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Andreas M. Antonopoulos 2014-04-01 22:20:59 -07:00
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=== What is Bitcoin?
Bitcoin is collection of concepts and technologies that form the basis of a digital money ecosystem. It includes a currency, with units called bitcoins, that are used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol, primarily via the Internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible. Users can transfer bitcoin over the network to do just about anything that can be done with conventional currencies, such as buy and sell goods, send money to people or organizations, or extend credit. Bitcoin technology includes features, based on encryption and digital signatures, to ensure the security of the bitcoin network. Bitcoins can be purchased and sold, exchanged for other currencies at a floating exchange rate, at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the Internet: fast, secure, borderless.
Bitcoin is collection of concepts and technologies that form the basis of a digital money ecosystem. It includes a currency, with units called bitcoins, that are used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol, primarily via the Internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible.
Users can transfer bitcoin over the network to do just about anything that can be done with conventional currencies, such as buy and sell goods, send money to people or organizations, or extend credit. Bitcoin technology includes features, based on encryption and digital signatures, to ensure the security of the bitcoin network. Bitcoins can be purchased and sold, exchanged for other currencies at a floating exchange rate, at specialized currency exchanges. Bitcoin in a sense is the perfect form of money for the Internet: fast, secure, borderless.
Unlike traditional currencies, bitcoins are entirely virtual. There are no physical coins, or even digital coins per se. The coins are implied in transactions which transfer value from sender to recipient. Users of bitcoin own keys which allow them to prove ownership of transactions in the bitcoin network, unlocking the value to spend it and transfer it to a new recipient. Those keys are stored in a digital wallet on each user’s computer. Possession of the key that unlocks a transaction is the only prerequisite to spending bitcoins, putting the control entirely in the hands of each user.
Rather than having central authorities to issue currency or validate transactions, bitcoin is a fully-distributed, peer-to-peer system, and as such there is no “central" server or point of control. Bitcoins are created through a process called "mining", which involves looking for a solution to a difficult problem. Any participant in the bitcoin network (i.e. any device running the full bitcoin protocol stack) may operate as a miner, using their computer's processing power to attempt to find solutions to this problem. Every 10 minutes on average, a new solution is found by someone who then is able to validate the transactions of the past 10 minutes and is rewarded with brand new bitcoins. Essentially, the currency-issuance function of a central bank and the clearing function are de-centralized and turned into a global competition.
Bitcoin is a fully-distributed, peer-to-peer system, and as such there is no “central" server or point of control. Bitcoins are created through a process called "mining", which involves looking for a solution to a difficult problem. Any participant in the bitcoin network (i.e. any device running the full bitcoin protocol stack) may operate as a miner, using their computer's processing power to attempt to find solutions to this problem. Every 10 minutes on average, a new solution is found by someone who then is able to validate the transactions of the past 10 minutes and is rewarded with brand new bitcoins. Essentially, the currency-issuance function of a central bank and the clearing function are de-centralized and turned into a global competition.
The bitcoin protocol includes built-in algorithms that regulate the mining function across the network. The difficulty of the problem that miners must solve is adjusted dynamically so that, on average, someone finds a correct answer every 10 minutes regardless of how many miners (and CPUs) are working on the problem at any moment. The protocol also halves the rate at which new bitcoins are created every 4 years, and limits the total number of bitcoins that will be created to a fixed total of 21 million coins. The result is that the number of bitcoins in circulation closely follows an easily predictable curve that reaches 21 million by the year 2140. As a result, the bitcoin currency is deflationary and cannot be inflated by "printing" new money above and beyond the expected issuance rate.