What about Bitcoin?
Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem. Units of currency called bitcoins are used to store and transmit value among participants in the bitcoin network. Bitcoin users communicate with each other using the bitcoin protocol primarily via the Internet, although other transport networks can also be used. The bitcoin protocol stack, available as open source software, can be run on a wide range of computing devices, including laptops and smartphones, making the technology easily accessible.
Users
can transfer bitcoins over the network to do just about anything that can be
done with conventional currencies, including buy and sell goods, send money to
people or organizations, or extend credit. Bitcoins can be purchased, sold, and
exchanged for other currencies at specialized currency exchanges. Bitcoin in a
sense is the perfect form of money for the Internet because it is fast, secure,
and borderless.
Unlike
traditional currencies, bitcoins are entirely virtual. There are no physical
coins or even digital coins per se. The coins are implied in transactions that
transfer value from sender to recipient. Users of bitcoin own keys that allow
them to prove ownership of transactions in the bitcoin network, unlocking the
value to spend it and transfer it to a new recipient. Those keys are often
stored in a digital wallet on each user’s computer. Possession of the key that
unlocks a transaction is the only prerequisite to spending bitcoins, putting
the control entirely in the hands of each user.
Bitcoin
is a distributed, peer-to-peer system. As such there is no “central” server or
point of control. Bitcoins are created through a process called “mining,” which
involves competing to find solutions to a mathematical problem while
processing bitcoin transactions. Any participant in the bitcoin network (i.e.,
anyone using a device running the full bitcoin protocol stack) may operate as a
miner, using their computer’s processing power to verify and record
transactions. Every 10 minutes on average, someone is able 1 to validate the
transactions of the past 10 minutes and is rewarded with brand new bitcoins.
Essentially, bitcoin mining decentralizes the currency-issuance and clearing
functions of a central bank and replaces the need for any central bank with
this global competition.
The
bitcoin protocol includes built-in algorithms that regulate the mining function
across the network. The difficulty of the processing task that miners must
perform—to successfully record a block of transactions for the bitcoin
network—is adjusted dynamically so that, on average, someone succeeds every 10
minutes regardless of how many miners (and CPUs) are working on the task at any
moment. The protocol also halves the rate at which new bitcoins are created
every four years, and limits the total number of bitcoins that will be created
to a fixed total of 21 million coins. The result is that the number of bitcoins
in circulation closely follows an easily predictable curve that reaches 21 million
by the year 2140. Due to bitcoin’s diminishing rate of issuance, over the long
term, the bitcoin currency is deflationary. Furthermore, bitcoin cannot be inflated
by “printing” new money above and beyond the expected issuance rate.
Behind
the scenes, bitcoin is also the name of the protocol, a network, and a
distributed computing innovation. The bitcoin currency is really only the first
application of this invention. As a developer, I see bitcoin as akin to the
Internet of money, a network for propagating value and securing the ownership
of digital assets via distributed computation. There’s a lot more to bitcoin
than first meets the eye.
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