What Is Bitcoin?

Let us first decide what we mean when we use this word. It may stand for any of a number of related things:

Bitcoin as the world’s first cryptocurrency, a peer-to-peer distributed digital variety of money;
Bitcoin as a digital economic network which is controlled by certain rules and protocols;
Bitcoin as the source code of the software that supports the network on computers around the world.

Usually it is the first definition that people mean, especially if they are not too well-versed in economics and cryptocurrency in particular, when they ask “What is bitcoin?”. Below we give an introduction to the concept.

As we have said, bitcoin was a pioneering cryptocurrency – a special sort of information-based payment instrument that may not easily be copied, altered or destroyed, unlike the rest of data floating online.

That information can be copied easily is the principle at the foundation of the Internet. However, the simplicity with which files, texts, images can be replicated in the thousands has given impetus to a search for ways to keep data unique and copy- proof so that it could be passed along in exchange as a digital equivalent of money. Yet success did not come right away.

Origins

Data security has worried programmers practically from the beginning of their time. Information was far too easily copied, ready code – rewritten, with broad possibilities for abuse and copywrong. Minds ground about information protection. In the early 1990s Stuart Haber and W. Scott Stornetta came up with a solution for data uniqueness – the blockchain principle.

The idea was to store information in coded cryptographically linked blocks, each inextricably connected to the one before and after it in the sequence, so not to be altered without changing the entire chain. Hacking one of them without knowing the coding algorithms would also be very difficult. This principle was taken up and perfected by others, e.g. Hal Finney, but it achieved culmination in the 2008 in publication of White Paper for the first digital cryptocurrency, the bitcoin by a person (or a group of persons) which is known as Satoshi Nakamoto.

It utilized the blockchain notion of a distributed network or flat to make the system transparent, resistant to modification and hacking, with every element guaranteed unique.

Distributed and secure

Bitcoin’s number one bragging point is resilience to reproduction and forgery. Here is how it’s achieved.

Every transaction comes digitally signed with the personal code of its author. If the transaction is verified and admitted, the signature becomes encoded in a block that is added to the one before it – extending the blockchain. This guarantees that no bitcoin may appear out of nowhere or disappear without a trace, nor be reused for the same transaction – ownership is transferred irrevocably.

Verification of a transaction, recording of the transaction information in a block and its encoding in an equation, a. k. a. hash, are together called mining. When all this has been done, the newly created block is built into the same common chain on all machines in the network. The first level of data protection is just the difficulty of decoding blocks, because every block contains information not just about this transaction but also a number of others together with clumps of random values necessary to calculate the hash.

The next level of protection comes from the distributed nature of the network. The block is added to every machine, so while it might be possible to alter it on one device, the same would not be feasible on all hardware everywhere (actually, consensus of a little more than half of computers would be required). The “consensus algorithm” automatically singles out untrustworthy data blocks. Several mechanisms exist to do this, the main called the proof-of-work algorithm. It comes down to the idea that the longer a chain built on a block is, the more trustworthy it must be.

In addition to all this, storing data on computers stashed around the world keeps the overall system more virus- and failure-safe, unlike centralized systems that rely on a single server base.

But the bitcoin system does more than shift so many tokens (as its “coins” are called) from one account to another. New tokens are churned out as a reward for creating blocks and verifying them. The initial limit of the system was a maximum of 21 million tokens. This number has not yet been achieved: as of January 2019 16.9 million tokens were in circulation, so new ones continue to be mined.

Data uniqueness

The modern world derives much benefit from free distribution and reproduction of data. But still more can be gained from making some data unique and resistant to fraud and copying. Among other possibilities, even the most complex financial operations are simpler, more reliable and safer using the power of distributed networks – just the case of the bitcoin.

The blockchain principle at the base lets users send each other cryptocurrency without intermediaries, without reliance on trust, without delays and at much less expense than by regular channels – and in complete confidentiality to boot. The blockchain may find applications beyond finance in other information-dependent industries. It is very useful in many cases to have data securely recorded, open for examination at any time and protected from interference.