Sources of data of Bitcoin
Dsicuss about the Liquidity Price And Stability Of Crypto currencies.
Cryptocurrency refers a digital asset, which is designed for working as a medium of exchange through using cryptography. Cryptography provides secure transactions for controlling additional creation of units along with verification regarding transfer of assets (Kosba et al. 2016). These types of currencies refer as digital currencies, virtual currencies and alternative currencies. Through using decentralised control, those digital currencies oppose activities of central banking system and electronic money, as well. Transactions of cryptocurrency happen between individuals through direct interaction while bank does not play any role (Abboushi 2017). For instance, a person sends a particular form of cryptocurrency to someone else through using crypto wallet while a digital ledger, that is, blockchain records those transactions. In this context, it can be mentioned that each cryptocurrency has possessed its exclusive blockchain and to maintain those currencies, computers conduct complex math under a large network. Computer creates block after doing transactions through cryptocurrency for a specific number by users. For sending a block along with adding transactions to this blockchian and for winning monetary reward, computers operate complex math, which is called cryptoghraphic function. At present, more than 1500 cryptocurrencies are performing over the internet and this number is increasing gradually (Cocco, Concas and Marchesi 2017). However, according to the market capitalisation, Bitcoin possesses the largest network of blockchain presently while Ethereum, Bitcoin Cash, Ripple and Litecoin have also earned significant popularity as cryptocurrency.
Hence, this report is going to describe the importance of cryptocurrency at modern economy with the help of a particular cryptocurreny, which is, Bitcoin. Through various sources, this report is intended to describe the chief role of Bitcoin along with the concept of Lightning Network.
Bitcoin is a form of cryptocurrency that is used as mode of payment all over the world. Satoshi Nakamoto, a group of some unknown people, was invented this first decentralised digital currency and in 2009 it was released as open-source software. In 2015, around 100000 vendors and merchants have accepted this digital currency as payment (Reynolds and Irwin 2017). This digital currency, which is referred as the reward of mining process, can be exchanged for other products, services and currencies.
Bitcoin has first introduced and defined in the whitepaper in 2008. The term is a combination of two words, which are, bit and coin and instead of using the word “Bitcoin”, the paper only uses “coin”. This digital currency has revolutionised the global payments and consequently people and industry all over the world have started to rethink about the meaning of money (Swartz 2018). In addition to this, network and the underlying technology, which process Bitcoin transactions, have transformed various industries like banking, healthcare, logistic, farming, manufacturing and elections and so on. Publication of groundbreaking work of Satoshi Nakamoto has helped this revolution to occur as this publication has outlined the concept of Bitcoin and its functions (Dobrescu and Dobrescu 2017). Consequently, at present many projects are formed with bitcoin with the help of Bitcoin software. Those different versions of bitcoin separate with each other on the basis of some properties though the only one, that is, Bitcoin Cash, has earned huge importance with its original version according to the whitepaper.
Bitcoin: Whitepaper
After the divergence of Bitcoin network in 2017, people have faced difficulties to differentiate between Bitcoin Cash (BCH) and Bitcoin Core (BTC). Hence, it is essential to differentiate between BCH and BTC based on some unique criteria of Bitcoin (Shanmugam et al. 2017). Those can be described as follows:
- Bitcoin has reliable and fast transactions along with low transaction fees. on the other side, Bitcoin Core has slow transaction and expensive as well.
- BCH accepts 0-confirmation transactions while BTC does not accept.
- BCH has decentralised development team but BTC does not have any team of this kind.
- Network and development of Bitcoin Cash is permission less while Bitcoin Core needs permission.
- BCH is a form of digital currency but the BTC is not.
Hence, the above differences have showed that Bitcoin Cash is the version of Bitcoin, which is used as digital currency as mentioned in the Bitcoin whiteboard.
Satoshi Nakamoto, the creator of Bitcoin, has discussed about the reliance of web on the trusted third party like credit card companies and banks for processing electronic payments (Vasek, Thornton and Moore 2014). Most of the financial transactions follow traditional method though the chief problem occurs when those institutions purchase and sell goods on the internet (Pridemore, Roche and Rogers 2018). Some limitations of traditional electronic payments considering third parties are:
- Banks mediate clashes, which occur unavoidably and consequently transactions can be reversed. For instance, disputes can be occurred during the transactions among consumers, merchants and other third parties like payment processors.
- Intervention of banks has led the costs of transactions to increase further and this limits the minimum size of practical transaction as well. When a provided provides non-reversible services, the transaction reversibility becomes a problem.
- The possibility of reversal regarding transactions threats everyone and this lead people to trust on a third party like banks to overcome payment disputes.
- This traditional system considers some percentage of fraud that cannot be avoided. However, this fraud increases cost if everyone regarding doing business. In this context, Nakamoto has proposed that a payment system through electric medium, based on cryptocurrency, can be trustworthy, as this digital currency uses codes and protocols for establishing secured communications.
Hence, according to Nakamoto, Bitcoin can provide secured transactions between two parties directly, as it has possessed some features (Badertscher et al. 2018). These are described as follows:
- Peer-to-peer (P2P) method o payments through an online network
- Transactions through Bitcoin or cryptocurrency are irreversible and according to Nakamoto, this irreversibility can protect sellers from fraud. Moreover, escrow mechanism can protect buyers from fraud.
- Timestamp server distributed through a peer-to-peer process can generate mathematical proof of transactions in a chronological order. This secured system can perform honestly; as long as participants together can control computing power more, compare the attackers or hackers.
- Bitcoin eliminates the existence of third party and replaces trust through verification.
Nakamoto has described the electronic transaction process, which is, block chian, technically. In other words, the group has described this specified electronic coin as a chain of digital signatures. For the previous transaction, owners sign a hash digitally and for the next owner, the previous owners add a public key to the end of the coin (Jovicic and Tan 2018). The recipient of this coin or the payee can verify those signatures for verifying the chain of the ownership.
In this context, the concept of lightning network, which is a second layer protocol of payment performing on the top of blockchain, can be described. It facilitates instant transactions between nodes, which have participated and can be represented as a solution associated to the bitcoin scalability problem (Yeow et al. 2018). This process represents the feature of p2p system to make micropayments regarding digital cryptocurrency with the help of a network of bidirectional channels of payment without giving custody related to funds along with minimising third party trust. The basic use of the Lighting Network is to open a payment channel through committing a funding transaction, based on relevant blockchain and to make any number of lighting transactions, which update the tentative distribution regarding funds of the channel without broadcasting to the blockchain.
In the process of transaction, paying fees is optional. Miners have options to choose any process of transaction and consequently they receive the opportunity to earn incentives for prioritizing those transactions, which pay higher fees (Sompolinsky and Zohar 2018). The network caps the size of mined blocks and for this; miners choose transactions according to the fee paid, based on their storage size and this is not absolute amount of money that is paid as a fee. Hence, fees are measured in terms of satoshis per byte, where 100000000 satoshis represent one Bitcoin (Matzutt et al. 2018). The transaction size is based on the number of inputs, which are used to generate transactions along with the number of outputs.
Difference between Bitcoin Cash (BCH) and Bitcoin Core (BTC)
This service is used to keep record, which is done with the help of computer processing power. Miners keep the blockchain compete, unalterable and consistent through grouping newly broadcast transactions repeatedly into a block after which this block is broadcasted to the network and verified as well (Zheng et al. 2017).
Mining pool represents the concept of pooling of resources, done by miners. Those miners share processing power of their processing power over network for splitting the reward equally based on the working amount they have contributed to finding a block (Zolotavkin, García and Rudolph 2017). The process of mining of pool starts when the difficulty associated with mining increases to the point when other slower miners may require centuries to generate a block. To solve this problem, miners pool their resources to generate blocks at a faster rate and consequently receive reward from a portion of the block on a consistent basis rather than on a random basis.
Being an emerging industry, it is essential to determine the impact of digital currencies on the financial market and on the economy as well. New services and companies have emerged for facilitating the workings of cryptocurrencies while their data represents that this market is a pure one (Jaag and Bach 2017). According to a study, around 1876 people are employed as full-time workers within this concerned industry while around 720 people have obtained job in Asia-Pacific and 676 people have found job in North America (Motsi-Omoijiade 2017).
As most of the people use online wallet for using cryptocurrency, information on exchanges can offer insight into users regarding digital currencies. However, it is also impossible to know that how many people are using cryptocurrency in real field. According to some studies on this digital currency, it is observed that Europe has the highest number of exchanges while Asia-Pacific has ranked second regarding this number of exchange. In 2017, Bitfinex has obtained the highest market share, which is, 16% among all exchanges (Li and Wang 2017). However, 25% of the entire market share has come from the combined exchanges of smaller groups. The U.S dollar, considered as the highly supported national currency, has appeared on 65% exchange rate while Euro has come in the second position with 49% (Caginalp and Caginalp 2018).
Based on exchanges, dollar and pound have traded with highest number with bitcoin and Ethereum while Litecoin has come as the next most popular digital currency. Other well-known digital currencies with which dollar and euro have exchanged are Ripple, Monero, Ethereum Classic, Dogecoin and Dash (Andrianto and Diputra 2018).
Reason behind occurrence of Bitcoin
Figure 1 has represented that capitalisation in the total cryptocurrency market has increased by more than 3 times since the early 2016 and has reached nearly around $25 billion in March of 2017. Through holding private keys of users, these online exchanges operate predominately. For instance, 73% of exchanges have taken custody of their users’ cryptocurrency through controlling private keys (Gkillas and Katsiampa 2018).
In 2017, the number of active wallets has remained between 5.8 million and 11.5 million. From Europe and North America, the maximum number of active wallet users has come with about 30%.
Among those active wallets, only 32% users have used closed source software and the remaining 68% have used open source software. As a result, mobile wallet apps have used widely and has captured about 65% users. More than half of the providers of survey wallet have offered their customers integrated currency exchange services while 20% among those providers have offered linked credit card services (Zulhuda and binti Sayuti 2017).
In this context, some limitations have also occurred, for instance, around half of wallets providers have provided currency exchange services through integrating a third-party exchange and this phenomenon has consequently increased the question about security. Based on recent digital currency crackdown, it is seen that around 76% of total incorporated wallet providers have not possessed any license.
As mentioned above, both mining and mining pools have played significant role for shaping the digital currency landscape while they are aware about their importance and influence. Consequently, more than half of miners have considered that they have ability to influence protocol development to a large extend. This consideration comes after the development of the SegWit protocol, which has been implemented on August 2017.
Users and miners have battled to enact various protocols. However, irrespective of half of these big mining pools, which they have think that already have influenced, the individual users have almost have defeated them.
Instead of this, the bigger mining pools have maintained their significant influence on the protocols. In this context, it is seen that China has possessed 58% of the large mining pools and for this, it is believed that the country key to the mining operation of Bitcoin and protocol updates as well (Wang, Vergne and Hsieh 2017). The U.S has come in the next position with 16% after China for these mining operations.
Though digital currencies have grown successfully, mining revenue has continued to fluctuate. Bitcoin may earn this revenue, which is the sum of block reward and transaction fees, for each year if it converts immediately to the U.S.D in 2014, which was higher compare 2016 (Zhang and Preneel 2017). In 2014, the total revenue has come to $786 million dollars while in 2016 this amount has become only $563 million due to the increasing difficulty regarding mining, especially for Bitcoin.
Transactions
Conclusion:
The entire discussion can be described briefly at this section. The traditional digital money works through a payment network with accounts, transactions and balances. A central authority or central bank of a country regulates the entire network and it also takes responsibility to ensure the authenticity of all transactions. However, this traditional process has some difficulties; for instance, all participants in this specified network rely only on the records, which are maintained by the central server. Hence, for every transaction, legitimacy has based only the trust maintained on this authority. However, this authority can exploit it easily for personal gain or can be exploited by others. Hence, to solve this problem, the concept of cryptocurrency has occurred. Consequently, in 2008, Satoshi Nakamoto has developed digital currency, that is, Bitcoin, focusing on a peer-to-peer electronic cash system. This decentralised payment system has changed the payment system, as it does not depend on the third party. For this absolute consensus, the concept of blockchain has come while concepts of this blockchain are technical and difficult to understand. The first application of this specified blockcahin techno logy is to conduct financial transactions and for this, Bitcoin has been transacted first. At present, many people have possessed Bitcoin. The creator of Bitcoin has defined and described its activity in whitepaper.
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Mining
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