The advent and concurrent rise in the use of cryptocurrency come with a lot of questions. First and foremost of these is “What is Bitcoin?” It seems to be a very simple query, but not many can answer it correctly. In order to fully understand Bitcoin, the best option is always to trace its source.
Dr. Craig S. Wright released a whitepaper he wrote under the pseudonym Satoshi Nakamoto on October 31, 2008. Entitled “Bitcoin: A Peer to Peer Electronic Cash,” it aims to develop an online payment system that allows peer-to-peer transactions without having to rely on trusted third parties like financial institutions. Using cryptographic proof instead of trusted intermediaries will create transactions that are nearly impossible to reverse. This protects both buyer and seller from fraud and double spending.
So, what is Bitcoin?
To be literal, Bitcoin is an amalgam of data (bit) and money (coin). It functions as electronic cash where one Bitcoin is equal to one unit of Bitcoin digital currency. However, it is so much more than just a digital coin.
Bitcoin is actually a triadic term that is made up of digital money, a fixed protocol and an immutable data ledger called referred to as the blockchain. Combining these three creates a peer-to-peer electronic cash system, where transactions are practically irreversible.
The Bitcoin Protocol
The Bitcoin network operates on a set of fixed rules that cannot be changed. These rules are enforced by honest nodes which are also called miners or transaction processors. This stable protocol governs the flow of data through the Bitcoin system. All transactions must adhere to the Bitcoin Protocol for them to be considered valid.
The Bitcoin Blockchain
The Bitcoin Protocol is maintained by a decentralized network of distributed honest nodes that process transactions and save them to an immutable data ledger referred to as the blockchain. The blockchain serves as a timestamped globally distributed public ledger that stores all confirmed Bitcoin transactions. The details of each transaction are recorded in blocks of data that are connected together to form a chain.
All transactions must be authenticated by a digital signature using cryptographic techniques and must follow the Bitcoin Protocol. Once a block is verified by a majority of honest nodes that it is valid, it will be added as a new block to form the longest chain of blocks. Meta data stored in the previous block is replicated in the new one and becomes a child to the new block in a permanent chain that grows in length over time. All honest nodes on the network keep an entire copy of the longest chain which is considered the most accurate ledger, this means there are numerous copies of the information stored on the blockchain.
Once a block has been validated, it can be viewed by all users within the network, creating a system of transparency. It is decentralized because there is no leader or administrator who has power over the network or the protocol rules, they are set in stone.
There was a time when the question “What is Bitcoin?” is asked, the answer was that it was a good way to hide money from authorities due to its anonymity. However, Bitcoin is far from being anonymous. It is private inasmuch as only the address is made public. All activities on the address can be audited if fraud is suspected. Because all transactions are recorded on an immutable ledger, it is virtually impossible to tamper with the data and it is a good way to trace criminal activities and gather evidence.
One of Dr. Wright’s main goals in creating Bitcoin is to protect buyers and sellers from double spending brought about by putting trust third parties like banks in between the two peers that are transacting. Since there are no rulers, just rules enforcers, Bitcoin needs to exist within the law; otherwise, the data stored on the chain will lose its validity and credibility.