What Is 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 bitcoins in the bitcoin network. With these keys they can sign transactions to unlock the value and spend it by transferring it to a new owner. Keys are often stored in a digital wallet on each user’s computer or smartphone. Possession of the key that can sign 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 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 is adjusted dynamically so that, on average, someone succeeds every 10 minutes regardless of how many miners (and how much processing) are competing 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 just below 21 million coins. The result is that the number of bitcoins in circulation closely follows an easily predictable curve that approaches 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 peer-to-peer network, and a distributed computing innovation. The bitcoin currency is really only the first application of this invention. Bitcoin represents the culmination of decades of research in cryptography and distributed systems and includes four key innovations

brought together in a unique and powerful combination. Bitcoin consists of:

• A decentralized peer-to-peer network (the bitcoin protocol)

• A public transaction ledger (the blockchain)

• A set of rules for independent transaction validation and currency issuance (consensus rules)

• A mechanism for reaching global decentralized consensus on the valid blockchain (proof-of-work algorithm)

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. In this chapter we’ll get started by explaining some of the main concepts and terms, getting the necessary software, and using bitcoin for simple transactions. In following chapters we’ll start unwrapping the layers of technology that make bitcoin possible and examine the inner workings of the bitcoin network and protocol.

@ElGuaroDigital