What is Bitcoin?
Bitcoin is the solution to many attempts at creating a digital, permissionless money. It combines cryptography, mathematics and game theory to solve the double-spend problem.
Bitcoin is an internet protocol and a network where you can exchange units of value called bitcoins between users in a peer-to-peer trustless way. Bitcoin is a new form of money that is absolutely scarce: there will only ever be 21,000,000 bitcoins.
Unlike a traditional bank where a central authority keeps track of users’ balances and validates transactions, participants in the Bitcoin network hold the keys to their funds and maintain the ledger as a single source of truth of all transactions.
Who created Bitcoin?
An anonymous computer scientist under the pseudonym of Satoshi Nakamoto published the Bitcoin whitepaper on 31st October 2008 and released the Bitcoin open-source software on January 3rd, 2009.
Who can use Bitcoin?
Bitcoin is inclusive and permissionless. You don’t need to reveal your identity or private information to use Bitcoin, which means anyone with an internet connection can use it. Everyone plays by the same rules, benefits from the same features, and no one has any special permissions.
Users are known to the network by sets of public addresses which can be generated to receive payments. They can spend the bitcoins from these addresses by using the associated private key.
Who controls Bitcoin?
The Bitcoin network is decentralized which means there is no committee, government or corporation that controls it. It is an open-source project which means anyone can propose improvements and updates.
The rules of Bitcoin are enforced by ‘nodes’. They keep and update a copy of the ledger, which contains every transaction since the inception of the network. Nodes are easy and cheap to run for any user that wants to do so.
Is Bitcoin secure?
Bitcoin has been engineered to function in an adversarial environment where it would constantly be under attack. It is optimised for security and resilience.
- The code is simple, open-source and secure by design.
- It is decentralized and therefore has no single point of failure.
- It has never been hacked and has had 99.98% uptime since its launch.
- Malicious behavior such as double spending, spam and denial-of-service attacks are prevented by a process called mining– an algorithm which imposes real-life energy cost on block validation.
- It incorporates economic incentives and game theory, making attempts to attack it expensive and ineffective.
- Billions of dollars’ worth of savings are stored in Bitcoin and the network settles multiple trillions of dollars’ worth of transactions each year.
How are bitcoins created?
One of the pillars of Bitcoin is its difficulty adjusted proof-of-work consensus mechanism. Entities called miners use ASIC machines which expend electricity to try and compute a random hash which is smaller than the current target set by the network. New bitcoins are issued as a reward to the miner that can timestamp a new block the fastest. The more energy a miner spends, the more likely they are to find that valid hash. Miners can join or leave the network at any time without affecting its reliability.
Every 210,000 blocks (about 4 years) the reward is cut in half, an event referred to as the halving. The block reward started at 50 bitcoins per block in 2009, and currently stands at 6.25 bitcoins per block. The next halving will take place around April 2024. There will only ever be 21 million bitcoin in existence, and more than 90% of them have already been mined. All of the bitcoins that exist will have been distributed fairly and no one can create any for free.
How does Bitcoin work?
Bitcoin is a network of nodes maintaining a distributed ledger of transactions.
Users broadcast signed transactions to the network, which are then added to a queue called the mempool. Miners batch these transactions together in blocks, prioritizing those which pay the highest fees, and compete to be the first to find a valid timestamp. Once a new block is mined, nodes append it to the ledger and broadcast it to the rest of the network.
Who uses Bitcoin?
Bitcoin is used all over the world by millions of individuals and organisations for a variety of reasons:
- to protect themselves from inflation
- they do not have access to a traditional bank account
- to send remittances or international money transfers
- to avoid financial censorship
- as a way of transporting savings across borders without confiscation
- or just simply to purchase goods and services
What makes bitcoin ‘good money’?
Throughout human history, people have used different forms of money. Some in the form of ledgers or IOUs, others in the form of commodities like glass beads, seashells or precious metals.
Money is used to perform three functions:
- Store of value: to store purchasing power for future spending.
- Medium of exchange: to facilitate the exchange of goods and services.
- Unit of account: once a money becomes ubiquitous, people will use it to perform economic calculations such as comparing between prices or accounting.
In order to perform well as money, a good must perfect these attributes:
- Scarcity: good money must be hard to obtain.
- Divisibility: it must be divisible in order to make small transactions.
- Portability: it should be easy to store and transport.
- Durability: goods that rot or spoil would not make good money.
- Verifiability: it must be easy to identify if the money is genuine.
- Fungibility: units of money must be tradeable equally for one another. Diamonds or paintings for example are not fungible.
- Acceptability: In order to be useful money must be commonly accepted in exchange for goods and services.
For the past few centuries, gold was regarded by humanity as the best form of money. However, gold is not practical for small transactions, large amounts are not very portable and are expensive to secure against theft. While it is still used by some as a store of value, it is no longer used as a medium of exchange or unit of account.
Bitcoin, however, has been engineered to be perfect money. It is absolutely scarce: no more than 21 million can ever exist. One bitcoin is divisible into a hundred million units. You can transport it anywhere simply by remembering or writing down a private key, and send it to anyone in an instant. Due to its digital nature and the redundancy of its ledger, the Bitcoin network is immune to spoilage, system failure, or natural disasters, making bitcoin very durable. It is impossible to dupe the network with fake bitcoin and anyone can verify that their coins are genuine by auditing the entire supply. Although humans can differentiate bitcoin just like a banknote can be identified by its serial number, the network itself does not discriminate between coins making bitcoin fungible for all intents and purposes. Bitcoin is still a relatively new and misunderstood technology, but it is being adopted by more and more people every day. As the world realises its properties and government currencies continue to be debased, Bitcoin could very well become the dominant, most acceptable form of money.
You can learn more about Bitcoin by reading the whitepaper originally published by Satoshi Nakamoto on October 31st 2009