Bitcoin is a digital currency created in 2009 by Satoshi Nakamoto. It is also the name of the open source software he designed that uses it, and the peer-to-peer network that it forms. Unlike most currencies, bitcoin does not rely on a central issuer, like a bank or government.Bitcoin uses a distributed database across a peer-to-peer computer network to record transactions, and uses cryptography to provide basic security functions, such as ensuring that bitcoins can only be spent once, and only by the person who owns them.
Bitcoin’s design allows for anonymous ownership and transfers of value. Bitcoins can be saved on a personal computer in the form of a wallet file or kept with a third party wallet service, and in either case Bitcoins can be sent over the Internet to anyone with a Bitcoin address. Bitcoin’s peer-to-peer topology and lack of central administration make it impossible for any government or other authority to change the value of bitcoins or induce inflation by producing more of them.
Bitcoin is one of the first implementations of a concept called ‘cryptocurrency,’ first described in 1998 by Wei Dai on the cypherpunk mailing list. As of 2011 there are over 6 million Bitcoins in existence. At current prices, the total value of the Bitcoin economy is just over $49 million. Real goods and services, such as used cars and freelance software development contracts, are now being traded. Bitcoins are accepted for both online services and tangible goods.
The Free Software Foundation, Electronic Frontier Foundation and Singularity Institute accept bitcoin donations. Traders exchange regular currency (including US dollars, Russian rubles, and Japanese yen) for bitcoins through exchange sites. Anyone can view the block chain and observe transactions in real-time. Various services facilitate such monitoring.
As opposed to conventional fiat currency, the bitcoin differs in that no overseer can control the value because of its decentralized nature, mitigating possible instability caused by central banks. There is a limited controlled inflation hardcoded in the Bitcoin software, but it is predictable and known to all parties in advance. Inflation cannot therefore be centrally manipulated to effect redistribution of value from general users.
Transfers are facilitated directly without the use of a financial processor between nodes. This type of transaction makes chargebacks impossible. The Bitcoin client broadcasts the transaction to surrounding nodes who propagate the payment across the network. Corrupted or invalid transactions are rejected by honest clients. Transactions are mostly free, however a fee may be paid to other nodes to prioritize transaction processing.
The total number of bitcoins tends to 21 million over time. The money supply grows as a geometric series every 210,000 blocks (roughly every 4 years); by 2013 half of the total supply will have been generated, and by 2017, 3/4 will have been generated. As it approaches that mark the value of bitcoins will likely begin to experience price deflation (increase in real value) because of the lack of new introduction. Bitcoins, however, are divisible to eight decimal places (giving 2.1 x 1015 total units), removing practical limitations to downward price adjustments in a deflationary environment.
The decentralization and anonymity embodied by Bitcoin appears to be a reaction to the U.S. government’s prosecution of digital currency companies like e-gold and Liberty Dollar.
The Daily Omnivore 