Bitcoin is a decentralized, peer-to-peer network that allows for the proof and transfer of ownership without the need for a trusted third party. The unit of the network is bitcoin (with a little “b”), or BTC, which many consider a currency or internet cash. The Bitcoin network was conceived in 2008 and launched in 2009 by a programmer(s) who used the pseudonym Satoshi Nakamoto and whose identity remains uncertain. The network is based on a mathematical proof; people around the world called “miners” use software programs that follow a mathematical formula to produce bitcoins. The formula and software are freely available for anyone to use. There is a finite amount of bitcoins that can be produced and as more bitcoins are created, the mathematical computations required to create more become increasingly difficult. Bitcoin can be traded or used to buy goods and services. All bitcoin transactions are recorded in the “block chain” – a massive and transparent ledger of each and every bitcoin transaction maintained by the miners. There is no central authority that oversees Bitcoin.
HOW ARE BITCOINS CREATED?
Bitcoins are mined by miners – people or institutions that employ increasingly sophisticated computer systems to run the mathematical computations required to verify bitcoin transactions and record them in the so-called block chain. Each new block contains hundreds of transactions and a “hash”, which is a seemingly random, short group of numbers and letters produced by applying a mathematical formula to the transaction data, the hash of the prior block, and one last piece of data called a “nonce”. Miners compete to verify new blocks in the chain by finding a nonce that results in a new hash value with specific properties that are automatically adjusted to govern the difficulty of mining. They are awarded bitcoins if they are the successful miner (as well as – at times – a transaction fee). The reward for completing a block is currently 25 BTC (about $16k). The fact that each new block contains the hash of the prior block makes tampering with the block chain extremely difficult because if a block is tampered with, its hash would change and become immediately apparent to everyone looking at the block chain.
The system was designed to allow an arbitrary maximum of 21 million bitcoins to be created at a limited and predictable pace; the amount of computer power devoted to mining will not change the pace at which they are created. All bitcoins are anticipated to be mined by 2140; after that point it is assumed that transaction fees alone will be sufficient to motivate miners to perform the service of maintaining the block chain.The sophistication and amount of computing power to complete a block has accelerated very rapidly. Most mining is now done by large mining groups called pools, and companies set up specifically to mine.
In the next article we will explain How to Obtain, Exchange and Transact Using Bitcoins.