Bitcoin’s creator, Satoshi Nakamoto, explained Bitcoin’s purpose in the whitepaper:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Bitcoin is a digital money. Unlike fiat currencies such as the U.S. dollar, Bitcoin is not controlled by any central authority. Instead, Bitcoin is regulated by a set of rules. This makes Bitcoin decentralized. Nobody independently owns or controls Bitcoin, so everyone can participate in the network.
Bitcoin transactions are strictly peer-to-peer. This means money flows directly from the sender to the receiver, and it is never held or controlled by a third party in between. Bitcoin is sent to a Bitcoin address, a string of letters and numbers. If the owner of the address is unknown, transactions with that address will be effectively anonymous.
Bitcoin was created in tandem with the rules that govern its use and supply. As such, the supply of bitcoin is predetermined and will not be changed. The supply of bitcoin will never exceed 21 million, making it probably scarce.
Bitcoin can be used in similar ways to other currencies. It can pay for goods and services based on the value of the currency. To send Bitcoin to another party, the sender only needs to know the recipient’s Bitcoin.
All transactions can be seen by everyone in the network, and the balance of an address can be easily checked. However, addresses do not directly identify the person that controls them. This makes the network pseudonymous as transactions are public, but the human owner may not be known.
Many people who own Bitcoin do not control their private keys directly. Instead, they allow trusted custodians to maintain the storage and security of their bitcoin. These custodians will need to maintain private keys for any address which holds Bitcoin. The public key is the mailbox, the private key is the mailbox key. Anyone can mail you anything but only you and the mailman have the keys.
Many people choose to use Bitcoin instead of other currencies because it satisfies the characteristics of money very. Among other factors, the divisibility, portability, durability, and scarcity of Bitcoin make it effective.
On average, Bitcoin transactions are confirmed every 10 minutes, although this period varies. A transaction is usually reliable after a single confirmation, but most people prefer to wait for 2-6 additional confirmations (blocks formed) before accepting the payment as an additional security and verification measure.
Even if you wait for several confirmations, Bitcoin payments clear much more quickly than traditional fiat currencies, which may take days to move through legacy financial institutions and do not clear on weekends or holidays.
There will never be more than 21 million bitcoin. No matter how high demand for bitcoin rises, the supply is fixed, and thus, the value of Bitcoin can ascend indefinitely against trading pairs of fiat currencies with uncapped supplies. Scarcity is a valuable trait for money because it enables money to be a truly fair, stable measure of value.
Bitcoin is completely decentralized, and uncontrollable by any one party. Unlike other currencies, particularly fiat currencies, no centralized party can arbitrarily change the rules, produce more bitcoin, or redistribute bitcoin.
Furthermore, no one can be banned from the Bitcoin network. Anyone can mine, run a node, or send and receive transactions. No qualifications or permission is required.
Bitcoin uses a blockchain to store all of the transactions that occur on the network. Bitcoin’s blockchain is a shared public ledger that all participants in the network can observe. Batches of transactions are added to the blockchain in blocks. Every block is appended chronologically to the previous block, ensuring that no bitcoin is double-spent. This design was intended to make Bitcoin transparent and resistant to corruption or fraud, and it has worked for over a decade.
Every block contains Bitcoin transactions. There is a limit to the number of transactions that can be included in a single block, so a transaction might not be confirmed in the first block after it was initiated. A transactor can include a higher network fee to incentivize miners to include their transaction as quickly as possible. This fee generally represents a very small percentage of the overall transaction.
Bitcoin mining, the procedure for adding new blocks to the blockchain, ensures that past transactions cannot be changed. This immutability ensures that payments will never be reversed or redirected. Once a transaction has received multiple confirmations, the recipient can feel confident that the money has settled. Every additional confirmation makes this transaction less likely to be reversed.
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