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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 a digital concept sort of like a virtual IOU. On the other hand, you have 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 through a central authority, like a bank or payment gateway. It's made and kept electronically. Bitcoins arent printed, for example dollars or euros theyre produced by computers all around the world, using free software.
It was the first example of what we today call cryptocurrencies, a growing strength class that shares some characteristics of traditional currencies, with verification based on cryptography.
A pseudonymous software developer going by the name of Satoshi Nakamoto suggested bitcoin in 2008, within an electronic payment system based on mathematical proof. The idea was to produce a means of exchange, independent of any central power, which could be transferred electronically in a secure, verifiable and immutable manner.
Bitcoins most important characteristic is that it is decentralized. No single institution controls the bitcoin network. It is maintained by a group of volunteer coders, and run through 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 issue of electronic currencies (in which electronic assets can easily be replicated and re-used) via 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 try to manipulate a currencys worth relative to others. Holders of the currency (and notably citizens with little alternative) bear the cost.
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Together with bitcoin, on the other hand, the supply is tightly controlled by the underlying algorithm. A small number of new bitcoins trickle out every hour, and will continue to do so at a diminishing rate until a maximum of 21 million has been reached. This creates bitcoin more appealing as an advantage in concept, if demand grows and the distribution remains the same, the value will increase. .
Even though 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 function 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 submitted, the protocol assesses all prior transactions to confirm that the sender gets the necessary bitcoin in addition to the authority to send them.
In practice, each user is identified by the address of their pocket. Transactions can, with some effort, be tracked this way. Additionally, law enforcement has developed approaches to identify users if necessary.
Additionally, most exchanges are required by legislation to perform identity checks on their clients before they are permitted to buy or sell bitcoin, facilitating another manner that bitcoin usage can be monitored. Since the network is transparent, the progress of a specific transaction is visible to all.
This is because there is no central adjudicator that can say okay, return the money. When a transaction is listed on the network, and when greater than an hour has discover this passed, then it is not possible to modify.
While this may disquiet some, it will mean that any transaction on the bitcoin network cannot be tampered with.
The smallest unit of a bitcoin is referred to as a satoshi. It is one hundred millionth of a bitcoin (0.00000001) in todays prices, roughly one hundredth of a cent. This could conceivably enable microtransactions that traditional electronic money cannot.
Bitcoin is an electronic currency, also known as a cryptocurrency. It had been invented in 2008 with an anonymous person or group named Satoshi Nakamoto.