Bitcoin

[1] IHK Region Stuttgart

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Bitcoin (BTC), created in 2008, is the most popular application and virtual cryptocurrency based on the Blockchain. A cryptocurrency describes virtual money, where the principle of cryptography is used to realize a distributed, decentralized and secure digital payment system. [1]

The aim of the Bitcoin system is to conduct transactions anonymously and electronically without a central intermediary. To achieve such decentralized consensus in the network, the transactions are validated with a so-called proof of work mechanism. Accordingly, network participants, known as miners validate new transactions and store them on the Blockchain while providing high computing power. In return, the miners receive Bitcoins. However, since the number of Bitcoins is limited to 21 million Bitcoins, it has become a speculative commodity.

Meanwhile, almost 20,000 merchants worldwide accept Bitcoin for payment in 2020, nevertheless Bitcoin only fulfills monetary functions to a limited extent compared to other means of payment. Bitcoin thus focuses on the preservation of value in terms of decentralization, proof of authenticity, and identity.

A Bitcoin transaction proceeds as follows:

  1. The Public key of the receiver is known to the sender to conduct a transfer

  2. Sender conducts a transaction via the wallet and confirms the transaction with his own private key

  3. Nodes distribute the transaction into the Bitcoin network and verify the authenticity with the public key of the sender

  4. Miners transform incoming transaction into a hash function, cryptografically seal and interlink it with other transactions in a new block

  5. The miner, who is successfully fulfilling the proof of work creates a new block and receives Bitcoins in return

  6. All Nodes synchronize and save updated version of the Blockchain

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