Bitcoin Payment System
A bit on Bitcoin
Bitcoin operates on a peer-to-peer technology and doesn"t have any centralized authority. The transaction management process and money issuing are taken care of by the entire network, collectively. You need to download open source software to use this currency. The software has been released under the MIT license. It has been confirmed that no more than 21 million coins will be released on a whole and it may take time till 2140 to complete the entire process. A Bitcoin is referred as BTC.
Bitcoin is not backed up by any financial institutions or banks. However, the merchants who accept Bitcoins form its backbone. These are useful, mainly because these are scarce. The total number of Bitcoins is limited and hence, the values are expected to increase over the period of time.
How it works?
After creating a transaction, it instantly is broadcasted throughout the network of working Bitcoin nodes. After a short time, the miners include your transaction in a new block found during the mining process. After this moment, the transaction is considered completed, and the payee can spend the funds.
You can buy Bitcoins at a certain price today and keep it with you. Now, after some time, when you see the rates to increase, you can sell the same to interested parties for a higher price. The value lies in exchange and there is no inherent value of Bitcoins. Thus, the early investors were able to buy huge number of Bitcoins for lower price and as they took the risk, they are bound to reap the benefits in future as well, provided the total number of users also grows.
History
Santoshi Nakamoto described the Bitcoin protocol for the first time in 2008 in an online paper. Later on 3rd January, 2009, the Bitcoin network came into existence through launch of the first version of open source Bitcoin software. The initial exchange rates for the digital currency were determined a year later. Today, Bitcoin has more than 1000 merchants.
Bitcoin Client Software
Bitcoin clients make the basic level of technology to conduct transactions through Bitcoins. The clients who use it store a collection of keys in a computer, these are known as wallets. You can use those keys to complete payments across the entire Bitcoin network. These keys should be kept secured and none else should have any sort of access on them. Currently, there are 5 different Bitcoin client software available and all of these are explained below for you:
Electrum: It focuses to use less amount of resource and increases the speed while doing the transaction. If you use this, there"s no need of taking regular backups as the wallet can restore itself through a secret phase. This phase should be remembered by you. It operates with high-performance servers and as a result, startup times are almost instant.
MultiBit: This is ideal for people without any sort of technical knowledge. You will also get a YouTube channel along with it and that helps you to learn the functionalities of the software. A particular useful feature of this software is the exchange rate ticker. This works in other languages than English such as: Greek, Spanish and German. This works best if you are using a Mac and the synchronization time is around a few minutes in general.
Armory: It gives better security to the clients. The cold storage feature is extremely useful as it allows you to maintain Bitcoins on an offline computer, thereby, protecting the same from any sort of online threat. Apart from that, numerous encrypted wallets are supported by Armory.
Bitcoin Wallet: This standalone wallet is for Android users. It uses a Simple Payment Verification model and you can initiate transactions through NFC, Bitcoin URIs or QR codes. It supports numerous languages and tries to work independent of the centralized servers.
Bitcoin-Qt: This is the original software programed by the founder of Bitcoin, Satoshi Nakamoto. This acts as a peer-to-peer client thereby building the backbone of the network. However, the software is resource intensive and takes more than 8 hours to start initially. So, if you"re not comfortable with that, you can switch to other clients mentioned above.
Bitcoin addresses
Payment through Bitcoins is done to the Bitcoin addresses. An address is a human readable sting consisting of letters and numbers. The string is generally as long as 33 characters and it begins with a 1 or 3 all the time. A new Bitcoin address is obtained by the users through the Bitcoin client software they use. The creation of an address is however an offline process.
Transaction fees
This is little to none as of this date. The transaction fees are normally included in the transfer process itself.
Merchants
As a merchant, you can accept Bitcoins in your website. The merchant can redirect the customer to a Bitcoin address where they need to send payment to have access on the product. Otherwise, it is also possible to do a complete set up through third-party plugin or pre-generated Bitcoin addresses.
Exchange
Refunds
It is possible to refund Bitcoins after obtaining an address from the payee. This address is generally different from where the initial payment was made though.
Shortcomings
Bitcoin definitely is an interesting project. However, it has a few disadvantages:
- The entire concept of Bitcoin is sometimes not understood by interested users. Also, there is no direct monetary worth of a Bitcoin such as other e-currencies. The value is expected to grow over the period of time and this should be touted as an investment. This model definitely does not interest many online sellers who want direct cash instead. Moreover, there is no guarantee that the value will indeed grow over time.
- It"s tough to associate a Bitcoin with the real life identities and hence, it has become popular among illegal product sellers.
- The transactions are completed over a network and hence are public. However, the sender and receiver can still keep their identities private and though message will be posted describing the transactions, others will not know who the seller or buyer is. However, if one address can somehow be connected to a user, a series of transaction details can easily be fetched, thereby, exposing it to a security and privacy threat.
Though many think of Bitcoin as a Ponzi scheme, it contradicts several characteristics of the same. Its popularity is increasing and it is to be seen whether more people starts accepting Bitcoin or not.