In a Nutshell… Bitcoin and Blockchain
This article first appeared over audio on NOA. If you don’t have time to read you can listen to it here.
Bitcoin is a virtual (or digital) currency. It can be used both as a store of value (by saving them in your digital Bitcoin wallet) and as a way to exchange value (by using them to purchase goods or services).
It was introduced to the world in January 2009 by Satoshi Nakamoto — a person (or group of people) whose identity remains unclear.
“The creator’s intention was to create a digital currency that did not rely on any financial institutions”
Ownership is determined by what are known as “digital signatures”. These digital signatures prevent counterfeiting and are stored in your Bitcoin wallet (itself a piece of software installed on your PC or mobile device).
The main difference between Bitcoin and the money in your purse, your wallet, or your bank account is that it is not government or central bank issued or controlled. The creator’s intention was to create a digital currency that did not rely on any financial institutions.
However, one potential threat that all digital currencies face is the risk of “double-spending” (in other words the risk that fraudsters may attempt to spend the same unit of currency twice). Banks prevent this from happening by acting as a trusted intermediary. They determine which transactions arrived first and process them in that order. Cash is immune to this risk because it is a physical currency and once it leaves an individual’s possession it cannot be reused.
Bitcoin is the first digital currency to overcome this “double-spending” threat without any reliance on centralised verification. It achieves this by incentivising a large network of users to verify groups of pending transactions before adding them to a public database known as the “block chain”.
The block chain simply records each transaction and is shared with every user on the network. As a result, your transaction history and account balance is made public; however, your identity is protected because no personal information is ever shared — relying instead on unique account keys (of which an individual could setup one or more). The users who take part in the verification process are known as “miners”.
In essence, each and every Bitcoin transaction is publicly broadcast to the network for everyone to see. Miners then select a number of pending transactions and group them into what is known as a “block”. In order to verify the transactions within the block the miner’s computer must solve a difficult mathematical puzzle by continuously making a series of guesses until the correct solution is obtained.
Once a miner solves the required puzzle it broadcasts its block to the network for other miners to accept. The other miners express their acceptance by beginning to create new blocks, thereby starting the process all over again.
Miners are rewarded for their effort (which is expressed in terms of computing power and electricity, as opposed to physical labour) with newly created Bitcoins after one of their blocks has been successfully added to the block chain. This is also the method by which new Bitcoins are created.
The maximum number of Bitcoins that can ever enter circulation is 21 million.
As of April 2017 there were a little over 16 million Bitcoins in circulation, with each one changing hands for around $1,200. Fast forward eight months to the end of December 2017 and there are 16.8 million in circulation with each one priced in the market at between $14,000 and $15,500.
For comparison, they sold for less than ten cents in July 2010.
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