What is Bitcoin? Part 2

In Part 1 we figured out that Bitcoin is digital money. But there’s a little more to it than that.  Actually, Bitcoin is a decentralized digital currency that operates on a peer-to-peer network using blockchain technology.  

Satoshi Nakamoto

What does that mean?  We need to  go back to Satoshi Nakamoto and the whitepaper to begin getting an answer. If you’re not sure who Satoshi Nakamoto is, you can read about him in 'What is the History of Bitcoin?'

Satoshi Nakamoto created Bitcoin one year after the 2008 Financial Crisis. Nakamoto wanted to create a new form of money that would be free from the control of governments and banks. In the Bitcoin whitepaper, Nakamoto wrote:

"The root problem with conventional currencies is all the trust that's required to make them work. The central bank must be trusted not to devalue the currency, but the history of fiat currencies is full of breaches of that trust."

In other words, Nakamoto believed that the main problem with regular money is that it comes from a central bank which controls the money for a whole country. Unfortunately, central banks can print more money any time they want to, which makes the money less valuable. This hurts people who save money, because their savings will buy less over time. This is inflation.  

Now, let’s go back to the definition from the first paragraph and take it one complicated word at a time.

Bitcoin is a decentralized digital currency that operates on a peer-to-peer network using blockchain technology. 

Decentralised

Instead of one central bank controlling the money, Bitcoin is ‘decentralized’.  That means it is controlled by a group of participants, who work together to ensure that it operates smoothly and fairly.  Picture the Bitcoin network as a vast web of thousands of individual computers scattered all over the world, each of these computers plays a role in keeping the system going. This decentralized structure ensures that no single institution has absolute control, making the network more transparent and secure.

Peer-to-Peer Network

If I want to send you 1 Bitcoin, I can just do it without any help from a bank or a credit card company.  Basically, when I start a transaction to send you a Bitcoin it is put on the Bitcoin network where it gets verified.  This means that we don’t even need to trust each other because the network will make sure everything is okay with the transaction for us. After that, you receive the Bitcoin.  Easy! 

Blockchain Technology 

When that Bitcoin transaction that I made is complete it is recorded on the blockchain. Each block contains information about the new transaction as well as information about the previous transaction. This creates a chain of blocks, called…the blockchain! Think of the blockchain as a giant spreadsheet with all the Bitcoin transactions that have ever taken place.  Everyone can see it, but no one can change it once the blocks are in the chain.

Here are the steps for completing a transaction on the blockchain:

1. I want to send you 1 Bitcoin.

2. That transaction is represented online as a block.

3. That block is seen by all the computers on the Bitcoin network.

4. The network approves the transaction.

5. The new block is added to the blockchain which holds all the transactions that have ever taken place. 

6. You get 1 Bitcoin!

So, Bitcoin is a digital currency that you can use without a bank or other financial institution. It is traded from person to person using a computer network called blockchain.

Whew…that is not easy to understand.  Keep reading the other articles about Bitcoin. Toegther they will give you the full picture of Bitcoin.