Bitcoins are the first democratic currency. It’s an experimental new digital currency that enables instant payments to anyone, anywhere in the world using peer-to-peer technology to operate with no central authority. This is very different from our government controlled central banks model currently used around the globe. Bitcoin is based on faith in an algorithm and an open network instead of the full faith and credit of a country.
Wired did a good job explaining how it works.
1) How They’re Made
Bitcoin’s economy consists of a network of its users’ computers. At preset intervals, an algorithm releases new bitcoins into the network: 50 every 10 minutes, with the pace halving in increments until around 2140. The automated pace is meant to ensure regular growth of the monetary supply without interference by third parties, like a central bank, which can lead to hyperinflation.
2) How They’re Mined
To prevent fraud, the bitcoin software maintains a pseudonymous public ledger of every transaction. Some bitcoiners’ computers validate transactions by cracking cryptographic puzzles, and the first to solve each puzzle receives 50 new bitcoins. Bitcoins can be stored in a variety of places—from a “wallet” on a desktop computer to a centralized service in the cloud.
3) How They’re Spent
Once users download the bitcoin app to their machine, spending the currency is as easy as sending an email. The range of merchants that accept it is small but growing; look for the telltale Bitcoin symbol at the cash register. And entrepreneurial bitcoiners are working to make it much easier to use the currency, building everything from point-of-service machines to PayPal alternatives.
Wired’s article, the rise and fall of Bitcoin is an interesting read, but almost a year after this article was written, Bitcoin is still around and being watched by many as to how this new technology will weave it’s way into modern society. I find this to be a very interesting concept and one whose time has come. The centralized government controlled currency system has showed it’s weaknesses over the past 10 years and new options and ideas like Bitcoin are welcomed in my opinion.