As defined by Satoshi himself in the so-called whitepaper, which is the document that describes how Bitcoin works and that started it, Bitcoin is a “peer-to-peer electronic currency system“. A peer-to-peer system is a network where there is no hierarchy. All computers are at the same level and interact with each other without the need for an intermediary. A well-known peer-to-peer system is, for example, the software E-mule for sharing files. In a way we can think of Bitcoin as a kind of E-mule of money, hence a software by which instead of sending and receiving mp3 files we can send and receive money.

From a technical point of view Bitcoin is a protocol, a set of rules that determines how multiple computers communicate with each other. The Internet is also made up of protocols, for example TCP/IP is the protocol that we use to connect to the Internet, HTTP the one we use to visualize a site on our browser, and SMTP is what we use to send and receive emails.

Currency and payment system

Bitcoin is often described as a digital currency, but this definition loses sight of a fundamental aspect: Bitcoin is also, and more importantly, a decentralized network of computers for making payments. Therefore it is simultaneously a currency, like the euro or the dollar, and also a payments infrastructure, like Visa, Mastercard or Paypal.

Unfortunately, the word Bitcoin is used to call both. Other cryptocurrencies have preferred to use two separate names: for example Ethereum is the name of the network and Ether is the currency. In Bitcoin, generally the lowercase b refers to the coin and the capital B to the network.

Key features of Bitcoin

The main features that make it unique are:

• usable by anyone, thanks to the Internet;
• completely decentralized: it is not controlled by anyone, no government, organization or company;
• open-source: anyone can contribute to the improvement of the Bitcoin code;
• always available and usable, 24/7.

Because of such characteristics it has been very effectively defined by Andreas Antonopoulos, a leading expert on the subject, as “the Internet of money“. If the Internet has digitalized and decentralized communication, Bitcoin digitalizes and decentralizes finance. But, as Andreas points out, “the Internet of money, not the money of the Internet” which is a much more reductive concept.

How Bitcoin works

The idea behind Bitcoin is, as with the Rai stones of Yap Island, the sharing of the information. We can say that “everyone knows everything”: each participant, each node, has a copy of all transactions in the network and therefore everyone is able to verify  those transactions.

What makes it possible to create a network in which everyone despite everyone knowing everything can exchange something as sensitive as money is primarily cryptography. Cryptography is based on the combination of mathematics and computer science, and it is a system for making a message unintelligible to people who are not authorized to read it.

We use cryptography every day without even realizing it. For example, digital signatures work because of cryptography, and so do passwords. Cryptography is not a new technology. One of the fathers of cryptography is considered Julius Caesar, who was able with the Caesar’s Cipher to hide a message by replacing each letter with a letter of 3 subsequent positions (so for example using a D to mean an A).

And then obviously what makes it possible to create a decentralized network with high computing power is the Internet. Although it is technically possible to send a Bitcoin transaction even without being connected to the Internet (even with SMS or you could also send a transaction with a piece of paper), in order to propagate the transaction to the network we need to be connected to the Internet. Nowadays there is also the possibility of using Bitcoin through satellite communication, so even if the Internet would go down worldwide, which is very unlikely, Bitcoin could still continue to function.

If we get a bit more technical, there are also a set of rules such as how to data is stored – the famous blockchain, the consensus algorithm that determines an incentive mechanism for the participants of the network to behave according to the rules, the maximum limit to the issuance of bitcoin – 21 million, and many other rules that allow this network to function uninterruptedly from 2009 until today.

Image Credits: Yegor Petrov