What is a Bitcoin?

Divjyot Singh
Jul 4, 2017 · 6 min read

Preface

This is the first in a series of 6 chapters written to explain Bitcoins and other cryptocurrency. By the end of these chapters one should be able to understand, invest, and trade in cryptocurrencies.

This is written specifically for the Indian audience and uses simple, daily life examples to explain the complex technology. It contains the best parts of the several lessons available on the Internet.

For any suggestions, technical details, critique, discussions, or queries, please comment below or mail me at “divjyot_singh2016@pgp.isb.edu”.


Chapter 1: What is Bitcoin?

Imagine:

Imagine you and I are sitting on a bench, in a park. It’s a lovely day.

I have one apple with me. I give it to you.

Now, you have 1 apple and I have none.

Quite simple, right?

Let’s dig in and see what happened here. The apple I gave you was physically put into your hands. You can see it, touch it, and smell it. You know it happened.

We don’t need a 3rd person to confirm it. We don’t need my Uncle Jain (who is a High Court Judge) to sit and rule that the apple was transferred from me to you.

I don’t have any more apples that I can give to somebody else. You have 1 apple and you can give it to whoever you want. You have full control of the apple.

This is what a physical transaction looks like. It can be with apples, or oranges, or books, or a 100 rupee note, for example.

Digitization:

Now, let’s assume we are sitting on the same bench in the same park on another lovely day.

But, this time I have one digital apple with me. You know the kind that is made out of bits and bytes, and lives in my iPad.

Now I give you that one digital apple. Still that easy?

How do you now know if you got the digital apple that I had and not a copy of it?

I could’ve sent this digital apple to my Uncle Jain first; Or could’ve done copy-paste and made several copies of this apple; Or I could’ve just put it up on the Internet and a million people could’ve downloaded it.

So transacting digitally is difficult and this is what scientists call the double spending problem. This is what makes transacting with digital money difficult.

But, hey! We use PayTM and transfer money using Internet banking all the time. There must be a way to avoid this double-spending and transact with digital money.

Sure, there is a solution. And that is to maintain a list of all the balances in a ledger and keep it with someone trusted, like a bank or the guys at PayTM.

Central Entity maintains a Ledger for every account

These “centralized” entities or trustees will monitor and maintain all the balances in the system. All the transactions would need to go through and be approved by these trustees.

It’s like Your Honor, Uncle Jain, sitting on the bench next to us and verifying all the apple exchanges.

Problems:

There are some problems in involving Uncle Jain or a Bank in our apple exchange:

1) More Time: Since there are more people in the system now, the exchange will take more time. The central trustee will want to verify the transaction and that takes time.

2) Fees: The central trustee will also charge fee for the work he/she does. So, a part of the digital apple will be lost as fees.

3) Fraud: The trustee may want to create more digital apples for themself or just pass on false information to you (the receiver), in order to benefit me (the sender).

4) Theft: The trustee may just take the digital apple that I have to give to you and run away with it.

5) Privacy: The original transaction of apple exchange was just between you and me; we didn’t want to tell the whole world about it. But, going through a Bank or some intermediary just makes the transaction more public.

So, we realize that digitization can complicate things too. Giving you a digital apple is not as easy as giving you a real, physical apple in person.

It seems like there is no way to replicate the simple apple exchange transaction in the digital world, unless…

We get everyone else involved!

Instead of making a ledger in the systems of a Central entity like a Bank or a PayTM (a private ledger), everybody has a copy of the ledger (a public ledger).

Because the ledger is public, all the transactions that have ever taken place are in the public domain and hence, can’t be edited. In fact, bigger the network, the harder it is to edit any record.

Also, no one company or person owns the public ledger. So, Uncle Jain can’t commit any fraud or run away with our digital apple.

Therefore, No Fraud!

Even if I try to give you a copy of the digital apple and send the original to someone else, I can’t do that because as per the public records I have already given my 1 digital apple to you.

You also can’t just eat that digital apple (in bits and bytes) and say that I never gave you the apple. It’s harder to be greedy when everyone is involved.

Therefore, No Cheating!

And, as a reward for everyone keeping helping to maintain this public ledger, they’ll get a reward of 25 digital apples every time they help make an honest entry in the book.

This is what happens in Bitcoin transactions.

BITCOIN is a digital currency that operates without the control of one Centralized trustee, like a Bank. It relies on distributed maintenance of records (involving everybody in the network) and cryptography (encryption). Hence, it is also called as a DECENTRALIZED, CRYPTO-CURRENCY.

Bitcoin is often abbreviated as BTC and its visual symbol is

Symbol for Bitcoin (BTC)

The current price of 1 Bitcoin (as on June 28, 2017) is about $2,500. The current price on Indian exchanges is about Rs 1,80,000.

The smallest denomination of 1 BTC is 1 Satoshi (named after the pseudonym of the person(s) who wrote the original paper explaining Bitcoin). 1 Satoshi = One hundred millionth of 1 BTC, i.e. 1 Satoshi = 8th decimal place of 1 BTC.

Great news! You now already know more about Bitcoin than a lot of people do!

Now let’s know a little bit more….

This public ledger exists for recording Bitcoin transactions and is called as the BlockChain. The rules of Bitcoin transactions are laid out in the Bitcoin Protocol. This protocol defines the:

1) total number of bitcoins in the system

2) process on how to verify transactions

3) security guidelines

4) rewards that people who help verify transfers will receive

This Bitcoin protocol not only verifies transactions, but also provides for an honest, rewarding way to produce more bitcoins.

In fact, this is the only way to create more bitcoins. Every transaction block not only transfers bitcoins, but also creates 25 more bitcoins.

It is the network that pays the intermediaries (called “miners”) for their verification services. In fact, the system is built to pay those who help with the transactions (in Bitcoins) up to 2021. After that these miners may charge a small transaction fee.

How do these transactions happen? What is this BLOCKCHAIN? How do I send apples, oranges, and money using Bitcoin and Blockchain?

We explore this in the next chapter. Stay hooked….

(The contents of this article are the personal work of the writer and written in his personal capacity. The opinions expressed in the article are author’s own and in no way reflect the views or objectives of the organization(s) the author may be associated/working with. For any comments, queries, criticisms please reach out to the author at “divjyot_singh2016@pgp.isb.edu” or write in comments below)

A very special thanks to Nik Custodio!

Divjyot Singh

Written by

The Fintech Man.

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