Bitcoin can refer to three things:
- the leading cryptocurrency (bitcoin or BTC) which is central to the cryptocurrency market,
- the Bitcoin protocol, which was the first successful application of blockchain technology, and
- the Bitcoin network, which refers to the developers, miners and users and the actual usage of the cryptocurrency/protocol.
After gaining a first mover advantage and achieving a substantial network effect, bitcoin has become the most valuable cryptocurrency in existence and possesses the most decentralised and robust network.
The main defining properties of bitcoin include; it is open source, censorship resistance, impossible to counterfeit, digital, secured by cryptography and provably scarce.
As a combination of technology, cryptography, economics and finance, the Bitcoin protocol is a new monetary system enabling people to be their own bank and transact without relying on a third party. The Bitcoin system also has a programmed monetary policy such that the supply of new coins entering circulation is constantly falling until the hard cap of 21 million bitcoins is reached.
The Bitcoin idea originated from a mysterious pseudonym, Satoshi Nakamoto, in early 2008 and the network launched January 3, 2009. The launch of the Bitcoin network marked the beginning of the first ever decentralised digital currency. While there were previous attempts at an e-currency or ‘crypto cash’, such as DigiCash and Liberty Reserve, they always relied on centralised entities.
Bitcoin the Cryptocurrency
The currency bitcoin (BTC) is often seen as a store of value like gold since it cannot be counterfeited and has a fixed supply. The mining of bitcoin, which refers to miners confirming transactions and acquiring new bitcoins in the form of block rewards, was designed to be similar to the mining of gold. Every four years, the block rewards available to miners are cut in half until the block rewards are completely exhausted sometime around 2140.
Bitcoin is often termed ‘money of the internet’ due to its technical nature and its strong following and adoption amongst online communities and merchants. BTC is often viewed as money because it possesses most of the properties required, with its weakest properties being fungibility, scalability, and stability. Bitcoin is currently only able to handle about seven transactions per second.
Individuals can use BTC to bypass foreign currency fees to buy something from a bitcoin-accepting merchant in a different country (or to hedge against a currency collapse in their own country). BTC can be traded against fiat currencies or other cryptocurrencies.
Nevertheless, bitcoin provides several advantages over gold. For example, in terms of portability all that is needed for BTC is a USB stick or just by remembering a 24 word seed which can be recovered in a wallet. Also, bitcoin can be divided up into 100 million satoshis while gold performs poorly on the divisibility property since it is often held as coins or bars. Other denominations include the Finney (0.0000001 BTC), bits (0.000001 BTC) and milliBits (0.001 BTC).
The Bitcoin Network
Bitcoin transactions are organised into blocks and these blocks linked to each other chronologically to form what is known as a ‘blockchain’. These transactions are written in stone after a certain point and cannot be reversed or altered in any way.
The fees for bitcoin transactions are paid to miners, who confirm transactions that are genuine and valid and add them to a block. Miners must create blocks that conform to the protocol’s rule to be added to the blockchain. Nodes ensure that miners are following consensus rules by only broadcasting valid transactions and enable users to verify transactions for themselves.
Bitcoin uses Proof of Work (which states the valid blockchain is the one with the most accumulated work) to secure the network from any attacks. The value of transaction fees and miner revenues are often used as a sign of the network’s usage.
The Bitcoin Protocol
The Bitcoin protocol relies on developers, miners, and users working together. Miners ensure that there are no invalid transactions and they secure the blockchain in return for transaction fees and block rewards. Developers, on the other hand, work to improve the protocol and improve adoption of the network and cryptocurrency. Users include individuals who transact with bitcoin to pay for goods and businesses like exchanges or merchants.
Nodes are run by users and broadcast valid transactions throughout the network for miners to pick up and process. While developers are responsible for improving the protocol, any changes made to Bitcoin must be agreed upon by developers, miners and users.
All of the code and discussion on protocol changes is done publicly and anyone can contribute suggestions or improvements to the Bitcoin codebase. There are different implementations of the Bitcoin protocol, with Bitcoin Core being the reference client implementation which basically checks that the consensus rules of the protocol are being followed.