Bitcoin is a crypto-currency that was first proposed by Satoshi Nakamoto after the economic meltdown of 2008. It proposed an alternative financial model to prevent inflation, central control over currency and a transparent financial scenario
Bitcoin in its essence is a collection of various concepts and technologies and forms the very basis of digital currency.
It serves as a mechanism to transfer value among various individuals connected to each other via the bitcoin network.
Bitcoin has various features that proves it more beneficial and useful over the conventional currency. They are:-
- Decentralized control
- Peer-to-peer network
Bitcoin comes with a protocol stack that holds various protocols governing the bitcoin network. This protocol stack is available as an open source project thus making it possible for anyone to implement his/her own bitcoin client.
This thus makes bitcoin accessible to almost anyone with the capability to connect to any other node in the network.
Just like conventional currency is printed in reserve banks, gold and silver are mined, bitcoin is also mined.
Bitcoin mining is thus the process of adding new bitcoins to the network.
Any member of bitcoin network can, at any instant of time, become a miner. This makes bitcoin completely decentralized as no one organization or person can claim control over its mining.
To mine bitcoins, every miner has to solve a difficult problem. The difficulty of the problem is so adjusted by the protocol stack that someone solves the problem every 10 minutes.
Once a miner has solved the problem, he verifies the transactions that took place during that 10 minute window and gets awarded some bitcoins by the bitcoin network. These are the mined bitcoins.
The bitcoin protocol also has precautions to make it deflationary. It halves the number of bitcoins mined approximately every 4 years thus limiting the total number of bitcoins to be mined to 21 Million.
This number is estimated to be achieved by 2140. After that, no more bitcoins could be mined.
Security is a crucial element in any financial transaction. And with the decentralization of control, it becomes very important for the bitcoin network to be extremely secure.
These security features are in-built in the protocol stack.
The protocol stack makes use of digital signatures and various encryption techniques to make the bitcoin network extremely secure.
Bitcoin is essentially virtual in all its aspect. It does not include any coins, neither physical nor digital.
But then, how does the network take care of the values transferred and held in possession?
The answer is transactions.
Coins are implied as transactions in bitcoin network.
Each transaction carries with it a certain amount of value. This value is later traded when spending or transferring the bitcoin.
All of such transactions are stored on all the nodes of a bitcoin network but can only be unlocked by specific key(s). This thus makes it possible for only the owner of the bitcoin to unlock the value of the transaction.
This key is generally stored in the wallet application software of the end-user and is the only pre-requisite to using and spending the bitcoins.
This was the end of an overview of the bitcoin technology. More detailed descriptions are to follow in other parts of this series.