Bitcoin is the future, according to lots of people, both inside and outside mainstream financial institutions. Well, not just Bitcoin, but all technology based on the blockchain technology. The blockchain is a term for cryptographic computer code that facilitates a distributed, decentralized ledger of transactions. Many people believe that the blockchain represents a fundamental extension of internet technology that much of the next wave of progress will be built on.
Why is the blockchain so revolutionary? And how does Bitcoin spring from the blockchain? It starts with cryptographic principles that underlie the blockchain. The blockchain is a constantly growing chain of records that house data. It could be financial transactions, shipping record or proof of ownership. Each record, or block, contains a hash pointer (that is where the cryptographic stuff comes in), a timestamp and data about the transaction. The reason that it can be revolutionary from a financial standpoint is that it can serve as an open, decentralized, peer-to-peer ledger of transactions. Transactions that can be verified efficiently without the use of a third party. A lot of value in the world of finance is concentrated in middlemen and third parties.
So how does Bitcoin fit in? Bitcoin is a cryptocurrency that is based on blockchain technology. It is digital cash. And since it gains market share and relevance first, it is the most widely adopted digital cash in the world. That is where a lot of its current value comes from.
Bitcoin is a good example of a public blockchain. That is where the decentralized nature of it comes from. Its power comes from that fact that there is no central bank or entity controlling the creation of Bitcoins. The maintenance of these transactions on the ledger, basically the mechanism that creates the trust in the chain, is performed by donated computing power from nodes on a network. Multiple people out in the world lend their computers and servers to the Bitcoin network, so the transactions can be compiled and run.
These people that operate the nodes are called Bitcoin miners. They essentially “mine” Bitcoin by doing the math and creating new blocks on the chain. Mining is basically a public service where the computer owners donate their computing processing power to record the transactions.
It all seems a bit overwhelming and can prompt a lot of questions. How can Bitcoin transactions be verifiable? If there is no trusted central authority, where is the security? Time will tell.
What everyone does now is that the inventor of Bitcoin, in the seminal white paper that described the cryptocurrency, set forth that there would be an artificial scarcity of the digital cash. There will only ever be 21 million Bitcoins in circulation.