Overview: what is bitcoin?
Bitcoin is a decentralized digital currency that can be transferred instantly and securely between two people around the world. It’s like electronic cash that you can use to pay friends or merchants.
Overstock, OkCupid, 1-800-Flowers and many other companies now accept Bitcoin for purchases (see full list of supporters here). Additionally, there are several ways to earn Bitcoins yourself (see below).
Since its creation in 2008 by Satoshi Nakamoto, Bitcoin has grown into a billion-dollar market. This number could increase significantly over the next few years as more companies adopt bitcoin codes technology to streamline their operations.
Forbes contributor Gordon Kelly explains how Bitcoin works in practice under the hood: “Transactions are made without intermediaries, i.e. without banks! There are no transaction fees and no need to give your real name. More and more companies are starting to accept them: you can buy web hosting services, pizzas or even manicures. And it’s not half-baked “store credit” – people use Bitcoin for real purchases.
For the first time in history, people can exchange value without intermediaries, resulting in better control of funds and lower fees.
Who created Bitcoin?
Satoshi Nakamoto is known as the creator of Bitcoin, although it is speculated that this person’s real identity is actually a group of developers writing under this pseudonym. As part of the original 2008 white paper, Satoshi wrote that he had developed an implementation of “A Peer-to-Peer Electronic Cash System” which later became known as Bitcoin.
Satoshi then disappeared from public view, but community development continued under a new team of developers with Gavin Andresen as chief architect.
When Satoshi left in 2011, he handed over the reins to Gavin Andresen. A former lead developer at Mozilla, Andresen now leads the Bitcoin Foundation where he holds the position of chief scientist. He is also one of the most respected lead developers along with Wladimir van der Laan, Jeff Garzik, Gregory Maxwell, Luke Dashjr and Pieter Wuille.
How does bitcoin work?
Before we get into how Bitcoin works under the hood, let’s take a step back and look at an example of how it works in practice.
Let’s say I want to send my friend Hitesh 5 BTC from my wallet on one computer to his wallet on another computer. Here is what happens:
I generate a new bitcoin address and private key using my wallet. I can do this on any computer or device, not just a smartphone. I give the newly generated address to my friend Hitesh via email, chat, SMS, etc. along with the amount. He responds by sending me a brand new secondary receiving address from his own wallet on his own device which he generated by following the same steps as above. My Wallet creates a digital signature by processing all of this information with its embedded private key. The digital signature proves that the transaction is valid and authorized by me.
Since my wallet holds the private key, it also verifies that I am able to transfer the funds out of my wallet as part of this transaction. My Wallet sends a copy of the signed transaction to a decentralized network which confirms that all of this information is correct using its own copy of the blockchain (the public ledger). Once everything is verified, an encrypted version of the approved transaction propagates to the rest of the decentralized network. Using peer-to-peer connections, each computer in this decentralized network has a copy of this new, updated “block” or list of transactions.
Because there is no central server verifying these transactions, there are no third parties like PayPal that will charge you a fee. In fact, there is nothing to pay! Computers in the decentralized network will now compete with each other to solve irreversible cryptographic puzzles as often as possible. The first computer to find a solution verifies all transactions in the most recent “block” and rebroadcasts this information to the rest of the decentralized network.
All the computers then update their copy of the public ledger (blockchain) with these new transactions and start competing against each other to solve more puzzles. Back on my device, once I have received the secondary address from Hitesh, I can finalize the transaction by sending it through our internet connection.
This is where things get interesting: after all, Hitesh and I don’t trust each other. After all, if I use a decentralized network, there’s no guarantee that Hitesh won’t overspend by trying to send the same 5 BTC twice (effectively allowing him to “overpay” for an item and keep his money). What makes this possible is something called proof of work.