Background
While the concept of bitcoin is often described as "a digital cryptocurrency", a simple way of describing bitcoin is as an innovative digital payment system.
Financing models
Bitcoin is a decentralized digital currency, as opposed to centralized currencies such as the U.S. dollar or the Euro that are controlled by a central bank.
Advantages
Cryptographically, transactions in bitcoin are irreversible. This distinguishes bitcoin from many currencies, such as the United States dollar, which are subject to significant numbers of reversible transactions. For example, a centralized government or bank could "revert" payments of U.S. dollars by, for instance, reversing payments deducted from bank accounts.
Bitcoin can be spent at nearly 1,500,000 retail and commercial establishments (including most merchants that take credit cards) worldwide as of March 2014, in addition to hundreds of thousands of online merchants. By comparison, Visa Inc. and MasterCard Worldwide have less than 50,000 networked merchants in their respective international networks. Bitcoin can also be spent at thousands of Internet cafés, anonymizers, and internet subscription services, and at over 80,000 ATMs through a third party service.
Transactions
A transaction is an arrangement between two parties to send or receive bitcoins. Transactions take the form of digitally signed messages called transactions. Transactions consist of one or more inputs and one or more outputs. An input represents the amount that a user wants to pay and an output represents the amount that the user wants to receive. In a sense, inputs are like the boxes that you put your items into when paying with cash, and outputs are like the boxes that you receive in return.
An output script is a script that defines the recipient, the amount being transferred, and the combination of private and public keys used to complete the transaction. To prevent malicious double-spending, each output must be unique and by design can only be spent once. An output is created by broadcasting a transaction to the network and receiving a private key that can be used to claim the bitcoins sent in that output.
The peer-to-peer Bitcoin network itself is intentionally decentralized; no single server holds transaction records. The Bitcoin protocol defines a mechanism through which nodes verify and accept transactions into the ledger. Instead of requiring transactions to be signed and checked by a trusted party, Bitcoin uses a proof-of-work system to maintain security. As a result, Bitcoin effectively trades decentralization for simplicity, security, and speed. Anonymity is