On the one hand, you have bitcoin-the-token, a snippet of code that represents ownership of a digital concept — sort of like a virtual IOU. On the other hand, you have bitcoin-the-protocol, a distributed network that maintains a ledger of balances of bitcoin-the-token. Both are referred to as “bitcoin. It is created and held electronically. Bitcoins aren’t printed, like dollars or euros — they’re produced by computers all around the world, using free software.
It was the first example of what we today call cryptocurrencies, a growing asset class that shares some characteristics of traditional currencies, with verification based on cryptography.
The idea was to produce a means of exchange, independent of any central authority, that could be transferred electronically in a secure, verifiable and immutable way. To this day, no-one knows who Satoshi Nakamoto really is. In what ways is it different from traditional currencies?
Bitcoin can be used to pay for things electronically, if both parties are willing. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.
But it differs from fiat digital currencies in several important ways: No single institution controls the bitcoin network. It is maintained by a group of volunteer codersand run by an open network of dedicated computers spread around the world. This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. Bitcoin solves the “double spending problem” of electronic currencies in which digital assets can easily be copied and re-used through an ingenious combination of cryptography and economic incentives.
In electronic fiat currencies, this function is fulfilled by banks, which gives them control over the traditional system. With bitcoin, the integrity of the transactions is maintained by a distributed and open network, owned by no-one. Holders of the currency and especially citizens with little alternative bear the cost.
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With bitcoin, on the other hand, the supply is tightly controlled by the underlying algorithm. A small number of new bitcoins trickle out every hour, and will continue to do so at a diminishing rate until a maximum of 21 million has been reached. This makes bitcoin more attractive as an asset — in theory, if demand grows and the supply remains the same, the value will increase.
Since there is no central “validator,” users do not need to identify themselves when sending bitcoin to another user.
When a transaction request is submitted, the protocol checks all previous transactions to confirm that the sender has the necessary bitcoin as well as the authority to send them. The system does not need to know his or her identity.