Bitcoin is the first and most popular cryptocurrency in the world. It is a digital asset capable of peer-to-peer transactions and was designed to serve as an alternative to traditional fiat money. Bitcoin’s database resides in a decentralized network called a blockchain, which is beyond the control or regulation of any single entity or organization.
What is Bitcoin?
Bitcoin is an electronic form of cash. But unlike other forms of digital currencies such as virtual cash (like GCash or PayPal), Bitcoin is a cryptocurrency–which means it resides within a blockchain network instead of being stored in a centralized database.
What the blockchain does is that it allows people to engage in digital transactions directly with one another, also called a peer-to-peer (P2P) transaction, without needing a third party–like a bank–to facilitate “trust” between the transacting parties.
Bitcoin is the very first cryptocurrency to have ever been circulated and is currently the largest and most traded cryptocurrency in terms of market capitalization.
How does Bitcoin work?
Bitcoin and other cryptocurrencies are only made possible because of blockchain technology. Essentially, a blockchain is a distributed ledger system, powered by numerous specialized computers called “nodes” which are situated all around the globe. These nodes are responsible for authenticating and validating transactions made in bitcoin with the help of complex algorithms, instead of having the transactions supervised and validated by a third party such as a bank or a remittance platform.
Instead, in a blockchain, all of the nodes in the network are constantly making independent calculations to validate every transaction added to the ledger. At any given time, Bitcoin nodes all around the world are constantly double-checking and comparing each other’s results which is what makes Bitcoin a highly secure and efficient automated system.
What makes Bitcoin special?
As the very first cryptocurrency, Bitcoin’s contribution to digital currency is “immutability”. This means that transactions made in bitcoin can never be deleted, altered, or manipulated in any way.
Unlike physical ledgers and record books which are easily altered or destroyed by anyone with malicious intentions, or centralized databases which can be hacked–it is virtually impossible to manipulate the Bitcoin ledger because of its decentralized design. The ledger itself does not exist in just one place at one time–but more accurately, the ledger exists across the whole global network at all times.
Another appealing feature of Bitcoin is its permissionless nature. Since there is no central authority in charge of the whole network, this means that anyone is free to transact with bitcoin whenever they want to. In fact, Bitcoin was conceived in part, to provide a transparent online financial system which can be inclusive even towards those without bank accounts or necessary documentation.
Where does Bitcoin come from?
The nodes that keep the global Bitcoin network running are also referred to as “miners” because the work of authenticating and validating transactions happens to also be the process for creating or “minting” new bitcoin as the network rewards. Anyone with the appropriate hardware can lend their computing power to the network to become a miner, which can be very profitable for the mining node operators.
In technical terms, mining is referred to as a “Proof-of-Work” (PoW) consensus protocol. This protocol ensures that miners are doing their part in keeping the blockchain running, and at the same time, that they are doing their computations independently from one another.
To keep this system in place, the PoW protocol is set up as a “race” between the nodes who have to work very hard at trying to crack a randomly generated puzzle generated by the network for every set of transactions. Whenever a computer is successfully able to crack the puzzle for the “block”, it is then rewarded in newly minted bitcoin.
Who invented Bitcoin?
Bitcoin was introduced in 2008, built on the concept of the blockchain which had been put forward among academic circles as early as the 1990s. In Bitcoin’s original white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System, the author is listed as a certain “Satoshi Nakomoto” but whose real identity remains unknown to this day.
There are various theories on the true identity of Satoshi Nakomoto, with some purporting it only to be a pseudonym while others think that Nakamoto is a collection of people who worked on the Bitcoin project together.
The whitepaper cites Bitcoin as a solution to the “double-spending” problem, which was a flaw with earlier forms of digital cash. Double-spending is being able to spend digital money “twice” by making more copies of digital currency–basically an electronic form of counterfeiting. But with the use of the blockchain, the problem can be eliminated since new bitcoin can only be produced and spent with the consensus of an entire network, and not by any single individual.
Regardless of the mystery surrounding its creator, Bitcoin has been able to establish itself as the most traded and most valuable cryptocurrency on the market today–a testament to the efficiency of its design and the integrity of the technology behind it.
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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.
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