Here’s to
the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in
the square holes. The ones who see things differently. They’re not fond of
rules. And they have no respect for the status quo. You can quote them,
disagree with them, glorify or vilify them. About the only thing you can’t do
is ignore them. Because they change things. They push the human race forward.
And while some may see them as the crazy ones, we see genius. Because the
people who are crazy enough to think they can change the world, are the ones
who do. –Steve Job
Digital
currency. Just the thing tech-savvy
individuals like you and I should be both concerned and excited about. It’s been around for 7 years now and all
indications are it’s here to stay. So,
is bitcoin the currency of the future or just another way to lose money with
technology? Digital currency certainly could
have security concerns. It seems to be
used for all sorts of illegal
activities. But then again, real currency can be used for illegal activities. First, let me explain how Bitcoin works.
Bitcoin is decentralized
digital currency also referred to as cryptocurrency. First, it’s digital, meaning there are no coins or paper money exchanged. It uses public key cryptography certificates
on a peer-to-peer network of bitcoin users.
It’s decentralized, meaning
there is no main database of transactions and no central authority. The transactions are stored redundantly on
all the user’s computers in a blockchain ledger
(distributed database), broadcast to the network. A transaction is broadcast in a process that
prevents bitcoin from being spent twice or spent in two transactions at the
same time, since the transactions are recorded on all the computers in the
peer-to-peer network. Each transaction
creates a hash
value that is stored with the transaction.
If the hash changes, the transaction information has been changed and is
not trusted. Another blockchain ledger
entry will be used to validate the data.
Bitcoins are mined
by allowing a computer to process bitcoin transactions as part of the
peer-to-peer network. Anyone allowing
their computer to be used for the transactions gets a small bitcoin reward for
participating and the new bitcoins are added to the blockchain. Bitcoins are stored in a bitcoin wallet, either an application on your computer
or cell phone that stores your bitcoins, a web based third party that stores
them for you or a hardware wallet which stores the keys on specially designed removable
media. Only the person with the private
cryptokey can spend the bitcoin. The
wallet stores the private keys and a record of anyone you exchange bitcoins
with without actually knowing who the other person is since you only have an
address for the person. The address
doesn’t have any personal information.
The address is actually just a number.
Key Characteristics
Open Source –
nobody owns or controls bitcoin. Once it
was introduced to the world, it started being used and will only cease to exist
if everyone stops using it.
Efficient –
There’s no third party (bank or credit card company) processing the
transaction, so it’s fast and reliable.
Inexpensive - There’s
no third party (bank or credit card company) processing the transaction, so it’s
very low cost. Credit cards typically
charge 2 to 4% per transaction for processing (transferring the funds from the
buyer’s bank to the seller’s bank). This
is cheap because there is no bank involved, only the buyer and seller. The transaction is stored in the blockchain.
Anonymous – transaction
is recorded but the two parties are untraceable. Anyone can see how many bitcoin are in an
address, but they can’t find out who has that address. To increase anonymity, a person can use
multiple addresses for a single transaction.
There’s no record of what was bought or sold.
Secure – Bitcoin
uses SHA-256 encryption for transactions and verification. The next section outlines the security
problems that bitcoin has had so far.
Security
There have been
four bitcoin security
breaches, but the security problems weren’t bitcoin issues, they were the
same security issues any network faces. All
involved attacks on bitcoin wallets or accounts. The
first breach one was a social engineering attack that stole a password to an
email address used for a bitcoin account.
The second, the Mt.
Gox bankruptcy, was caused by inadequate network security in what was at
one time the largest bitcoin exchange.
What wasn’t stolen by hackers was lost to poor management. The third, Silk
Road 2.0 was an attack against the darknet website’s bitcoin account. There is speculation that it was a cover-up
for corruption within the illegal site. The
fourth breach, called the Pony
botnet, stole passwords to 85 personal, locally stored bitcoin
wallets. The weakness exploited was the computer
system security, not a weakness in the bitcoin algorithm.
Bitcoin appears
to be here to stay. There’s even some
talk about banks and other large financial organizations using blockchain
technology for transactions. So the
bottom line seems to be, bitcoin is safe, quick, cheap and reliable--as long as
you protect your digital wallet. Once again
we find the importance of good security practices.
Bitcoin image courtesy of Imgur, http://imgur.com/Jdszyq9
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