Is Bitcoin Proof Of Work Or Stake

Peer-to-peer network that processes and records bitcoin transactions

A diagram of a bitcoin transfer

Number of bitcoin transactions per month (logarithmic scale)[1]

The
bitcoin network
is a peer-to-peer payment network that operates on a cryptographic protocol. Users send and receive bitcoins, the units of currency, by broadcasting digitally-signed messages to the network using bitcoin cryptocurrency wallet software. Transactions are recorded into a distributed, replicated, public database known as the blockchain, with consensus achieved by a proof-of-work organisation called
mining. Satoshi Nakamoto, the anonymous designer of the protocol, stated that design and coding of bitcoin began in 2007. The project was released in 2009 every bit open source software.

The network requires minimal structure to share transactions. An ad hoc decentralized network of volunteers is sufficient. Letters are broadcast on a all-time-endeavour basis, and nodes tin leave and rejoin the network at will. Upon reconnection, a node downloads and verifies new blocks from other nodes to complete its local copy of the blockchain.[2]
[3]

Transactions

[edit]

An actual bitcoin transaction including the fee from a web-based cryptocurrency exchange to a hardware wallet

The best chain

consists of the longest serial of transaction records from the genesis block


to the current block or record. Orphaned records


exist outside of the best chain.

A bitcoin is divers past a sequence of digitally signed transactions that began with the bitcoin’s creation, as a block reward. The owner of a bitcoin transfers it by digitally signing it over to the next owner using a bitcoin transaction, much like endorsing a traditional bank cheque. A payee tin examine each previous transaction to verify the chain of buying. Dissimilar traditional check endorsements, bitcoin transactions are irreversible, which eliminates risk of chargeback fraud.

Although it is possible to handle bitcoins individually, information technology would be unwieldy to require a split transaction for every bitcoin in a transaction. Transactions are therefore allowed to contain multiple inputs and outputs, allowing bitcoins to exist divide and combined. Common transactions will take either a single input from a larger previous transaction or multiple inputs combining smaller amounts, and one or ii outputs: one for the payment, and one returning the change, if whatever, to the sender. Any difference between the total input and output amounts of a transaction goes to miners as a transaction fee.[ii]

Mining

[edit]

GPU-based mining rig, 2012

A Bitcoin mining farm, 2018

To form a distributed timestamp server as a peer-to-peer network, bitcoin uses a proof-of-work organization.[three]
This work is often called
bitcoin mining.

During mining, practically the unabridged computing power of the Bitcoin network is used to solve cryptographic tasks, the proof of work. Their purpose is to ensure that the generation of valid blocks involves a certain amount of effort, so that subsequent modification of the block chain, such equally in the 51% attack scenario, tin be practically ruled out. Because of the difficulty, miners form “mining pools” to get payouts despite these high power requirements, costly hardware deployments, and/or hardware under their ain command. The largest proportion of mining pools are based in China, which is also where most of the miners—or about 75% of the computing power—of the cryptocurrency are based.[four]

Requiring a proof of work to accept a new block to the blockchain was Satoshi Nakamoto’s cardinal innovation. The mining process involves identifying a cake that, when hashed twice with SHA-256, yields a number smaller than the given difficulty target. While the average work required increases in inverse proportion to the difficulty target, a hash can always exist verified by executing a single round of double SHA-256.

For the bitcoin timestamp network, a valid proof of work is found by incrementing a nonce until a value is institute that gives the block’s hash the required number of leading zero bits. Once the hashing has produced a valid result, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the cake would include redoing the work for each subsequent cake. If there is a deviation in consensus and so a blockchain fork can occur.

Majority consensus in bitcoin is represented past the longest chain, which required the greatest amount of endeavour to produce. If a majority of calculating power is controlled by honest nodes, the honest chain will grow fastest and outpace whatever competing bondage. To modify a by block, an attacker would have to redo the proof-of-work of that cake and all blocks afterward it and and then surpass the work of the honest nodes. The probability of a slower assaulter catching upwards diminishes exponentially every bit subsequent blocks are added.[3]

Mining difficulty has increased significantly.

To recoup for increasing hardware speed and varying interest in running nodes over time, the difficulty of finding a valid hash is adapted roughly every two weeks. If blocks are generated besides quickly, the difficulty increases and more than hashes are required to make a block and to generate new bitcoins.[3]

Difficulty and mining pools

[edit]

The largest Bitcoin mining pools as of April 2020 by nation in which they are based[
description needed
]

Bitcoin mining is a competitive endeavor. An “artillery race” has been observed through the diverse hashing technologies that take been used to mine bitcoins: basic key processing units (CPUs), high-end graphics processing units (GPUs), field-programmable gate arrays (FPGAs) and application-specific integrated circuits (ASICs) all have been used, each reducing the profitability of the less-specialized engineering. Bitcoin-specific ASICs are now the primary method of mining bitcoin and take surpassed GPU speed past every bit much as 300-fold. The difficulty inside the mining procedure involves self-adjusting to the network’southward accumulated mining power. Equally bitcoins take become more difficult to mine, computer hardware manufacturing companies have seen an increment in sales of high-end ASIC products.[five]

Computing power is frequently bundled together or “pooled” to reduce variance in miner income. Individual mining rigs ofttimes have to wait for long periods to confirm a cake of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block. This payment depends on the amount of piece of work an individual miner contributed to help notice that block.[vi]

Energy sources and consumption

[edit]

Bitcoin electricity consumption equally of 2021[7]

In 2013, Mark Gimein estimated electricity consumption to be about twoscore.nine megawatts (982 megawatt-hours a day).[viii]
In 2014, Hass McCook estimated eighty.7 megawatts (80,666 kW). As of 2015[update],
The Economist
estimated that even if all miners used modern facilities, the combined electricity consumption would be 166.7 megawatts (1.46 terawatt-hours per twelvemonth).[9]
The Cambridge Bitcoin Electricity Consumption Alphabetize estimates the free energy use of the bitcoin network grew from 1.95 terawatt-hours per year at the end of 2014, to 77.1 terawatt-hours per year by the end of 2019.[vii]

Seeking lower electricity costs, some bitcoin miners have set up in places similar Republic of iceland where geothermal free energy is cheap and cooling Arctic air is free.[10]
Chinese bitcoin miners are known to use hydroelectric ability in Tibet to reduce electricity costs.[xi]
North American companies are utilizing stranded gas as a cost-effective source of energy for bitcoin mining.[12]
In West Texas, wind powers bitcoin mining.[thirteen]
As of April 2021, at to the lowest degree i-3rd of Bitcoin mining was powered by coal in China’s Xinjiang region.[xiv]

A 2021 study found that carbon emissions from Bitcoin mining in People’s republic of china—where a majority of the proof-of-work algorithm that generated economic value was computed prior to mid-2021[15]—had accelerated rapidly in the tardily 2010s, are largely fueled by nonrenewable sources and was expected to exceed total annual emissions of countries like Italy and Spain during 2016, interfering with international climate change mitigation commitments.[xvi]
[17]
It was as well found that in 2021, bitcoin mining consumed more free energy than the country of New Zealand.[eighteen]
A formal Chinese ban on cryptocurrency mining operations in May 2021—reiterated in both September and November—resulted in the relocation of a big majority of mining equipment away from China. Nonetheless as many as twenty per centum of “all the earth’s bitcoin miners remain in China. This is well off its elevation of effectually 65% to 75% of the global market.”[15]
By December 2021, the global hashrate had more often than not recovered to a level before People’s republic of china’due south crackdown, with increased shares of the total mining power coming from the U.South. (35.iv%), Kazakhstan (18.1%), and Russia (11%) instead.[19]

A 2022 survey[xx]
on technologies approached cryptocurrencies’ technological and environmental issues from many perspectives and noted the plans of using the methods of unconventional computing and grid computing to make bitcoin and ether both greener and more justified.

Process

[edit]

Avalon ASIC-based mining machine

A rough overview of the process to mine bitcoins involves:[iii]

  1. New transactions are circulate to all nodes.
  2. Each miner node collects new transactions into a block.
  3. Each miner node works on finding a proof-of-work lawmaking for its cake.
  4. When a node finds a proof-of-work, it broadcasts the cake to all nodes.
  5. Receiving nodes validate the transactions information technology holds and accept merely if all are valid.
  6. Nodes limited their credence by moving to work on the side by side block, incorporating the hash of the accepted block.

Mined bitcoins

[edit]

Diagram showing how bitcoin transactions are verified

By convention, the first transaction in a block is a special transaction that produces new bitcoins owned by the creator of the block. This is the incentive for nodes to support the network.[2]
It provides the manner to move new bitcoins into circulation. The advantage for mining halves every 210,000 blocks. Information technology started at 50 bitcoin, dropped to 25 in late 2012 and to 12.5 bitcoin in 2016. The most recent halving, which occurred in May 2020 (with block number 630,000), reduced the block reward to 6.25 bitcoin. This halving process is programmed to proceed a maximum 64 times earlier new money creation ceases.[21]

Security

[edit]

Various potential attacks on the bitcoin network and its utilise every bit a payment system, real or theoretical, have been considered. The bitcoin protocol includes several features that protect it against some of those attacks, such as unauthorized spending, double spending, forging bitcoins, and tampering with the blockchain. Other attacks, such as theft of individual keys, require due intendance by users.[22]
[23]


[edit]

Unauthorized spending is mitigated by bitcoin’s implementation of public-individual fundamental cryptography. For example, when Alice sends a bitcoin to Bob, Bob becomes the new possessor of the bitcoin. Eve, observing the transaction, might desire to spend the bitcoin Bob just received, simply she cannot sign the transaction without the knowledge of Bob’s private key.[23]

Double spending

[edit]

A specific problem that an internet payment organization must solve is double-spending, whereby a user pays the aforementioned coin to two or more different recipients. An example of such a problem would be if Eve sent a bitcoin to Alice and afterwards sent the aforementioned bitcoin to Bob. The bitcoin network guards against double-spending by recording all bitcoin transfers in a ledger (the blockchain) that is visible to all users, and ensuring for all transferred bitcoins that they have not been previously spent.[23]

: 4

Race attack

[edit]

If Eve offers to pay Alice a bitcoin in exchange for goods and signs a corresponding transaction, it is still possible that she also creates a different transaction at the same time sending the aforementioned bitcoin to Bob. By the rules, the network accepts but ane of the transactions. This is called a race attack, since there is a race which transaction will be accepted first. Alice can reduce the risk of race set on stipulating that she volition not deliver the goods until Eve’s payment to Alice appears in the blockchain.[24]

A variant race assault (which has been called a Finney attack past reference to Hal Finney) requires the participation of a miner. Instead of sending both payment requests (to pay Bob and Alice with the aforementioned coins) to the network, Eve issues only Alice’southward payment asking to the network, while the cohort tries to mine a block that includes the payment to Bob instead of Alice. There is a positive probability that the rogue miner will succeed before the network, in which instance the payment to Alice volition be rejected. As with the plain race attack, Alice tin can reduce the hazard of a Finney attack by waiting for the payment to exist included in the blockchain.[25]

History modification

[edit]

Each block that is added to the blockchain, starting with the block containing a given transaction, is chosen a confirmation of that transaction. Ideally, merchants and services that receive payment in bitcoin should wait for at least i confirmation to exist distributed over the network, earlier assuming that the payment was done. The more confirmations that the merchant waits for, the more difficult it is for an attacker to successfully reverse the transaction in a blockchain—unless the assailant controls more than one-half the total network power, in which case it is called a 51% attack.[26]

Deanonymisation of clients

[edit]

Deanonymisation is a strategy in data mining in which bearding data is cantankerous-referenced with other sources of information to re-place the bearding data source. Along with transaction graph analysis, which may reveal connections betwixt bitcoin addresses (pseudonyms),[22]
[27]
in that location is a possible attack[28]
which links a user’s pseudonym to its IP accost. If the peer is using Tor, the attack includes a method to carve up the peer from the Tor network, forcing them to use their existent IP address for whatever further transactions. The attack makes employ of bitcoin mechanisms of relaying peer addresses and anti-DoS protection. The toll of the assail on the full bitcoin network is under €1500 per month.[28]

Payment verification

[edit]

Each miner tin can choose which transactions are included in or exempted from a cake.[29]
A greater number of transactions in a block does not equate to greater computational ability required to solve that block.[29]

Upon receiving a new transaction a node must validate it: in particular, verify that none of the transaction’s inputs have been previously spent. To comport out that check, the node needs to access the blockchain. Any user who does non trust his network neighbors, should continue a full local re-create of the blockchain, so that whatever input can exist verified.

As noted in Nakamoto’s whitepaper, it is possible to verify bitcoin payments without running a total network node (simplified payment verification, SPV). A user but needs a copy of the cake headers of the longest chain, which are available by querying network nodes until it is credible that the longest chain has been obtained; so, get the Merkle tree co-operative linking the transaction to its block. Linking the transaction to a place in the chain demonstrates that a network node has accepted information technology, and blocks added later information technology further establish the confirmation.[2]

Data in the blockchain

[edit]

While it is possible to store whatever digital file in the blockchain, the larger the transaction size, the larger any associated fees become. The more information that is stored on each cake means more data is stored on nodes, potentially creating “blockchain bloating.”[xxx]
The starting time block of the Bitcoin blockchain, known as the “Genesis Block”, contains a famous newspaper headline that may hint at Bitcoin’due south mission.[31]
Various items have been embedded, including URLs to websites, an ASCII art epitome of Ben Bernanke, material from the Wikileaks cables, prayers from bitcoin miners, and the original bitcoin whitepaper.[32]
Other important information is stored in the blockchain too. In
Blockchain: Insights You lot Need from Harvard Business Review, Tapscott, Lakhani, and Iansiti state “With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. Intermediaries similar lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and collaborate with ane some other with little friction.”[33]

Criminal activity

[edit]

The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement, and the media.[34]
The FBI prepared an intelligence assessment,[35]
the SEC has issued a pointed warning about investment schemes using virtual currencies,[34]
and the U.S. Senate held a hearing on virtual currencies in November 2013.[36]

Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal appurtenances.[37]
[38]
In 2014, researchers at the University of Kentucky constitute “robust testify that figurer programming enthusiasts and illegal activity bulldoze involvement in bitcoin, and find limited or no back up for political and investment motives.”[39]

Blackness markets

[edit]

A Carnegie Mellon University researcher estimated that in 2012, 4.5% to 9% of all transactions on all exchanges in the globe were for drug trades on a single nighttime spider web drugs market, Silk Road.[twoscore]
Child pornography,[41]
murder-for-hire,[42]
and weapons[43]
are also allegedly available on black marketplace sites that sell in bitcoin. Due to the bearding nature and the lack of central control on these markets, it is difficult to know whether the services are real or just trying to accept the bitcoins.[44]

Several deep web black markets accept been close by authorities. In October 2013 Silk Route was shut down by U.S. law enforcement,[45]
[46]
[47]
leading to a short-term subtract in the value of bitcoin.[48]
In 2015, the founder of the site was sentenced to life in prison.[49]
Alternative sites were soon available, and in early 2014 the Australian Broadcasting Corporation reported that the closure of Silk Route had footling impact on the number of Australians selling drugs online, which had actually increased.[l]
In early on 2014, Dutch authorities airtight Utopia, an online illegal goods market place, and seized 900 bitcoins.[51]
In late 2014, a joint police operation saw European and American government seize bitcoins and close 400 deep spider web sites including the illicit goods marketplace Silk Road 2.0.[52]
Police force enforcement activity has resulted in several convictions. In Dec 2014, Charlie Shrem was sentenced to two years in prison house for indirectly helping to send $i one thousand thousand to the Silk Road drugs site,[53]
and in Feb 2015, its founder, Ross Ulbricht, was convicted on drugs charges and given a sentence of double life imprisonment plus xl years.[54]

Some black market sites may seek to steal bitcoins from customers. The bitcoin community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut downwardly afterwards an alleged bitcoins theft.[55]
In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market were hacked in early 2014.[56]

According to the Cyberspace Watch Foundation, a UK-based charity, bitcoin is used to purchase child pornography, and almost 200 such websites accept information technology equally payment. Bitcoin is not the sole way to purchase child pornography online, as Troels Oertling, head of the cybercrime unit at Europol, states, “Ukash and paysafecard… accept [also] been used to pay for such material.” Withal, the Internet Watch Foundation lists around 30 sites that exclusively have bitcoins.[41]
Some of these sites have shut down, such equally a deep web crowdfunding website that aimed to fund the creation of new child porn.[57]
[
amend source needed
]

Furthermore, hyperlinks to kid porn websites have been added to the blockchain equally arbitrary information can be included when a transaction is made.[58]
[59]

Money laundering

[edit]

Bitcoins may non be platonic for money laundering, because all transactions are public.[lx]
Government—including the European Cyberbanking Potency,[61]
the FBI,[35]
National Treasury (South Africa)[62]
and the Financial Action Task Force of the G7[63]—have expressed concerns that bitcoin may be used for money laundering.

In early 2014, an operator of a U.S. bitcoin exchange, Charlie Shrem, was arrested for money laundering.[64]
Subsequently, he was sentenced to two years in prison house for “aiding and abetting an unlicensed money transmitting concern”.[53]

Alexander Vinnik, an alleged owner of BTC-eastward, was arrested in Hellenic republic on 25 July 2017, on $iv billion money laundering charges for flouting anti-money laundering (AML) laws of the Us. A report by the UK’s Treasury and Home Office named “UK national run a risk assessment of money laundering and terrorist financing” (October 2015) found that, of the twelve methods examined in the written report, bitcoin carries the everyman gamble of being used for money laundering, with the most common money laundering method being the banks.[65]

Roman Sterlingov was arrested on 27 April 2021 for allegedly laundering about 1.2 million BTC or US$336 million. According to reports from IRS Criminal Investigation, Sterlingov was the main operator of a Cryptocurrency tumbler Bitcoin Fog, launched in 2011.[66]

Ponzi scheme

[edit]

In a Ponzi scheme using bitcoins, the Bitcoin Savings and Trust promised investors upwards to 7% weekly involvement, and raised at least 700,000 bitcoins from 2011 to 2012.[67]
In July 2013, the U.S. Securities and Exchange Commission charged the visitor and its founder in 2013 “with defrauding investors in a Ponzi scheme involving bitcoin”.[67]

Come across also

[edit]

  • Lists of network protocols
  • List of bitcoin organizations
  • Web3
  • Economics of bitcoin

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[edit]


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