The Basics of Bitcoin: A Beginners Guide to the First Cryptocurrency.

Bitcoin and the Media

 

If you follow the news in any capacity, you will definitely have heard about Bitcoin. Barely an hour goes by in the media without speculation about Bitcoin prices, yet public understanding of cryptocurrencies remains low.          

Jordan Belfort famously labelled bitcoin a scam, likening the crypto-craze to the Dutch tulip mania. The community reacted with scorn; how could anyone liken a cryptographically secure, totally unique, non-reproducible digital asset to something perishable and organic like a tulip? The main difference being that there is a finite supply of bitcoin, whereas tulips can be reproduced infinitely.

Even major influencers like Bill Gates have publicly denounced it. Apparently, Bitcoin is responsible for heroin deaths in cases where it was used to purchase drugs online. Following this logic, the biggest killers are the USD, the GBP, and all the other forms of money used in most drug deals.

Read on for a balanced overview of Bitcoin, the catalyst for one of the most important technological advancements since the internet. 

Fiat Currencies

‘Fiat’ is latin for ‘let it be done’. At one time, the pounds in my pocket could have been exchanged for gold or silver whereas these days, GBP has value because the government says it does, and because other governments across the world recognise that value. These currencies are centralised by nature, as particular governments control the supply of the money and decide how it can be traded.

How do Traditional Bank Transfers Work?

If I send money to somebody electronically via my bank, the money passes between many hands before it gets there. This makes international transfers slow and costly, as transaction fees are paid to each service that handles the money. 

This figure shows a simple payment between a payer (the originator) and a payee (the beneficiary)

The originator initiates the transaction, their bank then confirms that they have the balance to process the transaction, and then the money is sent through clearing. The funds are pulled from the originator’s bank once the process has been finalised.

How is Bitcoin Different?

Firstly, bitcoin is decentralised. Instead of sending funds between financial institution, transactions are sent person-to-person via a vast network of computers that validate and process the transfer. This means that when somebody sends a bitcoin across the world, there is no need to involve a bank or central authority of any kind. Instead of paying fees to various merchants, banks, clearing houses and other intermediaries; users of the bitcoin network simply pay a nominal, one off fee.  Secondly, the value of bitcoin is not dependent upon the performance of any particular economy. 

What is the Bitcoin White Paper?

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”

A mysterious developer, or group of developers, called ‘Satoshi Nakamoto’ released the original Bitcoin white paper in 2008. The relatively short 7 page document outlines a vision of a peer-to-peer (person to person) digital cash that works using one way cryptographic hash functions and distributed ledger technology. 

Lost? Don’t worry, this is complex stuff. Carry on reading for explanations that don’t require a maths degree.

How Does the Blockchain Work?

‘Blockchain’ is the technology under-the-hood of Bitcoin. A blockchain uses cryptography to store transactional data on a ledger (or score card) that is maintained by a network of computers across the globe. 

Think of the Bible or the Quran. Each text has been reproduced millions of times and will be, right now, in countless homes all over the World in exactly the same form. The bitcoin blockchain is similar, in that anybody can access an exact copy of every transaction ever made. Unlike the Bible however, bitcoin’s blockchain is open – meaning that any person who wishes to use the network can add their own transaction to it. Crucially, nobody can change any of the information in the previous blocks, they can only add new transactions.

The chain stores these transactions in 1mb blocks, which is about roughly 1000 transactions. You can actually watch live as the blocks are confirmed here. 

How is this possible? Ok, brace yourself; this may get a little technical.

What is Bitcoin Mining?

When a transaction is broadcast across the network it enters the ‘mempool’, a big pool of transaction requests that need sorting and confirming. From here, the mining begins.

Mining has two functions; it confirms the transactions on the network and it releases new bitcoins into supply. Miners are people (or businesses) who offer their computational power to check that incoming transactions match up to the previous transactions recorded on the blockchain ledger. Miners ensure that any person sending a bitcoin has the amount of funds available to them to send their transaction. Mining units essentially scan the history of the ledger to ascertain the validity of the transaction, and good transactions are added to data chains ready for assorting into blocks.

 As the miners perform a vital service to the network, they are rewarded with new coins every time a block is sealed. This reward is delivered to whichever unit solves the algorithm of the (approx) 1000th transaction. This incentive promotes good behaviour on the network and provides something called ‘distributed consensus’, where multiple parties agree on the ledger as opposed to a centralised authority like a bank.

Where is my Bitcoin?

Digital Signatures: Private Keys, Public Keys and Wallets

If I send five bitcoins to a friend, I generate both a private and a public key which are put through a signing algorithm to generate a digital signature. The Private key is mine to keep, and is what links me to that particular transaction. The cryptography that allows for this is complex, and for now all you need to know is that any transaction can be verified with this digital signature. 

Watch this space!

Over the next few months, expect more articles from us at the Beyond Bitcoin Film team about Bitcoin, the problems with Bitcoin and the whole array of digital currencies on offer today.

 

 

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