The prosperity of industry 4.0 and digital money has raised the curiosity for Bitcoin – the first generation of Blockchain. Although Bitcoin was recorded as the second most-searched global news term of 2017, still there is a lot of confusion around the definition of Bitcoin.
Bitcoin – The creation
The year 2008 has witnessed the biggest and most severe global financial crisis with the collapse of Lehman Brothers – one of the largest investment banks in the United States. This full-blown international banking crisis ended up with suspicion and hesitation in exchanging money through intermediary. In such light, in late 2008, an unknown entity named Satoshi Nakamoto conceptualized the first distributed system in which exchangers can eliminate middleman, mitigate transaction costs as well as control funds themselves. The idea of Bitcoin, the first application of blockchain technology, was set out.
What is Bitcoin?
Image source: Moneylender
The word “bitcoin” refers to either a kind of digital currency or the blockchain itself. On one hand, Bitcoin is a decentralized virtual currency, also called cryptocurrency, which is independent of any government or central monetary authority. Bitcoin transaction can be made between users directly on its peer-to-peer network without passing through intermediaries and with high transparency and efficiency. On the other hand, Bitcoin is defined as a P2P electronic cash system which enables money to be transferred worldwide through a decentralized ledger where everyone can do transactions on “trustless” basis.
Thanks to the first application bitcoin, the importance of blockchain, the public ledger where all confirmed bitcoin transactions are recorded, is undeniable. Blockchain technology is the power behind the Bitcoin system.
Bitcoin differentiates itself from other types of traditional fiat digital money. Decentralization is the most outstanding and prominent characteristic of bitcoin. Instead of being under the control of any institution, the maintenance and operation of bitcoin are implemented by an open-source network of innumerable computers spreading around the world. Secondly, apart from the traditional system, bitcoin transaction is irreversible once it is confirmed and added to the chain of blocks, allowing a tamper-proof record of transactions.
How does Bitcoin work?
To understand how bitcoin really works, it is necessary to break down two terms in the process which are bitcoin transaction and bitcoin mining.
Bitcoin transaction is simply defined as the transfer of bitcoins between users. Initially, user installs wallet in his computer or mobile devices. The software then generates a unique address with 30 characters indicated the signature of the user, allowing him to make payment and remit bitcoins. There are three fundamental elements included in the transaction, including input, output and the amount of bitcoin. Specifically, the address of sender is registered on bitcoin blockchain as the transaction input, whereas the address to which bitcoin is transmitted is transaction output.
New bitcoins are released and come into circulation through the process named “bitcoin mining”. Technically, bitcoins are mathematically generated when the computers within the network called “miners” discover new transaction added to existing chain by solving a complicated puzzle. In return, an amount of bitcoins will be given to the first miner as a reward as well as transaction fees. The difficulty of mining bitcoin is progressively increased with the growth of bitcoin released during the period. However, the transcendent mathematics embedded in the Bitcoin system allows the difficulty to adjust promptly so as to maintain the stable mining rate of the whole system.
Image source: Shutterstock
Lastly, despite conflicting judgement and perspective on bitcoin, it is undeniable that bitcoin has brought to life numerous advantages regarding fraud elimination and cost reduction among others. The volatility of bitcoin value has triggered the interest in cryptocurrency and other blockchain applications in the near future.
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