Years ago people bartered in order to get the services or goods they needed, which meant that they could only “buy” something if they already had something of equal value to offer. The problem was solved by creating currency, which is a medium of exchange with a specific value. Currency has traditionally been created in coin or bill form, and its transfers facilitated by institutions, such as banks. Modern technology now allows banks to complete many tasks digitally; and currency can be transferred via the Internet. In 2009 digital currency took a step further when open source software began allowing peer-to-peer transfers of a unique currency.

The new system, called “Bitcoin” relies on a set of rules and processes that allows currency to be created and transferred anonymously. Users exchange units known as bitcoins, just like they might trade dollar bills and physical coins for goods or services. Since the process is non traditional, most people need Bitcoin Explained. Although the system involves several processes, it essentially consists of two basic concepts:

  • CREATING COINS: Bitcoins maintain their value because only so many can be created. They come into existence when users “mine” them using specially-designed software that constantly searches for the solution to a math problem. Globally, about 6 answers per hour are found. Users with solutions announce this fact over the network, via “blocks”. Currently this entitles them to 25 new bitcoins; but the system is designed to reduce this award over time, to ensure that no more than 21 million bitcoins are ever created. If users break any of the systems rules, their currency is rejected.
  • SENDING AND ACCEPTING PAYMENTS: Bitcoin transactions between two parties are safe from third-party interference because the system uses public key cryptography. That means that each user has at least one address that includes a public and private key. These are held in a wallet, similar to many other online transactions. A typical transaction involves person one sending their address to person two, who then adds the address and bitcoins to a transaction message. Person two signs the transaction with a private key, announces their public key for signature verification, and then broadcasts the transaction to the bitcoin network. Private keys keep information secret, allowing currency to be continually transferred safely. Bitcoins are also anonymous, since the system does not use email addresses, accounts, user names, or passwords.

Those who want Bitcoin Explained often wonder what prevents users from double-spending the same currency. The answer is that there is a mechanism in place to prevent this. When transactions take place, details are sent to as many computers as possible. These computers maintain an ever-growing chain of blocks, and all of them contain details of the transaction. Transaction blocks must contain proof of work in order to be considered valid, and if one is changed, every following block is also modified. A fast growing, long chain of valid continuations is created. Users recognize long chains as signs of reliable transactions.