What is Bitcoin?

Launched anonymously in January 2009 to a small group of technical experts, Bitcoin is today a globally traded financial asset with daily settlements in the tens of billions of dollars.

Source: Bitcoin.com

Bitcoin is the first and by far the most widely recognized cryptocurrency. It realizes peer-to-peer value exchange in the digital realm by using a decentralized protocol, encryption algorithm, and a mechanism to reach a global consensus on the state of the public transaction ledger (blockchain).

In effect, Bitcoin is a digital currency that (1) exists independently of any government, state, or financial institution; (2) can be transferred globally without the need for a centralized intermediary; and (3) ) Monetary policy is well known and cannot be modified.

Bitcoin can refer to both the Bitcoin software protocol and the currency unit, and its currency symbol is BTC.

Introduced anonymously to a small group of technical experts in January 2009, Bitcoin is today a globally traded financial asset with daily settlements in the tens of billions of dollars. While bitcoin’s regulatory status varies by region and continues to evolve, its most common form of regulation is as a currency or commodity, and its use is legal in all major economies (with varying degree of limitation).

The origin, early development and evolution of Bitcoin

Bitcoin originated from the ideas presented in the Bitcoin white paper (ie, "Bitcoin: A Peer-to-Peer Electronic Cash System") published in 2008.

The white paper details an approach that "allows any two willing parties to transact directly without the need for a trusted third party." The technology deployed in the white paper solves the "double spending" problem, making digital scarcity possible for the first time.

The paper is signed by Satoshi Nakamoto, presumably the pseudonym of a person or group whose identity remains a mystery to this day. Satoshi Nakamoto released the first open-source Bitcoin software client on January 9, 2009, and anyone who installs the client can start using Bitcoin.

Bitcoin is a new way of transacting value in the digital world, and the initial development of the Bitcoin network was largely driven by this utility. Early supporters were largely "cypherpunks," those who advocate the use of powerful cryptography and privacy-enhancing technologies to drive social and political change. However, speculation about bitcoin's future value quickly became a significant driver of bitcoin usage.

Over the next decade, Bitcoin's price and number of users rose in waves. As regulators in major economies clarified the legality of bitcoin, a large number of bitcoin exchanges established bank connections, allowing easy exchange between local currencies and bitcoin. As more high-profile investors have shown interest in bitcoin, other businesses have built robust custody services to make the asset more accessible to institutional investors.

What is Bitcoin used for?

At the most basic level, Bitcoin can be used to transact value outside of the traditional financial system. For example, if people use Bitcoin to make international payments, it is faster, more secure, and has lower transaction fees than traditional settlement methods such as the SWIFT or ACH networks.

In its early stages, when network penetration was low, bitcoin could even be used to settle small transactions, competing with payment networks such as Visa and Mastercard, which settle transactions much more slowly. However, as the use of Bitcoin becomes more and more widespread, the expansion and issuance make it less competitive as a medium of exchange for small items. This supports the narrative that Bitcoin has become a substitute for gold, or "digital gold." The investment theory here is that the value of Bitcoin is derived from a combination of technological breakthroughs, supply caps (monetary policy is "embedded in code"), and strong network effects.

Another popular claim is that Bitcoin supports economic freedom. This is purportedly possible because Bitcoin provides an alternative currency on an opt-in based mechanism that is effectively protected against: (1) currency confiscation; (2) censorship; and ( 3) Devaluation through unchecked inflation. Note that this statement does not contradict the statement "digital gold".

Basic Features of Bitcoin

Decentralization: No one person controls or owns the Bitcoin network, and there is no CEO. Instead, the Bitcoin network is made up of voluntary participants who agree to the rules of the protocol in the form of open-source software clients. Modifications to the protocol must be reached by consensus among users and should have a broad range of constituency voices, including "nodes", end users, developers, miners, and relevant industry players such as exchanges, wallet service providers, and custodians ). This makes Bitcoin a quasi-political system.

Distributed: All Bitcoin transactions are recorded on a public ledger called the blockchain. The network's operation relies on people automatically storing copies of the ledger and running the bitcoin protocol software. These "nodes" contribute to the correct propagation of transactions by following protocol rules defined by software. The Bitcoin network currently has more than 80,000 nodes distributed all over the world, which makes it almost impossible for the Bitcoin network to experience outages or information loss.

Transparency: The addition of new transactions to the blockchain ledger, as well as the state of the Bitcoin network at any given time (the "fact") are agreed upon in a transparent manner according to the rules of the protocol.

Peer-to-peer: While nodes propagate the state of the network ("truth"), payments are actually made directly between individuals or businesses. This means that there is no need for any "trusted third party" to act as an intermediary.

No permission required: Bitcoin can be used by anyone, there are no “gatekeepers” and no need to create a “Bitcoin account”. Any and all transactions that follow the protocol rules will be confirmed by the network according to the set consensus mechanism.

pseudo-anonymous. Identity information is not associated with Bitcoin transactions, which is an inherent property of Bitcoin. Instead, transactions are associated with addresses, which take the form of randomly generated alphanumeric strings.

Censorship resistance: Since all Bitcoin transactions that follow the protocol rules are valid, transactions are pseudo-anonymous, and users themselves own the "keys" to the Bitcoins they hold, it is difficult for regulators to ban individuals from using Bitcoin Or seize their Bitcoin holdings. This has very important implications for freedom and democracy.

Public: All Bitcoin transactions are recorded and can be viewed by anyone. While this all but eliminates the possibility of fraud, it also makes it possible in some cases to infer an individual's identity to a particular Bitcoin address.

Economic Characteristics of Bitcoin

Fixed supply: A key parameter in the Bitcoin protocol is that the supply of Bitcoins will eventually expand over time to a total of 21 million coins. This fixed and known total supply makes Bitcoin a "hard asset" and is one of several characteristics that make Bitcoin considered an investment.

Inflation resistant: The rate at which new bitcoins are added to the circulating supply gradually slows down on a schedule built into the code. Starting at 50 bitcoins per block (a new block is added approximately every 10 minutes), the issuance rate is halved approximately every four years. In May 2020, the third halving reduced the issuance rate from 12.5 BTC per block to 6.25 BTC. At this point, 18.375 million of the 21 million bitcoins (87.5% of the total) have been "mined." The fourth halving will occur in 2024, when the issuance rate will be reduced to 3.125 BTC, and so on until about 2136, when the final halving will occur, when the block reward will be reduced to only 0.00000168 BTC.

Incentive-driven: There is a group of core participants called miners, driven by interests, who contribute the energy needed to maintain network operation and ensure network security. Miners compete to add new blocks to the chain that makes up the ledger (blockchain) through a process known as proof-of-work (PoW). The hardware and energy costs associated with PoW mining promote network security in a decentralized manner with game theory-driven principles. The profit motive is considered to be an important factor endowing organic growth.

Who decides what is Bitcoin?

Bitcoin is not a static protocol. It can and has incorporated changes throughout its life cycle and will continue to evolve in the future. Governance of the Bitcoin protocol is ultimately based on consultation, persuasion, and voluntariness, although there are formalized procedures for people to upgrade Bitcoin (see "How does Bitcoin's governance work?"). In other words, what Bitcoin is is a collective decision of the people.

In some cases, the community has been very divided on the direction of Bitcoin. When these differences cannot be resolved through negotiation and persuasion, some users may choose to recognize a different version of Bitcoin out of their own will.

The alternative version of Bitcoin with the largest following is known as Bitcoin Cash (BCH). It arose out of a proposal to address rising transaction costs and extended transaction confirmation times. Bitcoin Cash was born on August 1, 2017.