Want to actually understand what Bitcoin is? Well, here ya go.
What is Bitcoin?
To understand what Bitcoin is, we first need to understand what blockchain technology is. Whenever I try to explain Bitcoin to someone, I start off with this quote that sums up the relationship between the two pretty well…
“Blockchain is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.” — Sally Davies, FT Technology Reporter
The most important thing I need to stress is that Bitcoin is a very small part of blockchain technology! While Bitcoin seems to be getting a lot of the hype due to its price increase of over 580% in the last year (as I write this it’s at $4300 per coin), blockchain is what can change our lives in the future, and what almost every technology company is exploring right now.
Bitcoin appeared in a 2008 white paper authored by someone named Satoshi Nakamoto (no one knows who or whom this is, one of the great 21st century mysteries — find out and I’ll pay you a Bitcoin!). The white paper described a type of currency that can be distributed online without someone acting as a middle man. This concept is very important, so let’s use a real world example.
When I buy something from someone else on eBay, eBay takes a small fee on every single transaction (3% or so), adding up to billions of dollars a year in revenue. But what if the fee was cut out of the process? Think of all the dollars saved. That’s an example of what Bitcoin can do. But the technology that powers that transaction is blockchain, and it’s applicable to a ton of different fields.
What is Blockchain?
Blockchain is a type of decentralized ledger where transactions are recorded and confirmed anonymously. The most important part of that is “decentralized ledger,” which basically means the blockchain isn’t located on just one computer, but on millions of different nodes.
Real-life Example: Think of it like a giant, global Google Doc that runs on millions of computers. It’s 100% person to person, and there’s no need for the middle man to authenticate transactions. The Google Doc updates in real time with new transactions.
“[Blockchain is] an immutable, unhackable distributed database of digital assets. This is a platform for truth and it’s a platform for trust.” — McKinsey & Co.’s
Once a transaction happens, it is put into a cryptography block (pictured below) with past transactions and updated to the entire world. The miners are the people who make all of this happen, as they race to try and validate each of these transactions by solving very complicated computer problems using tons of computing power. Whoever solves it first is rewarded with Bitcoin in the Bitcoin Blockchain for example, and the transaction is then time stamped and added to the blockchain. Blocks and older blocks are linked together to show every transaction made in that particular blockchain, and this is updated regularly.
Real life example: I have $40 in my bank account and Brit has $100 in hers. I pay $20 to Brit for pizza. The transaction is automatically uploaded in the Google Doc so that the entire network can see it, and it’s authenticated through people who race to figure out a complex equation, and in turn, get a small reward.
Is it secure?
The decentralized nature of blockchain makes it extremely hard to hack into. Large centralized organizations like banks are relatively much easier to hack into than blockchain. This is because if a hacker wanted to get into a single block in the chain, he or she would need to hack into all of the preceding blocks before that particular block, and on every single ledger in that respective network at the exact same time.
This is pretty much impossible. I’ll get much more into the technical side of why it’s so secure in later posts, if you’re interested, but for now, understand that it’s nearly impossible to hack into.
Why is Blockchain so important for the future?
This technology will change our daily lives. Instead of authenticating through a third party system, trust would be established through computer code and mass consensus.
Take certain industries, besides just the obvious implications for the financial services industry:
Secondary Exchanges: Think about if you could track the value of a house or apartment from the date it was built, and be able to see any repairs made and who did them? Any piece of data related to that house would be written into that particular address in real-time and be open to anyone’s access, so a buyer would have full transparency into what they’re actually buying. Or what if your car’s digital address on the blockchain automatically gave you information on how often you filled up for gas or changed your tires? Secondary markets have the potential to be truly trustworthy and transparent, which is something that would be revolutionary.
Music: A company founded by popular singer Imogen Heap has started to developed songs with Ethereum based smart contracts built in, which would allow artists to sell directly to people without going through a label or middle party. Royalty payments would execute automatically and instantly — and artists get paid first. Companies such as Spotify stand at risk if they don’t utilize blockchain and are an early adopter.
Cybersecurity: Banks and companies spend billions a year on cybersecurity, which is a major market that continues to have double digit growth year over year. If blockchain is so secure and companies start to shift to it, how would that affect cybersecurity companies already in place? I believe we will begin to see a fundamental shift in these companies, from protecting the centralized corporations like banks to determining how to help make blockchain even more secure and offering products using blockchain technology.
And finally, what is Bitcoin?
Well, hopefully you can answer that question now. Bitcoin’s a tiny piece of blockchain technology, as it’s a type of currency (like gold or cash), with the difference that it operates independently of a central bank, uses encryption techniques to verify the transfer of funds without the use of a 3rd party acting as the middle man, and can be used anonymously. Bitcoin’s exciting in its own right, but blockchain technology is what can truly change our lives.
Hopefully that helps! Stay tuned for more from me, including what other types of cryptocurrency I like more than Bitcoin (Ethereum!), ICO opinions, more in depth analysis of the technical side of blockchain, why everyone should put 5% of their net worth into cryptocurrency, and how I think blockchain technology can change the world. Thanks!