Many people often wonder what Bitcoin really is, and why everyone is talking about it. So, in this piece, I have a simple explanation for everyone. I hope it answers the basic questions at the back of your mind.
What is Bitcoin?
Bitcoin is simply the first crypto currency to ever come into existence.
That is too easy, right? Sure. There is definitely a lot more to it.
From the previous piece in this series, we learn that a cryptocurrency is a digital money. Do you remember? Following that explanation, we can simply call bitcoin digital money too! This is because you can send, spend or save it; just like you do with other digital currencies. However, it is a lot better than your normal government issued money.
Here’s the real deal: Bitcoin is the first and most popular digital money not under the control of anyone. Not any country’s central bank, nor any organization anywhere controls it. In fact, no single individual anywhere is in charge of Bitcoin.
There will not be anything special about Bitcoin if it is under third party control. This fairly helps prevent one person or a select group of people deciding how it is run. Thus, it has no single point of failure.
Technically, Bitcoin is a protocol that enables individuals to exchange value without middlemen. This value exchange is done in the natwork’s native coin, bitcoin – with small letters only. This Bitcoin protocol is run by a peer-to-peer network of strangers via computers in several locations all over the world.
Anyone, anywhere in the world, can join this network through their own computer with internet connection. You do not need to seek permission to join. You simply download the open source file that the network uses, from the web. And you’re in.
When did Bitcoin come into existence?
The manual that describes how Bitcoin works (known as its Whitepaper) was released in 2008. It was written by the creator who refers to himself as Satoshi Nakamoto.
On January 3rd 2009, the Bitcoin software was officially invented. This saw the creator bringing into the digital world the first set of bitcoins via a process called mining. Mind you, this is not the same as mining gold or coal!
But unfortunately, Satoshi Nakamoto has been missing from the radar since 2010.
Since then, no one really knows who he is. Whether he is a person, group of people or a government agency, no one knows. I often fear Satoshi is some covert government agent or agency. We may never really find out who he is.
But Bitcoin is continuing to thrive and grow ever since its creation! This is because it is not run by its creator. Good thing, right?
Why do people prefer to use Bitcoin for transactions?
As Bitcoin adoption continues to grow globally, many people prefer using it for their financial transactions. Why is this better than the traditional system already in place? Here’s a couple reasons:
1. Bitcoin is not vulnerable to censorship by any country’s government! Many governments have been trying to do that since its launch. But none of these attempts are stopping Bitcoin from operating. Bitcoin keeps growing and getting bigger!
2. One person cannot spend their Bitcoin twice! No one can cheat with it! It is either you pay or you do not pay using bitcoin. The record is public and irreversible unless the recipient initiates a refund. There’s nothing like falsifying the transaction. Thus, Bitcoin is secure for settlements.
3. There’s no discrimination among who can use it. Anyone can, from any part of the world, so long as you already have some in your wallet. Bitcoin has no racial nor geographical boundaries. Bitcoin is for all people.
4. Using bitcoin to make payments saves you a lot of stress. Remember, there are no middlemen. It is fast to process bulk amounts. Try that with the traditional system and they will frustrate you with delays and charges. In addition, Bitcoin gives you full control of your money while keeping it safe and secure. Bitcoin is better.
What can you do with Bitcoin?
You can use Bitcoin to make payment for goods and services. You can send money to anyone anywhere around the world – global remittance. Thus, Bitcoin has no borders.
Bitcoin is also a very good store of value. Some people call it digital gold. It is far better than gold in the eyes of many.
The total supply is 21 million bitcoins. With the ever rising global population size, not everyone can own a whole bitcoin. Some day, it will be very scarce. When this happens, its price may get so high that those who have it today may become so rich.
Bitcoin is also currently the perfect way to save money if you don’t want its value to degrade. Global inflation rates are uncontrollably getting higher by the day. Governments are so focusing on printing more money to combat this. Sadly, it only makes things worse. But over time, keeping money in Bitcoin saves one from the ever rising inflation rate.
Now, let’s switch to the nitty gritty of the whole discussion.
How does Bitcoin really work?
This question will lead us to the discussion about what powers Bitcoin.
Yes. There’s a technology that makes Bitcoin what it is today. That technology is the Blockchain. Bitcoin is the first Blockchain put into global use.
Thus, to fully understand how Bitcoin works, you need to understand what Blockchain does.
For instance, all the applications in your phone runs with a specific operating system – either iOS or android (there may be others).
So, if Bitcoin is like an app in your phone, the app needs your phone’s operating system to work. If your phone is android, it needs android build to function. So, for Bitcoin to work, it needs a platform known as the Blockchain.
What is Blockchain?
Blockchain is simply a digital book that records transactions on the Bitcoin protocol!
Yes, it is. But there’s more to it. Besides, the Blockchain is not peculiar to Bitcoin.
This kind of digital record keeping book (digital ledger or database) is found among a peer-to-peer network of computers all around the world. Therefore, it is not run by one person or one organization. It is not in one location, otherwise, the Blockchain lacks decentralization.
All these peers living all over the world participate in adding records of actual transactions on the Blockchain. This happens in real time, in a chronological order.
Once anyone tries to add a record on the Blockchain, all others are aware. If the record is not real, it will not go through. If it is real, it will be successful.
Once a record is successfully put into the Blockchain by a member of the network, all other members update their records to stay up-to-date. Every participant stays in sync with others.
Once an information about any transaction enters the Blockchain, no one can remove or modify it. It is permanent.
We can therefore conclude that the Blockchain is a distributed digital ledger (database or record book). Every transaction involving any crypto currency, such as Bitcoin, are recorded in it. This happens after their verification as being accurate by participants in the network.
Whenever you see the word “Distributed” it refers to something everyone has a copy of. All participants in a Blockchain has a copy of its database in their computer. This can be in part or in full.
How does the Blockchain technology work?
Here’s a little explanation using the Bitcoin network:
Transactions records are put in a block which is like a single page in a record book. Once a block is full with transaction records, it is put at top of all the other blocks before it. This follows a chain-like manner. Each block carries an information about the block before it. This is like a fingerprint of the block before it. It goes this way all the way down to the first block.
This is why it is difficult to manipulate records or change any information already in the Blockchain. If a bad person wants to change an information in a block, their tampering continues to automatically change all the information in the previous blocks. This leaves a cascading effect. The rest of the network participants will see this. They will know someone is trying to tamper with the records. They will reject this move, making that record void.
This is how the Blockchain technology helps to keep records very safe and secure.
Bitcoin Network Participants
In the Bitcoin network, you can refer to this peer-to-peer network participants as miners. They are constantly trying to solve mathematical puzzles. Succeeding at this lets them successfully validate a block containing transaction records, before they are added to the Bitcoin Blockchain.
Thus, no single person has control over the Blockchain, especially the Bitcoin Blockchain.
Also note that everyone participating in a Blockchain network has the entire database or part of it in their own computer. If one person leaves the network, it does not affect its performance in anyway. The others continue to share and receive information among themselves as usual. Every new block added continues to be broadcast to everyone and they update their own copy accordingly.
Now, you see why crypto currencies are the best and most secure form of money. They run on the Blockchain technology! And Bitcoin is the first and most popular of these crypto currencies.
Characteristics of the Blockchain
Here’s a list of things that will help you understand more about what the Blockchain is and how it works:
1. Consensus – majority of the participants must agree before a transaction is seen as valid. Each Blockchain uses a specific consensus algorithm. This is what secures the integrity of any blockchain network. We will discuss more about this in the next article in this series.
2. Provenance – all transactions are trackable and ownership of any asset is known to everyone participating. You cannot lay claim to what is not yours. The record is publicly accessible. Though people may not know who owns an address on a blockchain, they see all its transactions.
3. Immutability – No single or fewer number of participants can tamper with the records. Records can only be reversed by the recipient of a transaction initiating a refund. Even network validators cannot alter the content as they wish.
4. Finality – the record is viewable only in one place, and is timestamped conclusively. No need to stockpile several records or browse through several databases! Imagine what will happen if you are to analyze the records of financial transactions done in banks. Blockchain prevents that.
Bitcoin is the first crypto currency ever created. Its creator is known as Satoshi Nakamoto, a pseudonym. No one actually knows who he is or who they are in reality. This digital money, Bitcoin, runs on the Blockchain technology. The Blockchain technology uses a technic that makes it difficult for anyone or any entity to control Bitcoin. The network is open, and accessible, as well as highly secure from attacks.
I hope to read what you think about Bitcoin and the Blockchain in the comments section. In the next lesson, I’ll talk about Consensus Algorithms and discuss the Proof of Work Consensus.