His "death" was prophesied more than 400 times, they tried to ban him, he was called a "joke" and "fool's gold". However, the predictions of skeptics did not come true and Bitcoin is still with us.
Edition ForkLog prepared material on the basic properties and principles of operation of the first, most famous and largest cryptocurrency in the world by capitalization. What makes Bitcoin different from regular money and what makes it valuable.
- Bitcoin is a digital form of money that is not controlled by a central bank or any single institution.
- Coin issuance and transaction processing are performed collectively by network participants.
- All transactions in the Bitcoin network are recorded in a distributed data ledger, the blockchain. Data is regularly verified using the Proof-of-Work consensus algorithm.
What is Bitcoin?
Bitcoin from English bit - the minimum unit of information and coin - a coin - is a decentralized payment system based on the principle of direct exchange between users.
The technology is built on an open data transfer protocol. The system uses the eponymous unit of account "bitcoin" (BTC) - the first and most famous cryptocurrency. Since its creation, it has remained the largest by market capitalization.
How Bitcoin Works
Coin issuance and transaction processing are performed collectively by network participants. No one alone can control bitcoin, block or reverse a transaction. At the same time, anyone can join the network or use it for transfers.
The Bitcoin network itself consists of nodes (nod) — interconnected computers with installed special software. Each node stores and updates a copy of the blockchain. The process of confirming transactions, creating new blocks and validating a single version of the blockchain is provided by the Proof-of-Work algorithm.
The data of all transfers and the state of balances of all addresses are stored in a decentralized registry - the blockchain. This is a database that is a continuous chain of blocks, to each of which new transactions are recorded.
Who invented Bitcoin and who is behind its development now?
October 31, 2008 was publications a technical document (white paper) in which the concept of bitcoin is described for the first time. Its author was Satoshi Nakamoto. And it is still unknown who exactly is hiding behind this name - one person or a group of developers.
The Bitcoin network was launched on January 3, 2009.
Since the middle of 2010, Nakamoto stopped participating in the development of the project. The development community is now responsible for further development and coordination of the network's operation. Proposals for introducing updates to the Bitcoin code are called Bitcoin Improvement Proposal (BIP ).
However, this does not mean that only developers make decisions about the direction of Bitcoin development. Any significant changes to the protocol are only possible after agreement with the majority of miners.
What is the main innovation of Bitcoin?
One of the most important breakthroughs and at the same time the value of Bitcoin is that it was the first time to create a self-sufficient, reliable and decentralized payment system.
Any bank or other similar financial organization is a centralized structure. The work of its operator is usually completely or partially closed from customers. This leads to the need to trust her with your funds. In addition, it is vulnerable to errors, abuses and fraud.
Bitcoin does not have the above-mentioned risks because it is a decentralized structure that is built and maintained by its own participants without a central operator. The balances of all users are public (although specific identities are hidden), and the network protocol includes mechanisms that regularly check the correctness of the data.
Bitcoin vs fiat funds
A key element of the traditional economy that Bitcoin's founder wanted to fix was money. In the modern world, national currencies — fiat money — are printed at the level of states. The latter also represent a centralized structure. First of all, the value of money is determined by actions and trust in the issuer. In addition, fiat money is constantly affected by inflation, that is, depreciation.
That is why for transfers in the Bitcoin blockchain, not fiat funds are used, but a special unit of account - cryptocurrency. Its main function is to be a means of transferring value in the Bitcoin network. This value can be calculated using any convenient form — for example, in the same national currency. This is where the price of bitcoin is formed. The value of the first cryptocurrency is determined not by the central bank or any single organization, but by the users and investors themselves on the open market.
Thus, the price of bitcoin is determined not by the state, the Central Bank or a certain body, but only by the owners of the coins themselves. Some researchers also suggest determining the intrinsic value of Bitcoin.
However, despite the fact that the first cryptocurrency is used for making payments, today many perceive bitcoin more as an investment asset.
How to "Open an Account" in Bitcoin
Joining the "project" called "Bitcoin" is even easier than becoming a bank client. First, you need to set up a wallet - a special program that allows you to create addresses in the network, as well as carry out transactions, that is, receive coins or send them.
To create and manage a Bitcoin address, you do not need to go through a complex identity verification process, which involves uploading personal documents. Creating an address takes place in just a couple of clicks in the wallet interface.
An address in the Bitcoin network is analogous to a universal bank account. With the development of the protocol in the blockchain of the first cryptocurrency, several new address formats appeared. Almost all of them, with some exceptions, are fully compatible with each other.
However, "under the hood" of this procedure are difficult methods of cryptography. When creating a new address, its owner receives a pair of keys: public and private. The latter is intended only for the user.
For transactions on the Bitcoin network, a fee must be paid, which is distributed among the miners who are responsible for confirming and executing the transfers.
How many bitcoins are there and where do new coins come from?
New Bitcoins are generated every time a new block is successfully mined on the network. The amount of block reward and emission rate is periodically reduced as a result halving, which takes place every four years.
Thus, we have a clearly laid out schedule for the issuance of bitcoin. The total amount of coins to be issued is also known — 21 million. The last emission should occur around 2140.
The emergence of new bitcoins can be compared to the emission of money, only instead of government agencies printing new banknotes, the cryptocurrency is created by the users themselves. This process is called "mining".
At the same time, the equipment is located in different parts of the planet, and miners are combined into pools for greater efficiency. They receive a reward for their work.
Is Bitcoin a pyramid scheme?
No. The financial pyramid, promising an unrealistically high profit, provides for the income of the participants due to the constant attraction of funds. The first participants of the pyramid will receive payments from the contributions of the following. As soon as the flow of funds significantly weakens or stops, the whole scheme collapses, leaving a small number of "chosen" with a profit.
Bitcoin does not guarantee investors any benefits. His only promise is full control over own finances. And even if we assume that the demand for cryptocurrency from beginners or professional investors can lead to an increase in the rate, the old participants do not receive dividends from the new ones.
The very distributed nature of Bitcoin implies that there is no single central structure that can benefit financially.
Bitcoin is said to be anonymous. It is so?
This is another common mistake. Rather, we can talk about pseudo-anonymity. Any person can see the movement of funds and the current balance of the address, but it is quite difficult to tell who exactly they belong to.
However, it is possible to track the sender's IP address, even if it is not stored on the blockchain. For example, the server owners of some wallet providers have such information.
At present, quite effective tools for transaction analysis have already been developed. Their functionality allows cryptocurrency companies to instantly find out how reliable the counterparty is, and whether it operates with funds that were previously used in illegal financial transactions.
