Firstbits refers to the practice of abbreviating a Bitcoin address such that only enough of the initial characters of the address are given so that the full address can be identified from the block chain. It also refers to the website http://www.Firstbits.net.
The term Firstbits was popularized by the Firstbits website, which was provided with the intent of a "Bitcoin address shortener", working similar to a URL shortener. Firstbits.net performs a lookup service, giving the full address from the block chain from the initial portion of an address. Anyone with access to a complete copy of the block chain can independently perform the same lookup done by Firstbits.net.
Any time a Bitcoin address is used for transactional purposes and appears in the block chain, its firstbits - or the prefix that uniquely identifies that address within the block chain - are considered assigned at that time. If another address is created and used with the same prefix at a later time, the firstbits of that new address will be at least one character longer, as the shorter prefix remains reserved for the address that used it first. No action on the part of any user is required for firstbits to be assigned - any transaction activity (receiving or sending) for an address for the first time results in firstbits becoming automatically assigned.
Unlike Bitcoin addresses, firstbits are deemed assigned in a case-insensitive manner.
Firstbits is considered by many, including most (if not all) Bitcoin developers to be a bad idea. This is for a number of reasons:
Increases storage requirements of light nodes
Firstbits requires nodes to keep an unpruned index of every address ever used, which means it will grow forever. Note that all existing indexes required for fully-verifying Bitcoin nodes may be pruned. Since Bitcoin is designed so that every transaction should have a unique address, this index will also grow for every transaction. Thus, even light nodes are required to store an eternally, rapidly growing index for as long as Bitcoin (or at least Firstbits) is used.
Incompatible with SPV nodes
SPV nodes, which download data only as they require it for their own wallet's maintenance, never see most transactions and cannot build the Firstbits index at all. This means that it is impossible to support Firstbits in SPV nodes. Eventually, all Bitcoin clients will likely use SPV as an initialization state, which makes it additionally confusing for end users.
Contradicts design of Bitcoin
Bitcoin was designed such that addresses should only be used once, for a single transaction. Firstbits, by contrast, encourages people to find and use a single address for multiple transactions. This breaks numerous assumptions of the Bitcoin system (to be addressed on another page).
Firstbits effectively encourages its users to spam the blockchain with a dummy send to their address, in order to get the shortest possible firstbits before anyone else. This is especially true for vanity addresses, where they may be "squatted" like domain names in hopes of selling them to a trademark or obvious company/person they represent. Not only is it effectively encouraged by the design of Firstbits, but the creator himself is known to have squatted numerous identifiers in this way.