What is Bitcoin? It is the first decentralized digital currency that operates without a central administrator like a bank or a government. The system enables payments to be transferred between users without an intermediary. It is completely digital and has no physical version of the USD you may keep in your wallet.
On November 1, 2008, a person going by the alias Satoshi Nakamoto posted to a Cryptography Mailing List providing information on the Bitcoin protocol he was proposing to release. It included the following as well as the abstract pulled from the whitepaper.
I’ve been working on a new electronic cash system that’s fully
peer-to-peer, with no trusted third party.
The paper is available at:
Bitcoin: A Peer-to-Peer Electronic Cash System
The main properties:
Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hashcash style proof-of-work.
The proof-of-work for new coin generation also powers the
network to prevent double-spending.
What is Bitcoin?
Distributed Ledger Technology
DLT is a database that is consensually shared across a network spread out globally. It allows for a network to have multiple verifiers in different physical locations which helps mitigate cyber attacks.
The Bitcoin network is not controlled by one single institution or government. The network is maintained by volunteer developers across the world which each has a copy of the network on their computer often referred to as the blockchain. The network acts similarly to how a bank would traditionally act as the intermediary that verifies the transaction from one party to the other. It helps solve the “double spending problem” where someone could easily copy digital assets by copying them historically. Since the network has to verify the transaction in multiple geographic locations it helps to eliminate the ability for people to send money that they do not actually have.
Bitcoin coin has a limited supply and will never surpass 21 million Bitcoin based on mathematical proofs. Traditional fiat currencies like dollars and euros and created by central banks that can issue more if they want which leads to inflationary issues and currency manipulation issues when compared to other global currencies. Some countries that have poorly managed their finances like Venezuela leads the local currency losing almost all of its value and having the citizen of the nation hurt the most by the devaluation. Since the Bitcoin network has a finite amount of Bitcoins it shares some similarities to gold, that as it becomes more popular with time and more widely accepted as a medium of value it should increase in value to match the demand.
Bitcoin does not have a central validator that identifies owners of network addresses (ie Bitcoin Wallets). Traditional electronic payments are usually connected to identifying information (know your customer or KYC) that helps to comply with anti-money laundering and other banking legislation.
Even though network addresses are not directly connected to a user (like a bank account) overtime through chain analysis you could figure out who owns a wallet based on the transactions in which the wallet partakes.
In fact, through chain analysis, one could identify interesting facts about different wallets, including the 5 richest bitcoin wallets.
Wallets on exchanges are even easier to identify or control. Most require the submittal of KYC information in order to move large amounts of money. Even if your information is not identifiable with the wallet the wallet could still be flagged for inappropriate use and the accounts could be frozen since you, the individual, are not in control of the private keys for the wallet. The exchange in this sense operates as a historical bank.
Bitcoin transactions cannot be reversed on the network. No central adjudicator exists that has the power to reverse or refund a transaction. This is a double-edged sword. It leads to a public ledger that can always be validated that a payment actually happened and has not been tampered. On the other side though if someone steals your money it is currently nearly impossible to get your funds recovered on the Bitcoin network.
The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001). This has the potential to allow for microtransactions on the network that traditional electronic systems can’t offer. Transaction costs of running the network however currently don’t allow microtransactions to make financial sense. Even a cup of coffee purchased with Bitcoin would have lead to a $15 transaction cost, costing more than the cup of coffee itself. However, advancements in technology are leading to off-blockchain and on-blockchain solutions to lower these fees.
Bitcoin mining is the act of how transactions are verified and added to the distributed ledger (blockchain) and are also the way in which new Bitcoins are released. Mining was originally able to be done by anyone with a laptop but over time as the network has grown and mining efforts have become more competitive commercial hardware is required.
Mining is the process of compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant that first solves the puzzle is responsible for placing the next block on the chain to be filled and in doing so is rewarded with the Bitcoins freed up from the previous block.
The people or computers that are doing the mining are often referred to as miners, are incentivized to mine by these reward blocks as well as transaction fees associated with validating transactions that are compiled on the network.
Other Bitcoin Resources
Bitcoin: A Peer to Peer Electronic Cash System: Bitcoin Whitepaper
Bitnodes: estimating the size of the Bitcoin network by finding all the reachable nodes in the network
BitInfoCharts: network daily transactions