Satoshi Nakamoto, a pseudonymous programmer, published a 9-page document outlining a new decentralized digital currency in 2008. It was dubbed Bitcoin.
Bitcoin is the world’s first successful decentralized cryptocurrency and payment system, launched in 2009 by a mysterious creator who only goes by the name Satoshi Nakamoto. The term “cryptocurrency” refers to a class of digital assets in which transactions are secured and verified through the use of cryptography – a scientific method of encoding and decoding data. These transactions are frequently stored on computers distributed around the world using blockchain, a distributed ledger technology.
Bitcoin can be divided into smaller units called “satoshis” (up to 8 decimal places) and used for payments, but it is also regarded as a store of value, similar to gold. This is due to the fact that the price of a single bitcoin has risen dramatically since its inception, from less than a cent to tens of thousands of dollars. When referred to as a market asset, bitcoin is denoted by the ticker symbol BTC.
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When discussing cryptocurrency, the term “decentralized” refers to something that is widely distributed and does not have a single, centralized location or controlling authority. In the case of bitcoin, and many other cryptocurrencies, the technology, and infrastructure that govern its creation, supply, and security are not managed by centralized entities such as banks and governments.
Instead, Bitcoin is designed in such a way that users can directly exchange value with one another via a peer-to-peer network; a type of network in which all users have equal power and are connected directly to one another without the use of a central server or an intermediary company. This enables data to be shared and stored, as well as bitcoin payments to be sent and received between parties in real-time.
The Bitcoin network (capital “B” when referring to the network and technology, lower-case “b” when referring to the actual currency, bitcoin) is completely open, which means that anyone in the world with an internet connection and a device that can connect to it can participate freely. It is also open-source, which means that anyone can view or share the source code upon which Bitcoin was built.
The simplest way to understand Bitcoin is to compare it to the internet for money. The internet is purely digital; no single person owns or controls it; it has no borders (anyone with electricity and a device can connect to it); it operates 24 hours a day, seven days a week; and users can easily share data with one another. Imagine if there was an ‘internet currency’ in which everyone who used the internet could contribute to its security, issue it, and pay each other directly with it without the involvement of a bank. That is essentially what bitcoin is.
Bitcoin: A Substitute For Fiat Currency
Nakamoto created bitcoin as an alternative to traditional money, with the goal of eventually making it a globally accepted legal tender that people could use to buy goods and services.
However, bitcoin’s utility as a payment method has been hampered by its price volatility. Volatility is a term used to describe how much the price of an asset changes over time. Bitcoin’s price can fluctuate dramatically from day to day – and even minute to minute – making it a less than ideal payment option.
For example, you wouldn’t want to pay $3.50 for a cup of coffee only to find out it’s worth $4.30 five minutes later. Alternatively, it does not bode well for merchants if the price of bitcoin falls dramatically after the coffee is delivered.
Bitcoin functions in many ways in opposition to traditional money: it is not controlled or issued by a central bank, it has a fixed supply (which means new bitcoins cannot be created at will), and its price is unpredictable. Understanding these distinctions is critical to comprehending bitcoin.
What is the operation of Bitcoin?
It is critical to understand that Bitcoin is made up of three distinct components that work together to form a decentralized payment system:
Bitcoin operates on a peer-to-peer network, which means that users — typically individuals or entities looking to exchange bitcoin with others on the network — do not need the assistance of intermediaries to execute and validate transactions. Users can connect their computers directly to this network and download its public ledger, which contains a record of all historical bitcoin transactions.
This public ledger employs “blockchain” technology, also known as “distributed ledger technology.” Blockchain technology enables cryptocurrency transactions to be verified, stored, and ordered in an immutable and transparent manner. Immutability and transparency are critical credentials for a payment system based on zero trust.
When new transactions are confirmed and added to the ledger, the network automatically updates every user’s copy of the ledger to reflect the most recent changes. Consider it an open Google document that automatically updates when anyone with access edits its content.
The Bitcoin blockchain, as the name implies, is a digital string of chronologically ordered “blocks” — chunks of code containing bitcoin transaction data. It is important to note, however, that validating transactions and bitcoin mining are two distinct processes. Mining can continue whether or not transactions are added to the blockchain. Similarly, an increase in Bitcoin transactions does not always increase the rate at which miners discover new blocks.
Regardless of the volume of transactions awaiting confirmation, Bitcoin is programmed to allow new blocks to be added to the blockchain once every 10 minutes.
Because the blockchain is public, all network participants can track and evaluate bitcoin transactions in real-time. This infrastructure reduces the possibility of double-spending, a problem with online payments. When a user attempts to spend the same cryptocurrency twice, this is known as double-spending.
Bola, who has one bitcoin, may try to send it to both Emeka and Musa at the same time, hoping that the system does not detect it.
Because reconciliation is performed by a central authority in the traditional banking system, double spending is avoided. It’s also not an issue with physical cash because you can’t give two people the same single-dollar bill.
Because Bitcoin has thousands of copies of the same ledger, the entire network of users must unanimously agree on the validity of each and every bitcoin transaction that occurs. This agreement between all parties is referred to as “consensus.”
Just as banks constantly update their customers’ balances, everyone who has a copy of the Bitcoin ledger is responsible for confirming and updating all bitcoin holders’ balances.