As the world was seemingly on the brink of financial ruin, a whitepaper was posted to a cryptography mailing list titled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” That sparked a discussion on that mailing list about the virtues and pitfalls of such a currency system, but the originator, Satoshi Nakamoto, forged on ahead and on January 3rd, 2009 released the first Bitcoin client and created the first transactions in Bitcoin history. The technical details of how Bitcoin works is fascinating, but challenging to understand at first glance. For that reason, this article will avoid some of the more difficult concepts.

Satoshi Nakamoto is a pseudonym, and as of 2014, the creator of Bitcoin has remained hidden. There has been much speculation about the identity of Satoshi, but no confirmed verification of who he is. It is possible that Satoshi is a group of individuals or some corporation, but this is still unknown. The name “Satoshi Nakamoto” implies a Japanese origin, but this is refuted by the English language usage in the source code and the mailing list posts. Both the first name “Satoshi” and the surname “Nakamoto” are common in Japan, so they could be considered the equivalent of “John Smith,” in America. But the man is not as important as the concept, so perhaps that is why he chooses to remain hidden. Lest users worry about the possibility of a massive fraud, Satoshi released the source code of the Bitcoin software to the world to be reviewed and collaborated on. He has since stopped contributing to the project and the open source community continues the effort.

Bitcoin has a few properties that have to be understood fully. It is:

· Irreversible

· Anonymous (with exceptions)

· Electronic

· Decentralized

· Deflationary

· Impossible to Counterfeit

Irreversibility

Think of Bitcoin like cash in this regard. When you give cash to a friend, no third-party can reverse that transaction. Only your friend can give you that money back (or you can mercilessly beat him until he is knocked unconscious and then steal the money back). It is an important property of cold-hard cash that is often overlooked. A credit card, by contrast, is a reversible transaction. If you shop at a store and pay with credit card, the bank can reverse that transaction when you return the item — or if they suspect fraud. The same is true of many online payment systems such as PayPal and Google Checkout. When you send money to a friend with PayPal, it is a reversible transaction and PayPal can reverse that transaction for any (or no) reason. A Bitcoin transaction is completely irreversible. When you send a Bitcoin to someone, no one in the world can reverse that transaction. Even beating the recipient mercilessly, as in the cash example, will not guarantee that you can recover the funds as the recipient may have a password protecting his wallet. There is no corporation or central authority to complain to if you are unhappy with the product or service that you bought with bitcoins. This same property means that any government or corporation cannot seize your bitcoins.

Anonymity

Cash transactions are entirely anonymous since no party is there to witness the transaction or identify the participants. Unless you give some personal information with the transaction, you are anonymous and it is impossible to track how much money you spent and on what, with cash. Most electronic forms of payment are not anonymous by virtue of the fact that you need to register with some company to use the online payment method. When you sign up for a credit card, you divulge almost all of your personal details to the issuing bank. The same is true of PayPal, Western Union and other online payment services. As a result, the records indicating what was purchased and by whom exist and can be subject to scrutiny, targeted-marketing or even criminal investigation.

Bitcoin transactions are completely anonymous by default since there is no need to register with any company in order to send or receive bitcoins. Although several services exist that ask for your personal information, such as exchanges, online wallets and payment providers, these are all services built on top of the Bitcoin network, which is inherently anonymous. Sending bitcoins to a recipient can be even more anonymous than a cash transaction because you do not need to be present to hand over the bitcoins — they are transmitted over the Internet. No information about your location, your IP address, your name, email address or any personally identifiable information is sent along with the transaction. While a record of the transaction exists in the public ledger known as the “Blockchain,” the identities of the participants in the transaction are not maintained.

This anonymity is a double-edged sword however. By publically announcing just one of your Bitcoin addresses, you create a link between yourself and your wallet that can be used to identify yourself. Imagine, for example, that you run a website and have a Bitcoin donation address; that Bitcoin address is forever tied to you in the public domain and it is trivial for anyone to see how many bitcoins have been sent to that address, along with when and how much has been spent.

Purely Electronic

When people talk about owning bitcoins, they aren’t talking about owning anything physical. Gold coins, paper money and even stock certificates are physical. Bitcoin is a purely electronic currency, by contrast, which makes it somewhat difficult to grasp quickly. When you “own” a bitcoin, what you actually own is the right to send that bitcoin to someone else. Your wallet software holds the secret keys necessary to send bitcoins that you own. The way the protocol is structured so that every node on the network keeps a copy of every transaction that ever happened and what gives a particular wallet ownership over certain bitcoins is ownership of the secret keys, called “private keys.” A private key is a simply a very, very large number, that is mathematically linked to a public Bitcoin address such that every Bitcoin address can be calculated from a private key but the private key cannot be calculated from an address.

One consequence of bitcoins being purely digital is that there is no way to recover bitcoins if they are lost or stolen. If bitcoins are lost, because the private keys are lost, then they are effectively removed from circulation and can never be recovered. If bitcoins are stolen, there is no authority to call to reclaim them since transactions are irreversible.

Decentralized

No one person or company controls or owns Bitcoin. This may take a few moments to sink in and bears repeating. No one person or company controls or owns Bitcoin. While there are many companies, non-profits, developers and organizations that have strong influence over the direction of Bitcoin’s future, no one of them can exert that control without the willingness of the network at large. Bitcoin is not a company like Google that owns it’s own data centers, software and hardware. Instead, it is millions (or more) people and companies all connected to each other passing information to each other constantly.

Imagine a simplified version of the Bitcoin network that has only 5 participants: A, B, C, D and E. A is connected to B and C and C is connected to D and E. User A wants to send User C 5 bitcoins, so he broadcasts that transaction to his peers B and C. Once C hears about it, he verifies it (more on that later) and if it is valid, passes it along to D and E. Now the whole network is aware of the transaction without any central authority having to validate any part of it. To be clear, User A doesn’t send anything directly to User C, instead he just broadcasts that he is sending 5 bitcoins to a particular address. It just so happens that User C owns the private key to that address so User C is the only one that can spend it after it has been transmitted.

Deflationary

It should now be well understood that governments rarely exercise proper fiscal control over their monetary supply and print a never-ending stream of money to solve short-term problems. The causes and effects are well understood, but ultimately it always leads to disaster. To circumvent this, Satoshi Nakamoto designed Bitcoin to be deflationary and have a forever-fixed supply of currency. Each transaction on the network is broadcast by every node on the network, as part of the decentralized nature of the Bitcoin protocol.

Counterfeit Proof

This is where Bitcoin really shines and shows the value it has to society, not only as a currency, but also as a mechanism to make counterfeiting impossible. The way Bitcoin accomplishes this is by having everyone on the network validate that a transaction is valid before propagating that transaction onto other nodes in the network. Transactions are grouped together in something called a “block” and all of the blocks together comprise the Blockchain. It is just software, so the temptation to think that you can just write code to create bitcoins for yourself is high, but it is an impossibility given how the network is structured.