What is Bitcoin? Bitcoin, in a word is software. It is a decentralized digital currency that enables instant payments to anyone, anywhere in the world. It’s like electronic cash that you can use to pay friends or merchants. Bitcoins are the unit of currency of the Bitcoin system. A commonly used shorthand for this is “BTC” to refer to a price or amount (e.g. “100 BTC”).
Currency is money in any form when in actual use or circulation as a medium of exchange, especially circulating banknotes and coins. Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts. A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system. A medium of exchange permits the value of goods to be assessed and rendered in terms of the intermediary, money, widely accepted to buy any other good.
Bitcoin is a distributed peer-to-peer digital currency that can be transferred instantly and securely between any two people in the world.
To learn more about Bitcoin, check out this Bitcoin website.
The Bitcoin database that stores all the transaction data is called a block chain. The transactions are grouped together in batches for efficiency reasons. A batch is called a block and each block (except for the first, called genesis block) has a link to the previous block. This linking together of blocks is the chain part of the block chain.
- Block Chain
- The block chain is a public record of Bitcoin transactions in chronological order. The block chain is shared between all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending.
- Peer to Peer (P2P)
- Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.
- The power or right to give orders, make decisions and enforce obedience. The power to influence others especially because of one’s commanding manner or one’s recognized knowledge.
- A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. The wallet actually contains your private key(s) which allow you to spend the bitcoins allocated to it in the block chain. Each Bitcoin wallet can show you the total balance of all bitcoins it controls and lets you pay a specific amount to a specific person, just like a real wallet. This is different to credit cards where you are charged by the merchant.
- Double Spend
- If a malicious user tries to spend their bitcoins to two different recipients at the same time, this is double spending. Bitcoin mining and the block chain are there to create a consensus on the network about which of the two transactions will confirm and be considered valid.
- A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
- The science of coding and decoding messages so as to keep these messages secure. Cryptography is most often associated with scrambling plaintext (ordinary text, sometimes referred to as cleartext) into ciphertext (a process called encryption), then back again (known as decryption).
A Bitcoin wallet (sometimes called a client) is a software that facilitates performing bitcoin transactions. A bitcoin wallet is a type of cryptographic wallet. Without them, moving bitcoins from one address to another would be impossible. A wallet is a fundamental piece of Bitcoin software. There are a variety of software wallets. For an up-to-date list of the most popular wallets, see https://bitcoin.org/en/choose-your-wallet.
A wallet stores your secret private keys, so that you can access the bitcoins you own. The wallet actually does not store bitcoins directly. All the bitcoins are stored on the block chain and the wallet software simply allows you to transact with the bitcoins that the private keys stored in the wallet have control over.
A hardware wallet is a special type of bitcoin wallet which stores the user’s private keys in a secure hardware device. You can have a look at some examples at the Bitcoin Wiki. Many of them look similar to a USB Flash Drive.
You can see each 32-digit wallet address for Bitcoins and the balance it has. You can see the address, but you do not know the person or organization name who owns that address. This is pseudonymous.
Remember to backup your bitcoin keys!
How Bitcoin Works
On the blockchain there are constantly new transactions being entered into the system. In the case of Bitcoin, every ten minutes the transactions are collected into a block. Miners compete to have the privilege of recording that block. Every ten minutes blocks are confirming. The winning machine from the mining effort will be able to confirm each of the transactions in the block. There are about 7000 machines on the bitcoin network. After the initial confirmation is complete, each of the 7000 other machines will go ahead and also confirm the transactions in the block. The “trustability” of the network goes up geometrically over time. In practical terms, you may want to wait for perhaps an hour or two to be certain that the transaction confirms, whereas if you were just buying (or selling) a cup of coffee, you probably won’t want to wait more than ten minutes.
The blockchain is made up of many blocks of transactions (or data). A block is really a batch of transactions. Blocks are linked together in a chain. The most recent block is linked to the previous block, and so on. Each block has a header and a trailer that is responsible for this linking function. All of these blocks are time stamped.
For more information on bitcoin mining, have a look at the post called Bitcoin Mining.
Bitcoin is for immediate cash transactions, however there is a feature built-in that does allow you to set a future value date for the transaction to execute. The other big player is Ethereum. Ethereum is more for smart contracts that execute in the future, based on certain conditions. The provisions of many existing contracts are never enforced. However, once the conditions are met and the date and time has arrived, the blockchain simply executes the code. These contracts are not modifiable and there is much debate over this limitation.