(Financial News) Bitcoin, along with all other digital currencies, is a bit of an abstract concept when trying to explain it to someone who is trying to understand it for the first time. First and foremost unlike a Dollar or a Euro, you cannot just put a bitcoin in your pocket and walk around with it.
A bitcoin is not something that exists in the tangible world we live in. Instead it is a strictly digital and mathematical construct. You might be thinking right now “if a bitcoin doesn’t exist in the real world, well then what the hell do I want to do with this?”.
This is where the brilliance of the concept of Bitcoin comes in. Let us take some analogies for a minute to help us make some sense of this whole thing.
Want to learn more about Bitcoin? Check out our other articles on Bitcoin
- What is Bitcoin?
- Who invented Bitcoin and more importantly why?
- Bitcoin transactions explained
- Bitcoin cyptography explained
100 years ago, there was no such thing as a computer, or a smart phone, or any way to digitally transmit messages across the globe. If you were at war and the wife and kids were back home, you would have to get a pen, some paper, and then start writing your heart out. Only once your hand felt like it was going to fall off would you sign the letter, put it in an envelope, buy a stamp from the post office, and finally send the letter.
Now depending on where you were in the world fighting for your country, there were no airplanes yet flying commercially or delivering parcels.
So that letter you wrote your wife would have to get batched with other mail, then placed on a horse and buggy, a train, and even possibly a large ship and then another horse and buggy and so on. After a few weeks to even months later (if you were lucky), your letter would show up and your wife and kids would read it by the fireplace while they wrote you a letter back, and then the process would continue in reverse with your wife’s letter taking the horse and buggy, train and so on all the way back to you.
There is a reason for the letter example, because in the end the letter is something you can touch and feel and it exists in the real world much the same way that cold hard cash exists in the real world. You can touch a dollar, you can put it in your pocket, and you can use it to pay for goods and services at a store by handing it to the cashier and she will take it and put it in the cash register as you complete your transaction at your local grocery store.
Going back to my letter example, fast forward to today and we all have smart phones, Twitter, Snapchat, WhatsApp and I could go on and on… But the point is: if I was stationed on the other side of the world today at war, and I wanted to send my wife a letter, there is no more horse and buggy or train or ship or even airplane for that matter.
Instead I pull out my smartphone, open Whats-App, and send a digital message that goes at the speed of light from one side of the world all the way to the other and in less than 1/10th of a second, the message arrives.
The theoretical message that I just WhatsApped my wife does not exist in the real world, the “<3” I sent is just a digital representation of what my counterpart from 100 years ago would be sending. We have taken the concept of the letter and digitized it completely. That WhatsApp message that you send your friend, or I send my kids, doesn’t exist in the real world. It is simply a bunch of 1’s and 0’s flying around at the speed of light (quite literally) and has created an information revolution.
Bitcoin has done to money exactly what WhatsApp and Email did to the love letter: they completely digitized it.
Just like the WhatsApp message you just sent your friend, the Bitcoin sitting on the block-chain (don’t worry I will explain block-chain in a bit, just stick with me) doesn’t actually have a physical form anywhere. Instead it exists only in digital form, and herein lies the brilliance.
Since a bitcoin only exists in digital form it is almost impossible to steal (as long as you understand how it works). And because it exists only in digital form, it can cross borders instantly. And finally because it exists only in digital form, a bitcoin is free and immune from censorship and even regulation that is not voluntary.
Now you might be thinking, “if a bitcoin only exists in the digital world, that’s crazy because you can just make copies of them just like you would any digital file on your computer such as an image or song or whatever else!”
Not so fast, if it was that easy, well, let’s just say that bitcoin would not have becomes the phenomenon that it is today.
Using some cryptographic encryption, bitcoin makes it virtually impossible to duplicate or spend someone else’ bitcoin. I say virtually, because it is technically possible to brute force a bitcoin private key (don’t worry I will explain this too). However, to do this to Bitcoin would require all the computers on planet earth linked together solving one equation and this would take on average of 1 billion years per bitcoin address hacking.
So uhm, yes, it is highly unlikely that this will happen. Unless of course the rise of quantum computing renders SHA256 (the cryptographic algorithm that bitcoin uses, and don’t worry I won’t explain this as not to bore you to death) obsolete, or there is a quantum leap (pun intended) in mathematics, making solving these factoring problems much less resource intensive. Other than that, it is pretty safe to say that bitcoin is pretty secure (at least for now).
I am going to cover a few topics here on bitcoin to help you get a general understanding of what it is and how it works to help you try and make sense of a very strange concept that many people cannot seem to get their heads around.
What is a “bitcoin” blockchain?
A blockchain is probably the only reason that bitcoin has not been outlawed or criminalized since its inception. The idea of a blockchain is brilliant because it is not just about bitcoin, it is about a revolution comparable to that of the internet. Bitcoin is and will be the first case study for all things blockchain coming in the future.
There are several types of blockchains and I won’t go into each one of them, as this is geared towards bitcoin specifically, so I will only focus on the Proof of Work concept that was introduced with Bitcoin.
Proof of work, or PoW, means that a blockchain works on consensus of its network participants (computers hooked up to the blockchain) in order to validate transactions. Since a blockchain is simply a distributed ledger, the contents of the ledger must be exactly the same for each person, thereby reaching consensus. Network participants can be either “miners” or “nodes” on the bitcoin network. As long as most of these so called miners and nodes on the bitcoin network agree that a transaction is valid, then the transaction is deemed valid by all participants of the network.
If you get this consensus on the network, then a new block is added to all participants who agree on the state of the blockchain. This forms the strongest chain, as more people voted for it, and therefore is considered authenticated.
What are blocks that make up the so-called bitcoin blockchain?
As its name implies, a blockchain is a “chain” of blocks that are ordered chronologically going back to its “genesis block.” The genesis block is the first block in the blockchain, and provides the entire basis for the blockchain.
In the case of bitcoin, a single block contains transactions of people sending and receiving bitcoins between one another. As mentioned before, it is basically a distributed ledger that is publicly available and confirmed by a process of consensus between all network participants. That makes sense right?
Or Am I missing something?
You are probably asking yourself, “why on God’s earth would people give their computers to the bitcoin network to confirm these bitcoin transactions? There simply must be an economic reason for millions of computers to be connected to the bitcoin network confirming all these transactions on this distributed ledger.”
Block rewards and transaction fees
As you were probably guessing, millions of people are not going to essentially give the bitcoin network their computing power out of the kindness of their hearts, so there must be a reason for this. The answer is: there are 2 ways that people make money by being miners on the bitcoin network.
First and foremost, let us discuss this PoW algorithm without geeking out too much on the math and just going over it on a high level in simple laymen’s terms so that we can understand what all these millions of computers are actually doing.
The easiest way for me to explain a PoW algorithm such as Bitcoin’s is to think of a math contest that never ends. This contest goes on for an infinite amount of rounds and each miner is given a math problem to solve. This is a very complex math problem, that requires lots of computing power to solve.
Bitcoin’s blockchain is constantly adjusting itself
In the case of bitcoin, the complexity of the math problem adjusts continuously striving for a math problem that the collective hashing power of the network can solve in 600 seconds (10 minutes) on average.
This means the bitcoin blockchain is constantly analyzing its own hashing power, and subsequently adjusting the complexity of its own math problems so that the collective computing power will be able to solve it in 10 minutes. This is really interesting, as the bitcoin network is like a living breathing organism that is continuously changing itself as mining computers join or leave the bitcoin network.
So every 600 seconds or so, one lucky computer will guess the mathematical hash that is needed to mine that particular block, and 2 things happen here: First and foremost, the miner is rewards a block reward, as it stands today that mining reward is 12.5 bitcoin. The second is, the miner is able to take the block and fill it with transactions and the miner gets to charge a fee for this.
Keep in mind that block size is limited, and today we can fit approximately 2400 transactions in a block. So miners are paid for the privilege of including your transaction in a block. This limited space concept creates a constant need for space on the network, and also prevents users from spamming worthless transactions that takes computing power but will never be included in the block because the fee was too low.
And there is one more part to the block chain that makes it so ingenious. Do you remember me telling you about the genesis block above? That is the very first block in a blockchain. Blockchains all have one thing in common: their starting point. Each block after the genesis block takes a piece of information (called a hash) from the previous block and stores it in within itself. This process continues, forming a sort of chain with each block referencing it’s predecessor. This has helped coin the term “blockchain”.
Now this might not sound like much, but this is what makes blockchains “immutable”.
Blockchains are not able to be changed because in order to change a block, you would have to change the block before it, and therefor the block before it and this would go all the way to the genesis block. This is what makes bitcoin so secure, as it would require more computing power than any individual, group, business, or government. So it becomes a computationally implausible to do this, as to change one transaction, you would have to change every block that came before. The economic resources alone to do this would be substantial.
To go into more detail, as of the time of this writing, bitcoin sits at block height 609,502. This means that there are 609,502 blocks in the blockchain as of right now.
Let us assume that I am a miner and I wanted to change a block in the blockchain. If I was to manipulate block 609,502, i would have to manipulate block 609,501 and since I manipulated 609,501 I would have to also manipulate 609,500 and this would go all the way until such time that I got to the genesis block, which in essence means I would have to change 609,502 blocks just to change a single block.
But keep in mind: in order to build these blocks, the math that was required to solve them required the collective computing power of millions of computers over the course of 10 years (since bitcoin’s geneisis block) and would require the same exact computing power and 10 years to unwind and reverse a single block. So by nature, bitcoin’s mysterious creators have done a good job of gamifying the ultimate digital game for adults.
Basically we have a shit ton of computers all chained together in a web. Each of these computers is competing to solve a new math problem approximately every 10 minutes. The bitcoin network is constantly adjusting the complexity of this math problem to take into account the collective hashing power of each of the mining computers so that the time between blocks averages approximately 600 seconds AKA 10 minutes. By solving these problems and lending their “computing power” to the bitcoin network, these miners are securing the bitcoin network. Approximately every 10 minutes a random miner will guess the math problems (based on sheer brute force computing) and will be awarded, at the time of writing, 12.5 bitcoins (until next year when the bitcoin “halving” takes place in 2020 – Read more here.) and control over which transactions they will include into the new block they add to the network.
What is Bitcoin Decentralization?
As you read above, the bitcoin blockchain network is simply a group of computers that collectively are trying to solve a complex series of never ending math problems, and in doing this they create a very large network of computers that operate on consensus to authenticate transaction on the bitcoin network.
The beauty about bitcoin is there is no leader, there is no central office, there is no CEO, there is no King. Bitcoin is a collective of network participants, and because of this it has become the phenomenon that it has. Earlier attempts to do this always ended poorly for the creator as it required centralized services and offices to run ledgers and since it has always been the governments mandate to print and create money, anything centralized in this regard is doomed to fail once the government gets its hands on it.
Bitcoin’s leaderless network is like a hydra, cut off one server, 10 more popup in its place. Believe one thing here, if bitcoin was a centralized operation, the government would have put the kabosh on it as soon as it started getting any sort of traction. However, with no leader and nothing more than a loosely connected network of computers that anyone can join or leave at moments notice bitcoin is nothing more than an idea, and as we know ideas cannot be censored.