Let's start from the top and divide Bitcoin into two parts. There is a Bitcoin token, a code fragment that represents the ownership of a digital concept. And there is a Bitcoin protocol, a distributed network in which the balance sheet of bitcoin tokens is stored. Both are called “Bitcoin.”
The system allows users to exchange transactions without banks or other payment systems. Payments are created electronically. “The digital gold” is produced by computers around the world using free software - this is how it differs from dollars or euros, which are printed when needed.
Who created Bitcoin?
Bitcoin developer pseudonym is Satoshi Nakamoto. In 2008, he proposed Bitcoin as an electronic payment system based on mathematical theories. His idea was to create a means of payment, not subordinate to the central government and not regulated by anyone. To this day, no one knows who Satoshi Nakamoto really is.
How does Bitcoin differ from traditional currencies?
Bitcoin can be used for payment. In this sense, it is like ordinary dollars, euros or yen, which are also available in digital form. But "digital gold" has a few differences.
Decentralization is the most important characteristic of Bitcoin. The BTC network is currently controlled by no world institution. It is supported by a group of volunteer developers and is managed by an open network of computers distributed throughout the world.
Bitcoin solves the problem of “double spending” of electronic currencies (in which digital assets can be easily copied and reused) with the help of a brilliant combination of cryptography and economic incentives. In electronic currencies, this function is performed by banks, which gives them control over the traditional system. With Bitcoin, transaction integrity is maintained by a distributed and open network owned by no one.
Second, a limited number of coins.
Fiat currencies are unlimited: central banks can print as many as they need. Expenses are incurred by currency holders, especially citizens with low incomes.
Bitcoin is tightly controlled by the main algorithm. A small amount of new Bitcoins is created every hour. This will continue until the number of coins increases to 21 million. This makes Bitcoin even more attractive as an asset: in theory, if demand increases and supply stays the same, the value will rise.
Since there is no central controlling authority, users do not need to identify themselves when sending Bitcoin to another user. When a transaction request is sent, the protocol checks all previous transactions to confirm that the sender has the necessary Bitcoin, as well as the authority to send them. The system does not need to know the identity.
In practice, each user is identified by his wallet address. The transactions (with some effort) can be tracked this way. The law enforcement agencies have also developed methods for identifying users, if necessary.
Besides, most exchanges are legally required to verify the identity of customers. Since the network is transparent, the progress of a particular transaction is visible to everyone. This makes bitcoin a bad tool for money-laundering scammers.
Unlike fiat transfers, Bitcoin transactions cannot be aborted. This is again due to the lack of a single controlling body. No judge would say "yes, return the money." So if the transaction was recorded online more than an hour ago, it could not be canceled.
The smallest unit is called Satoshi. This is one hundred millionth bitcoin (0.00000001), at today's prices, about one-hundredth of a percent. So, theoretically, using Satoshi, it is possible to conduct microtransactions, which are impossible for fiat transfers.