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To cut through some of the confusion surrounding bitcoin, we need to separate it into two components. On the one hand, you've got bitcoin-the-token, a snippet of code that represents ownership of a digital concept type of like a virtual IOU. On the other hand, you've got bitcoin-the-protocol, a distributed network which maintains a ledger of balances of bitcoin-the-token.
The machine enables payments to be sent between users without passing through a central authority, like a bank or payment gateway. It is made and held electronically. Bitcoins arent printed, for example dollars or euros theyre produced by computers all around the planet, using free software.
It was the first instance of what we today call cryptocurrencies, a growing strength category that shares some features of traditional currencies, together with verification based on cryptography.
A pseudonymous software programmer going by the name of Satoshi Nakamoto suggested bitcoin in 2008, as an electronic payment system based on mathematical evidence. The idea was to produce a means of exchange, independent of any central power, that may be transferred electronically in a secure, verifiable and immutable way.
Bitcoins most important feature is that it is decentralized. No single institution controls the bitcoin network. It is maintained by a group of volunteer coders, and run by an open network of committed computers spread around the world. This brings individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. .
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Bitcoin simplifies the dual spending problem of electronic currencies (in which electronic assets can easily be replicated and re-used) via an ingenious combination of cryptography and economic incentives. In electronic fiat currencies, this function is fulfilled by banks, which gives them control over the traditional system. With bitcoin, the integrity of these transactions is maintained by a distributed and open network, owned by no-one. .
Fiat currencies (dollars, euros, yen, etc.) have an unlimited supply central banks can issue as many as they want, and can try to manipulate a currencys worth relative to others. Holders of the currency (and notably citizens with very little alternative) bear the cost.
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Together with bitcoin, on the other hand, the supply is closely controlled by the underlying algorithm. Even a small number of new bitcoins trickle out every hour, and will continue to do so at a diminishing rate until a max of 21 million has been attained. This creates bitcoin more appealing as an advantage in concept, if demand grows and the supply remains the same, the value will increase. .
While senders of traditional electronic payments are usually identified (for verification purposes, and to comply with anti-money laundering and other legislation), users of bitcoin in theory function in semi-anonymity. Since there's absolutely no central validator, users do not need to identify themselves when sending bitcoin to another user. When a transaction request is submitted, the protocol checks all previous transactions to confirm that the sender has the necessary bitcoin in addition to the authority to send them.
In practice, every user is identified by the address of his or her wallet. Transactions can, with some effort, be monitored this way. Additionally, law enforcement has developed methods to identify users if necessary.
Additionally, most exchanges are required by law to perform site identity checks on their customers before they're permitted to buy or sell bitcoin, facilitating another manner that bitcoin usage can be tracked. Since the network is transparent, the progress of a specific transaction is observable to all.
This is because there is no central adjudicator that can say okay, return the money. If a transaction is listed on the network, and when more than an hour has passed, then it is not possible to change.
Even though this might disquiet some, it will mean that any transaction on the bitcoin network cannot be tampered with.
The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001) in todays prices, about one hundredth of a cent. This may conceivably enable microtransactions that traditional electronic money cannot.
Bitcoin is an electronic currency, also known as a cryptocurrency. It was invented in 2008 by an anonymous person or group named Satoshi Nakamoto.