A Short Introduction to Bitcoin
I. What is Bitcoin? Bitcoin is a digital payment system across a de-centralized peer-to-peer network. Each node in the network runs the same Bitcoin protocol software. The unit of account in this payment system is the Bitcoin itself, which are stored in digital 'wallets'. Like cash, it is owned by the directly by the owner and not by some bank or clearinghouse, therefore if a wallet is stolen or the Bitcoins are lost, as with cash they are gone.
Each wallet is assigned a unique address with a public and private key encryption scheme. A payment is made by transferring some or all of the Bitcoins from your wallet to another, by entering the public address for that payee. Once a payment has been made it must be confirmed by the network.
The Bitcoin payment system is also a permanent public ledger of all transactions – known as the 'Blockchain' – that have ever taken place, and although each wallet address is anonymous, the ledger is public and available for anybody to see. This prevents the so-called double spend problem.
The software and protocol for Bitcoin is open-source, so anybody can see the inner workings of the system, and there is no central authority, bank or overseer to control it. Nobody knows who actually created Bitcoin except for the pseudonym 'Satoshi Nakamoto,' who's true identity (or identities) remains unknown.
II. How are Bitcoins created? Anybody can go to an online Bitcoin currency exchange and buy them for dollars (or euros, renminbi etc.), and merchants can choose to accept Bitcoin as payment for products or services rendered.
Bitcoins themselves are created through 'mining' efforts. Miners run a computer algorithm (actually a form of encryption called SHA-256, hence the moniker crypto-currency) and try to solve a difficult mathematical problem. Miners compete with each other to solve this problem, and the first to do so is rewarded with a block of Bitcoins (right now a block has 25 Bitcoins). At that...