Anatomy of a PAN

Future of Bitcoins

There are several interesting observations to be made about bitcoins.

Reduction in the Number of Miners

As the bitcoin reward diminishes over the next few years and the difficulty level is raised, it is expected that miners will start to drop out of the network. This means that the difficulty level will eventually go down unless the increase in per-miner compute capacity increases.

Value of a Bitcoin

There is a limit to the number of bitcoins that will be generated, currently estimated at 21 million bitcoins. At $1,000 per bitcoin, this is a total value of USD 21 billion dollars. This amount is trivial compared to the total currency value of most nations. If bitcoins really take off, there will be millions of participants worldwide. Twenty-one billion dollars is not nearly enough to handle the level of transactions that this group will generate. Therefore, many predict that the value of bitcoins will increase by a large factor. Of course, if bitcoins don’t make it into the mainstream, they may ultimately be worth nothing.

Transaction Rate

Currently, the bitcoin transaction rate is limited to one block every ten minutes. At an average of 400 transactions per block, this is a rate of 40 transactions per minute. This pales in comparison to the thousands of transactions per second that Visa and other payment processors handle. It is not clear how bitcoins is going to modify its algorithms to handle a transaction rate that is orders of magnitude greater than the current limit.

Higher transaction rates can be handled, for instance, by increasing the block generation rate. To be able to handle ten thousand transactions per second, the block generation rate would have to be increased from one block every ten minutes to 25 blocks per second.

BIT Coin - Infrastructure Continues...

The Block Chain

Its Bitcoin's general ledger.

The block chain is a linked series of transaction blocks that hold every bitcoin transaction made since the currency’s introduction in 2009. Each block is protected by a hash value to prevent it from being subsequently modified. Furthermore, the hash for each block includes the hash of the previous block. This guarantees the proper ordering of blocks.

Including the hash from the previous block has an additional advantage. The older a block becomes, the more likely that it is secure, since a hacker would have to modify all subsequent blocks in order for the block chain to remain viable.

Bitcoin and their Infrastrcuture

Bitcoins is a digital currency that made its debut in 2009. We described in some detail how bitcoins work in our earlier article entitled “Mt. Gox, Largest Bitcoin Exchange, Goes Belly Up.”1
Bitcoin mining is the way in which new bitcoins are minted (digitally, that is).


Mining involves packaging bitcoin transactions into blocks and appending them to the bitcoin block chain that records every bitcoin transaction. For each block that a miner adds to the block chain, he is rewarded with 25 bitcoins. At today’s price of about $600 USD, this amounts to $15,000. Sounds like a fast way to make a lot of money.

The backup service iDrive decided to try its hand at bitcoin mining. iDrive backs up its customers’ files overnight, which leaves most of its 3,000 quad-core servers idle during the day. It put 600 of its servers to work during the day mining bitcoins. After a bit of experience, it calculated that it would earn around 0.4 of a bitcoin per year – about $240.

The Bitcoin Infrastructure

How can mining for bitcoins be so difficult? The answer is that the algorithm for creating a legitimate block of transactions is very difficult to calculate, and its difficulty is raised as time goes on. To understand this, we must first understand a bit about the structure of the bitcoin network.

The Bitcoin Peer-to-Peer Network

The bitcoin infrastructure comprises a large number of peer-to-peer nodes worldwide that cooperate to manage bitcoins. Every bitcoin transaction is sent to each node in the network. Available to each node is the bitcoin block chain, a sequence of blocks that contains every bitcoin transaction that ever occurred since bitcoins were introduced in 2009.

Some of these nodes are mining nodes run by miners. Their job is to package a set of transactions into a block and append them to the block chain. For this effort, they receive as compensation some bitcoins as well as any transaction fees offered by the parties to the transaction.

A miner may be an individual, an organization, or a group of participants that form a mining pool and share the profits based on their relative contribution of processing power to the pool

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