Bitcoin is one of the first implementations of a concept called crypto-currency, which was first described in 1998 by Wei Dai on the cypherpunks mailing list. Building upon the notion that money is any object, or any sort of record, accepted as payment for goods and services and repayment of debts in a given country or socio-economic context, Bitcoin is designed around the idea of a new form of money that uses cryptography to control its creation and transactions, rather than relying on central authorities.

BITCOIN_BILLBOARD
BITCOIN_BILLBOARD

On September 27th 2012, the Bitcoin Foundation was created in an effort to standardize, protect, and promote Bitcoin. Today, the Bitcoin economy is developing quickly with new users joining every day.

Technical features

These are the basic features of any Bitcoin-like network.

  • Bitcoins can be transferred between arbitrary nodes on the network.
  • Transactions are irreversible.
  • Double spending is prevented by using a block chain.
  • Transactions are broadcast within seconds and verified within 10 to 60 minutes.
  • Transaction processing and money issuance are carried out collectively through mining.
  • Transactions can be received at any time regardless of whether your computer is turned on or off.

Economic rules

These rules are enforced collectively by the network. While they will not change for Bitcoin, other digital currencies using the same technology may change them to suit their needs.

  • Hard limit of about 21 million Bitcoins.
  • Bitcoins are divisible to 8 decimal places yielding a total of approx. 21×1014 currency units.
  • Transactions are cheap, and mostly free.

The basics for a new user

As a new user, you only need to choose a wallet that you will install on your computer or on your mobile phone. Once you have your wallet installed, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose one of your Bitcoin addresses to your friends so that they can pay you or vice versa, you can pay your friends if they give you their addresses. In fact, this is pretty similar to how email works. So all that is left to do at this point is to get some bitcoins and to keep them safe. In order to start using Bitcoin, you are not required to understand the technical details.

However, if you want to know more, keep reading!

Bitcoin overview

Blockchain

The blockchain is a shared public transaction log on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain with no exception. This way, new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography.

Transaction

A transaction is a transfer of value between Bitcoin addresses that gets included in the blockchain. Bitcoin wallets keep a secret piece of data called a private key for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they come from the owner of the addresses. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and confirmed by the network in the following minutes, through a process called mining.

Bitcoin-Money
Bitcoin-Money

Mining

Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the blockchain. It enforces a chronological order in the blockchain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent any previous block from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the blockchain. This way, no individuals can control what is included in the blockchain or replace parts of the blockchain to roll back their own spends.

Going down the rabbit hole

This is only a very short and concise summary of the system. If you want to get into the details, you can read the original paper that describes the system’s design, and explore the Bitcoin wiki.