Bitcoin is an invention that, for the first time in history, enabled a group of

software users to create and manage a digital money supply outside the control of
any government or bank. 

A revolutionary idea when introduced in 2009, Bitcoin continues to have

implications that are just beginning to be understood and explored by technologists
and economists today. 

To begin, it helps to think of Bitcoin as a software protocol like those you interact
with every day – think SMTP (which helps route your emails) and HTTP (which
ensures the web content you request from your browser is delivered to you by
servers). 

The Bitcoin protocol enables computers running its software to manage a data set
(the blockchain) and enforce a set of rules that make this data (bitcoins) scarce and
valuable. 
As its essential building blocks, the Bitcoin protocol uses: 

1. Public-key cryptography – Wallet software assigns bitcoin owners both a

public key (which is used by the protocol to prove you own bitcoin) and a
private key (a kind of password that, if secured well, guarantees your
bitcoins can only be accessed by you).
2. Peer-to-peer networking – Nodes (computers running the software) review
transactions to ensure the software’s rules are being followed. Miners (nodes
using special computer chips) then compete for the right to batch these
transactions into the blocks periodically added to the blockchain.

3. A finite supply – According to the software rules, only 21 million bitcoins

can be produced, a limit that gives bitcoins value.
The Bitcoin blockchain is a full record of the network’s history validated by
individuals running the Bitcoin software (nodes). This ensures that unlike most
digital data, which can be freely copied and modified, bitcoins cannot be. 

Because bitcoins are scarce, divisible, and transferable, bitcoins are used as money.
Who Created Bitcoin?
While Bitcoin can safely claim to have created the world’s first successful cryptocurrency, its
technology is built on decades of ideas for how cryptography could help create digital money.

This includes such formative projects as:

B-money – A proposed anonymous, distributed digital cash system

Bit Gold – An attempt to create a type of scarce online commodity
eCash – The first major attempt to create anonymous online payments
HashCash – A proof-of-work system designed to prevent email spam
In 2006, “Satoshi Nakamoto,” a still pseudonymous person or group, began writing the code
for a new digital cash system called “Bitcoin.” 

This was then followed by the publication of a white paper explaining this proposed system
in 2008, and the release of Bitcoin 0.1, the first version of the software, on January 9, 2009.
Nakamoto authored a trove of emails and forum posts offering his or her thoughts about the
future of Bitcoin before leaving the project in 2011. Today, hundreds of developers
contribute to Bitcoin’s code, where they make everything from routine bug fixes to efficiency
improvements.

What Makes Bitcoin Decentralized?

Many technologists believe that Bitcoin’s fundamental property – i.e. what makes
it different from other digital money systems – is that its network is decentralized.

To fully understand the idea behind decentralization and why it’s so important, it’s
helpful to consider how banking works today.

You likely deposit your paycheck regularly into a bank account. In this case, the
bank provides you the means to use your money (via its ATMs, payment cards,
and checks), while keeping it safe from theft (with security guards, vaults, and
alarms).

In our example, banks act as central authorities. They are third parties that facilitate
transactions between individuals and businesses. Essentially, banks act as
middlemen to your transactions. They then provide this same service for all
customers, which gives them control of a giant supply of other people’s money. 
With this power, they can easily change the rules. Your bank might lend your
money without your permission, decide not to process a transaction for you, or
even deny you access to your money. Governments and criminals can also seize
your data and money from banks.

The idea behind Bitcoin is to have a system where there is no middleman or central
authority. Only you have control of your money and your transactions cannot be
denied.  

Bitcoin is “decentralized” because its software allows anyone to trustlessly verify

the authenticity and scarcity of the bitcoins they are receiving. In this way,
Bitcoin’s decentralization solves the trust issue inherent in centralized money
managers. If anyone’s computer stops performing its function, another can take its
place. 

Bitcoin developers tend to consider the network more or less decentralized

depending on how much it costs for the average user to synchronize a node with
the network, and they propose changes to the protocol according to how it might
impact this process.

How Does Bitcoin Work?

True to its design, bitcoins can today be sent between two users without the need for any
trusted intermediary.

If you hand someone a dollar bill in person, they now have a dollar and you don’t. You’ve
given the other person something of value, and they’ve received it. It works the same with
bitcoin. 

But you might be asking, what about all those computers operating the network? What keeps
them from breaking the software’s rules and stealing my money? Essentially, incentives.

For Bitcoin’s ledger to be manipulated, a hacker would need to be in control of at least a third
of the mining hardware. But as this miner would then be winning the lion’s share of new
bitcoins, it wouldn’t be in their best interest to attack the network.
For one thing, Bitcoin’s high value makes mining very costly. To compete for new BTC,
miners must use specialized hardware and cheap electricity to solve hashes and propose new
blocks. 
This isn’t an easy race to win – the computational power competing to mine new BTC is now
greater than that of Google’s data centers. In practice, this means that while it is technically
possible to manipulate the Bitcoin blockchain, it is economically impractical.

What Gives BTC Value?

Bitcoin shares many of the characteristics that give traditional commodities and
government monies value – scarcity, durability, portability, divisibility, fungibility,
and acceptability. 

It can even be argued that BTC has an advantage over government monies and
commodities in many of these categories.

Scarcity
BTC supply is more limited than silver and gold supply, as there will only ever be
21 million BTC introduced to the network’s economy.

When the first block was mined in 2009, 50 BTC were released. Through this
process, more than 18 million BTC have been made available as of 2020.

The number of BTC released in each block is cut in half roughly every four years
to keep the total supply finite, in an event known as the halving (or halving). 

Durability
Any form of cash needs to be durable enough to be used over and over again. BTC
private keys are numbers and letters, which can be stamped into stainless steel,
backed up, or divided into pieces, adding to their durability. 

Portability
With BTC, you can carry around all your wealth on a flash drive, memorized in
your brain, or transfer it instantly via the internet. 

Divisibility
All currencies carry denominations so people can purchase goods that carry
differing values. U.S. dollars, for example, are divisible from $100 bills down to
pennies. 
BTC, too, is divisible and can be subdivided up to the eighth decimal place. The
smallest unit of currency is called a Satoshi after Bitcoin’s creator. 1 BTC equals
100,000,000 satoshis (sats).

Fungibility
All units of money must be uniform and interchangeable. 

Like paper cash or gold, depending on how you received your BTC it will have
varying degrees of fungibility. BTC that was involved in a crime, for example,
may not be accepted by exchanges or merchants. (This remains an active area of
research for Bitcoin developers.)

Acceptability
For something to store value, people need to recognize and accept that it’s worth
something.

There are currently thousands of individuals and vendors accepting Bitcoin

payments, from Microsoft to Subway, and thousands of other small businesses
taking payments and donations with Bitcoin.
You can also buy and sell BTC for other cryptocurrencies alongside more
traditional currencies at exchanges like Kraken, which are online 24/7 to match
your trades.