What is Bitcoin?
Hello fellow crypto-traders!
It is always good to know how Bitcoin works before you throw yourself into the cryptocurrency market. If you know Bitcoin, you will be able to know more in depth about other coins, since most crypto-currencies are actually based on Bitcoin. In fact, most alt-coins are just Bitcoins with modified features or different markets! While I don’t expect you to be an expert by the end of this article, I do hope that you will at least gain a firm enough understanding to be able to understand, fundamentally, what Bitcoin is trying to achieve, how it works, and why it is a revolutionary idea.
What Kind of goal does Bitcoin have?
Bitcoin is a decentralized-blockchain system that is trying to replace the ‘trust based model’. I might have lost you there, but that statement tells you a lot if you break it down:
What is decentralized?
It basically means that it is impossible for just one party to dictate what is going on the market. For example, let’s say I am some guy who has a lot of power. Even though I am powerful, I can’t really tell the system to give me one million bitcoins to myself or someone else unless I actually have those one million bitcoins. This is unlike the bank where, at the risk of inflation, they can always just print more money.
What is a blockchain system?
It is a system that the creator, Satoshi Nakamoto, chose to run in this crypto-currency market. If I put it simply, it is a series of blocks, or history of transactions, that are chained one after another. It sounds confusing right? Don’t worry, I will explain it more in depth a bit later on.
What is a trust based model?
Trust based model would be the banks right now. They tell you how much you have in your account, where you sent the money to when you were online shopping, and how much you spent on it. They work as a mediator between merchant and you, the consumer.
So now that we’ve got that done, let’s go straight to what it is trying to do. Bitcoin is trying to replace a currency system where one big party, such as the banks, controls your transaction. Rather than depending on the ‘trust based model’, Bitcoin relies on huge number of people to verify your transaction that goes on the system. It is just like democracy: it needs to go through a vote system instead of some random guy saying yes or no to the authenticity of the purchases.
How does Bitcoin work?
Bitcoin works its magic through several different technologies, so here’s the gist of it. First, let’s look at how the process goes:
Person A sends 3 BTC to person B
This is publicly announced as a block with a very hard mathematical function
Mathematical function is then solved in the network of Bitcoin, a lot of people trying to solve it,
Person C solves the problem (this process is also called mining) and gets bitcoin as incentive for the resources that C put in (the cost of running the computer to solve the problem like electricity)
C announces that C mined the block and proves its authenticity to the public
The network of Bitcoins puts it to a vote to determine whether or not the block is authentic
This block is then appended to the to the previous block, creating a chain (keeping track of who has how much)
This chain keeps on going with other transactions
Once the block is announced and becomes a part of the longest chain, it is impossible to rollback the transaction. Because of this, it makes the whole system more secure against hackers. If Person D tries to hack the block, first D needs to solve the mathematical function on that block again. By the time D solves the problem, another series of block will be added to the block so D needs to manipulate those blocks to change the block D was trying to hack in the first place.
You might have noticed a problem here: what if A gives a fake block to say that A sent the money to somewhere else? This problem actually does not become a big problem once you understand the system. A, in order to prove that her fake block is real, has to compute the block faster than other people in the network. Basically A has to race against the entire network’s computing power and actually win this race which is virtually impossible. As a result, the chaining process continues as it normally would. But how do we know which chain is the most legitimate chain? The longest chain becomes the most reliable chain in this case.
What if some group of people chooses to gather their computing power and make their chain longer? As an illustration, group A is trying to make their chain longer than the most reliable, a.k.a the longest, chain. Still they have to race against the entire network who is also in the same race. But what if huge group of computing network tries to mess with the system and verify an invalid block? This is likely to never happen due to its impracticality. The incentive of verifying the block, or solving the block’s function, is bitcoin itself. Any coins or blocks generated from any chains other than the longest chain are not considered to be legitimate. Consequently, making longer chain than the currently existing chain is impractical and unprofitable compared to just joining the existing blockchain.
As mentioned on the process, all the transactions are announced publicly so how does Bitcoin network maintain privacy? Although blocks are shared all around the world there is no way to figure out who gave 5 BTC to someone else since the block is announced with the owner’s public key – not his name, not his address, not his phone number, but just his public key. Trying to find the owner of the public key would be harder than looking for a needle in a haystack.
Through these processes Bitcoin’s decentralized-blockchain system achieves a trust-less monetary structure. No transaction is proved by trusted third party, but through the mathematical functions (proof of work). Since the incentive to verifying the block keeps away most malicious attempts to manipulate the network, there is no need to worry about trust in this system.
Why is Bitcoin such a revolutionary idea?
Most of the transactions are done digitally. Every time you pay money for your groceries, you probably don’t pay with cash but rather pay with your debit or credit card. The information goes to your bank’s digital network and distributes the money according to what the code dictates. Payments are already being done virtually through the digital web so why use the effort to print actual money.
Furthermore, Bitcoin does not have to rely on other people’s trust and it does not give power to one central institution. The system makes people stay straight within the system by offering them incentives for honestly verifying transactions, making trusted third parties like banks obsolete. This also prevents fraudulent spendings and makes rolling back transaction impossible, thus protecting the merchant.
Whew, thanks for bearing with me as that was a lot of information. I tried to make this guide as short and informative as possible and I hope I have done a good job of achieving this. If you learned something from this post and feel free to leave a comment telling me what you learned. Or perhaps, if you think some of my arguments are wrong go ahead and leave some feedback as it would help immensely!
GOOD LUCK ON YOUR JOURNEY TO THE CRYPTOCURRENCY WORLD!!!
Until next time!