BitCOIN 101 💰

What is the general consensus when you hear the term Blockchain?

“That fancy digital money thing which everyone seems to talk about and costs a lot! Do you have a bitcoin?”

Cryptocurrency is based on blockchain technology but they are two separate entities. To understand Blockchain tech in general, lets take Bitcoin as our candidate to nail those core concepts. Bitcoin is the poster-child of the blockchain world, so lets start by understanding the motivation, high level concepts behind Bitcoin.
Ready? Lets get started.🚀

How does Bitcoin work? 😮

The simple answer is, you have some money, your friend needs money, so you transfer some amount from your account to your friend’s account. Lets analyze what is happening here.

1. You have 100 dollars. Your friend, lets assume it is the Hulk, needs 40 dollars to buy some extra large shirt. Maybe XXXXXL?
2. So you would transfer 40 dollars to Hulk’s account digitally.
3. This would mean, a debit of 40 dollars from your account and a credit of 60 dollars to Hulk’s account. Simple enough? Sure.
4. The bigger point to remember here is that the total amount remains same as before when you add up money from your account and Hulk’s newly added cash, in his account.
5. Generally any transaction involves a transaction fee which is debited from the sender’s account. Let us assume it was 1 dollar in this case. That 1 dollar is taken by your bank to facilitate payment and in return used for building and maintaining the infrastructure which made the payment possible.
6. That infrastructure would generally be user apps on your phone, maintaining a website and more importantly operating a central server.
7. The central server has information of all accounts. This allows it to transfer money from one account to another and track those changes.
8. If the central server is compromised, the service goes down and accounts may get compromised.

The motivation for decentralized currencies 👻

As you would have seen, that last point is a major headache in financial world with companies and banks spending billions on safeguarding their systems to prevent attacks and to maintain the integrity of data. This also leads to the scenario where, the central banks which manage accounts and handle cash flows for the general public have enormous amounts of power. Misusing of funds by adhering to unsafe and risky trade practices is what bought Lehmann Brothers down in 2008 and started the economic crisis. Banks lent money to high risk candidates on high risk properties and the debt incurred was sold as CDO’s to other firms. So when payments stopped or slowed down, the entire banking system came to a grinding halt and money was lost. The banks which were seen as SAFE and were supposed to safeguard assets and facilitate payments suddenly seemed vulnerable.
What if there was a system which would allow creation of a currency which would be valid and could be traced always?
Enter Bitcoin. 👏🏻

Core Working of Bitcoin 💡

Bitcoin works on the concept of immutable ledger. A ledger which maintains and records all transactions in the system and facilitates transactions between users. This ledger is immutable, which means, the content of the ledger or the records cannot be changed arbitrarily. This also serves as the single source of truth since it has a record of all transactions which occur in the Bitcoin network.

Now you may ask, ledgers, immutability are all good..but isn’t this concept similar to how existing banks work? This ledger seems awfully similar to the central server which banks maintain.

Enter Decentralization ↗️

Decentralization is the factor which adds authority to the validity of transactions in the Bitcoin network.

Decentralization is a concept in which a task, which is generally done by one agent at one single place is broken down and distributed to several agents spread across different geographical locations. Sounds fancy?
In real world, the agent is a server or a computer which handles/manages the transactions on a network. A bitcoin network has no central agent or server. The agents in this case are everyday computers or powerful computers which are spread across the globe and connected via the internet. Bitcoin network is nothing but a series of connections between these computers over the internet. In computer terminology, these computers are called as Nodes.
Each node, in a bitcoin network plays a role in maintaining the integrity of transactions which run on the network.

I will explain the way this works in another post since the scope of that is beyond this article. But for now, this is a high level overview of how things work.

Key benefits 🔉

The benefits of this approach include but not limited to :

1. Since there is no centralized server, there is no single point of failure.
2. Having a bunch of nodes across the world allows redistribution of traffic based on network traffic.
3. It also means, no dependency on any one entity, in our case, banks or financial institutions. Everyday computers fuel the growth of Bitcoin network.

In the next post, I will explain the technical inner working of Blockchain namely,
1.How transactions work
2. How data gets transferred in a blockchain network

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Bitcoin Address: 186LZNFgGCMfa3x2MmyJY5rMVu7aFHxxW5
Ethereum Address: 0x552410434f2E74Ccf13038325Fc55f0DAB8Bb772