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What Is Bitcoin?
Bitcoin is a digital currency that was created in January 2009. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and, unlike government-issued currencies, it is operated by a decentralised authority.
Bitcoin is a type of cryptocurrency. There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to. All bitcoin transactions are verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as alt coins. Bitcoin is commonly abbreviated as "BTC".
Understanding Bitcoin
The bitcoin system is a collection of computers (also referred to as "nodes" or "miners") that all run bitcoin's code and store its block chain. Metaphorically, a block chain can be thought of as a collection of blocks. In each block is a collection of transactions. Because all the computers running the block chain has the same list of blocks and transactions, and can transparently see these new blocks being filled with new bitcoin transactions, no one can cheat the system.
Anyone, whether they run a bitcoin "node" or not, can see these transactions occurring live. In order to achieve a nefarious act, a bad actor would need to operate 51% of the computing power that makes up bitcoin. Bitcoin has around 12,000 nodes, as of January 2021, and this number is growing, making such an attack quite unlikely.
But in the event that an attack was to happen, the bitcoin miners—the people who take part in the bitcoin network with their computer—would likely fork to a new block chain making the effort the bad actor put forth to achieve the attack a waste.
Balances of bitcoin tokens are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins.
The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorise bitcoin transmissions. Bitcoin keys should not be confused with a bitcoin wallet, which is a physical or digital device that facilitates the trading of bitcoin and allows users to track ownership of coins. The term "wallet" is a bit misleading, as bitcoin's decentralised nature means that it is never stored "in" a wallet, but rather decentralise on a block chain.
Bitcoin Mining
Bitcoin mining is the process by which bitcoins are released into circulation. Generally, mining requires the solving of computationally difficult puzzles in order to discover a new block, which is added to the block chain.
Bitcoin mining adds and verifies transaction records across the network. For adding blocks to the block chain, miners are rewarded with a few bitcoins; the reward is halved every 210,000 blocks. The block reward was 50 new bitcoins in 2009. On May 11th, 2020, the third halving occurred, bringing the reward for each block discovery down to 6.25 bitcoins.
A variety of hardware can be used to mine bitcoin. However, some yield higher rewards than others. Certain computer chips, called Application-Specific Integrated Circuits (ASIC), and more advanced processing units, like Graphic Processing Units (GPUs), can achieve more rewards. These elaborate mining processors are known as "mining rigs."
One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, bitcoin could eventually be made divisible to even more decimal places.