Bitcoin in Layman's Terms
What is Bitcoin?
Bitcoin, like most other software technologies, can seem daunting when you attempt to understand it. However, it doesn’t need to be this way. In fact, you don’t even really need to understand its technicalities. You probably don’t understand exactly how the World Wide Web works, but you can navigate your way around that and do whatever you need to do without thinking too much about it. Well, the same can be said for Bitcoin, but if you do want to know how it works without fighting your way through all the technical terminology, read on.
In short, Bitcoin is an open-source, decentralised, independent of any central authority, peer-to-peer, trustless, immutable, cryptographically secure payment network and ledger. Each bitcoin 1.00000000 is divisible by one hundredth of a million, and each of these units 0.00000001 is known as a satoshi. A lot to digest? Let me explain.
Satoshi Nakamoto's Creation
Bitcoin is a relatively new software technology that is known as blockchain. It was created by a pseudonymous software engineer going by the name of Satoshi Nakamoto who launched it on 3rd January 2009, and the Bitcoin Blockchain has never stopped producing blocks ever since. The blockchain is an open source distributed public ledger, which has recorded every single transaction since Bitcoin’s inception. Once each transaction has been entered on to the blockchain it cannot be reversed, and as long as the user sends it to the correct address, the bitcoin cannot go astray. But how does it work?
The fundamental infrastructure of Bitcoin is thousands of distributed nodes and even more miners. A node is a storage device that has the Bitcoin Protocol installed. Every node has the complete blockchain running on it and they all work together in agreement. Miners can be anyone from a single person, a mining company (mining farm), or a group of thousands of people mining together (a mining pool) all using their powerful computing power to validate the transactions. The nodes and the miners constantly work together to process everything that goes onto the blockchain.
How Does Bitcoin Work?
Without getting too technical, here’s how it works: When somebody sends a bitcoin to somebody else a transaction has been made on the ledger. It is then picked up by the network of nodes who send it on to the miners. Once a miner has picked up the transaction it cryptographically processes the data and adds it to its other recent transactions.
Every ten minutes or so, using the most secure hashing algorithm SHA_256, the miner shrinks the group of transactions into a hash of 256 bits. The cryptographic hash becomes what is known as a block. The block is then sent back to the network of nodes that need to agree that all transactions in the block are legitimate and that the hash agrees with the previous block on the chain. This is known as Proof of Work. Once consensus is agreed between the nodes, the block is added to the chain and 12.5 new bitcoins are minted and sent to the miners as reward. The miners are also rewarded with the transaction costs.
How Secure is Bitcoin?
Can a rogue transaction or block be added to the chain by a fraudulent miner or node? I hear you say. Well, the answer is that it is technically possible, but highly unlikely. Remember all the thousands of nodes have the Bitcoin protocol installed and they will automatically refuse any rogue block. If somebody tries to manually corrupt the transactions their node’s version of the blockchain will not align with the public version and be refused part of the public chain.
What’s more, it would take a conglomerate of miners (or billions of dollars worth of computing power) to seize control of 51% of the blockchain to have any chance of trying to manipulate the blockchain. Then they would have to get around the nodes’ consensus to have any chance.
However, the incentives for any miner to try and manipulate the system are obliterated by the effect it would have on the price of Bitcoin, because if news came out that it had been hacked the value of all bitcoins, including theirs, would disintegrate rapidly. Hackers have been trying to hack it every day since it was launched, and they will keep trying, but the decentralised nature of it makes it probably the most secure system ever built.
Where to Keep Bitcoin
The owner of any bitcoin has an address with a public and private key. The public key is as it states: public, and a user will give this to the person who wants to send them some coins. There is no third party involved; it is trustless. The sender will send an amount of bitcoin to the receiver and the miners, nodes and Bitcoin protocol will do the rest. The transaction cannot not go to the address the sender sent it to.
The bitcoins will always remain on the blockchain, however, and proof of ownership is having what is known as the private key. A private key, like the public key, is a group of letters and numbers, but private means private. Do not let anyone know your private key or they will also have claim to your bitcoins.
Although the coins never actually leave the blockchain, you can store the public and private keys in a software or hardware wallet which is an interface showing you how much you have, thus making it much more user friendly. You can also write your private key on a piece of paper or store it in your memory if you prefer. These are arguably the safest ways to store Bitcoin, and probably a good idea if you’re storing long term. Once you decided to spend the ‘paper bitcoin’, you would just type the private key into a Bitcoin wallet and your value of Bitcoin would appear in your wallet.
Scarcity of Bitcoin
There can only ever be 21 million Bitcoin and at time of writing, there are just over 17.5 million in circulation. For now there are 12.5 Bitcoin minted every 10 minutes, but the Bitcoin protocol is designed to halve the reward every four years. The next ‘halving’ is due by about May 2020, when the reward will become 6.25 every 10 minutes, and then four years after that the reward will be cut in two yet again, and that will continue until the last piece of Bitcoin is created in or around 2140. Therefore, we know how many bitcoins there will be at any given time. Something we cannot say for Central Banks’ issued FIAT currencies like the dollar, euro or pound.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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