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To cut through some of this 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 which represents ownership of a digital concept type of like a digital IOU. On the other hand, you have bitcoin-the-protocol, a dispersed 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, like a bank or payment gateway. It's created and held electronically. Bitcoins arent printed, for example dollars or euros theyre made by computers all around the world, using free software.
It was the very first instance of what we today call cryptocurrencies, a growing asset class that shares some features of traditional currencies, with verification based on cryptography.
A pseudonymous software developer going by the name of Satoshi Nakamoto suggested bitcoin in 2008, as an electronic payment system based on mathematical proof. The idea was to generate a means of exchange, independent of any central power, which may be transferred electronically in a secure, verifiable and immutable way.
Bitcoins most important feature is 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 computers 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 simplifies the double spending problem of electronic currencies (in which electronic assets can readily 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 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 attempt to manipulate a currencys worth relative to others. Holders of this currency (and notably citizens with little alternative) bear the price.
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Together with bitcoin, 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 makes bitcoin more attractive as an advantage in theory, if demand grows and the supply remains the same, the value will increase. .
Even though senders of traditional electronic payments are often 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 has the necessary bitcoin in addition to the ability to send them.
In practice, each user is identified with the address of their pocket. Transactions can, with a little effort, be monitored this way. Also, law enforcement has developed methods to identify users if necessary.
Furthermore, most exchanges are required by legislation to perform identity checks on their customers before they are allowed to purchase or sell bitcoin, facilitating another manner that bitcoin utilization 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 ok, return the money. If a transaction is recorded on the network, and if greater than an hour has passed, then it's impossible to modify.
Even though this might disquiet a few, it does 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, roughly 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 by an anonymous person or group named Satoshi Nakamoto.