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To cut through some of the confusion surrounding bitcoin, we need to separate it into two components. On the one hand, you've got 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 have bitcoin-the-protocol, a dispersed network which maintains a ledger of balances of bitcoin-the-token.
The system enables payments to be sent between users without passing through a central authority, such as a bank or payment gateway. It is made and kept electronically. Bitcoins arent printed, like dollars or euros theyre made by computers all around the world, using free software.
It was the very first example of what we today call cryptocurrencies, a growing asset category that shares some characteristics of traditional currencies, with verification based on cryptography.
A pseudonymous software developer 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, which may be transferred electronically in a secure, verifiable and immutable way.
Bitcoins most important feature is that it is decentralized. No single institution controls the bitcoin network. It's maintained by a group of volunteer coders, and run through an open network of dedicated servers spread around the world. This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. .
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Bitcoin simplifies the dual spending issue of electronic currencies (in which digital assets can easily be replicated 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. With bitcoin, the integrity of the 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 attempt to manipulate a currencys value relative to others. Holders of the currency (and especially citizens with very little alternative) keep the cost.
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Together with bitcoin, on the other hand, the distribution is closely controlled by the underlying algorithm. A small number of new bitcoins trickle every hour, and will continue to do so at a diminishing rate until a max of 21 million has been attained. This makes bitcoin more appealing as an asset in theory, if demand grows and the distribution remains the same, the value will increase. .
Even though senders of traditional electronic payments are usually identified (for verification purposes, and to comply with anti-money laundering and other legislation), users of bitcoin in theory 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 previous transactions to confirm that the sender gets the necessary bitcoin as well redirected here as the authority to send them.
In practice, each user is identified by the address of his or her pocket. Transactions can, with some effort, be tracked this way. Also, law enforcement has developed methods to identify users if necessary.
Additionally, most exchanges are required by law to perform identity checks on their customers before they are permitted to buy or sell bitcoin, facilitating another manner that bitcoin usage can be tracked. Since the network is transparent, the advancement of a specific transaction is observable to all.
This is because there is no central adjudicator that can say ok, return the money. When a transaction is recorded on the network, and when more than an hour has passed, it is impossible to change.
While this may 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's one hundred millionth of a bitcoin (0.00000001) at todays prices, roughly one hundredth of a cent. This could conceivably enable microtransactions that traditional electronic money cannot.
Bitcoin is a digital currency, also known as a cryptocurrency. It was invented in 2008 with an anonymous person or group named Satoshi Nakamoto.