What is Bitcoin?

Bitcoin is a decentralized electronic cash system is changing the future of currency. Bitcoin uses peer-to-peer networking, digital signatures and cryptography to enable irreversible payments between parties. Payments are made in “bitcoins”, a digital currency issued and transferred by the Bitcoin network.

The Bitcoin network is a peer-to-peer network of nodes using bitcoin software. Nodes broadcast transactions to the network, which records them in a public history after validating them with a proof-of-work system.

Participants use Bitcoin by first acquiring a Bitcoin client, an open source software program that interacts with the Bitcoin network. This will act as a “wallet” and it can be used to create Bitcoin addresses. Bitcoin addresses are used for receiving bitcoins, similar to how e-mail addresses are used for receiving e-mail. Owners transfer bitcoins by sending them to another Bitcoin address using a wallet website or software. Contained in a Bitcoin wallet are a collection of the user’s addresses and corresponding private encryption keys. The wallet transfers the coins by generating a digital signature to link the prior transaction with the public key of the next owner. Bitcoin nodes record all data in a publicly distributed database called the blockchain. Nodes build the blockchain using a system that reliably confirms transactions.

The Bitcoin system uses public-key cryptography to ensure that addresses are secure. The way this works is that users of the Bitcoin network have a digital wallet containing a number of cryptographic keypairs. The wallet’s public keys are transformed into Bitcoin addresses, which act as the receiving endpoints for payments. Addresses in human-readable form appear as strings of numbers and letters around 33 characters in length, always beginning with the digit 1 or 3. The wallet’s private keys are used to authorize transactions from that user’s wallet.

Users can create as many Bitcoin addresses as they wish. When user A wants to transfer bitcoins to user B, A creates a transaction message indicating that some of the balance associated with their Bitcoin wallet is to be sent to the address of B, and A’s Bitcoin client signs the transaction with the address’s private keys. Because of the cryptographic method used, only the owner’s private keys are able to create a valid signature to send coins from their Bitcoin wallet. The private keys cannot be determined from the signature – they are a secret known only to the address owner. The owner’s node broadcasts the resulting message to send money, the transaction, on the peer-to-peer network. Other members of the peer-to-peer network validate the cryptographic signatures and the amounts of the transaction before accepting the transaction.

The blockchain contains the cryptographic ownership history of all coins from their creator-address to their current owner-address. Therefore, if a user attempts to reuse coins already spent, the network rejects the transaction.

Because transactions are broadcast to the entire network, they are inherently public. Anyone can view the block chain and observe transactions in real-time.

Transactions are facilitated directly without the use of a centralized financial processor between nodes, which makes reversal unlikely. Currency exchanges also exist between bitcoins and other real and virtual currencies. Bitcoin’s design allows for pseudonymous ownership and transfers. Because of this, Bitcoin has privacy properties weaker than cash but stronger than traditional electronic payment systems. Although the network makes the complete history of every bitcoin transaction public, it can be difficult to associate bitcoin identities with real-life identities.
Bitcoin is a new method for storing and handling value. The ways that Bitcoin can be used have only begun and the future of this interesting and exciting new technology is still unfolding.

Source material from http:// en.wikipedia.org/wiki/Bitcoin