IBM Introduction to Blockchain and Bitcoin Training Class
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Virtual currency is not new. But neither Linden Dollars earned in Second Life nor Facebook credits earned on Farmville could be spent outside of their restricted virtual worlds, even though some could be exchanged for dollars or other real world currencies on third-party websites.
The bitcoin is changing this landscape. Inthe Bitcoin Network was established and actual bitcoins were first issued and its evolution since has been swift. Practitioners in cyberspace or commercial finance law need at least a working knowledge of this digital currency which has no borders and is unregulated by any governmental authority or central bank.
A central purpose of bitcoin according to Nakamoto was to reduce transaction costs incurred when parties validate transactions and mediate disputes.
To that end, the bitcoin system is based on open source computing. Although creators of bitcoins originally used them for Internet-related tasks, like trading bitcoin for programming help, the currency has gained increasing acceptance in broader contexts. The early use of bitcoin in online drug markets and casinos gave it a somewhat tarnished reputation. But bitcoin increasingly is used in legitimate commerce.
Later, venture capitalists began pouring millions into startups that focus on bitcoins. Miners who succeed in adding a block to the block chain automatically receive a fixed number of bitcoins as a reward for their effort. Space does not permit a detailed description of the mining process, but in essence a miner maps an input data set i.
Because each unique block can only be solved and added to the block chain from one source, all individual miners and mining pools in the Bitcoin Network are competing.
Such competition spurs them to constantly increase their computing power in order to improve their ability to solve for new blocks. In addition to new bitcoins, the successful miner receives any transaction fees paid by transferors whose transactions are recorded in the block. Because the method for creating new bitcoins is mathematically controlled, the total bitcoin supply grows at a pre-set, limited rate.
The fixed reward for solving a new block is currently 25 bitcoins per block, but will decrease to The targets established by the Bitcoin Network constantly increase in difficulty, meaning that miners constantly need more expensive processing power to compete. Computers now are specially designed solely for bitcoin mining, and the newest rigs use an application-specific integrated circuit ASIC built specifically to execute the hash operation.
The current mining protocol makes it increasingly difficult to solve for new blocks as computer processing power dedicated to mining increases in order to maintain a minute per block average. Because the difficulty in finding valid hash values has grown exponentially since the first block was mined, one individual can no longer mine bitcoins successfully.
When pool members solve a new block, they allocate the reward according to the processing power each contributed to the solution. Such pools give participants access to smaller, but steadier and more frequent, bitcoin payouts. The Wall Street Journal reported on November 6,that the speed of bitcoin mining was now 40 times faster than in January It was estimated in August that about Estimates are that 90 percent of the 21 million bitcoin limit will have been produced by The Bitcoin Network is designed so as to decrease the reward for adding new blocks to the block chain over time.
Ultimately, miners will need to be compensated in transaction fees in order to provide adequate incentives for miners. To buy or sell bitcoins, one must have Internet access to the Bitcoin Network, where such transactions are consummated within seconds. Double-spending of any single bitcoin is avoided by having the user give information on the transaction to the Bitcoin Network of the transaction, which uses the block chain to memorialize every bitcoin transaction.
The trader then connects to the Bitcoin Network and engages in the purchase, sale, and receipt of bitcoins. The private key, used to authorize bitcoin transactions, has no information about the user, although the transactions are traceable by means of the public key.
One way to buy bitcoins is to identify someone willing to sell bitcoins, then offer to buy them with conventional currency. Another and more organized way is to use a bitcoin exchange.
As with conventional currency exchanges, price is usually not individually negotiated, but instead based on the aggregate supply of and demand for bitcoins in the system. While using an exchange adds to the transaction cost, it is both more efficient and better monitored. There are estimated to be approximately 12 currency exchanges around the world where consumers and businesses can trade bitcoins for local currency.
Because the technology is open source, new services are created almost every week. Among the more active are Mt. Banks like Morgan Stanley and Goldman Sachs reportedly visit bitcoin exchanges up to 30 times a day. Bitcoin exchanges are not problem-free: Gox said attackers wait until the price of bitcoins reaches a certain value, then sell, destabilize the exchange, wait for panic-selling to cause the bitcoin price to drop to a certain amount, then stop the attack and start buying as much as they can.
A retail customer can pay in bitcoin by using a smartphone to scan a barcode provided by the retailer. Retailers see an advantage in avoiding credit card fees that can run as high as 3 percent, compared to less than 1 percent for bitcoins.
Moreover, bitcoin transactions are final, whereas credit card charges can be disputed. This kind of advantage helped BitPay, Inc. Startups focused on marketing bitcoin services have attracted increasing interest from venture capitalists.
Bitcoin faces a number of unresolved regulatory issues. American Banker online has asserted that at least three U. Gox on the theory that the Japanese exchange was operating as an unlicensed MSB. Gox subsequently registered with the U. Treasury as an MSB. Fifty states also have laws regulating MSBs. Several, including California and New York, have reportedly warned companies involved in bitcoin that they may be violating such laws. Turning to securities laws, in Julythe SEC filed a civil action in federal court in Texas, charging an individual and his company with using a bitcoin-based Ponzi scheme to defraud investors.
Two federal criminal indictments in have somewhat tarnished the bitcoin image. An indictment of Liberty Reserve, S. Values on the Mt. The FBI filed an affidavit in the case which asserts that digital currency is not just used in the black market, but can serve criminal purposes because of the ease of moving money anonymously. The economist Paul Krugman stated earlier this year that, unlike gold or paper fiat currencies, bitcoin derives its value solely from a self-fulfilling expectation that others will accept it as payment.
There are many areas where the future of bitcoin is yet to be developed: Is it an investment? How will transactions be taxed? Inwe can expect some answers, but also many new questions. The September issue of Business Law Today will feature topics and advice for business lawyers such as smart contracts, what structured negotiation can offer business attorneys, shareholder activism, and more.
Do you have a great idea for a BLT article? Would you like to see more of a featured column? Let us know how we can make Business Law Today the best resource for you and your clients. We welcome any suggestions. Please send us your feedback here. Business Bankruptcy August Consumer Financial Services June Corporate Governance July Cyberspace Law August Legal Opinions Spring Nonprofit Organizations Second Quarter, BLT is a web-based publication drawing upon the best of the Section's resources, including featured articles and other information from around the Section.
Stay informed on the latest business law practice news and information that will benefit you and your clients. Rice About the Authors: Trading For Bitcoins To buy or sell bitcoins, one must have Internet access to the Bitcoin Network, where such transactions are consummated within seconds. Using Bitcoin in Day-to-Day Commerce A retail customer can pay in bitcoin by using a smartphone to scan a barcode provided by the retailer. Venture Capital and Bitcoin Startups focused on marketing bitcoin services have attracted increasing interest from venture capitalists.
Criminal Issues Two federal criminal indictments in have somewhat tarnished the bitcoin image. Print Feedback A A.
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