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To cut through some of the confusion surrounding bitcoin, we need to divide it into two components. On the one hand, you have bitcoin-the-token, a snippet of code that represents ownership of an electronic concept type of like a digital IOU. On the other hand, you've got bitcoin-the-protocol, a distributed network that maintains a ledger of balances of bitcoin-the-token.
The system enables payments to be sent between users without passing via a central authority, such as a bank or payment gateway. It's created and held electronically. Bitcoins arent printed, like dollars or euros theyre produced by computers all around the world, using free software.
It was the very first instance of what we today call cryptocurrencies, a growing strength class that shares some features of traditional currencies, with verification based on cryptography.
A pseudonymous software programmer going by the name of Satoshi Nakamoto proposed bitcoin in 2008, within an electronic payment method based on mathematical proof. The idea was to generate a means of exchange, independent of any central authority, that could be transferred electronically in a secure, verifiable and immutable manner.
Bitcoins most important feature is that it is decentralized. No single institution controls the bitcoin network. It is maintained by a group of volunteer coders, and run by an open network of dedicated servers spread around the globe. This brings individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. .
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Bitcoin solves the double spending problem of electronic currencies (in which electronic assets can readily be copied and re-used) through an ingenious combination of cryptography and economic incentives. In electronic fiat currencies, this function is fulfilled by banks, which gives them control over the traditional system. Together with bitcoin, the integrity of these transactions is maintained by a distributed and open network, owned by no-one. .
Fiat currencies (dollars, euros, yen, etc.) have an unlimited supply central banks can issue as many as they want, and can try to manipulate a currencys value relative to other people. Holders of the currency (and especially citizens with little alternative) bear the price.
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Together with bitcoin, find this on the other hand, the supply is tightly controlled by the underlying algorithm. Even a small number of new bitcoins trickle every hourand will continue to do so at a diminishing rate until a maximum of 21 million has been attained. This creates bitcoin more appealing as an advantage in concept, if demand grows and the distribution remains the same, the value will increase. .
While senders of traditional electronic payments are often identified (for verification purposes, and to abide by anti-money laundering and other legislation), users of bitcoin in concept operate in semi-anonymity. Since there's absolutely no central validator, users do not need to identify themselves when sending bitcoin to another user. When a transaction request is filed, the protocol assesses all prior transactions to confirm that the sender has the necessary bitcoin as well as the ability to send them.
In practice, each user is identified by the address of his or her pocket. Transactions can, with some effort, be monitored this way. Also, law enforcement has developed approaches to identify consumers if necessary.
Furthermore, most exchanges are required by legislation to perform identity checks on their clients before they are allowed to buy or sell bitcoin, facilitating another way that bitcoin usage can be tracked. Since the network is transparent, the progress of a specific transaction is visible to all.
This is because there's absolutely no central adjudicator that can say ok, return the money. If a transaction is listed on the network, and if greater than an hour has passed, then it's not possible to change.
Even though this might disquiet a few, it will mean that any transaction on the bitcoin network cannot be tampered with.
The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001) at todays prices, about one hundredth of a cent. This may conceivably enable microtransactions that traditional electronic money cannot.
Bitcoin is a digital currency, also known as a cryptocurrency. It had been invented in 2008 with an anonymous person or group named Satoshi Nakamoto.