# Analyzing the Bitcoin Network: The First Four Years
## 2 Bitcoin Technology and Economy  
A Bitcoin can be defined as a chain of digital signatures. By transferring the electronic coin to the next user it gets digitally signed with a hash of the previous transaction and the public key of the next owner; adding these together to the end of the Bitcoin. The signatures can be verified by the payee to prove the chain of ownership [1]. To avoid inflation in the system, a unique feature of the currency is that it has a predetermined limited number of 21 million coins in circulation. Until that point, which might be reached around the year 2140, the money supply will increase at a certain rate [5]. To provide some sort of anonymity, direct personally identifiable information is omitted from the transaction. Therefore, the source and destination address are encoded in the form of public keys. Every public key that serves as a pseudonym has a corresponding private key which is stored in the electronic wallet. These are used to sign or authenticate any transactions. To become part of the peer-to-peer network, one needs to have a client software that runs either on the own device or as cloud service [6]. A node in the network will not accept multiple transactions using the same inputs. The nodes accept only the first transaction they receive and reject all subsequent. This is done to prevent double spending from malicious users and is part of the proof-of-work concept [5]. The main idea behind the proof-of-work system is to make it expensive for a single user or a group of users to rewrite the history of transactions once it has been accepted as definite. This should prevent malicious users from double spending their Bitcoins [6]. The solution that [PERSON] [1] proposed is the use of a timestamp server that takes the hash of a block of items, timestamps it, and widely publishes the hash. The proof of work involves using hash algorithms such as SHA-256 to find a specific value. The objective is to increment a nonce in the block until a value is found that results in a required number of zero bits. The average work to do so is exponential with the number of zero bits, but the result can be easily verified. There is a predetermined target difficulty that is updated for every 2016 blocks that have been generated. This ensures that the time it takes to generate one block is on average about 10 min. The block is only accepted by users if all transactions in it are valid and the Bitcoins have not been spent previously. Users show their acceptance by using the newly found hash in the \"previous hash\" section of the next block they attempt to generate; thus adding a new block to the chain. This chain is called the block chain or transaction log and contains the entire history of all transactions that have been carried out in the network [5]. The generation of blocks by users is called mining and is achieved through providing a certain amount of computation power to the network to solve the proof-of-work problem. The expending of computation power is rewarded when generating a block. There is competition to get the reward, and the more computation power a user or group possesses the better the chance to get it. The reward is predetermined and started at 50 BTC. It will decrease by half every 210,000 blocks. In that way new Bitcoins are introduced to the network. This procedure will continue until the predetermined final amount of 21 million Bitcoins is in circulation, around the year 2140. Figure 1 shows a general overview of the Bitcoin economy with its major participants. Users can exchange their fiat currencies into Bitcoins via exchange platforms or local exchanges (1); withdraw money from recently introduced Bitcoin ATMs (2); store Bitcoins in an online wallet (3); use payment services in transactions with online merchants (4); pay with Bitcoins in local shops or bars (5); gamble with Bitcoins on various gaming platforms (6); incorporate transactions in a block, called mining (7); thus verifying the transactions and publish it to the network via the block chain (8).