What is Bitcoin?

Bitcoin was founded by a pseudonymous author, Satoshi Nakamoto, who wrote a whitepaper titled, Bitcoin: A Peer-to-Peer Electronic Cash System, describing the rules for this new monetary ecosystem. It detailed “a system for electronic transactions without relying on trust” by using peer-to-peer nodes (like those made famous by record industry disruptor, Napster) to record blocks of transactions and verify the blocks with each other.

The Bitcoin Whitepaper

Mining

An important role in the Bitcoin ecosystem are the “miners”, nodes that record and relay the transactions. New coins are created as a reward to the first miner node to encrypt the next block of transactions in a hash with a certain number of zeros at the beginning of the hash. The hash is designed so that it is quite difficult and resource intensive to find the right hash, but once it has been found, it can be validated very quickly. This system is called “proof of work” and is how both the transactions are secured and how inflation is created.

Inflation

The rate of inflation is controlled by a mathematical function that adjusts the difficulty of the proof of work (by increasing the number of 0s required) to adjust for increases in equation solving speed which occur as computer technology gets more powerful. Ultimately, the total number of Bitcoins that can ever be produced is 21 million – an arbitrary cap created by Satoshi. Although it seems like it could be a problem if their value got very expensive, Bitcoins are designed to subdivide down to 8 decimal places, the smallest unit being a “Satoshi” after its creator.

An interesting fact is that Satoshi is believed to have mined 1 million Bitcoins in the first 10 days before any other miners joined and he will ultimately control 4.8{3f24fd6a6f3cb1f39a83c764682d0ee6abe11682a32b284207f40c9cb7e6897b} of the total currency. To give some perspective, currently 1 Bitcon equals about $3,000, so he has $3 billion worth of Bitcoin! Now imagine if Bitcoin were to replace the US dollar which is worth about $10.5 trillion – he would be worth $500 billion!

One very attractive aspect to this system is that inflation is very predictable. The money supply is not subject to rapid and massive inflation or deflation caused by tyrannical governments or corruption. In fact, it is becoming a strong alternative store of value in countries that have inflationary problems or government instability such as Nigeria, Ghana, Slovenia and Estonia. You can see which countries are interested in Bitcoin on Google Trends.

 

What is Ethereum? »