Bitcoin is an agreement among a community of people to use 21 million secure mathematical tokens - ‘bitcoin’ - as money. The bitcoin network consists of thousands of computers run by individuals all over the world.
To understand how bitcoin functions as a currency, you need to understand money. Money isn’t wealth. Instead, money is an accounting system used to facilitate the exchange of wealth. Think about it this way: people don’t want money, they want what money affords. Bitcoin is the same.
Some people doubt the legitimacy of bitcoin because it’s ‘just data.’ The truth is, all money - including traditional currencies - is ‘just data.’ In other words, money is a recognised and accepted means of conveying data, or information, about a product’s or service’s value.
We can also conceptualise money as a ledger. With fiat currencies like the dollar, that ledger is centralised. This gives that central authority tremendous power, a power that history has proven will be abused.
In contrast, bitcoin’s ledger is decentralised. No one individual or entity has the capacity to create new units (causing inflation), freeze (or seize) accounts, or prevent a payment from being processed.
Bitcoin isn’t the first decentralised money; gold is another example. No more gold can be made, and the ‘ledger’ of gold - that is, the physical gold itself - cannot be manipulated or counterfeited. Gold’s hefty physical nature make it an inefficient and unrealistic currency solution.
The digital nature of bitcoin, on the other hand, makes it a natural fit for today’s tech-driven, connected world.
Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralised peer-to-peer payment network powered by its users with no central authority or middleman. From a user perspective, bitcoin is cash for the internet.
Bitcoin can also be seen as the most prominent triple-entry bookkeeping system in existence. It’s the first currency that is both decentralised and digital. It is more reliably scarce than gold, more transactionally efficient than ‘modern’ digital banking, and enables greater financial privacy than cash.
Bitcoin could still fail for one reason or another, but if it doesn’t, it has the potential to be very, very revolutionary.
All bitcoin transactions are recorded on a public ledger called the blockchain. All transactions are then checked, verified, and confirmed by miners. Miners perform this duty on incredibly powerful computers in exchange for newly minted bitcoin. With tens of thousands of miners contributing to the community, transactions run smoothly, and the network is secured. Bitcoin cannot be reproduced, or double-spent.
Cryptography is an additional security measure, which makes it impossible for anyone to spend bitcoin from another user’s wallet. Cryptography can be used to encrypt a wallet, so it cannot be used without a password.
Bitcoin is not controlled by a central company, bank, or financial institution. Therefore, it cannot be inflated like the dollar. In fact, only 21 million bitcoin can ever be created.
To ensure a steady rate of distribution, bitcoin’s production is modelled on gold mining. As more gold is mined, finding new gold becomes more difficult. Similarly, as more bitcoin is minted, the process of production becomes more difficult. The final bitcoin will be mined around the year 2140.
Nobody. The bitcoin network has no owner, just like the technology behind email has no owner. Instead, bitcoin is controlled by all bitcoin users around the world.
While developers do work to improve the software, they cannot change the bitcoin protocol. All bitcoin users are free to choose which software and version they use, and, for bitcoin to function properly, these versions must be compatible. Therefore, all users and developers have an incentive to protect the consensus among software.
Bitcoin is the first application of a concept called ‘cryptocurrency.’ Cryptocurrency was described in 1998 by Wei Dai on the cypherpunks mailing list, which suggested the concept of a new form of money that used cryptography - rather than a trusted, central authority - to control its creation and monitor its transactions.
The first bitcoin specification and proof-of-concept were published in 2009 in a cryptography mailing list by Satoshi Nakamoto. Satoshi left the project in late 2010 without revealing anything about himself, herself, or themselves. The community has since grown exponentially, with thousands of developers working on bitcoin worldwide.
Satoshi’s anonymity has raised unjustified concerns, many of which are linked to the misunderstanding of the open-source nature of bitcoin. The bitcoin protocol and software are published openly, meaning any developer around the world can review the code and create their own modified version of the bitcoin software.
Satoshi’s influence was, therefore, dependant on their ideas being adopted by others, meaning they did not control bitcoin. As such, the identity of bitcoin’s ‘inventor’ is probably as relevant today as the identity of the person who invented paper.