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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 that 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 system enables payments to be sent between users without passing through a central authority, like a bank or payment gateway. It's created and held electronically. Bitcoins arent printed, for example dollars or euros theyre produced by computers all around the world, using free software.
It was the very 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 developer going by the name of Satoshi Nakamoto proposed bitcoin in 2008, as an electronic payment system based on mathematical evidence. 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's maintained by a group of volunteer coders, and run through an open network of committed servers spread around the world. This brings individuals and groups who are uncomfortable with all 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 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. Together with bitcoin, the integrity of the transactions is maintained by a distributed and open network, owned by no-one. .
Fiat currencies (dollars, euros, yen, from this source 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 the currency (and especially citizens with 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 out every hourand will continue to do so at a diminishing rate until a max of 21 million has been reached. This creates bitcoin more appealing as an advantage in concept, if demand grows and the supply remains the same, the value will increase. .
While senders of traditional electronic payments are usually identified (for verification purposes, and to abide look at this site by 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 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 his or her wallet. Transactions can, with a little effort, be tracked this way. Additionally, law enforcement has developed methods to identify users if necessary.
Furthermore, most exchanges are required by legislation to perform identity checks on their clients before they're permitted 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 okay, return the money. If a transaction is recorded on the network, and when greater than an hour has passed, go to website then it's not possible 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 referred to as 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 an electronic currency, also known as a cryptocurrency. It was invented in 2008 by an anonymous person or group named Satoshi Nakamoto.