What are Bitcoins?
What are Bitcoins? To answer this question we will draw on the definition provided by Wikipedia, then we will break it down and explain each section.
According to Wikipedia…
“Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto who published the invention in 2008 and released it as an open-source software in 2009. The system is peer- to-peer; users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the Block Chain. The ledger uses Bitcoin as its unit of account. The system works without a central repository or single administrator, which has led the US Treasury to categorize Bitcoin as a decentralized virtual currency. Bitcoin is often called the first Cryptocurrency although prior systems existed. Bitcoin is more correctly described as the first decentralized digital currency. It is the largest of its kind in terms of total market value.”
Beginning with the first sentence,
“Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto who published the invention in 2008 and released it as an open-source software in 2009.”
It is thought that the name Bitcoin most likely came from the term bittorrent. Bit torrents were a common form of file sharing at the time of the development of Bitcoin. What makes Bitcoin digital is that it is entirely software based. Its designation as an asset is due in part to its scarcity, security and its value relative to other assets, such as gold or real estate. Given this value, it can be used for payments as part of a payment system. However, without the network of computers this system cannot exist and Bitcoin would have no value. Because of this, Bitcoins existence relies heavily on the network. This is precisely what the developer wanted. Satoshi Nakamoto is the developer of Bitcoin. This name is pseudonymous, in other words its an anonymous made up name. All that is known of Satoshi Nakamoto is derived from the way he wrote the code and his blog posts. It is thought that he is English and had a great understanding of cryptography and economics. The code was released, open source in 2009. Open source means that anyone has access to the original coding. This makes it possible for individuals to get an understanding of how it works by being able to take a look in side and scrutinize the inner workings and processes. This also benefits Bitcoin because people can then suggest changes and upgrades to improve the system.
“The system is peer-to-peer; users can transact directly without needing an intermediary.”
Peer to peer simply refers to the ability to conduct transactions directly, on to one. These are known as A to B transaction where a third party, such as a Broker or intercessor are not utilized. In A to B to C transactions, two of the parties are reliant on a third to broker the transaction when trust is required. This third party ultimately decides whether or not the transaction will go through, they also are usually paid a fee for processing the transaction.
“Transactions are verified by network nodes and recorded in a public distributed ledger called the Block Chain. The ledger uses Bitcoin as its unit of account. ”
Network Nodes are merely computers that are running the Bitcoin-qt software. Each of these computers is a participant in the network. Each of them maintain a copy of the ledger and also process transactions. Another name for these nodes are Miners. Miners verify transaction by what is know as “Proof of Work.” Proof of Work is also known as Hash Cash. Hash Cash was created in 1997 by Adam Back. Essentially what it is, is paying in computational power to process the transaction. Miners use the computational power of their computers to solve complex puzzles. These puzzles take approximately 10 minutes to solve by the network but can be quickly verified. The first node or node pool to solve the puzzle broadcasts their solution. This is then confirmed by all other nodes. Once confirmed, the winning Miner’s processed transactions are then added to the Block Chain and he is then rewarded with 25 brand new Bitcoins.
“The system works without a central repository or single administrator, which has led the US Treasury to categorize Bitcoin as a decentralized virtual currency.”
A central repository is a place where something is accumulated or stored, such as a vault or network server. Fiat currencies are centrally stored and administered by central banks. Bitcoin and Block Chain are stored on 100s of thousands of computers world wide instead of being stored at one location. Bitcoin and Cryptocurrencies have no single administrator because the whole network of Miners work as the administrator.
It is this Authors view that the US Treasury’s classification is a bit redundant and that their reason for this “Classification,” is simply an attempt to put controls on something that they feel threatened by and do not understand.
“Bitcoin is often called the first Cryptocurrency although prior systems existed.”
Bitcoin is the first legal successful decentralized Cryptocurrency. There have been attempts in the past at creating Cryptocurrencies such as DigiCash, E-gold, Gold Age and Liberty Reserve Dollars. DigiCash was founded by David Chaum in 1990. Chaum used cryptography to make transaction anonymous. The company declared bankruptcy in 1998 and was sold off to eCash Technologies. E-gold was launched in 1996 by Gold & Silver Reserve Inc. The concept was created by Douglas Jackson and Barry Downey and had success until it was shut down in 2009. Gold Age was started in 2002 by Arthur Budovsky and Vladimir Kats as a digital currency exchange service. They were both indicted on charges of running an illegal financial business. Budovsky fled to Costa Rica where he then developed and incorporated Liberty Reserve. Liberty Reserve was shut down in 2013.
“Bitcoin is more correctly described as the first decentralized digital currency. It is the largest of its kind in terms of total market value.”
As supported by the statements above the strength of Bitcoin comes from its decentralized design. Bitcoin is kept everywhere but not stored anywhere. It is not manged by one but by several. It has succeeded where all other Cryptocurrencies have failed. Its success and usefulness have and will continue to grow.