What is Bitcoin and How it Works: the Basics

What is Bitcoin and How it Works: the Basics


How does Bitcoin work?
This question is taken by many who are interested in this digital currency. On the Internet you can find many articles that try to explain it, but most of them are either too technical, or contain errors and distortions. Let’s try to answer the most common questions without complicated technical jargon.

What is Bitcoin?

Bitcoin is digital money that exists mostly in electronic form. Bitcoin is also called an electronic payment system open to all, through which transactions with this digital currency are carried out. Bitcoins aren’t printed, like dollars or rubles — their production is carried out by the participants of the payment system worldwide, which use freely available software to solve complex mathematical problems. Bitcoin is the first kind of money known as “cryptocurrency”in the history of mankind. Their reliability is based on the laws of mathematics (specifically, cryptography), not on trust in a single organization that issues currency (such as the Central Bank or Paypal). In addition to the pre-known set of rules, no one manages or controls Bitcoin.

How does Bitcoin Differ From other Forms of Digital Cash?

Bitcoin can be easily used for online shopping. In this sense, it is similar to customary dollars, euros or rubles, which are also often treated in digital form.

The most important characteristic of bitcoin, distinguishing it from ordinary money, is that It is completely decentralized. Simply put, it is the lack of intermediaries between you and your money. In order to use the usual money in electronic form, you need to “open an account” and give the money to an intermediary, such as a Bank, WebMoney or Paypal. All further operations are carried out through this intermediary, and he dictates to you the rules to whom, how and how much you can pay. And the Commission takes over the service but for the transfers. And in case of that, it can freeze your account. And just disappear with your money one day.

No company or organization controls the Bitcoin network. Unlike the usual money lying on a Bank account, your bitcoins are only yours, and no one can forbid you to use them, block the transfer, “freeze” the account or “roll back” already committed transactions.

Who Invented Bitcoin?

The developer of the project is considered Bitcoin Satoshi Nakamoto. In 2008, he published a scientific paper proposing a new electronic payment system based on cryptography and a mathematical description of its functioning. The idea was to create a independent of any Central authority, currency transfers which are carried out only in electronic form, almost instantly, with very low cost. Apparently, fearing that such an independent currency is not very much like the power of the powers, the inventor of Bitcoin published an article anonymously, and has long been involved in the development of a system that is fully open source developed by a large group of developers on a non-commercial basis.

So Who Prints Bitcoin?

Nobody. Unlike the “official” currency, which, at its discretion, publish the Central Banks of the world, unaccountable to their populations, no one will “print” a Bitcoin.

Instead, Bitcoin is produced digitally by a community of users to which anyone can join at any time. The community of Bitcoin users is a distributed computer network that combines its computing power in order to verify and carry out Bitcoin transactions. Currently, it is the largest distributed computing network in the world, the power of which exceeds the computing resources of 500 of the world’s most powerful supercomputers combined.

Members of this network, working according to the rules and providing it with their computing resources, get a small reward from the newly created digital coins. The rate at which new bitcoins are issued by the network is subject to a predetermined algorithm and is absolutely predictable.

Can I Print an Unlimited Number of Bitcoins?

It’s impossible. The computer algorithm that controls the release of bitcoins does not allow for the release of more than an average of 150 coins per hour. Moreover, this number is constantly decreasing (2 times every 4 years). As a result, the maximum number of coins that can be issued before 2140 is 21 million. Like would, this quite a bit. However, each of these coins can be divided into many parts (the smallest nomination is one hundred million bitcoin, called “Satoshi”, in honor of the founder).

What is Bitcoin Based On?

Once used in the world currencies were based on a binding to real assets, such as gold, or silver. In theory, you could bring dollars to the Bank and get some gold in return (although in practice, it didn’t always work).

But for a long time, ALL world currencies are refused any support. The only thing the dollar, the Euro, the hryvnia or the ruble are based on now is trust in Central Banks. People hope that Central banks will not print too much new money, and will not allow inflation to devalue their currency too much. Unfortunately, at present, all the world’s leading Central banks are deceiving this trust and printing new money in huge and increasing numbers. In the long term, this can not end in anything but increasing hyperinflation, which is well known to those who had the happiness to live in the post-Soviet space in the early to mid-90s.that is why many people thought about alternatives to “official” currencies.

Bitcoin is based neither on gold nor on trust in Central banks. Instead, it is based on mathematics. There is absolutely clear and understandable math formulas, which are used to release bitcoins. These formulas cannot be changed either by decree of governments or by decision of Central banks. Around the world, people use client programs that follow these formulas and simply reject anything that deviates from them.

All formulas and code programs are freely available, so anyone can check them and make sure that they work that way, and nothing else. Moreover, everyone can write their own client program, and if it works according to bitcoin mathematics, This program can be successfully used for all operations.

What are the Features of Bitcoin?

Bitcoin has several important features:

1. It is completely decentralized
The Bitcoin network is not controlled by any company or organization. Each machine on which there is a client program, working in accordance with the mathematics of Bitcoin, is part of the network and conducts bitcoin transactions, and all together these machines make up the Bitcoin network. Removing any of these machines, or even most of them, from the network will not affect the operation of the system. There is no” center “that can be” turned off ” to make Bitcoin stop working. This means that nobody can “control monetary policy”, “block payments”, “freeze account” — as it was in the savings Bank in the 90s, or perhaps simply to collect money on the accounts of people — as happened in Cyprus in 2013.

2. It is easy to use
Try to connect to the payment system to accept payments for goods and services — you will go crazy from bureaucracy and technical problems. You can set up a Bitcoin client in minutes, make yourself a Bitcoin address, and all-you’re ready to receive bitcoin payments. No one needs to ask permission, no forms and negotiations, no “connection fees” — 5 minutes, and all markets of the world are open to you through bitcoin payments. It is also easy to pay in bitcoins for goods and services around the world.

3. He’s anonymous.
Well, almost anonymous. Users can have an unlimited number of Bitcoin addresses, and they have nothing to do with names, addresses, or other personally identifiable information. However, see below …

4. All transactions are public
… details of each individual bitcoin transaction are visible to the entire network-everyone can see from which address and how many bitcoins are listed. The history of all bitcoin transactions, called blockchain, is stored on all nodes of the network. So if you yourself have announced that an address belongs to you, everyone will know how much bitcoin you have on that address, and all transactions related to that address.

5. The transaction cost is negligible
You can send any number of bitcoins anywhere in the world, in principle, for free. To speed up the passage of these payments, people usually give a small piece of the coin (a few cents, less than the ruble) as a kind of “tip” for the nodes conducting their transactions.

6. Payments are made quickly
You can send payment at any time of the day or night, anywhere in the world, in any size and in a matter of minutes, the one who you pay, you’ll see it.

7. Unable to cancel or “block” payment
When a bitcoin payment is sent, there is no way to “roll back”it. In this sense, bitcoin is exactly like “digital cash” — as soon as you gave them, they are not yours. On the other hand, as in the case of cash payment in the store, if you are not satisfied, you can apply for a refund, and the seller will return the money to you if he values his reputation.

We have tried in this article to answer many questions that are asked for the first time faced with Bitcoin, and will continue this topic in a series of articles on the basics of Bitcoin technologies. You can also read more information and watch the explanatory video in the section “what is Bitcoin?”.

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