A Simplified Explanation of Bitcoin

The symbol for bitcoin. Ironically, this coin does not actually exist. Pic Source

So Cryptocurrency is probably a word that you have heard being thrown around a lot recently.  And if you have hurt of Cryptocurrency you have no doubt heard about the biggest one, Bitcoin. You have probably heard more negative things than good about it, such as it being used as the main currency in places like the dark net. But, beyond that what do you really know about Bitcoin, and why should you really care.

The first thing you need to know about bitcoin is that it is not real. Bitcoins are not physical coins or currency that you just keep in your wallet. They are virtual things and are kept in virtual wallets. So this brings up the question of how do you get bitcoins? Well, all bitcoins are generated through mining. Now, its not real mining like going into a hole in the middle of a mountain, but its mining in that you put in risk and energy with no guarantee of a profit.

Imagine for a second that Jack wants to give Jill $5. In Bitcoin, in order to transfer money you always need a middle man in order to confirm the transaction and and add it to the central record. But there are thousands of these middleman that are willing to confirm the transaction, but only one of them is able to add it to the central record. So the middlemen all compete with each other, solving a very difficult math problem. The first person to solve the problem gets to add the transaction to the central record, and they get paid to do it. Now imagine that Jack and Jill are two regular people, the dollar is bitcoin, and the middlemen are the miners, the central record is called the blockchain, and Jack and Jill's transaction is the block. I'm sure there are some questions that I will try to answer about this analogy. The first question is, you understand mining but you don't get why people are buying specialized software, and a bunch of graphic cards to solve math problems. Well, overtime the math problems get harder and harder, and so take longer to solve. Imagine one miner has a basic calculator that you used in elementary school, and the other miner is using the equivalent of a super computer. Sure the first guy might get the answer here and then, but statistically the second guy is more likely to solve the problem first. And the more problems the solve, the more transactions they can confirm and the more money they get paid.

So bitcoin is just a form of payment right? What makes it so revolutionary? Well, the main aspect of bitcoin is that it is decentralized. Imagine you put your $100 in the bank. The next day the bank says you only have $90 in your account. There is not really much you can do in this case, cause its your world against theirs. In bitcoin, this does not happen because everybody has a a copy of the central record, and they all agree that the copy they collectively have is the correct copy of the record.  Suddenly, if there is a case of fraud its not your word against another, its literally thousands and thousands of people all in agreement. Now, this system can be broken, through something called the 51% attack. That is when the majority of the mining power collectively agrees to do something bad. Now, Jack and Jill's transaction cannot ever be changed, lets get that clear.  But what you can do is just ignore Jack and Jill's transaction by skipping it and writing something else's transaction in the record. You can also reverse transactions for as long as you have control of the majority mining power. However, one thing to realize is that there are many many miners out through, all with a lot of calculating power behind them. The sheer amount of money that would need to be spent to achieve 51% of the total power is unrealistic. It has been close to happening before, through the use of mining pools, but it is unlikely to happen again as the network has gotten bigger and bigger.

The longest chain is the one that everyone else agrees is the correct on. There is the occasional orphan block (purple) that is added, but it is quickly knocked off the chain as the other miners reach a consensus that it is not the correct block. This is a major reason why an attack on the network is so difficult. Pic Source.

Another reason bitcoin has been gaining popularity is that it is a commodity. There are finite amount of bitcoins and when the final bitcoins are awarded to a miner then that is it, all the coins are in circulations. In real life it is different because money can be printed by the government and it is difficult to find out how much money is really out there and how much it is worth. For bitcoin, at any given time you are able to find out the total numbers of bitcoin in circulation. This makes assigning a value to it relatively easy. Furthermore, the value of Bitcoin is not tied to any government. So this might make you wonder why Bitcoin is suddenly worth so much, when it is a virtual currency with nothing actually backing the value? Well, it's price is purely determined as what people think it is worth at the time. Why is gold valued how it is? Its a finite resource that cannot be easily manipulated. Its seen as a safe haven during times of instability in markets. The same is true for bitcoin, which explains why the last few years, bitcoin has been similar to gold, rising during times of economical instability.

So is bitcoin the future of money? We are probably not going to see our wallets and paper money disappearing anytime soon. However, there is some interesting technology behind it and even if it does ultimately take off, it was enough to


Sources

Kelleher, John. "What Is Bitcoin Mining?" Investopedia. N.p., 02 Sept. 2014. Web. 03 May 2017.

Learn Cryptography - 51% Attack. N.p., n.d. Web. 03 May 2017.

Mining?, What Is Bitcoin. Everything You Need to Know about Bitcoin Mining. N.p., n.d. Web. 03 May 2017.