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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 have 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 have 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, such as 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 very first example of what we today call cryptocurrencies, a growing strength category that shares some features of traditional currencies, together 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 evidence. The idea was to generate a means of exchange, independent of any central authority, 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's maintained by a group of volunteer coders, and run through an open network of committed servers spread around the world. This attracts 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 dual spending issue 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, etc.) have an unlimited supply central banks can issue as many as they want, and can try to manipulate a currencys value relative to others. Holders of the currency (and notably citizens with very little alternative) bear the cost.
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Together with special info bitcoin, on the other hand, the distribution 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 advantage in theory, 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 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 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 with the address of his or her wallet. Transactions can, with a little effort, be tracked this way. Also, law enforcement has developed approaches to identify consumers if necessary.
Furthermore, most exchanges are required by legislation to perform identity checks on their customers before they're allowed 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's absolutely no central adjudicator that can say okay, return the money. If a transaction is listed on the network, and when more than an hour has passed, it's impossible to modify.
Even though this might disquiet some, 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's Website one hundred millionth of a bitcoin (0.00000001) at todays prices, about one hundredth of a cent. This may 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.