The Loser’s Guide to Bitcoin

Everything you need to know about the digital currency, in 10 minutes or less

There Are Two Sides to a Bitcoin

The first hurdle we’ll tackle is the difference between how a Bitcoin is represented and how it operates.

Picture yourself shopping in Manhattan one day. You go to a café to purchase a cup of coffee, pay with cash, and take a seat.

You’ve just completed a transaction: you saw a product, recognized a price expressed in dollars, and paid for the product in physical U.S. currency.

Bitcoin, on the other hand, has no physical form. Because it isn’t palpable nor backed by any government — despite its BTC currency ticker — Bitcoin operates like gold. It’s volatile, openly-traded, and treated like a commodity. The pro to this is that its value is independent of any one nation, the con is that it is not fully embraced and accepted by any one nation.

Double-Spending and Trust

Bitcoin was introduced by Satoshi Nakamoto to solve the problem of trust within the realm of digital payment. (Satoshi Nakamoto was the name used by the person, or persons, who invented Bitcoin, who still remains anonymous today.) With cash, trust isn’t a problem. You exchange cash for a product and the transaction is irreversible. You have your coffee and the vendor has your cash.

The problem with digital transactions is in its impermanence. Someone could
“copy-paste” more money, because digital spending uses digital files that can be copied or forged. Someone could pay for a product, receive said product, and then reverse the transaction before its completed in order to have both the product and their money. Someone could also claim to have and promise to pay money that isn’t his, or isn’t there. All of the above situations are variations of what’s called the double-spending problem, a problem where one person could spend a currency that’s meant to be finite twice, or more, in duplicitous transactions.

To avoid this, we trust institutions such as banks and credit agencies to regulate, authenticate and standardize the process. They confirm the increase and decrease of credit on behalf of both parties and charge fees for the hassle. It’s both time and resource-intensive, and relies on a central authority. Without national backing, digital currencies were too unstable and insecure for practical use; that is, until Bitcoin came along.

Part 1: Blocks

The terms “block” and “blockchain” are now invariably tied to Bitcoin. The highest level of abstraction of a bitcoin is the block. This is, however, a bit of misnomer; think of the block more so as a page.

Part 2: Mining and Miners

In the field of accounting, a junior accountant often bears the brunt of the work.

Part 3: Proof-of-Work

The security of the multi-billion dollar industry begins with email spam. The economics of computer time vs. human time means it takes an individual much longer to weed out and delete spam than it does for an automated program to produce the offending emails. In the late 90s, email service providers figured out how to use the same economics that email spam thrives on against them. They required every incoming email request to pass a proof-of-work.

  1. Spend the time it takes to solve the proof-of-work to send the spam.

Part 4: Economy

Banking is a peculiar industry. It’s the only industry that’s paid in the same goods it manages. In case you’re in any way confused, we’re talking about money.

Conclusion

Bitcoin, and associated blockchain technology, has become a force to be reckoned with. Updating the accountant’s ledger for the 21st century, blockchain has built a system of checks and balances founded on mathematical proofs and economics to rule out the middle man. Proof-of-work systems replace the need for a central authority and, by emulating the self-interest of the finance industry, create a veritable army of miners fighting to reinforce the security of the proof-of-work. However, despite its success as a currency, Bitcoin still remains an experiment of trust. It is an experiment against central authority — that of banks, credit agencies, and other individuals as flawed as ourselves. The experiment may still be in progress, but if the recent and mounting attention paid to Bitcoin says anything, Nakamoto just might have been on to something.

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