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Bitcoin is an open source peer-to-peer (P2P) electronic cash system that's completely decentralised, with no central server, trusted authorities or middle men. The availability of bitcoins can't be manipulated by governments or financial institutions.
Bitcoin is the first truly decentralised currency and has paved the way for hundreds more to compete together in Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in books like The Sovereign Individual and which is coming to be known by agorists as The Second Realm.
If you have a bitcoin, what that means is that there is an agreement among its users that the world owes a certain amount of labor to you. The value of the bitcoin approximately depends on the size of the network, and essentially gives you a 1 / 21000000 share in the value that can come out of this network and its ability to facilitate trade. When gold was the dominant currency, it seemed that it represented physical value while bitcoin is a looking glass that shows us what money really is: social value.
Bitcoin is the first online currency to solve the so-called “double spending” problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can’t be spent twice–because it’s distributed (a lot like BitTorrent), there’s no central authority. This makes digital bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don’t have them anymore, all without the help of a third party.
A couple of good introductions to bitcoin are this one by Bitcoin Weekly and this one by Bitcoin Bytes.
Organic Design statement on Bitcoin:
...yeah! what he said!
Recently Bitcoin has been receiving a lot more attention from the mainstream media and is in fact starting to become a mainstream service in many ways. This has been causing the price to rise a lot which in turn has been leading to a lot of heated debate on both the positive and negative side. Organic Design fully supports Bitcoin and the entire cryptocurrency movement, and has therefore been receiving some negative feedback from those who feel that Bitcoin is not a solution, is not "sound money", is "just another fiat currency" or is a bubble that will crash at any time. I'll address each of these issues in this section, and conclude with the positive side; why Bitcoin is so important and so deserving of full support. [more]
After you've installed the bitcoin applicaton on you computer and run it, you'll see a simple application window with six tabs across the top which ara each explained as follows:
Ovreview: this is the default tab and gives you a basic summary of your confirmed and unconfirmed (by other nodes in the network) balance, and a list of the last few recent transactions.
Send coins: this allows you to send bitcoins to any number of recipients. For each recipient you enter an amount to send them, and their bitcoin address with an optional name for you to remember the address by. You can also select the address from your "address book" which is a list of all the addresses you've given a name to. There's an "Add Recipient" button at the bottom for adding more recipients to send to at the same time.
Receive coins: this a list of your bitcoin addresses that other people can send coins to. The sender is anonymous, so you can use these named receiving addresses to kepp track of where your coins have come from by telling each contact a specific address to send to. You can create as many receiving addresses as you like using the "New Address" button at the bottom.
Transactions: this tab is a simple list showing all your transactions with you can filter by amount sent or received, and by period. Each item in the list shows the date/time of the transaction, your local name for the address the transaction was received with or sent to, and the amount in bitcoins.
Address Book: this is a list of the addresses you've created for sending bitcoins to and the local name you've chosen for each address. You can edit or delete each address by right-clicking on it, and you can add new addresses with the "New Address" button at the bottom (which is the same as useing the "Add Recipient" button in the "Send Coins" tab.
Export: this a button that brings up a file-save window to export the data shown in the currently selected tab. This button can't be used if the "Overview" tab is selected since it only works for the table-data in the other four tabs.
When the application is started for the first time (or after a few days or more of disuse) there is a long delay while your instance of the application synchronises its local data with the current state of the network. This is very computationally intensive and can take many hours. Your displayed balance may be incorrect until its fully synchronised, but you can still send coins from out of the currently confirmed coin-balance. You can never spend any coins you don't have because the locally out-of-date information only applies to incoming transactions, because all outgoing transactions are done locally.
How it works
In a p2p computer network there are no servers, the entire network is composed of users running instances of the application on their computers. Each running instance offers a small amount of processing and storage resource to the network so that it can deliver the services it was designed for such as redundant storage, anonymity or voice-over-IP applications.
In the case of a p2p currency system, some of the services the network is designed to offer are privacy, verification, authentication, currency creation and transfer of ownership. To ensure a reliable and tamper-proof system requires a lot of resource, and that amount is proportional to the amount of coins in the network. The network is able to pay the users for the resource they offer by making the coin-creation process part of the network protocol itself instead of being handled by a central trusted authority. This creates a natural and incorruptible link between the supply of currency in the network and the demand for it.
Even aside from the ability to exchange bitcoins for other currencies, it still makes a very useful tool for independent organisations and groups because it allows them to trade and settle accounts amongst themselves independently and privately. It effectively gives them a "bank" that has a trustworthy system of accounts that can't be tampered with and requires no corruptible central authority to operate. See the following links for more detailed information about how it works.
Bitcoin was born on January 3rd, 2009, at 6:15PM Greenwich Mean Time, which is when Satoshi Nakamoto mined the first 50 coins, known as the "genesis block."
The Bitcoin Wallet
The term "wallet" is actually a little bit misleading because the information representing coins and transactions are actually stored throughout the entire network, not in the wallets. The wallet actually stores private keys that give the wallet-holder the ability to spend coins in the network that are confirmed as being currently associated with one of your private keys. A bitcoin address that you show to other people in order for them to send you money is the public half of one of the private keys in your wallet.
This means that it's very important to back up your wallet and to remember the password you've locked it with, because if you lost access to your wallet you'd no longer have control over any of the coins in the network that are associated with your addresses. You must back up your wallet whenever you create a new address, but there's no need to back up your wallet every time you receive new coins, because these are not stored in your wallet. For example, you could have a bitcoin wallet on a computer that's never been connected to the network and be paid into that wallets address for years before you got around to connecting it and checking your balance.
Many people are concerned about this "21 million coin limit" for example this blog post about Why Bitcoin Will Fail as a Currency is based on this belief. But it's not actually a problem because Bitcoins are divisible into eight decimal places (and future versions of the protocol could easily be designed to divide it further if there becomes demand for that) so even if there were only a few Bitcoins in existence, the entire Bitcoin economy could still operate properly.
Inflation and Transaction Fees
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
The incentive (for nodes to support the network) can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.
Fiat Leak- realtime map showing fiat currencies moving in to the Bitcoin economy
BlockTrail- interesting info about addresses and the blockchain
Bitcoin exchange sites
Buying Bitcoins is more difficult than expected considering that there's so many people trying to buy them. The reason is because Bitcoins more closely resemble cash than they do credit. This is because the transactions are irreversible whereas credit cards, Paypal and many other electronic forms of credit can be reversed up to six months later. To make matters worse, PayPal and most credit card company's have reversed many Bitcoin transactions because they consider Bitcoin to be a fraudulent operation. So the bottom line is that buying Bitcoins needs to be done with a solid irreversible form of currency such as cash in person or posting a cheque. Following are some exchanges offering various means of buying and selling Bitcoins. I find the easiest method is to use a wire transfer from a bank account which many exchanges accept (even though wire transfers can actually be reversed, but it's quite a procedure).
Intersango- (based in London) allows international wire to deposit funds into EUR, GBP or PLY
Bitstamp- (based in Slovenia) allows international wire in USD and a few other currencies
Bitcoin-24.com- no BTC transfer fees, only $3.20 international wire fee, no ID for signup, based in Britain, accounts in Poland
MtGox- (based in Tokyo) extremely strict signup & verification procedures
BTC-e - (based in Russia) allows international wire in USD and a few other currencies, minimum US$5000 (also handles Namecoin, Litecoin and others)
BTC China- doesn't currently have wire transfer option, support liberty reserve and Chinese payment systems
IMCEX- a user-to-user Bitcoin, Namecoin and LibertyReserve exchange
BitInstant- Providing instant transfers for the bitcoin economy
It has been a hot debate for years amongst the bitcoin developers as to whether or not the blockchain should allow the storage of data not related specifically to bitcoins. Even Satoshi himself weighed in on this debate saying that,
“Piling every proof-of-work quorum system in the world into one dataset doesn't scale. Bitcoin and BitDNS can be used separately. Users shouldn't have to download all of both to use one or the other. BitDNS users may not want to download everything the next several unrelated networks decide to pile in either.”
— Satoshi Nakamoto
Eventually projects started to store custom data in the blockchain in exotic ways which began to bloat the blockchain, so the developers in mid 2014 added the OP_RETURN opcode to the official set of executable codes which allows 40 bytes of custom data to be added to transactions. With OP_RETURN, Bitcoin's long-running debate over acceptable uses of the block chain has received some much needed clarity. Applications can now inexpensively add a 40 byte data payload to transactions using the OP_RETURN script function. On a technical level, OP_RETURN doesn't enable anything that wasn't previously possible. Instead, OP_RETURN provides a standard interface through which new services can potentially be layered onto the block chain, and a central point of focus for future work on integration tools.
Here's a list of various projects and ideas that extend the functionality available in the blockchain.
The History of Gold and the Future of Bitcoin- "if the subjective theory of value means anything, 'unique cryptographic hash' is not inherently less valuable than 'shiny rock', even if it has no representation in physical space. Each has only the value that people give to it."