Bitcoin is a decentralized digital cryptocurrency that was created in 2009 by an unknown person or group using the pseudonym Satoshi Nakamoto. It is the first and most well-known digital cryptocurrency, utilizing peer-to-peer technology for transactions without the need for an intermediary.

How Bitcoin Works

Bitcoin is based on blockchain technology, which is essentially a public ledger of all transactions that have ever happened within the Bitcoin network. This ledger is completely decentralized and distributed across thousands of computers globally, meaning no single entity controls it.

When a Bitcoin transaction occurs, it is broadcast to the network and grouped together with other recent transactions into a block. This block then gets appended to the previous blocks, creating a chain of blocks (thus the term blockchain).

The key innovations that allow Bitcoin's decentralized nature are:

• Decentralized Ledger - The blockchain ledger is distributed amongst thousands of computers, rather than being held centrally. This avoids the need for any third-party intermediaries.
• Peer-to-Peer Network - The Bitcoin network is peer-to-peer, meaning users interact directly with each other when sending and receiving Bitcoins. There are no intermediary banks or payment processors.
• Cryptography - Bitcoin utilizes public-key cryptography to secure transactions. Users have private keys and public keys to ensure only the rightful owners can send transactions.
• Proof-of-Work - Bitcoin mining computers solve complex mathematical problems to validate transactions and add them to the blockchain ledger. This provides security and prevents double spending.

Bitcoin Mining

Bitcoin mining refers to the process of validating Bitcoin transactions and creating new Bitcoins. It involves compiling recent Bitcoin transactions into blocks and trying to solve a difficult mathematical puzzle. Bitcoin miners use specialized computers to solve these problems.

When a miner solves the puzzle, the associated block is added to the blockchain, and the miner is rewarded with newly minted Bitcoins. This provides an incentive for people to provide the computing power needed to power the Bitcoin network. The difficulty of the puzzles adjusts regularly to ensure that new blocks are added roughly every 10 minutes.

Bitcoin Wallets

To send or receive Bitcoins, users require a Bitcoin wallet. A wallet generates a Bitcoin address, which is a unique alphanumeric identifier that appears as a string of around 30 characters. Addresses can represent either adestination where Bitcoin can be sent or the source where Bitcoin was sent from.

There are several types of wallets:

• Software wallets - Bitcoin wallet applications that connect to the Bitcoin network. Examples include applications like Exodus, Electrum, and Bitcoin Core.
• Hardware wallets - Physical devices designed to store private keys offline for security. Popular hardware wallets include Trezor and Ledger devices.
• Paper wallets - Simply put, Bitcoin private keys printed on paper. These can be used for cold storage.
• Custodial wallets - Bitcoin accounts provided by exchanges and third party providers. Coins are stored on their servers.

Users can send or receive Bitcoins via digital wallet addresses. The system uses public-key cryptography to ensure only the proper recipients can access Bitcoin balances.

Purchasing Bitcoin

There are several ways individuals can obtain Bitcoin:

• Bitcoin exchanges - Online platforms where users can buy and sell Bitcoin using fiat currencies or altcoins. Exchanges include Coinbase, Kraken, and Binance.
• P2P trading platforms - Allows direct Bitcoin buying and selling between individuals without an exchange intermediary. LocalBitcoins is one example.
• Bitcoin ATMs - Physical kiosks that allow users to exchange fiat currencies for Bitcoin using their private keys. Found in malls, stores, etc.
• Mining Bitcoins - Users compete to validate transactions and are rewarded with newly created coins. Requires specialized hardware.
• Accepting Bitcoin as payment - Merchants can accept Bitcoin from customers as payment for goods or services.
• Bitcoin airdrops - Projects sometimes freely distribute Bitcoin tokens to promote usage.
• Bitcoin forks - Occasional forks of the Bitcoin blockchain can result in new coins being airdropped.

Once obtained, users can store their Bitcoin in wallets or trade it on exchanges. Possession of the secret private key that corresponds with a wallet's Bitcoin address proves ownership.

Bitcoin Transactions

To send Bitcoin, the sender needs the recipient's Bitcoin address. The sender then uses their private key to authorize the movement of Bitcoin from their own wallet to the recipient’s address. This transaction is broadcast to the entire Bitcoin network.

Miners will compile the transaction into a block with others and compete to validate it. The first miner to solve the proof-of-work mathematical problem can validate the block and add it to the blockchain.

The transaction is complete once the block is added. It now has one confirmation. With each subsequent block (typically mined every 10 minutes), the transaction accrues another confirmation. Exchanges typically require 3-6 confirmations before deposits are credited.
Double spending is prevented through both the blockchain and Bitcoin mining. The blockchain maintains an ordered, timestamped record of all transactions, meaning the inputs for any transaction must be unspent in previous blocks. Mining also provides a chronological order to each transaction.

Bitcoin Blockchain

The blockchain is a decentralized, distributed digital ledger recording all Bitcoin transactions and protecting against double spending. It is constantly growing with newly validated blocks. These blocks are linked and secured using cryptography.

Each block on the Bitcoin blockchain contains:

• Block version number
• Hash of the previous block
• Timestamp
• Bitcoin transactions (sender, receiver, BTC amount)
• Target difficulty for the proof-of-work algorithm
• Nonce value used for validation

Once a block is added, it cannot be altered or removed. The block's hash is a cryptographic function of all its contents. If altered, the hash would change and alert the network. Later blocks also include hashes of earlier blocks, creating a chain.

This system prevents fraud, as any changes need to be re-validated across the entire network. The constantly increasing "block height" also helps prevent double spending and enforces the chronological order of blockchain activity.

Bitcoin Supply

The maximum supply of Bitcoin is limited to 21 million coins. This fixed total supply creates scarcity and controls inflation. The protocol rules state new Bitcoins are minted as block rewards to miners roughly every 10 minutes.

When Bitcoin was first launched, the block reward was 50 BTC. It underwent its first "halving" in 2012 to 25 BTC. The reward now halves after every 210,000 blocks mined, decreasing issuance rate.

Bitcoin's monetary policy and controlled supply are key reasons supporters consider it "digital gold" and a hedge against inflation. Critics argue the deflationary economics make Bitcoin unsuitable as a medium of exchange.

As of August 2023, over 19 million Bitcoins have been mined, leaving under 2 million left to be introduced into circulation. Barring protocol changes, the last Bitcoin is expected to be minted around 2140.

Bitcoin Scaling Debate

Due to Bitcoin's constrained block size and frequency, the maximum transactions processed on the network is limited. Demand has at times outpaced capacity, resulting in higher transactions fees. This has created an ongoing debate around Bitcoin scaling.

Some of the proposed Bitcoin scaling solutions have included:

• Increasing the block size - This would allow more transactions per block but has centralization risks.
• SegWit protocol upgrade - Doubled capacity without changing block size but adoption has been gradual.
• Lightning Network - Creates payment channels between users that can facilitate instant, high volume transactions off-chain.
• Bitcoin sidechains - Separate blockchains with different rules that could handle excess transaction volume.

Critics argue that scaling does not align with Bitcoin's decentralized ethos. Others claim capacity needs to expand for Bitcoin to become a more competitive payment network. The scaling debate is highly contentious within the Bitcoin community.

Bitcoin introduced the first functional decentralized cryptocurrency and remains the most influential. Its peer-to-peer nature solves the double spending problem without requiring trusted third parties. The cryptographically-secured blockchain enables censorship resistance and trustless exchange.

However, Bitcoin also suffers drawbacks such as limited speed and high costs during periods of peak demand. Its energy intensive proof-of-work mining has environmental concerns. Questions remain about usefulness for everyday transactions vs being merely a speculative asset.

Nonetheless, Bitcoin's nine year track record has inspired confidence in its reliability and safety. Its fixed supply and adoption as "digital gold" also provide a hedge against inflation in the view of supporters. Bitcoin's overall influence on finance continues to rapidly evolve.