What is Bitcoin?
Bitcoin (currency: ฿; Abbreviation: BTC) is a peer-to-peer payment system and digital currency. Conventionally "Bitcoin" capitalized refers to the technology and network whereas "bitcoins" lowercase refers to the currency itself. It was introduced in 2009 by pseudonymous developer Satoshi Nakamoto with his paper Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin is open source. Bitcoins can be obtained by mining or in exchange for products, services, or other currencies. We conventionally call those assets, represented by Bitcoin, as cryptocurrencies. Bitcoin (as well as other assets) is called a cryptocurrency because it uses cryptography to control the creation and transfer of money. Users send payments by broadcasting digitally signed messages to the network. Participants known as miners verify and timestamp transactions into a shared public database called the blockchain, for which they are rewarded with transaction fees and newly minted bitcoins.
Creation of Bitcoin
In the Bitcoin system, money creation is scheduled so that the number of Bitcoin units will converge to 21 million units. How Bitcoin schedule its creation process? The Bitcoin network is calibrated in such a way that, on average, a block candidate with a valid hash value is found every 10 minutes. The winner of the mining contest receives a predefined number of newly created Bitcoin units. Correspondingly, miners will be increasingly rewarded through transaction fees. The reward for the miners is halved every 210,000 blocks (approximately every four years). The number currently is 12.5. Under such mechanism, the total amount of bitcoin in circulation will reach the ultimate level of 21 million around 2140. After that, producing new blocks will no longer reward miners with bitcoin created. All of the rewards to miners come from transaction fees. But even today, the quick processing of a transaction can be guaranteed only if an adequate fee is paid to incentivize the miners to include the transaction in their block candidates. The incentive now mainly comes from the rewarded bitcoins from mining contest.
Mining and Consensus Mechanism
What are miners? A miner collects pending Bitcoin transactions, verifies their legitimacy, and assembles them into what is known as a “block candidate.” The goal is to earn newly created Bitcoin units through this activity. The miner can succeed in doing this if he or she can convince all other network participants to add his or her block candidate to their copies of the Bitcoin Blockchain.
For a block candidate to be generally accepted, it must fulfill a specific set of predefined criteria. For instance, all included transactions must be legitimate. Another important criterion is the so-called “fingerprint” of the block candidate. A miner obtains this fingerprint by computing the block candidate’s hash value using the hash function dSHA256.
The detailed process of mining is that miners, putting together the hash value of last block, newly-verified transaction after last block, and a guessing of an arbitrary value X, pack them to a block candidate to make the hash value of this block candidate smaller than a given number in Bitcoin network. It is as if a calculation test is open to all miners. The smaller the given number in Bitcoin network is, the higher difficulty of the guessing of the arbitrary value X. Every 2016 blocks, the network will adjust the difficulty of mining according to mining time of last cycle, to ensure that the average time length spent to produce a new block is about 10 minutes.
Mining is expensive, as the computations use large amounts of electricity and are increasingly dependent on highly specialized hardware. Valid block candidates can be found only through a trial-and-error procedure. The consensus mechanism is therefore called “proof of work.” If a miner finds a valid fingerprint for a block candidate, then this is proof that statistically, he or she has, on average, performed largest amount of costly computations. Adding false information (e.g., illegitimate transactions) to a block candidate would render the block candidate invalid and essentially waste all the computations. Finding a valid fingerprint is therefore proof that the miner helped to maintain the Bitcoin system.
Advantages of Bitcoin
Unless a user voluntarily publishes his Bitcoin transactions, his purchases are never associated with his personal identity, much like cash-only purchases, and cannot be traced back to him. In fact, the anonymous Bitcoin address that is generated for user purchases changes with each transaction.
2.Very Low Transaction Fees
Standard wire transfers and foreign purchases typically involve fees and exchange costs. Since Bitcoin transactions have no intermediary institutions or government involvement, the costs of transacting are kept very low. This can be a major advantage for travelers as they need international transfer very often. Additionally, any transfer in Bitcoins happens very quickly, eliminating the inconvenience of typical authorization requirements and wait periods. You can transfer your bitcoin everywhere and anytime.
Traditional currencies and forms of money require permission to use (typically from banks, financial institutions, governments). Bitcoin requires no permission from anyone and is free and open to use globally. There are no borders or limits with Bitcoin.
4. Immune to Seizure & Censorship
Nobody can confiscate your Bitcoin since you own it; it’s not housed at any central bank or company. Using a computational algorithm called proof-of-work (PoW), no one can block or censor your transactions.
5. No Need for Trust in Third-Party Risk
The network is distributed globally among many thousands of nodes (computers) and millions of users where you don’t have to rely on trusted third-parties.
6. Limited Supply
There will only ever be 21 million bitcoins created and are generated at a predictable rate. Bitcoin is scarce and deflationary.
7. Open Source and Transparency
Bitcoin is open source. Anyone can contribute to developing Bitcoin in a myriad of areas including different Bitcoin software clients. All the transaction information in the blockchain is viewable through tools (e.g. explorer).
8. Transaction Irreversibility
With Bitcoin, there is no risk of charge-backs because once Bitcoin are sent, the transaction cannot be reversed. Bitcoin is akin to cash — once you give someone cash, you cannot get it back (unless they give it back to you).