What is Bitcoin?

I outlined in my first Bitcoin post why I was learning what Bitcoin is. Before I delve into the nitty mechanics of it I think it would be useful to get an overall, high level, introduction to it.

I’ve been reading up on Bitcoin, listening to podcasts and attending conferences for some 8 months now. Yet I still have to catch myself, or reiterate certain aspects of its mechanisms, to ensure I fully understand it. It’s one of the reasons I’m writing this blog!

So what is Bitcoin? The terminology used within the Bitcoin sphere: ledger, decentralised systems, hashing, nodes, blockchain, mining can seem alien and frankly, dull. Yet, the technology that has been devised here, as I alluded to in my first post, is ground-breaking, with its possibilities both exciting and inspiring and nowhere near fully realised.

I’m firstly going to state from the outset. Let’s forget Bitcoin for now, unusual for a “What is Bitcoin?” post I know, but Bitcoin is just an element of the technology, it’s most famous by far, but still just an element, an application to the technology that is blockchain. Blockchain, here, is the equivalent of the internet, while Bitcoin is merely an application of the blockchain, like email is an application of the internet.

The blockchain is a database. Pure and simple. It’s a database recording a list of transactions, which in theory could be anything. Knowing what is being transacted, with whom, and who owns what, is what the blockchain is logging. Now that is no different to how any other database is constructed. Just a list of transactions. Yet if you take a step back and consider how a database is MAINTAINED then important questions are asked.

So I transfer John a tenner, electronically, directly to his account. My database goes down in the value column by £10 while John’s increases by £10. Does John know whether I actually owned that £10? Does John physically adjust his own database to increase it’s value by £10? No, we both leave it to our respective banks, and we trust them to do a sterling job (pun intended). Yet for the banks to maintain all the millions of individual databases, to ensure that no fraudulent activity is being implemented, or just to ensure human error isn’t creeping in, it needs to construct and internal structure of checks and double checks, reviews and sign off’s, and we trust them to maintain this system without fault.

The blockchain database is maintained completely differently and this is the ground-breaking technology.

Here when I transfer John £10 electronically the transaction is broadcast to the blockchain network. A network of independent computers (nodes), verifying whether I owned the £10, and whether it has been transferred to John’s account correctly.

This verification is performed through cryptography. Cryptography is a complex field that I will barely touch upon apart from the basics required to understand the blockchain. For the purpose of this blog I feel it is sufficient to say that in order to verify the transaction is correct using cryptography, which is basically trying to solve a complex algorithm, requires a lot of computational power. It is these nodes, that are trying to solve this algorithm. Why? you might ask. Well there’s an ingenious incentive mechanism (for the computer owner) built into the verifying process that I will touch upon in a future post.

Now, the nodes are not trying to verify one transaction at a time but a block of transactions. Once the transactions have been verified they are then added to the database. One block at a time, built upon the previous blocks, causing a chain of blocks.

That’s it — the blockchain. A bunch of (human owned!) computers around the globe using cryptography to solve an algorithm that in turn verifies a block of transactions that can then be added to the database. They don’t know each other, they aren’t colluding, there is no central point and it is distributed globally. If the UK faced a country wide power cut right now then arguably your banks database would suffer, the blockchain wouldn’t as there are other nodes across the globe to maintain it.

This is the ground-breaking technology. No-one owns the blockchain and it can only be corrupted if someone owns 51% of the nodes.

So lets rewind and go back to the point of this post — What is Bitcoin? Bitcoin uses blockchain technology to store and transfer value from one user to another. It is a currency that is verifiable through cryptography, hence the term crypto-currency.

My next post will delve a little deeper into the mechanics of the blokchain, but in the meantime I’ll probably have to re-read this post to make sure I understood it…