So by now you have probably heard about Bitcoin and the Bitcoin value rapidly increasing in 2018, but what exactly is it?  Bitcoin is a digital currency that lets people exchange money and perform transactions as easily as sending a text or email. It was invented by a person or a group of people known pseudonymously as Satoshi Nakamoto.

In 2008, Nakamoto published a white paper describing an electronic payment system independent of any central authority that performed transactions based on mathematical proofs. The system would enable two people to securely send each other payments without the need of a third party intermediary like a bank.

Think of all the third parties (Visa, MasterCard, etc.) you currently have to deal with to perform an online transaction. Bitcoin completely cuts out those middlemen while providing you with the same service but in a cost-effective and secure way.

 

How Bitcoin Works in a Nutshell

The bitcoin network is built on a “blockchain,” which is a distributed digital ledger analogous to the physical book ledgers accountants used to keep track of transactions before computers went mainstream. The ledger is “distributed” because:

• It is not maintained or owned by a central authority.
• It is hosted on a network of millions of computers (called “nodes”) run by people who use special software to verify transactions.

Think of the blockchain ledger as a “magic book” with millions of copies around the world, and when someone writes a new entry in one book, it magically appears in all the other copies. No one can delete what is already written in this magic book.

Bitcoin uses the magic book to log transactions. If you write, “Send 3 bitcoins to Alice,” the book goes through all your previous entries to make sure you have the correct amount of bitcoins before sending it to Alice, who will see a new entry appear in her copy of the book confirming she received 3 bitcoins. All this happens in a matter of seconds.

To prevent thieves from writing fake entries requesting transfers from someone else’s account, the book requires a signature to prove that an entry was written by the true account owner. That signature works like a traditional handwritten signature, but it’s based on maths rather than human handwriting. Every bitcoin account has an associated key that only the real account owner knows. The magic book uses that key to create a new signature for each entry, so they can’t be copied or reused.

 

Who Maintains the Bitcoin Network?

The bitcoin network requires a constant supply of computational power and electrical energy to decrypt signatures and process transactions. Since the network has no central authority to depend on, it relies on the people who maintain copies of the ledger to provide these resources.

For the sake of simplicity, let’s call those people “maintainers.” Every time someone performs a transaction, an alert is sent to all the maintainers, and they each update their copy of the ledger with the new entry after they confirm the attached signature is valid.

But if the ledger is simultaneously maintained by millions of people from all over the world, how does the network decide which version to use? This is where it gets a little tricky. Maintainers “vote” on the correct version by solving randomly-generated mathematical puzzles known as “proof-of-work” problems. The first person to successfully solve a problem announces their solution, and all the other maintainers update to that version of the ledger.

The proof-of-work problems are intentionally designed to be difficult and resource-intensive to keep the network secure and free from tampering. Maintainers don’t provide their resources for free; they receive a small amount of bitcoin every time they successfully solve a proof-of-work problem.

This reward system is the network’s incentive for encouraging people to maintain the ledger, in addition to small fees maintainers earn for verifying transactions. It’s also how new bitcoins are added to the pool. Since maintainers are effectively minting new money out of thin air, they are typically called “miners.”

Satoshi wanted the number of bitcoins created to remain steady even as the network expanded, which is why the proof-of-work problems become more difficult and the amount of bitcoins earned gets smaller as the network continues to grow. Once all 21 million available bitcoins are mined (estimated to happen in 2140), the small fees bitcoin users are required to attach to every transaction will become the network’s only incentive for maintaining the ledger.

 

Why Use Bitcoin?

If you’re not sure why mainstream adoption of bitcoin is a good thing, here are seven reasons:

1. Decentralized – Bitcoin has no central administrator, which means there is no single point of failure. The network will run as long as there are nodes working somewhere in the world.
2. Fast and global – Unlike bank transactions that can take several days to process, bitcoin transactions take minutes to process and can be performed from anywhere in the world.
3. Anonymous, sort of – Users don’t have to tie their real identities to their bitcoin address. However, every transaction is logged in the ledger, and anyone can tell how many bitcoins you have and where they came from if you publicly share your address.
4. Irreversible – All bitcoin transactions are final, which means no fraudulent chargebacks. Unless your recipient sends you back your bitcoins, they’re gone forever.
5. Very smalltransaction fees – The fees paid to miners for verifying transactions are almost negligible, especially when compared to the fees charged by banks and online payment processors.
6. Easy setup – You can set up a bitcoin address in seconds without paying fees or dealing with any bureaucratic red tape.
7. Limited supply – Government-issued currencies like dollars, euros, etc. have an unlimited supply. A government can simply mint more money to manipulate the value of its currency relative to other currencies. Bitcoin’s total supply is capped at 21 million BTC, and its value will always increase as long as there is demand and the total supply remains static.

The Bottom Line

Once you cut through the confusion, it’s easy to see why bitcoin has the potential of revolutionizing how money works. With mainstream adoption, it could decentralize the global financial system, make all transactions lightning fast, and give users unparalleled security against fraud and theft.

Even banks and financial institutions have taken notice of Bitcoin’s value and are looking for ways to implement the blockchain into their existing infrastructure. Skeptics may call bitcoin another passing tech fad, but the technology has proven to have valuable real-world applications, and it’s unlikely to stop grabbing headlines any time soon.