Bitcoin is a decentralized digital currency that operates on a peer-to-peer network of computers. It was created in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto. Bitcoin has several key characteristics that distinguish it from other forms of money and payment systems.
Limited supply
Unlike fiat currencies that can be issued by central banks at will, Bitcoin has a fixed supply of 21 million coins that will ever be created. This limit is enforced by the rules of the Bitcoin protocol, which require that new coins are generated at a predictable and decreasing rate. The last Bitcoin is expected to be mined around the year 2140. This scarcity makes Bitcoin a deflationary currency, meaning that its purchasing power tends to increase over time.
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Cryptographic security
Bitcoin transactions are secured by cryptography, which is the science of encoding and decoding information. Each transaction is verified by a network of nodes (computers running the Bitcoin software) using a mathematical process called hashing. Hashing involves applying a function to a piece of data to produce a unique and fixed-length output, called a hash. Hashes are used to create digital signatures, which prove that the sender of a transaction has the right to spend the coins. They are also used to create proof-of-work, which is a way of ensuring that the nodes agree on the state of the Bitcoin ledger.
Transparency and Immutability
Bitcoin transactions are recorded in a public and distributed ledger, called the blockchain. The blockchain is a chain of blocks, each containing a batch of transactions and a reference to the previous block. The blockchain is maintained by the network of nodes, which validate new blocks and append them to the chain. Anyone can access and verify the blockchain, which ensures transparency and accountability. Once a transaction is confirmed by the network, it cannot be reversed or altered, which ensures immutability and finality.
Pseudonymity and privacy
Bitcoin users do not need to reveal their real identities or personal information to transact with each other. Instead, they use pseudonyms, called addresses, which are strings of alphanumeric characters derived from their public keys. Addresses are like account numbers that can receive and send bitcoins. Users can create as many addresses as they want and use different ones for different purposes. However, addresses are not completely anonymous, as they can be linked to each other by analyzing the transaction history on the blockchain. Users can enhance their privacy by using techniques such as mixing services, encryption, or anonymous networks.
Innovation and adaptability
Bitcoin is an open-source project that welcomes contributions from anyone who wants to improve it. The Bitcoin protocol is designed to be flexible and adaptable, allowing for upgrades and enhancements through a process called consensus. Consensus is achieved when a majority of nodes agree on a set of rules that govern the network. Consensus can be reached through various methods, such as soft forks, hard forks, or user-activated upgrades. These methods allow for innovation and experimentation, while preserving the core principles of Bitcoin.