Ever looked at the headlines, scratched your head, and wondered what Bitcoin and cryptocurrency actually are? We’ve got you covered.
So, what are cryptos?
Cryptocurrencies are virtual currencies that can be used to buy goods and services but rely on a ledger and cryptography to secure and verify transactions rather than a trusted third party.
What is Bitcoin?
Bitcoin is the name of the original cryptocurrency. It was designed to allow users to make digital payments without relying on financial institutions like banks. This also means its users can send or receive money anonymously.
Where did Bitcoin come from?
In 2008, a developer known only as Satoshi Nakamoto uploaded the Bitcoin whitepaper to a cryptography mailing list, laying out his vision for the first cryptocurrency.
The same individual is believed to be responsible for deploying the source code and protocol that Bitcoin is based on. There is still no definitive answer as to who Nakamoto is or whether it was someone working alone or a group of people working together.
How does it work?
Bitcoin is built on a publicly distributed digital ledger known as the blockchain. This allows a record of all transactions to be compiled and shared across a peer-to-peer network. The same ledger protects the system from the problem of ‘double spending’, which is the risk that a digital token or a digital coin can be spent twice.
Under the bitcoin protocol, every ten minutes a “block” of all the transactions carried out on the network in the preceding ten minutes is compiled and verified through what is known as ‘Proof of Work’ mining.
The Proof of work mechanism requires computers in the network to compete in a race to solve a computational problem. Think of it as an elaborate game of ‘guess the number’ where the higher your computational power is, the higher your chances are of winning.
The first computer to solve the problem is allowed to verify the block and add it to the blockchain, earning Bitcoin as a reward.
Under the Bitcoin protocol, the computational problem to be solved becomes more complex the more computers there are trying to solve it.
The idea behind proof of work is to make the network more secure and protect it from attacks, spammers, or individuals gaming the system.
Critics point out that it’s hugely energy-intensive, leading to recent concerns about Bitcoin’s environmental impact.
For more on this story, watch the video explainer in the media player above.