What is Bitcoin?

28.11.2018

Bitcoin is the first cryptocurrency ever created. It is, basically, a digital form of money that is highly resistant to frauds and cannot be copied or destroyed. Computer and network technologies have advanced to its current state through one universal property of digital information: most of it can be easily copied. The fast creation of pretty much everything, from the web to word processors to network programming, relies on the fact that a series of bits can be quickly and easily copied at close to zero cost.

It was only a matter of time before computer scientists and developers started to wonder about the other half of the data economy. What if data couldn’t be copied? What if there were such a thing as a unique piece of data, and what if it could be transmitted from user to user? The practical ramifications were pretty clear right off the bat. Unique data that can't be copied could be used as digital money.

That is how the first cryptocurrency was invented. Most people have little or no experience with this particular kind of digital currencies, so they might ask "what is Bitcoin?" or might want to know how Bitcoin works. The underlying technology that makes cryptocurrencies so unique is probably one of the most complex topics to the majority of us. 

Due to its various qualities and functionalities, Bitcoin as a word may be used to define many different things. First, Bitcoin as a cryptocurrency (BTC) is a distributed peer-to-peer (P2P) digital form of money. Second, this digital economic network is operated by an underlying set of rules, the Bitcoin Protocol. Third, the source code for such protocol and the respective software - which is running on many computers worldwide - may also be referred to as Bitcoin. Therefore, the word Bitcoin may be used to refer to the whole ecosystem, encompassing all the above-mentioned functionalities.


Blockchain

The problem of unique and unalterable data has bothered programmers since the earliest days of digital storage. If data on a disk or tape can be so easily changed, who is to say which is the legitimate and true version? It's a hard question and one that had few answers until the early 1990s when the first archetype of a blockchain was created by Stuart Haber and W. Scott Stornetta. They were the first to apply cryptographic proofs to secure a chain of blocks as a way to prevent data tampering. The work of Haber and Stornetta certainly inspired the work of Hal Finney and many other computer scientists, eventually leading to the creation of Bitcoin. The Bitcoin whitepaper was published in 2008 by the pseudonym Satoshi Nakamoto.

Certainly, the emergence of the blockchain was crucial for the conception of Bitcoin and other cryptocurrencies as a new kind of digital money. Essentially, the blockchain structure is a series of records, very much like a general ledger or a flat database. Its uniqueness comes from the mechanism it uses to validate and protect those records.


Distributed and Secure

The technology underlying Bitcoin is designed to preserve the integrity of data and transactions. First, every transaction is digitally signed and verified through cryptographic techniques that ensure the funds cannot be spent more than once. If confirmed to be valid, the transaction is permanently recorded in the blockchain through a process known as mining (which involves more cryptography). This might seem to be a lot of additional effort, but it has a very profound effect on the safety of the Bitcoin system. Altering the Bitcoin blockchain requires the entire structure to be unraveled record-by-record, something which is a practical impossibility even for the most powerful computers.

Another important layer of security relies on the fact that the data is distributed through a myriad of network nodes across the world (each one holding a copy of the blockchain data). This means that even if data is managed to be altered on one node, the other network participants would easily recognize it as corrupted since it wouldn't match any of the other copies. This process is governed by a "consensus algorithm" called Proof of Work. Unraveling dozens, hundreds or thousands of copies of the same data simultaneously is many orders of magnitude harder than doing it once, which is why the data is so secure. In addition, a distributed system is much more resistant to failures and cyber attacks, because it does not rely on a single data center as traditional centralized systems do.

The blockchain technology gave birth to a unique and un-copyable piece of electronic data that could also be tracked through a series of distributed ledger entries, leading to the creation of Bitcoin as a decentralized and cryptographically secure digital currency. The Bitcoin Protocol is designed in such a way that no more than 21 million coins will be issued. New coins are generated through the process of Bitcoin mining, which relies on cryptographic hash functions and is regulated by the Proof of Work (PoW) consensus algorithm.

In other words, the blockchain acts as a distributed ledger that records all transactions and that is highly resistant to modification and frauds. The database records can't be altered, nor can they be tampered without an impractical amount of computing power - which means the network can enforce the concept of "original" digital documents, making each Bitcoin a very unique and uncopyable form of digital money.


The Power of Unique Data

All the value in digital technology up until now has been derived from easily replicated data. Much of the future power in technology will be derived from utilizing unique pieces of information and analyzing how they might interact. Complex financial transactions, for example, will be far more accurate and far less open to mistaken interpretation as a result of advances like Bitcoin.

Digital currency is already being used in a wide variety of contexts and as payment for many kinds of services and products. The blockchain technology makes it possible for users to perform financial transactions with significantly lower fees, without having to rely on third parties, like banks or financial institutions. Moreover,  the blockchain guarantees an accurate and unalterable trail of data that can be audited and preserved for decades, which makes it suitable for a wide variety of applications.

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