What is Bitcoin?

Bitcoin is a borderless digital currency and payment network owned by its users which is regarded as money for the internet.

It is similar to conventional money like dollars, sterling, euros and yen in that it can be used to buy things and be traded electronically.

Bitcoin

Bitcoin differs from fiat money because it is not created or printed from a central source and is independent of financial institutions: this makes bitcoin an alternative to the traditional minting process. Bitcoin’s users like this as it means their money can’t be controlled by a bank and is also immune from the corroding effects of inflation: this makes bitcoin a store of wealth with a high degree of security.

Bitcoin is open source software which doesn’t require credit checks, application forms or third party consent to start using (making it permissionless). Bitcoin uses public key cryptography - difficult to understand language - which generates both public and private keys: the public key is where money can be sent, the private keys allowing access to these funds. Bitcoin transactions are recorded on an immutable digital ledger, known as the blockchain. The blockchain is determined by computer code and is a decentralised peer to peer network. The ledger is maintained through a process known as mining, performed by computers running software which solve mathematical problems. New bitcoins are created as a reward to miners for their undertaking, as the blockchain establishes a distributed consensus on the ledger which is publicly auditable and viewable. This means bitcoin takes out the middle man, with no central point of weakness or potential compromise.

Origins of Bitcoin

The basic premise of bitcoin was to create secure and decentralised money which was transferred electronically, almost instantly with very low transaction fees.

Before bitcoin, there had been previous attempts to create digital money. Influences include eCash, Hashcash, b-money, Bitgold and BitTorrent; eCash developed by David Chaum in 1983, used public key cryptography. Hashcash was developed by Adam Back in 1997 and used proof of work as a way of preventing email spam (proof of work is the system used in bitcoin, which is difficult to generate but easy to verify). B-money was an early proposal developed in 1998 by Wei Dai for anonymous money on a distributed ledger. Bitgold, developed by Nick Szabo in 1998 as a digital currency which although never implemented, worked on a chain of proofs; and in 2001 BitTorrent was created as a peer to peer file sharing protocol.

The genius of bitcoin is how it joined together these innovations and how it prevented the double spend problem (where coins are spent in more than one transaction). In November 2008 Satoshi published his white paper Bitcoin: A Peer to Peer Electronic Cash System. In January 2009 the genesis block was mined and the first bitcoin transaction took place between Satoshi and Hal Finney.
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