HowDoesBitcoinWorkEBC.lyx

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\pdf_title "Economics of Bitcoin and Cryptocurrenies"
\pdf_author "Bastiaan Quast"
\pdf_keywords "bitcoin, cryptocurrencies, economics"
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\begin_layout Chapter
How Does Bitcoin Work?
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\begin_layout Standard
The essential principle is that every user has a piece of software on their
 computer, a
\series bold
 
\begin_inset CommandInset nomenclature
LatexCommand nomenclature
symbol "wallet"
description " "

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, which contains a set of public addresses (like bank account numbers),
 each address is mathematically linked with a 
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\begin_inset CommandInset nomenclature
LatexCommand nomenclature
symbol "private key"
description " "

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 (like a password).
 Using this secret key, users can create a digital 
\begin_inset CommandInset nomenclature
LatexCommand nomenclature
symbol "signature"
description " "

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, to prove that they are the owner of an address.
 This 
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LatexCommand nomenclature
symbol "signature"
description "  "

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, together with a transaction is sent to a bitcoin 
\series bold

\begin_inset CommandInset nomenclature
LatexCommand nomenclature
symbol "miner"
description " "

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.
 The miner is a node in the network, which verifies that the address and
 signature are linked, after which the transaction is recorded in the public
 ledger, or 
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LatexCommand nomenclature
symbol "blockchain"
description " "

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 and disseminated throughout the network.
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\begin_layout Standard
There are a number of other features which are important to highlight.
 Bitcoins are created through a process called mining, this is a computationally
 intensive process used as the mechanism for transaction verification.
 The Bitcoins created as a reward for mining becomes incrementally smaller,
 until finally becoming zero.
 This is predicted to be around the year 2140, and at that point around
 21 million bitcoins will have been created.
 There will never be more bitcoins in the system.
 Furthermore, bitcoins will be lost if private keys are lost, these will
 never be recovered.
 The system is thus strictly deflationary.
 To keep transactions of every size possible, bitcoins are highly granular,
 every 
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LatexCommand nomenclature
symbol "bitcoin"
description "  "

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 can be divided into a hundred million 
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LatexCommand nomenclature
symbol "satoshi"
description " "

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 (named after the pseudonym of the creator).
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