Features of the Bitcoin System

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Features of the Bitcoin System

The most well-known cryptocurrency is Bitcoin. Bitcoin was launched in 2009, a year after a report describing the Bitcoin system was released under Satoshi Nakamoto. The system was designed to mimic the features of a cash transaction electronically. 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 a central party (such as a bank).

Unlike conventional national currencies such as Australian dollars or U.S. 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).

One feature of the Bitcoin system is that the supply of Bitcoins increases at a pre-determined 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 them. 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 records of their customers' account balances, deposits, and withdrawals.

Instead, the Bitcoin system uses ‘blockchain’ technology to record transactions and the ownership of bitcoins. This technology connects groups of transactions (‘blocks’) over time (in a ‘chain’). Each transaction occurs and forms part of a new block 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 (often referred to as a ‘distributed ledger’). 

The integrity of the Bitcoin system is protected by cryptography, a method of verifying and securing data using complex mathematical algorithms (or codes). This makes the system very difficult to corrupt.
Other network users verify Bitcoin transactions, and the process of compiling, verifying, and confirming transactions is often called ‘mining.’ 

In particular, complex codes must be solved to verify transactions and ensure 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 competition between miners for new Bitcoins has seen significant increases in computing power and electricity required (often used for air conditioning to cool computer systems). While it is difficult to calculate with precision, some estimates suggest that the annual energy consumption of the Bitcoin system is roughly equal to the country of Thailand.