Bitcoin is an experimental system that combines aspects of a currency (like Dollars, Euros, and Yen) with a payment system (like Paypal) and a commodity (like gold). It does all this without any central authority such as a company, bank, or government being in charge. The system works by many users running the software and communicating via peer-to-peer (p2p) software.
What you can do with Bitcoin:
-Start accepting Bitcoin by simply running the software without the requirements such as having a bank account.
-Purchase and use fractional bitcoins. The system uses 8 decimal digits so each Bitcoin can be broken into 100 million pieces.
-Purchase products without submitting personal information. Bitcoin payment are not reversible so a merchant does not need to collect personal information to verify payment. If they don’t have it, they can’t lose it!
-Transfer Bitcoin to anyone, anywhere in the world any time of the night or day for a small fee (usually a few cents).
-Donate to causes without concern for restrictions or revealing your personal information.
-Conduct business with parts of the world not serviced by conventional financial services.
-Invest in Bitcoin. Bitcoin’s supply is capped at 21 million. (Note that Bitcoin is still experimental and the exchange rate is highly volatile and investing in Bitcoin is very high risk).
-Many third party services are available to mange your bitcoins, trade bitcoins, convert bitcoins into other currencies, or immediately convert bitcoins into your local currency.
Bitcoin Basic Concepts
- Bitcoin is a shared ledger. It is essentially a spreadsheet that shows how many bitcoins each account contains. All the complications come from the need to make sure it is valid and everyone see the same ledger.
- The current state of the ledger is determined by a decentralized and trustless consensus. It cannot be controlled at any central point.
- Bitcoin “mining” is the process of adding transactions to the ledger and is done by solving math problems that take substantial computational power.
- The “consensus” is achieved by users and “miners” deciding to run compatible versions of the software and enforcing the consensus rules.
- Users can run “nodes” using peer-2-peer connections that shares the ledger. By running a full node a user can completely verify all transactions without the need of a third party service.
- Nodes enforce the rules by only broadcasting transactions and sections of the ledger that fit within the consensus rules.
- A user can easily verify the shared ledger took a huge amount of computational power to create as a way of trusting it is real.
- Miners get transaction fees and “block rewards” as an incentive to use their computer power.
- The “block rewards” are a way to initially distribute the currency and are cut in half about every 4 years until all 21 million bitcoins are distributed in 2140. Due to the nature of “halving” most bitcoins are distributed during the first few halvings. It was 50 Bitcoins for the first 4 years and is currently 25 Bitcoins. In 2016 it will be 12.5 and in 2020 it will be 6.25.
- Bitcoin addresses are secure because the numbers are so large that all the computers in the world cannot come close to cracking it.
- A Bitcoin can be broken down to 8 decimal digits so each one has 100 million pieces.
- A Bitcoin transaction can be used to indirectly store information in the permanent shared ledger without trusting a third party.