Back in 2009, an anonymous person (or a group of people) under the pseudonym Satoshi Nakamoto wrote a white paper stating a goal to create a totally “new electronic cash system.” The main characteristic of this system is non-existence of central authority or server which controls it. Therefore, bitcoin is completely decentralized – there is no financial institution (e.g. bank) or state authority in charge of it. This is the fundamental difference between this virtual currency and standard, fiat money issued by governments.
The creators of today’s largest digital currency were motivated by a double-spending problem which is a feature (and some would say a bug) of traditional money. For example, someone who wants to abuse the system can utilize the potential flaw in digital cash transaction scheme to spend the same amount more than once. Since the data about all transactions is controlled by a central authority and recorded in a centralized database, this database is vulnerable to fraud attempts.
In contrast, bitcoin uses peer-to-peer technology (the blockchain). This means that when someone wants to send money or buy some goods and services, everyone in the bitcoin’s decentralized network receives a copy of that particular transaction. All the members need to verify the transaction in order for it to be approved. Thus, the bitcoin network works on a consensus principle and eliminates the possibility of fraud.
So, how are the transactions verified by the bitcoin network? The members of the network use special, increasingly more powerful hardware and software to inscribe these transactions into a digital ledger, i.e. the record of all transactions that have ever been made. This is called mining, and the records about the transactions are called the “blocks”. In order to join another block to the existing sequence of blocks, serious computational power is deployed by thousands of miners that do it simultaneously.
After reading this, the readers unfamiliar with the topic probably wonder how and where does one store his or her bitcoins. There is a large number of digital currency exchanges like Kriptomat, where people can buy, sell and store bitcoins. The latter is managed by digital wallets, which don’t contain actual bitcoins, but the private key which unlocks the access to digital funds, and the public key which is an address of the member inside the network. Check out the infographic below for a more illustrative explanation of bitcoin wallets.
One of the main advantages of bitcoin is that you can use it for payment regardless of the country you’re currently residing in. This blog post will give you a better idea of how and where you can spend your bitcoin. Another fact worth mentioning is that the maximum number of bitcoins that will be mined is 21 million, and it’s estimated that the last one will be created in October 2140! Today, bitcoin is the largest and the most popular cryptocurrency, and it’s absolutely clear that this technology will have a tremendous impact on the global economy.
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The text is informative in nature and does not count as an investment recommendation. It does not express the personal opinion of the author or service. Any investment or trading is risky, past returns are not a guarantee for future returns – risk only those assets that you are willing to lose.