryptocurrencies have
historically reached the largest price decreases and increases. Smith (2016) deals with the
possibility that the price of Bitcoin is manipulated by a narrow group of speculators. Kancs et.
al. (2015) deal with the question of whether Bitcoin performs the function of currency and,
subsequently, analyse the factors affecting its price. Similarly as in the previous study, some
price fluctuations cannot be explained without the influence of speculators.
In literature, by contrast, the issue of development of the number of Bitcoin network users and
the factors that influence this development are not solved. How successful are the propagators
and developers of software in attracting new users? How high is a proportion of investors
6 Conclusion
This article introduces and provides closer account of the Bitcoin system and the relationships
between its individual components to those newly interested in cryptocurrency. The issue of
cryptocurrency is difficult in terms of input knowledge from many fields of science; this
article, however, does not assume any input knowledge. The advantage of this article as
compared to books is the clarity and brevity of definitions. In deriving new terms only the
already defined terms are strictly used. New terms are not defined by means of terms, which
will be defined later. A new system view of these terms is the author’s own.
We have introduced the Bitcoin system from three perspectives. The first view is in terms of
its internal structure. We have explained how transactions look and how they are organized in
blocks and blockchain. The second view dealt with nodes of the Bitcoin network, their types,
and their mutual relationships. Full nodes, wallet nodes and mining nodes were major nodes.
A third view dealt with various types of users of Bitcoin network.
In the discussion, we have elaborated on available scientific literature with respect to certain
relationships between the individual components of the Bitcoin system and drawn attention to
topics that are not covered in literature.
Acknowledgement
This research was supported by the Czech Science Foundation as part of the project New
Sources of Systemic Risk on Financial Markets (GA ČR 16-21506S).
References
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Cocco, L., & Marchesi, M. (2016). Modeling and Simulation of the Economics of Mining in the Bitcoin
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