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An introduction to Bitcoin

So, what is Bitcoin? Perhaps it's best to start with the words of its creator, Satoshi Nakamoto, which we find in the original whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System. It states the following:

"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based Proof-of-Work, forming a record that cannot be changed without redoing the Proof-of-Work."

To understand what Satoshi meant with these words, we'll have to explain a few important concepts in more detail.

First of all, Bitcoin's creator placed a great emphasis on the network's peer-to-peer nature. This means that Bitcoin is a decentralized network. There isn't any central party responsible for managing the system. It is a truly democratic platform, open to everyone to participate and contribute. The network of Bitcoin can be seen in the following diagram:

As Satoshi Nakamoto suggests, the main idea is to have a system without intermediaries that prevents double-spending with the sole involvement of peers on the network.

Until Bitcoin came around, people could not transact directly with each other over the internet without the involvement of a trusted central party. This is because money transmitted electronically isn't the same as other types of information or digital items. You can take a picture and share it with all of your friends on Facebook, but if you have one dollar and want to share it, you cannot send the same one dollar to each one of your friends.

Double-spending can occur when a user tries to spend the same unit of digital currency twice at the same time, effectively multiplying the money that one has by copying it. This is equivalent to counterfeiting currency in the real world.

If double-spending were to exist, the system would not be an effective store of value, and would lack one of the fundamental prerequisites of money, which is scarcity.

Imagine that you are shopping online, and you want to pay using digital currency. Let's suppose that you have a few coins in your wallet. You like a brand new movie on Amazon, and an audiobook on Audible. You want to have both, but the digital money that you have is sufficient for only one of the two items. What if you were able to use the same digital currency to buy both goods?

Before the Amazon or Audible guys know that you have spent the same coins twice, you will be able to click Purchase on both websites within a few seconds, and download the products.