world is abuzz about bitcoin these days and that has many people wondering what bitcoin actually is, why it’s so hot right now, and what it all means for the future of ecommerce. The following article will hopefully help demystify this ultra-hot cryptocurrency.
What is bitcoin?
Bitcoin is a form of digital currency and a worldwide payment system. Unlike traditional currency, such as minted coins or printed bills, bitcoin is created and held electronically. And unlike traditional currency that is controlled by a central bank, no single entity controls bitcoin and, by extension, no single authority can manipulate the value or destabilize the network. Bitcoin is exchanged electronically by users via cryptographic addresses. Third-party sites, called exchanges, help facilitate these transactions.
Where does bitcoin come from?
The process by which bitcoins are generated is called mining. Using powerful computer processors, individual miners or groups working together essentially solve a complex mathematical problem, which not only uncovers new bitcoin, but also serves to maintain the security and integrity of all bitcoin transactions that take place on the network.
Specifically, transaction details resulting from the transfer of bitcoin around the world are collected into a list called a block. It’s up to miners to confirm those transactions and write them into a general ledger, which is essentially a long list of blocks, known as the blockchain. Anyone can access the blockchain to explore any transaction made between any bitcoin addresses, at any point on the network.
When a block of transactions is created, miners put it through a complicated process involving a hash algorithm and a nonce, which this blog from Coindesk describes in greater detail for those who are so inclined. In return for all their hard work maintaining blockchain, miners earn bitcoins for successfully completing each complex cryptographic hash. The mining process makes use of various checks and balances to ensure that the system’s data remains secure, as tampering with data effectively prevents the production of new bitcoins.
There is a finite number of bitcoins to be discovered — 21 million to be exact — and the process of mining inherently increases in difficulty over time as a way of limiting the number of bitcoins found each day. It is predicted that all 21 million bitcoins will be mined by 2140.
Who created bitcoin?
It only makes sense that a cryptocurrency’s origin story should be shrouded in mystery. The name Satoshi Nakamoto has been associated with its invention ever since the first digital paper on bitcoin emerged in 2008. But even now, almost 10 years later, we are no closer to knowing with certainty just who Satoshi Nakamoto is or whether bitcoin was actually the result of a team of people working together instead.
So far, Hal Finney, Dorian S. Nakamoto, Craig Wright, and Nick Szabo, among others, have been considered possible candidates. As an homage to bitcoin’s purported creator, a satoshi is the smallest divisible amount within one bitcoin, representing 0.00000001 bitcoin or one hundred millionth of a bitcoin.
What are the key features of bitcoin?
Given that bitcoin was created in large part to serve as an alternative to fractional-reserve banking , it’s not surprising that it differs in some pretty significant ways to traditional currency and payment systems. Here are a few of the key differences:
1. It’s decentralized
Individual users are in control of their bitcoin. There is no central authority that can manipulate or seize control of the bitcoin network.
2. Personal information is not traceable to transactions
This is both a pro and a con in that it protects users from things like identity theft, but it also led to bitcoin becoming a popular payment method for illicit black markets, such as the Silk Road, an online marketplace for illegal weapons and drugs.
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