Bitcoin can often refer to two things. First, the Bitcoin network that keeps track of our transactions and balances, and second, the currency that we use as the unit of value when we transact. We’ll cover both here.
Bitcoin is a digital currency created in January 2009 following the housing market crash. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous Satoshi Nakamoto.1 The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of hundreds of other virtual currencies collectively referred to as Altcoins.
The Bitcoin Network
Bitcoin’s payment network (also called the bitcoin blockchain) is what makes it possible for us to transact with one another. The network uses distributed consensus to verify and confirm transactions, and consensus is reached via a large global network of high-performance computers (called miners) running the bitcoin software.
Whenever someone sends a transaction it is broadcast instantly to the network and verified by the miners. Miners are constantly working to confirm individual transactions and include them in the next block of transactions in the chain. Once a new block is verified, all the transactions within it are permanently recorded on the blockchain. Rewards are paid out in bitcoin to miners who confirm transactions and verify the next block as a way to incentivize productivity on the network.
Each party who participates in the mining process has an identical up-to-date copy of the blockchain or public ledger, which is a record of all the transactions in bitcoin history. Each party’s copy of the ledger is updated every time a new block is found.
The unit of value that we send and receive on the Bitcoin network is also referred to as bitcoin, or bitcoins. Bitcoin is completely digital, meaning we can’t physically hold it in our hand. It’s also portable, divisible, fungible, and irreversible.
Next – Is it safe to use Bitcoin?
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