BitcoinBitcoin is a form of decentralised digital currency that enables instant payments to anyone, anywhere in the world. It was defined by its creator Satoshi Nakamoto, an unknown individual or a group, as a “peer-to-peer electronic cash system”.
What is Bitcoin?
Bitcoin is a form of decentralised digital currency that enables instant payments to anyone, anywhere in the world. It was defined by its creator Satoshi Nakamoto, an unknown individual or a group, as a “peer-to-peer electronic cash system”.
Bitcoin operates without the existence and necessity of intermediaries and network administrators and central authority. Instead, the transaction takes place between users directly and these transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger. Money issuance is also carried out collectively by the network.
How does Bitcoin work?
The Bitcoin network requires an immutable ledger – the blockchain - to operate as a database for transactions and payments. The blockchain is a chain of blocks which contain bitcoin transactions. Each block can process approximately 2,000 transactions and a new block is produced every 10 minutes through a procedure called mining.
The network is sustained by a decentralized community of miners, node operators, and developers.
Transactions verified by nodes are broadcasted to the Bitcoin blockchain as unconfirmed transactions which are then picked by miners. The blockchain network and the consensus mechanism (a concept called ‘Proof of Work’ or ‘PoW’ for Bitcoin) prevent the possibility of double spendingby publishing every transaction recorded on the Bitcoin blockchain to nodes worldwide.
Each bitcoin represents a log of transactions and their inputs. A transaction is a combination of information that includes inputs, outputs, and amount and sending a bitcoin transaction in the Bitcoin network signifies the process of broadcasting these to the Bitcoin blockchain network, which are then verified by nodes and eventually by miners.
Mining is a critical system which supports the network’s security. Through the usage of computer power (or hash power), miners discover new blocks that contain bitcoin transactions. Mining bitcoin is expensive because it requires significant amounts of hash power, mining equipment, and electricity. In return, miners receive incentives with newly produced bitcoins and transaction fees.
Using the SHA-256 hashing algorithm, miners provide each block a cryptographic hash of the previous block. The chain of blocks with unique cryptographic hash eliminates the possibility of the Bitcoin network being breached by hackers and to alter information stored within blocks, the entire blockchain is required to be set apart.
Bitcoin wallets are platforms that allow users to transact bitcoins by simplifying the process of sending, receiving, and storing bitcoins.For Bitcoin there are two main types of wallets: (i) Hot wallets which are connected to the internet (e.g. Coinbase) and (ii) Cold wallets which are offline wallets such as USB drives, metal coins, and paper wallets, with private keys and funds stored in them.
The fixed supply of bitcoin makes the currency a deflationary currency by nature, as the supply of bitcoins can only decrease when it achieves its maximum capacity of 21 million bitcoins.