Bitcoin is a collection of concepts and technologies that form the basis of a digital money

ecosystem. Units of currency called bitcoins are used to store and transmit value among

participants in the bitcoin network. Bitcoin users communicate with each other using

the bitcoin protocol primarily via the Internet, although other transport networks can

also be used. The bitcoin protocol stack, available as open source software, can be run

on a wide range of computing devices, including laptops and smartphones, making the

technology easily accessible.

Users can transfer bitcoins over the network to do just about anything that can be done

with conventional currencies, including buy and sell goods, send money to people or

organizations, or extend credit. Bitcoins can be purchased, sold, and exchanged for

other currencies at specialized currency exchanges. Bitcoin in a sense is the perfect form

of money for the Internet because it is fast, secure, and borderless.

Unlike traditional currencies, bitcoins are entirely virtual. There are no physical coins

or even digital coins per se. The coins are implied in transactions that transfer value

from sender to recipient. Users of bitcoin own keys that allow them to prove ownership

of transactions in the bitcoin network, unlocking the value to spend it and transfer it to

a new recipient. Those keys are often stored in a digital wallet on each user’s computer.

Possession of the key that unlocks a transaction is the only prerequisite to spending

bitcoins, putting the control entirely in the hands of each user.

Bitcoin is a distributed, peer-to-peer system. As such there is no “central” server or point

of control. Bitcoins are created through a process called “mining,” which involves competing

to find solutions to a mathematical problem while processing bitcoin transactions.

Any participant in the bitcoin network (i.e., anyone using a device running the

full bitcoin protocol stack) may operate as a miner, using their computer’s processing

power to verify and record transactions. Every 10 minutes on average, someone is able

to validate the transactions of the past 10 minutes and is rewarded with brand new

bitcoins. Essentially, bitcoin mining decentralizes the currency-issuance and clearing

functions of a central bank and replaces the need for any central bank with this global

competition.

The bitcoin protocol includes built-in algorithms that regulate the mining function

across the network. The difficulty of the processing task that miners must perform—to

successfully record a block of transactions for the bitcoin network—is adjusted dynamically

so that, on average, someone succeeds every 10 minutes regardless of how

many miners (and CPUs) are working on the task at any moment. The protocol also

halves the rate at which new bitcoins are created every four years, and limits the total

number of bitcoins that will be created to a fixed total of 21 million coins. The result is

that the number of bitcoins in circulation closely follows an easily predictable curve that

reaches 21 million by the year 2140. Due to bitcoin’s diminishing rate of issuance, over

the long term, the bitcoin currency is deflationary. Furthermore, bitcoin cannot be inflated

by “printing” new money above and beyond the expected issuance rate.

Behind the scenes, bitcoin is also the name of the protocol, a network, and a distributed

computing innovation. The bitcoin currency is really only the first application of this

invention. As a developer, I see bitcoin as akin to the Internet of money, a network for

propagating value and securing the ownership of digital assets via distributed computation.

There’s a lot more to bitcoin than first meets the eye.

In this chapter we’ll get started by explaining some of the main concepts and terms,

getting the necessary software, and using bitcoin for simple transactions. In following

chapters we’ll start unwrapping the layers of technology that make bitcoin possible and

examine the inner workings of the bitcoin network and protocol.