Bitcoin is a cryptocurrency with no central authority. Bitcoin relies on the Bitcoin Peer-to-Peer Network to check and verify transactions when they happen by talking to each other with internet connections in a process called mining:
- Miners use their computers, often running special software, to do mathematical calculations and attempt to create (or “mine”) bitcoins;
- As payment for this work, miners collect transaction fees for the transactions that transfer ownership of bitcoins from one person to another. A fee is not required when transferring bitcoins from your Bitcoin wallet to an address outside of your control. You can also visit bitql.org/.
- In addition, anyone can process transactions using the computing power of specialised hardware and earn a reward in bitcoins for this service (these are called Bitcoin “farms”). This is often called “mining”, but Bitcoin does not utilise the mining process.
Although Bitcoin transactions can be made anonymously, Bitcoin addresses cannot be tracked to individuals because there is no central authority like a bank tracking who spends Bitcoins for what purpose. This has led some to use Bitcoin for illegal purposes while others prefer their privacy when buying goods online. The Bitcoin Peer-to-Peer Network is the system that keeps track of all Bitcoin transactions and decides which are valid, thus preventing duplicate spending or fraud.
The Bitcoin blockchain records all transactions in an ever-growing public ledger of every transaction since its inception on 3 January 2009. It’s available publicly for anybody to download and see what Bitcoin address is sending Bitcoin, and what Bitcoin address is receiving Bitcoin. This helps Bitcoin users to ensure that their Bitcoin balance remains correct.
Every Bitcoin transaction and its digital signature (aka “cryptographic authentication”) is broadcasted over the Bitcoin Peer-to-Peer Network and stored in the blockchain for anybody to see. Every Bitcoin node receives a copy of each new block added to the blockchain, so it can check against its own record of which Bitcoin addresses hold balances and thus prevent alternative versions of history from being created.
Just like there’s no single person who controls the flow of information over the internet, there’s also nobody who decides how many miners are active on the Bitcoin network or assigns new Bitcoins to miners as a reward for mining work done. Bitcoin is completely decentralised and the Bitcoin Peer-to-Peer Network decides itself how to spread which Bitcoin transactions around the Bitcoin network.
There are a growing number of Bitcoin users who have no desire to use Bitcoin as an actual currency or speculate on its future value but use Bitcoin purely for its blockchain’s ability to store information about other things besides Bitcoin transactions. This allows Bitcoin software developers to build alternative systems based on Bitcoin’s blockchain because it contains all public information necessary (a “public address” plus a cryptographic authentication signature) to ensure others can interact with you using that alternate system; e.g., colored coins, smart property and proof of existence.
This also makes it possible for alternative networks to overlay Bitcoin’s P2p network and Bitcoin users to use that alternative system without needing to switch Bitcoin software or Bitcoin addresses. For example, [ Bitcoin is used as the currency on the Bitcoin blockchain for buying and selling Bitcoin whereas] [ Namecoin is used as a decentralised domain name registry on the Bitcoin blockchain].
This can be done by anyone who wants to take advantage of the Bitcoin Peer-to-Peer Network’s ability to track all public information necessary (a “public address” plus cryptographic authentication) between two parties using timestamps instead of names or centralised servers where one party is trusted more than another. Maybe you want to prove your ownership of an asset without revealing any private details about yourself or maybe you just want something that’s 100% secure and 100% untraceable. Bitcoin allows you to do that because Bitcoin public addresses are just cryptographic authentication signatures; e.g., Bitcoin’s blockchain is capable of storing the name of a website, an email address, or any other piece of information without revealing anything about who controls either Bitcoin address involved in the transaction (i.e., no Bitcoin identities).
This enables Bitcoin software developers to create decentralised systems which rely on public-key cryptography rather than trusted third parties to establish trust between two individuals. The Bitcoin Peer-to-Peer Network is especially good at proving this concept by making it possible for users to transfer balances between themselves without needing to know or trust each other thanks to the power of cryptography working together with its P2p network.