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Introduction: What is Bitcoin?
Bitcoin is a decentralized digital currency that can be transferred instantly and securely between any two people in the world. It’s like electronic cash that you can use to pay friends or merchants.
Overstock, OkCupid, 1-800-Flowers, and many other businesses are now accepting Bitcoin for purchases (see the complete list of supporters here ). Plus, there are several ways you can earn Bitcoins yourself (see below).
Since its inception in 2008 by Satoshi Nakamoto, Bitcoin has become a billion-dollar market. That number may grow significantly in the next few years as more businesses adopt bitcoin code technology to streamline their operations.
Forbes contributor Gordon Kelly explains how Bitcoin works in practice under the hood: “Transactions are made with no middlemen – meaning, no banks! There are no transaction fees and no need to give your real name. More businesses are beginning to accept them: You can buy web hosting services, pizza, or even manicures. And this isn’t some half-measure “store credit”- people are using Bitcoin for actual purchases.”
For the first time in history, people can exchange value without intermediaries which translates to greater control of funds and lower fees.
Who created Bitcoin?
Satoshi Nakamoto is known as the creator of Bitcoin, though 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 developed an implementation of “A Peer-to-Peer Electronic Cash System” that later became known as Bitcoin.
Satoshi subsequently disappeared from public view, but the community’s development has continued under a new team of developers with Gavin Andresen serving as chief architect.
When Satoshi left in 2011, he turned over the reins to Gavin Andresen. Former lead developer at Mozilla, Andresen now leads the Bitcoin Foundation where he serves as Chief Scientist. He is also one of the most well-respected core developers along with Wladimir van der Laan, Jeff Garzik, Gregory Maxwell, Luke Dashjr, and Pieter Wuille.
How does Bitcoin work?
Before getting 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 that I want to send my friend Hitesh 5 BTC from my wallet on one computer to his wallet on another computer. This is what happens:
I generate a new Bitcoin address and private key with the help of 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, text message, etc. along with the amount. He replies by sending me a brand new secondary receiving address from his own wallet on his own device which he generated using the same steps as above. My Wallet creates a digital signature by processing all of this information with its built-in 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 all of this information is correct using its own copy of the blockchain (the public ledger ). Once everything checks out, an encrypted version of the approved transaction propagates throughout the rest of the decentralized network. Using peer-to-peer connections, every computer in this decentralized network has a copy of this new updated “block” or list of transactions.
Because there’s no central server verifying these transactions, there’s no third-party like PayPal who will charge you a fee. In fact, there’s no need to pay for anything! 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 of the transactions within the newest “block” and broadcasts this information back out into the rest of the decentralized network.
All computers then update their copy of the public ledger (blockchain) with these new transactions and begin competing with one another again to solve more puzzles. Back on my device, once I receive Hitesh’s secondary address, I can finalize the transaction by sending it over our internet connection.
This is where things get interesting: after all, Hitesh and I don’t trust each other. After all, if I’m using a decentralized network, there’s no guarantee that Hitesh will not double-spend by trying to send the same 5 BTC twice (which would effectively allow him to “overpay” for an item and then keep his money). What makes this possible is something called proof-of-work.