Bitcoin is a decentralized electronic currency system. It was first described in a paper by Satoshi Nakamoto (a pseudonym) in 2008. It relies on digital signatures to prove ownership and a public history of transactions to prevent double-spending. The history of transactions is shared using a peer-to-peer network and is agreed upon using a proof-of-work system. The first Bitcoins were transacted in January 2009.
Bitcoin has no central authority or issuer. There is no central bank or fractional reserve system controlling the supply of Bitcoins. Instead, they are generated at a predictable rate such that the eventual total number will never exceed 21 million.
There is no requirement for a trusted third-party when making Bitcoin transactions. Suppose Alice wishes to send a number of Bitcoins to Bob. Alice uses a Bitcoin client to join the Bitcoin peer-to-peer network and makes a public transaction or declaration stating that one or more identities that she controls (which can be verified using public-key cryptography), and which previously had a number of Bitcoins assigned to them, wish to re-assign those Bitcoins to one or more other identities, at least one of which is controlled by Bob. The participants of the peer-to-peer network form a collective consensus regarding the validity of this transaction by appending it to the public history of previously agreed-upon transactions (the block chain). This process involves the repeated computation of a cryptographic hash function such that the digest of the transaction, along with other pending transactions, and an arbitrary nonce, has a specific form. This process is designed to require considerable computational effort, from which the security of the Bitcoin mechanism is derived. To encourage users to pay this computational cost, the process is incentivized using newly generated Bitcoins and/or transaction fees. This entire process is known as mining.