Bitcoin is a form of money (currency) that only exists in the digital world. It operates without borders, so can be used globally. It doesn’t require a centralised system to work like the traditional global financial and banking system.
This means if you want to transact from one country to another using Bitcoin you no longer have to deal with currency exchange rates, international fees or the time delays of transacting across national borders that centralised systems currently operate.
It sits on technology called the blockchain, which in simple terms is a public ledger. A ledger being a record of transactions. Unlike any bank, financial institution or corporation, it’s not owned by anybody.
This technology is an open source system which allows transactions to happen from one person to another without the need of an intermediary (a middle man) to authorise them. These transactions are verified and recorded by the network where it is also distributed.
Below you can see in Figure A that in a centralised system everything is run through one central area where all the control is, where all the information is stored.
Providing the transaction from one person to another meets the predefined set of protocols then the transaction can be verified by the network and validated.
In terms of security, no information is truly secure. A centralised system is a system where all the information is held in one place, so it makes it a more attractive target for hackers to focus on as there is a big reward for being successful. However, in a distributed system, which you can see in Figure C above, information is spread it out so thin there is no place to attack it directly. That’s what makes it secure.
Bitcoin is the first example of a growing category known as cryptocurrency, digital currency, digital cash, virtual currency or electronic currency.
There are many other differences between Bitcoin and currency that we’re used to dealing with on a daily basis and these will be explored in a later post.