To cut some confusion around bitcoin, we need to separate it into two components. On the one hand, you have a bitcoin-token, a piece of code that represents ownership of a digital concept – kind of like a virtual slap. On the other hand, you have a bitcoin-the-protocol, a distributed network that maintains a bookkeeper’s balances of a bitcoin-token. Both are called “bitcoin”.
The system allows sending payments between users without going through a central authority, such as bank or payment gateway. It is created and held electronically. Bitcoins are not printed, like dollars or euros – they are manufactured by computers all over the world, using free software.
This was the first example of what we now call cryptocurrencies, a type of property that has grown in stocks and some characteristics of traditional currencies, with verification based on cryptography.
Who created it?
A pseudonymous software developer going on behalf of Satoshi Nakamoto suggested Bitcoin in 2008, as an electronic payment system based on mathematical proof. The idea was to produce means of exchange, independent of central authorities, which could be transmitted electronically in a secure, verifiable, and unchangeable manner.
To this day no one knows who Satoshi Nakamoto is.
How is this different from the traditional coins?
Bitcoin can be used to pay for electronic things if both sides are ready. In this sense, it is like conventional dollars, euros, or wine, which are also traded digitally.
But it differs from fiat digital coins in several important ways:
The most important feature of Bitcoin is that it is distributed. No single institution controls the bitcoin network. It is maintained by a group of volunteer volunteers and is managed by an open network of dedicated computers scattered around the world. It attracts people and groups that are uncomfortable with the control that banks or government institutions have over their money.
Bitcoin solves the “double spending problem” of electronic currencies (in which digital assets can be easily copied and reused) through an ingenious combination of cryptography and economic incentives. In electronic Fiat currencies, this function is maintained by the banks, which gives them control over the traditional system. With bitcoin, the integrity of transactions is maintained by a distributed and open network, owned by no one.
2 – Limited supply
The currencies of the Fiat (dollars, euros, yen, etc.) have an unlimited supply – central banks can issue as many as they want, and can try to manipulate the value of the currency relative to others. The currency holders (and especially citizens with a small alternative) bear the cost.
With bitcoin, however, the supply is well controlled by the basic algorithm. A small number of new bitcoins drip every hour, and will continue to do so at a decreasing rate until a maximum of 21 million has been achieved. This makes bitcoin more attractive as an asset – in theory, if demand increases and supply remains the same, the value will increase.
3 – pseudonymity
While the senders of traditional electronic payments are usually identified (for verification purposes, to comply with money laundering and other legislation), Bitcoin users in theory operate half the anonymity. Since there is no central “widget”, users do not need to identify themselves when sending a bitcoin to another user. When the request has been sent, the protocol checks all previous transactions to confirm that the sender has the required bitcoin as well as the authority to send them. The system does not need to know its identity.
In practice, each user is identified by their or her wallet address. Transactions, with a little effort, be followed in this way. Also, law enforcement has developed methods to identify users if necessary.
Furthermore, most exchanges are required by law to perform identity checks on their customers before they are authorized to buy or sell bitcoin, facilitating the use of other bitcoin methods and can be monitored. Since the network is transparent, the progress of a particular transaction is obvious to all.
This makes bitcoin not an ideal currency for criminals, terrorists or money laundering.
4 – Inability
Bitcoin transactions can not be canceled, as opposed to Fiat electronic transactions.
This is because there is no “judge” centers that can say “OK, return the money.” If the transaction is registered on the network, and if more than an hour has passed, it is impossible to change.
While this may disrupt a bit, it means that any deal on the bitcoin network can not be messed with.
The smallest unit of bitcoin is called satoshi. This is a hundred million of bitcoin (0.00000001) – at today’s prices, about one hundred cents. It can probably allow microtransactions that traditional electronic money can not