Bitcoin is the world’s most popular cryptocurrency, a form of digital money that exists on the internet.
The word ‘Cryptocurrency’ consists of 2 words: cryptography & currency. Cryptography is the science dedicated to the security of information and communication, and currency is a value exchange medium. Cryptocurrency is a medium of exchange of value in the digital form protected with encryption borrowed from cryptography. Encryption is a type of data conversion into a format that a human being cannot read. Most modern-day cryptocurrencies are decentralized. No central authority regulates their issuance, value, and circulation. A decentralized network of users helps to spread them all over the world.
Bitcoin’s working principles were first described in a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” published by Satoshi Nakamoto in 2008. The primary purpose of bitcoin was to serve as a medium of direct online payments without a third-party or intermediary such as government or financial institution.
Decentralization is one of the core features attributed to bitcoin. It allows transactions between individuals without a centralized clearance by an institution such as a bank. That makes sending online payments much faster. Blockchain, the foundational distributed ledger technology implemented into the bitcoin’s system, helps to record, verify, and store all transactions publicly in chronological order.
Bitcoin was the first to provide a viable solution to the double-spending attacks – the major weakness of the early electronic payment systems. Electronic money can be easily copied and reproduced (like any other digital data) in an unlawful manner. The same funds could be sent to two receivers simultaneously. With bitcoin’s verification system that Satoshi Nakamoto designed, double-spending became impossible.
Bitcoin’s core features
- Open-source: free to use and download, available to anyone who has a computer with internet access;
- Decentralized: not governed by a central institution controlling the demand, generation, and distribution of the tokens and their value;
- Digital: designed in and for use on the internet;
- Volatile: the price of bitcoin is continuously changing proportionately to the network activity governed by the code;
- Predictable: Bitcoin has a limited 21M supply and predictable pre-programmed issuance rate;
- Global: bitcoin can be used anywhere where there’s the internet;
- Secure: bitcoin’s code is designed to prevent the network from use for money-laundering, corruption, and double-spending that are commonplace in the traditional financial system;
- Pseudonymous: compared to opening a bank account, creating a bitcoin account doesn’t require an id. Instead, Bitcoin users are identified by public addresses that contain letters and numbers;
- Transparent: thanks to the blockchain technology anyone can view transaction details. Attempts to forge the system are immediately detected and prevented that way;
- Fast: a bitcoin transaction is processed in 10-20 mins
- Irreversible: a bitcoin transaction cannot be returned or canceled.
How are bitcoins created?
New bitcoins come into circulation automatically through ‘mining’. Miners are individuals who contribute run the mining software on their computers that use their processing power to solve mathematical puzzles. After each puzzle is cracked, new bitcoins come into circulation. This process is called the proof-of-work (POW), an algorithm that governs the transaction verification process.
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