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To cut through some of this confusion surrounding bitcoin, we need to divide it into two components. On the one hand, you've got bitcoin-the-token, a snippet of code which represents ownership of a digital concept sort of like a virtual IOU. On the other hand, you've got bitcoin-the-protocol, a distributed network which maintains a ledger of balances of bitcoin-the-token.
The machine enables payments to be sent between users without passing via a central authority, like a bank or payment gateway. It is made and kept electronically. Bitcoins arent printed, like dollars or euros theyre produced by computers all around the planet, using free software.
It was the first example of what we call cryptocurrencies, a growing strength category that shares some characteristics of traditional currencies, together with verification based on cryptography.
A pseudonymous software programmer going by the name of Satoshi Nakamoto proposed bitcoin in 2008, as an electronic payment system based on mathematical proof. The idea was to produce a means of exchange, independent of any central power, that could 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 computers spread around the globe. This brings individuals and groups that are uncomfortable with all the control that banks or government institutions have over their money. .
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Bitcoin simplifies the dual spending problem of electronic currencies (in which digital assets can readily be copied 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. 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 next manipulate a currencys worth relative to other people. Holders of the currency (and especially citizens with very little alternative) keep the price.
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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 every hour, and will continue to do so at a diminishing rate until a maximum of 21 million has been reached. This makes bitcoin more appealing as an asset in theory, if demand grows and the supply 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 concept operate in semi-anonymity. Since there is 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 previous transactions to confirm that the sender gets the necessary bitcoin as well as the ability to send them.
In practice, each user is identified by the address of their pocket. Transactions can, with some effort, be monitored this way. Additionally, law enforcement has developed methods to identify consumers if necessary.
Furthermore, most exchanges are required read this article by legislation 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 progress of a specific transaction is observable to all.
This is because there is no central adjudicator that can say okay, return the money. When a transaction is recorded on the network, and when greater than an hour has passed, it is not possible to modify.
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 is one hundred millionth of a bitcoin (0.00000001) in todays prices, about 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 had been invented in 2008 with an anonymous person or group named Satoshi Nakamoto.