Bitcoin Basics
There are two aspects of bitcoin, the currency and the technology that powers the currency.
In order to use digital currency someone has to keep a record of what’s spent to prevent an individual from using the same $100 to pay 5 people. When you open your banking app or sign-in to your account online you see this record. If you purchase something for $10 online you will see a record of that purchase and see it deducted from your balance.
Accountability without a Financial Institution
Bitcoin was created to preventing double-spending digital currency without requiring a central authority (i.e. bank, Square, Stripe, etc). We’ll get into what bitcoin is and how it works in more detail in a moment.
Reasons for not Using Financial Institutions
High fees, lack of access and concern for privacy & security are a few reasons for not using financial institutions. A peer-to-peer network can provide the support not received from financial institutions due to location or constraints. Data breaches are a constant occurrence. People are becoming more aware of what information companies request and if that information is necessary for them to complete their tasks.
Back to Bitcoin
There are two aspects of bitcoin, the currency and the technology that powers the currency. Bitcoin is a cryptocurrency. This means it uses cryptography to secure financial transactions. Instead of opening an account you download a wallet. Opening a banking account requires you to provide your name, address and some form of identification. Getting started with bitcoin requires downloading a wallet and clicking “Create an Account”. Depending on the wallet you choose no additional information is required.
With a bank, you have a bank account. With bitcoin, you have a public key. There are three things to always remember:
- First, all transitions are publicly posted to a ledger. While the ledger has a record of the transition it does not have identifiable information (i.e. name, address, email, etc.).
- Second, there is no way to undo transactions. Also, because there are no financial institutions there is no way to dispute a transaction.
- Third, do not give anyone your private key. The private key gives access to your account … and since there is no way to undo transitions this means there is no way to retrieve stolen funds.
How it Works
Peer-to-peer funding opens up financial opportunities. Having access has the potential to transform individuals and their communities. For that reason bitcoin in the groundbreaking. When you learn about blockchain, the technology behind bitcoin, you realize that bitcoin is just one use case of the technology.
I’ve heard people use group text as a way to explain how blockchains function. A message (block) is sent to a group of individuals (nodes) and that message cannot be changed (immutable).
Going back to the example at the beginning of this article. Only the buyer, bank and seller know about the $100 transaction. The transaction is centralized because it has to go through the bank. With blockchain, that same transaction will be combined with other transactions to make a block. That block is added to the ledger. Then the ledger is updated on all the nodes (computers). Trust comes from the decentralized nature of the ledger and the transparency of the transitions. The buyer cannot say they sent the money when they haven’t because all the nodes have a record. With blockchain you do not need one person with complete power to referee, there are millions of witnesses.
More to Know
This article only gives an overview of how blockchain works. The bitcoin whitepaper goes into details regarding:
- How cryptography is involved.
- How to know the order of transactions.
- Who adds a block. How and what’s their motivation.
- How to conserve space since public ledgers are constantly being added to.
- Verifications
- Transaction process
One Last Thing
One reason blockchain is more secure than a financial institution is because someone would only have to attack one system when it comes to accessing information from a bank. With the ledger on multiple systems in multiple locations, someone would have to attack all of the computers to be successful. The whitepaper also goes into the difficulty of manipulating the ledger itself. If given the option between several ledgers the nodes go with the one with the longest chain. In the whitepaper, it talks about how difficult it would be to manipulate one transaction and then catch up in length to the accurate ledger.
As more people participate in technology it evolves. Blockchain is no different. Bitcoin showed how to conduct transactions. What happens when you add conditions?
