Simply put, Bitcoin is a digital form of cash. But unlike traditional fiat currency, there is no central bank controlling it. Each unit of Bitcoin is unique and cannot be copied or destroyed, and it runs on top of a distributed network, maintained by thousands of computers around the world.
Through the past decades, the creation of pretty much everything, from the web to word processors to network programming, was highly dependent on the fact that digital information could be quickly and easily copied at close to zero cost. Certainly, several computer and network technologies were developed based on this universal property of data.
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? These questions and their practical ramifications eventually made it pretty clear that unique data that can't be copied could be used as digital cash.
Although there were other types of digital currencies, Bitcoin was the first one to implement cryptographic techniques, marking the start of cryptocurrencies. 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 fascinating, but probably one of the most complex topics to the majority of us.
As mentioned, Bitcoin was the first cryptocurrency to be ever created. It is a digital form of money that is highly resistant to frauds and is used within a decentralized financial system.
When it comes to Bitcoin as money, it can be described as a digital currency that runs on a distributed (peer-to-peer) economic system. In this context, Bitcoin may also be referred to as BTC or bitcoin (with lower “b”).
As digital cash, Bitcoin is maintained by thousands of lines of code. It is based on an open source software that is being regularly improved by a large community of developers. Initially, such software was also referred to as Bitcoin, but in order to prevent misunderstandings, the major Bitcoin client software was officially rebranded to Bitcoin Core in 2014.
Bitcoin is not issued nor controlled by a single authority or entity but is rather sustained by many computers (nodes) spread around the world. The Bitcoin network is based on a distributed ledger called blockchain, which is responsible for maintaining an organized list of all transactions. These transactions are grouped into linked blocks, forming a chain of blocks (hence, blockchain).
Due to their various qualities and functionalities, it is quite common to see people confused about the differences between Bitcoin and blockchain as they are closely related, although distinct concepts. But what exactly is blockchain?
Essentially, a blockchain is a series of records, very much like a general ledger or a flat database. But its uniqueness comes from the mechanism it uses to validate and protect those records.
The problem of unique and unalterable data has bothered programmers since the earliest days of digital storage. If data on a disk 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 Satoshi Nakamoto, and the first block was mined on January 3rd, 2009.
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 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. Therefore, the network can enforce the concept of "original" digital documents, making each Bitcoin a unique and uncopyable form of digital money.
Most of the value in digital technology up until now has been derived from easily replicated data, and 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 innovative advances like Bitcoin.
Cryptocurrencies are already being used in a wide range of contexts. 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 architecture guarantees an accurate and unalterable trail of data that can be audited and preserved for many decades, making it suitable for a wide variety of applications, not necessarily related to financial transactions.