system . The Bitcoin Blockchain consists of a sequence of blocks where each block builds on its predecessors and contains information about new Bitcoin transactions . The average time between Bitcoin blocks is 10 minutes . The first block , block # 0 , was created in 2009 ; and , at the time of this writing , block # 494600 was appended as the most recent block to the chain . Because everyone can download and read the Bitcoin Blockchain , it is a public record , a ledger that contains Bitcoin ownership information for any point in time .
The word “ ledger ” has to be qualified here . There is no single instance of the Bitcoin Blockchain . Instead , every participant is free to manage his or her own copy of the ledger . As it was with the stone money , there is no central authority with an exclusive right to keep accounts . Instead , there is a predefined set of rules and the opportunity for individuals to monitor that other participants adhere to the rules . The notion of “ public record of ownership ” also has to be qualified because the owners of Bitcoin units usually remain anonymous through the use of pseudonyms .
To use the Bitcoin system , an agent downloads a Bitcoin wallet . A Bitcoin wallet is software that allows the receiving , storing , and sending of ( fractions of ) Bitcoin units . 3 The next step is to exchange fiat currencies , such as the U . S . dollar , for Bitcoin units . The most common way is to open an account at one of the many Bitcoin exchanges and to transfer fiat currency to it . The account holder can then use these funds to buy Bitcoin units or one of the many other cryptoassets on the exchange . Due to the widespread adoption of Bitcoin , the pricing on large exchanges is very competitive with relatively small bid-ask spreads . Most exchanges provide order books and many other financial tools that make the trading process transparent .
A Bitcoin transaction works in a way that is similar to a transaction in the Yap payment system . A buyer broadcasts to the network that a seller ’ s Bitcoin address is the new owner of a specific Bitcoin unit . This information is distributed on the network until all nodes are informed about the ownership transfer . We will examine some technical details of this step in Section 2 .
For a virtual currency to function , it is crucial to establish at every point in time how many monetary units exist , as well as how many new units have been created . There must also be a consensus mechanism that ensures that all participants agree about the ownership rights to the virtual currency units . In small communities , as with the Yap islanders , everyone knows everyone else . The participants care about their reputation , and conflicts can be disputed directly . In contrast , within the Bitcoin system the number of participants is substantially larger , and network participants can remain anonymous . Consequently , reputation effects cannot be expected to have a significant positive impact , and coordination becomes very difficult . Instead , there is a consensus mechanism that allows the Bitcoin system to reach an agreement . This consensus mechanism is the core innovation of the Bitcoin system and allows consensus to be reached on a larger scale and in the absence of any personal relations .
1.6 Bitcoin Mining
To understand the consensus mechanism of the Bitcoin system , we first have to discuss the role of a miner . A miner collects pending Bitcoin transactions , verifies their legitimacy , and assembles them into what is known as a “ block candidate .” The goal is to earn newly cre-
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