Oleg Andreev - Bitcoin Non-Technical FAQ

Oleg Andreev - Bitcoin Non-Technical FAQ

How fast are the transactions? Transactions are secured by being included in a block. Blocks are generated approximately every 10 minutes. Including the time to propagate a transaction through the network, today it usually takes about 15 minutes to verify inclusion in a block. For better security, one can wait until more blocks are added after the block with the transaction. How transactions are secured? Transactions are grouped into blocks and each block contains the signature of the previous block, thus making up a chain of blocks. The security of the system is based on computational difficulty to generate blocks parallel to the main chain. The more blocks are created after the block containing your transaction, the harder it is to fork the chain and make the transaction invalid. Therefore, no transaction is 100% confirmed. Instead, there is a confirmation number — a number of blocks built after the transaction. Zero confirmations means that the transaction is not yet included in any block (unconfirmed). One confirmation means that the transaction is included in one block and there are no more blocks after it yet. Today for small transactions one or two confirmations (10-20 minutes) are considered enough. For bigger transactions it is recommended to wait for at least six confirmations (1 hour). One known exception is 120 confirmations required by the protocol for the use of generated bitcoins. This is because miners (those who create blocks) have the most of computing power in the network and must have extra incentive to play fairly and generate blocks in the main chain without attempting to double-spend their rewards. What do miners do exactly? Miners create blocks. To create a block one needs to create a file containing unconfirmed transactions (that are not yet included in any other block), add a timestamp, a reference to the latest block and a transaction sending 50 bitcoins from nowhere to any address. Then, the miner needs to compute a signature for the block (which is basically a very long number). This signature is called hash and the process of computing is called hashing. Computing a single hash takes very little time. But to make a valid block, the value of its hash must be smaller than some target number. The hash function is designed to be hard to reverse. That is, you cannot easily find some file contents that will produce the desired hash. You must alternate the contents of the given file and hash it again and again until you get a certain number. In the case of Bitcoin, there is a field in a file called “nonce” which contains any number. Miners increment that number each time they compute a hash until they find a hash small enough to be accepted by other clients. This may take a lot of computing resource depending on how small is the target hash value. The smaller the value, the smaller the probability of finding a valid hash. There is no guarantee that you need to spend a certain amount of time to find a hash. You may find it quickly or not find it at all. But in average, the small enough value of block hash takes time to create. This constitutes a protection against creation of a parallel chain: to fork the chain you will need to spend more resources than the people who created the original blocks What are the parameters of the network? Here are some parameters of the Bitcoin chain. They may be different for alternative currencies based on the Bitcoin software (like Namecoin). The minimum amount of bitcoins is 0.00000001 BTC. Blocks are created every 10 minutes. Block size is limited to 1 Mb. Difficulty is adjusted every 2016 blocks (approx. every two weeks) Initial reward for a block is 50 BTC. Reward is halved every 210 000 blocks (approx. four years). Points #5 and #6 imply that the total number of bitcoins will not exceed 21 million. Why are blocks created every 10 minutes? The 10 minute interval is designed to give enough time for the new blocks to propagate to other miners and allow them to start computation from a new point as soon as possible. If the interval was too short, miners would frequently create new blocks with the same parent block, which would lead to a waste of electricity, a waste of network bandwidth and delays in transaction confirmations. If it was too long, a transaction would take longer to get confirmed. Why is the block size limited to 1 Mb? The block size is limited to make a smoother propagation through the network, the same reason why the 10 minute interval was chosen. If the blocks were allowed to be 100 Mb in size, they would be transferred slower, potentially leading to many abandoned blocks and a decrease in the overall efficiency. Today a typical size of a block is 50-200 Kb which makes a lot of room for growth. In the future it is possible to increase block size when the networks get faster. Decreasing time interval would not change much because the security of transactions depends on the actual time, not the number of blocks. How can the protocol be changed? The protocol is a list of rules that every client must follow in order to validate transactions and have their transactions validated by others. Hence, if you change the rules for yourself, other clients will simply reject your transactions and you probably will not be able to accept theirs. This makes it hard to change the protocol. If there is a change that a vast majority of clients will find useful, then it is possible to publicly agree that starting with the block number X, new rules will apply. This will give a certain amount of time to everyone to update the software.