Features of the Bitcoin System !!!
The integrity of the Bitcoin system is protected by ‘cryptography’.
The most well known cryptocurrency is Bitcoin. Bitcoin was launched in 2009, a year after a report that described the Bitcoin system was released under the name Satoshi Nakamoto.
The system was designed to electronically mimic features of a cash transaction. It was designed to allow peer-to-peer (or person-to-person) transactions, without the need to know or trust the other person in the transaction, and to occur without the need for a central party (such as a bank).
Unlike conventional national currencies such as Australian dollars, which get part of their value from being legislated as legal tender, Bitcoin and other cryptocurrencies do not have any legislated or intrinsic value. Instead, the value of Bitcoin is determined by what people are willing to pay for it in the market (and, in theory, its value could fall to zero at any time).
A characteristic of the Bitcoin system is that the supply of Bitcoins increases at a predetermined rate and is capped at around 21 million (with each bitcoin able to be subdivided into 100 million satoshis or 0.00000001 bitcoins). Because of this, the supply of Bitcoins has been commonly compared to the supply of a scarce commodity, such as gold. The Bitcoin system allows transactions to occur directly from person to person without requiring a central party (such as a bank) to verify or record the transactions.
This is unlike most conventional payment methods, such as electronic bank transfers, which rely on a central party to keep and update records of transactions. For example, commercial banks maintain a record of their customers' account balances, deposits and withdrawals.
Instead, the Bitcoin system uses ‘blockchain’ technology to record transactions and the ownership of bitcoins. This is essentially technology that connects groups of transactions (‘blocks’) together over time (in a ‘chain’). Each time a transaction occurs, it forms part of a new block that is added to the chain. As a result, the blockchain provides a record (or database) of every bitcoin transaction that has ever occurred, and it is available for anyone to access and update on a public network (this is often referred to as a ‘distributed ledger’).
The integrity of the Bitcoin system is protected by ‘cryptography’, which is a method of verifying and securing data using complex mathematical algorithms (or codes). This makes the system very difficult to corrupt.
Bitcoin transactions are verified by other users of the network, and the process of compiling, verifying and confirming transactions is often referred to as ‘mining’. In particular, complex codes need to be solved to confirm transactions and make sure the system is not corrupted.
The Bitcoin system increases the complexity of these codes as more computing power is used to solve them. A new block of transactions is compiled approximately every ten minutes.
‘Miners’ want to solve the codes and process transactions because they are rewarded with new bitcoins (currently 6.25 new Bitcoins per block).
The increase in competition between miners for new Bitcoins has seen large increases in the amount of computing power and electricity required (which is often used for air conditioning to cool computer systems)
References
Reserve Bank of Australia : Digital Currencies (pdf)