Bitcoin is a new technology that allows for the transfer and management of resources, such as money and digital assets, over a decentralized, open-source protocol. This technology provides more freedom in conducting financial transactions, making the sending and receiving of money fast, secure and inexpensive.
The network behind this protocol manages transactions in a peer-to-peer and self-governing manner. Therefore, no outside person or system can interfere with the record or processing of Bitcoin transactions; and the trust of 3rd parties in using the network is unnecessary.
While Bitcoin itself is a very complicated technology for non-computer programmers, understanding Bitcoin can be broken down into a few primary attributes that collectively make it a gaming changing innovation. Below is a summary of those attributes. Click on the topic for more in-depth information.
Bitcoin is Decentralized – Bitcoin is a distributed, decentralized technology that anyone can access, sort of like the internet. Absence of centralized authority means more freedom and less cost in using Bitcoin.
Bitcoin is Global – sending and receiving money with Bitcoin is available wherever someone has an internet connection. Sending money to someone halfway around the world is just as easy as sending an email.
Bitcoin is Secure – Where credit cards fall short in providing privacy and security to the customers that use them, Bitcoin transactions that do not require that payors or payees reveal personal information.
Bitcoin is Open Source – Bitcoin's computer code is available to all for review and scrutiny. This means the technology is constantly peer-reviewed and publicly maintained – there are no tricks or hidden terms with Bitcoin.
Frequently Asked Questions (FAQs):
Is Bitcoin money?
Bitcoin functions as both as payment protocol and a new type of money. It helps to think of the Bitcoin network and the Bitcoin currency as two separate components. You can use bitcoin to pay for goods and services, and you can receive bitcoin as payment. Bitcoins can be thought of as digital tokens, sort of like credits, that are used to transfer value over the network.
What is the Blockchain?
The Blockchain functions as the "core engine" for how Bitcoin works. It can be thought of as a large, distributed database that contains all the verified transactions of the Bitcoin network. All transactions achieve consensus and verification through the cryptographic mechanism of the Blockchain. All information and data inputted into these transactions are permanent and irrefutable back until the very first Bitcoin transaction.
What is the legality of Bitcoin?
Bitcoin is currently legal in the United States and in most countries throughout the world. However, a handful of countries have "banned" the use of Bitcoin. A great resource for the current state of legality by country can be found here.
In 2014, the United States' Internal Revenue Service (IRS) issued guidance dictating that Bitcoin should be taxed as property, and other regulatory agencies have issued preliminary guidance on the topic of Cryptocurrencies. It appears that for now the U.S. government is taking a wait and see approach on the technology. Each state may also ultimately issue regulations the effect the use of Bitcoins, and a few states have already issued preliminary licensing regulations. While federal and state regulations and guidelines are still being formed, Bitcoin is currently a legal form of payment for buying and selling goods & services sanctioned under law.
Where can I acquire Bitcoin?
You can purchase Bitcoin through an exchange service that will sell you Bitcoin directly. There have been many news reports about security issues associated with Bitcoin exchange failures. These exchanges are businesses owned and operated by people and are subject to human error, fraud and failure.
However, it is important that the Bitcoin protocol itself has never been broken, hacked or compromised. Before using any Bitcoin exchange, evaluate that exchange's security and performance track record. For individuals in the United States, we recommend Coinbase.com.
You can also receive Bitcoin in exchange as payment for goods or services, or you may be tipped Bitcoin through a variety of applications.
What is Bitcoin "mining"?
Mining is a necessary component in the design of Bitcoin's architecture that provides the unique functionality Bitcoin enables. In short, Bitcoin mining is the process that securely processes Bitcoin transactions and records them in the public ledger known as the "Blockchain."
However, Bitcoin mining is a very complex system of computations and operations where specialized computers, or "miners," perform algorithmic work and receive Bitcoins in exchange for their efforts. The process of mining validates each transaction back to the very first Bitcoin transaction. Invalid transactions are rejected. Each group of valid transactions creates a new 'block' of transactions that is recorded in the public ledger 'chain' of validated blocks — hence the name "Blockchain."
Bitcoin mining also releases new Bitcoin into the market. Miners are rewarded a certain amount of Bitcoin for correctly solving a block. The current reward is set at 25 Bitcoins per block. However, the Bitcoin protocol dictates that the mining reward decreases by half at certain milestones until all Bitcoins – 21 Million in total – are mined.
As the difficulty of mining increases over time, only larger scale mining operations are expected to be profitable. The electricity costs of running a miner 24/7 outweigh the Bitcoin value received in turn. An industry of data center type mining operations is emerging in the Bitcoin space that is replacing the household mining operations you may have heard about.
Who is Satoshi Nakamoto?
Satoshi Nakamoto is the unknown creator of Bitcoin that released Bitcoin's whitepaper in 2008 and worked on the open source protocol until 2010. The name "Satoshi Nakamoto" is an anonymous pseudonym itself, existing only as an online entity surrounded in mystery.
Satoshi Nakamoto first appeared on the Cryptography Mailing List in October 2008 when he published the BitcoinWhitepaper. In the paper, Satoshi described Bitcoin as a "peer-to-peer version of electronic cash" that used several existing concepts, such as Adam Back's Hashcash and Wei Dai's B-money. The Bitcoin software was launched shortly thereafter on January 3rd, 2009.
Satoshi Nakamoto continued anonymous communication through email and the BitcoinTalk forum until late in 2010 when he disappeared and handed project leadership over to Bitcoin Chief Scientist Gavin Andresen. While no one knows Nakamoto's identity, there has been speculation over the years that points to several people who could be the creator of Bitcoin.
Of the listed Satoshi suspects, Nick Szabo is the most talked about and referenced. Nick Szabo is a pseudonymous blogger with a background in cryptography and law. Szabo was the first person to describe smart contracts in computing, which can be explained as self-executing code that enforces legal contracts. Szabo was working on his digital money concept, Bit Gold, before Satoshi released Bitcoin.
Because of his work on Bit Gold and his knowledge in the money-punk world, Szabo is speculated to be the creator of Bitcoin. An analysis of Szabo's writing claimed a high correlation with the writings of Satoshi. Szabo has denied being Satoshi multiple times.
Nick Szabo's writings on cryptography and other topics can be found here.
In March 2014 Newsweek reporter Leah McGrath Goodman falsely identified a California man named Dorian S. Nakamoto as Bitcoin's creator. The evidence she presented was full of pitfalls and inconclusive to Dorian being the real Satoshi.
While there have been others suspected of being the real Satoshi, no substantial evidence exists to identify Bitcoin's creator.
It Doesn't Matter Who Satoshi Nakamoto Is
Because Bitcoin is open source and decentralized, the identity of Satoshi Nakamoto is irrelevant. Bitcoin's software is updated and maintained by a global team of developers, and the Blockchain is secured by a decentralized system of miners.
While the unknown identity of Satoshi Nakamoto remains a great mystery, Bitcoin is not impacted by his anonymity.