Hi Steemians!
This is my first article of many regarding bitcoin and its technology. I ll be analysing many different aspects around block chain and smart contracts. Its only logical to begin with the king!
The first ever bitcoin was created in January, 2009. We are now 8 years later although it seems so much more. The idea behind bitcoin is not new. Many attemps have been done before to create decentralized payment systems. Digicash, bitgold and hashcash are all examples of failed attempts during the 90ies to produce efficient digital payment systems. Humanity is moving into a digital era at a fast pace. A lot of economic activity today has become digital and global although our ways of doing business and transacting value are often outdated and inefficient.
On September 29, 2008 Wall street was brought to its knees. Many people suffered immense losses. Economic consequences were globally visible. This was a perfect opportunity to introduce a new digital currency based on a new cryptographique technology. Satoshi Nakamoto published a whitepaper named Bitcoin: A Peer-to-Peer Electronic Cash System. Up until today no-one knows with certainty what the identity is of the man or men behind bitcoin.
The technology behind bitcoin is called the Blockchain. In IT terms it is an encryption based protocol utilizing a ledger called the blockchain allowing to process payments, program contracts and in theory many kind of applications can be built on this blockchain. The blockchain is actually a network where a multitude of computers verify each and every transaction separately and simultaneously. The first one to verify the transaction receives a reward. This concept is called Proof of work ( digital mining). All these verified transactions are bundled into blocks of 1Mb. All these blocks form the so-called blockchain.
In other words Blockchain is an enormous database which contains every transaction ever made on the bitcoin network. This network is run by every-one who wants to participate in the mining-proces.
This brings me to the first characteristic of bitcoin. A Decentralized network. Until now almost every form of human organization has been centrally controlled. Banks, assurances, government, etc have always been controlled by a central entity. Central banks are the perfect example for comparison. Until now money was and is still printed by a central bank. Only the central bank has the authority to print money or to change interest rates. This means that they have a huge influence on the economic performance of a country. The blockchain on the other hand is designed to be decentralized. Anybody can join the mining-proces and begin creating bitcoins. Nobody has full control over bitcoin. This means that in order to change some characteristic you need support of the majority of the people involved ( mainly developers, miners and users). These debates often lead to hard forks. Which is simply copying the blockchain to keep one intact and use the other one to conduct the changes on. This is a way to resolve differences between users in the network without having the need for a third party to intervene.
This concept of decentralization brings a whole new set of advantages which have not yet all been discovered. One of the advantages is that this system gets more secure the bigger the network gets. If a hacker wants to hack a banking firm in order to retrieve all their funds, the hacker only has to hack the main server of this 1 bank. This happens more frequently than is shown in the news. Even big banks like JP Morgan (USA) have become victim at some point to malicious hacking activities (October, 2014). someone wants to hack the bitcoin network, that person or entity will have to hack all the computers in the network simultaneously. This becomes more and more impossible as the network grows. It is estimated that in order to produce 1 fake bitcoin you need several Billion dollars to achieve this ( abstraction need to be made between hacking the network and hacking a wallet stored on a computer).
A second characteristic is transparency. The whole history of bitcoin is written in the blockchain and can be visioned and audited by anyone. Every transaction ever made on the bitcoin network can be retraced. This aspect is also quite revolutionary knowing that until now very few people knew and still don’t know what banks do with money deposited in their institutions. All transactions can be found at following site: https://blockexplorer.com/
Fractional banking is also out of the question in the bitcoin network. Banks use a very large amount of deposited funds to lend them to others or to invest in some lucrative financial instrument. This is not the case on the bitcoin network. A third party can never use Bitcoins stored in an offline wallet. They will always be left untouched in the wallet. This is not the case for sites like Coinbase. By leaving bitcoins in the hands of a third party a lot of the advantages that came out of the blockchain technology are being evaporated.
A third characteristic is anonymity. This characteristic goes hand in hand with another characteristic, which is the easiness to set up an account. There is literally no information needed to set up a new wallet and to generate BTC-adresses. Bitcoin was programmed to be as anonymous as possible. On the blockchain you can verify each and every transaction but the identities of the sender or receiver are encrypted. This has led to the success of the silk road during the early stages of bitcoin. In these early stages there was not much use for bitcoin. The silk road was a site where you could purchase illegal drugs or illegal objects with bitcoin. Due to the anonymity, this site could survive longer than anyone could have predicted. Nowadays the understanding of bitcoin and blockchains has improved up to the point that governments can retrace identities behind BTC-adresses.
A fifth characteristic is the low transaction fee. Banks charge all sorts of fees: to open an account often you need to pay an amount, they charge file fees and enormous fees for international transactions. Opening a BTC-account is free. You only pay a fee if you conduct a transaction. This transaction fee is used to reward miners who verify your transaction and let it confirm by the network. This transaction fee is variable and is expressed in satoshi/byte. The higher the transaction fee the quicker your transaction gets verified. In the following link a graph of the evolution of transaction fees can be consulted: https://bitcoinfees.info/
Another point of discussion is the limited amount of 21M coins that will be mined ever. The beautiful thing about this is that a bitcoin can be divided into 100.000.000 pieces. One single piece is called a Satoshi. This means there is much room for expansion. It is calculated that the last bitcoin will be mined somewhere around 2140. What will happen after this will be a subject of another article.
The whole currency is backed by math. The amount of coins that are produced, the difficulty to mine, verifying signatures,… are all backed by mathematical and cryptographic principles. This is very a powerful characteristic. We can doubt anything in life but math is precise and we humans have build our entire society on mathematical basics.
The last charaterisic that will be discussed in this article is the fast transation time. In order to have your transaction completed a miner has to verify the transaction. The higher the transaction fee the faster your transaction goes through. At the time of writing average transaction time is around 15minutes. This may seem slow but it is much faster than a banking transaction. Furthermore BTC is a global network so it takes the same amount of time to sent BTC to someone next to you than to someone on the other side of the globe.
Hyperinflation is like one of the worst possible case scenario’s an economy can go through. Many countries have had this problem. Most recent and shocking example was zimbambe. Where inflation has risen by 98 %. This is dramatic for the population because hardworking people who have put money aside now cannot use their money. These people have worked hard for money that has not any value left now.
Currently Venezuala is in a comparable situation. Their currency has depreciated by over 95%. This has forced a lot of Venezuelan citizens to search for alternative’s. many have turned to bitcoin mining. The government has forbidden any illegal mining operations. This means no one can mine btc whithout their consent. It will be very interesting what bitcoin and cryptocurrencies in general can mean for such countries.
Thanks to all the characteristics cited above BTC has the potential to bring half of the world population who don’t have bank accounts yet into the financial and economic zones/sector. With bitcoin you essentially can have a bank on your mobile device.
Until now the identity of Satoshi Nakamoto has remained a mystery. Some people think it’s a group, other people think it was a genius. What’s for sure is that his invention is revolutionizing the way we do business and the way we organize ourselves. These technologies have opened up discussion about the fundamentals of our society. Blockchain technology has opened up an enormous set of applications and practical use-cases. This story has just begun!
Author: Felich
Sources:
https://bitcoin.org/bitcoin.pdf
https://www.coindesk.com/math-behind-bitcoin/
http://thedailyfactor.com/top-7-characteristics-bitcoin/
https://cointelegraph.com/bitcoin-for-beginners/what-is-bitcoin
https://moneyonlinenow.top/operation-basic-characteristics-bitcoins/
http://www.huffingtonpost.ca/2014/01/26/what-is-bitcoin_n_4661604.html
http://uk.businessinsider.com/jpmorgan-hacked-bank-breach-2015-11?r=US&IR=T
https://bitcoinfees.info/
https://blockexplorer.com/block/000000000000000000b20e5bd316ed2d1f75e2189bef4cea38c831849f63cfef