Bitcoin is a network based on the consensus achieved by its users. It has crafted a brand new payment system and a fully digitized currency. It’s the first example of a growing category of money known as cryptocurrency. Bitcoin is also the first decentralized peer-to-peer payment network, where the users are the master of their payments without the interference of a third party such as central government or any sort of agency.
Since its birth, the concept of Bitcoin is always controversial. Keywords related with Bitcoin keep popping up in mainstream news reports. Some people may find the idea of Bitcoin hard to get at. Some may mistaken Bitcoin for another Ponzi Scheme lead by geeks.
So what on earth is Bitcoin?
Human beings have been through various monetary systems from goods to goods, to goods to entity money. Till now each round of payment can be traced if the government ever dedicates itself to it. The agency that issues currency can devalue the monetary system or make the price volatile without supervision from its users. Furthermore opening bank account needs validating your assets, and your credit history. Any flaws in the procedure will fail your account. Running your private property is never at your liberty.
That’s when the concept of decentralized currency occurs:
Transactions should be anonymous;
Each one should create their their own wallet bank accounts in minutes without intervention;
The network should be decentralized and run through consensus of its participants.
Who created Bitcoin?
In 2009 a unknown man (or a group of men) under the name of Satoshi Nakamoto published the paper titled Bitcoin: A Peer-to-Peer Electronic Cash System, The idea was to produce a currency independent of any central authority, transferable electronically. This digital currency should be run by users. New coins should be issued by miners at a certain rate through validating transactions between users.
What are the features of Bitcoin?
Bitcoin has several important features that set it apart from government-backed currencies.
1. It’s decentralized
The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.
2. It’s easy to set up
Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.
3. It’s anonymous
Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However…
4. It’s completely transparent
Bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The blockchain tells all.
If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours.
There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address.
5. Transaction fees are miniscule
Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t.
6. It’s fast
You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.
7. It’s non-repudiable
When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.
So, bitcoin has a lot going for it, in theory. But how does it work, in practice? Read more to find out how bitcoins are mined, what happens when a bitcoin transaction occurs, and how the network keeps track of everything.