WHAT IS BITCOIN? WHAT IS BITCOIN MONEY TECHNOLOGY?
Bitcoin is a form of digital currency, created and held
electronically. Bitcoins aren’t printed, like dollars or euros – they’re
produced by people, and increasingly businesses, running computers all around
the world, using software that solves mathematical problems, hence they are not
regulated by any central bank in the world.
It is the best example of a growing category of money known
as cryptocurrency.
How is it different from normal currencies?
Bitcoin can be used to buy things electronically. In that
sense, it’s like conventional dollars, euros, or yen, which are also traded
digitally.
However, bitcoin’s most important characteristic, and the
thing that makes it different to conventional money, is that it is
decentralized. No single institution controls the bitcoin network. This puts some
people at ease, because it means that a large bank can’t control their money.
Who created it?
It was created by a software developer called Satoshi
Nakamoto, he proposed Bitcoin which was an electronic payment system based on
mathematical proof. The idea was to produce a currency independent of any
central authority, transferable electronically, more or less instantly, with
very low transaction fees.
Who prints it?
This currency isn’t physically printed in the shadows by a
central bank, unaccountable to the population, and making its own rules. Those
banks can simply produce more money to cover the national debt, thus devaluing
their currency.
Instead, bitcoin is created digitally, by a community of
people that anyone can join. Bitcoins are ‘mined’, using computing power in a
distributed network.
This network also processes transactions made with the
virtual currency, effectively making bitcoin its own payment network.
So you can’t churn
out unlimited bitcoins?
That’s right. The bitcoin protocol – the rules that make
bitcoin work – say that only 21 million bitcoins can ever be created by miners.
However, these coins can be divided into smaller parts (the smallest divisible
amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after
the founder of bitcoin).
What is bitcoin based
on?
Conventional currency has been based on gold or silver. Theoretically,
you knew that if you handed over a dollar at the bank, you could get some gold
back. But bitcoin isn’t based on gold; it’s based on mathematics.
Around the world, people are using software programs that
follow a mathematical formula to produce bitcoins. The mathematical formula is
freely available, so that anyone can check it.
The software is also open source, meaning that anyone can
look at it to make sure that it does what it is supposed to.
What are its
characteristics?
Bitcoin has several important features that set it apart from
government-backed currencies.
1. It's decentralized
The bitcoin network isn’t controlled by one central
authority. Every machine that mines bitcoin and processes transactions makes up
a part of the network, and the machines work together. That means that, in
theory, one central authority can’t tinker with monetary policy and cause a
meltdown – or simply decide to take people’s bitcoins away from them, as the
Central European Bank decided to do in Cyprus in early 2013. And if some part
of the network goes offline for some reason, the money keeps on flowing.
2. It's easy to set
up
Conventional banks make you jump through hoops simply to
open a bank account. Setting up merchant accounts for payment is another
Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin
address in seconds, no questions asked, and with no fees payable.
3. It's anonymous
Well, kind of. Users can hold multiple bitcoin addresses,
and they aren’t linked to names, addresses, or other personally identifying
information.
4. It's completely
transparent
…bitcoin stores details of every single transaction that
ever happened in the network in a huge version of a general ledger, called the
blockchain. The blockchain tells all.
If you have a publicly used bitcoin address, anyone can tell
how many bitcoins are stored at that address. They just don’t know that it’s
yours.
There are measures that people can take to make their
activities more opaque on the bitcoin network, though, such as not using the
same bitcoin addresses consistently, and not transferring lots of bitcoin to a
single address.
5. Transaction fees
are miniscule
Your bank may charge you a Ksh 1200 fee for international
transfers. Bitcoin doesn’t.
6. It’s fast
You can send money anywhere and it will arrive minutes
later, as soon as the bitcoin network processes the payment.
7. It’s
non-repudiable
When your bitcoins are sent, there’s no getting them back,
unless the recipient returns them to you. They’re gone forever.
So, bitcoin has a lot going for it, in theory. But how does
it work, in practice? Read more to find out how bitcoins are mined, what
happens when a bitcoin transaction occurs, and how the network keeps track of
everything.
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