Cryptocurrency and Bitcoin: An overview
“Bitcoin is the real Occupy Wall Street”
-Julian Assange (Founder of WikiLeaks)
Now I can understand that you might have a lot of questions going inside your head like what is cryptocurrency? What is the difference between cryptocurrency and bitcoin? How wall street is involved in this topic? Why Julian Assange gave a shout-out to Bitcoin?
So at the end of this article, I hope that I can give you answers to those questions and an understanding of how all those things are connected to each other.
A glimpse to the history
So, how did we evolve from an era of bartering to an era of cryptocurrencies? Let’s take a look at this. No, I’m not going to tell you a boring history lesson but let’s take a look at how we got into where we are today.
Barter is the exchange of resources or services that are beneficial for each other. This practice goes back thousands of years. But people understood that it is too simple which is practically impossible to do when it comes to trading. So they invented a medium in which the value of a unit of that medium is established by mutual understanding (by agreeing). That was when ‘Money’ or ‘Currencies’ comes onto the stage. Then the concept ‘Bank’ was introduced because of some problems people faced when using money ( like bringing a huge amount of money from one country to another country when trading, threats from thieves when carrying money on long distances).
However, gradually these banks (and also governments) occupy a big role when it comes to controlling and regulating money. It means that people use banks as an intermediary for dealing with money. As an example, if you want to send money to one of your friends, you don’t send money notes or coins by putting them in an envelope. What you do is transfer some money from your bank account to your friend’s bank account. These systems are called centralized systems.
The concept of cryptocurrency has emerged against these centralized currencies. The first successful cryptocurrency that was made is Bitcoin. But most importantly, Bitcoin is a cultural revolution rooted in the ideals of libertarians and Cypherpunk movement from the late 80s.
The Bitcoin research paper was first published in October 2008, concise proposal for the structure and function of a peer-to-peer electronic currency by Satoshi Nakamoto (This is actually a false identity that is used by some individual or group of individuals).
What is Occupy Wall Street movement?
This began in New York’s financial district in 2011 against economic inequality. The main issues raised were social and economic inequality, corruption, undue influence of corporations on the government, especially in the financial services sector. According to Julian Assange, Bitcoin, or in other words, decentralized cryptocurrency systems are the real practical solution to the problems raised by the Occupy Wall Street Movement.
The concept of decentralized currencies
Before jumping into decentralized currencies, let’s talk about the purpose of the banks and governments in centralized systems. The first thing banks do for us is managing accounts. We can spend the money or the funds only after we got verified by the bank. How does a bank do that? They ask us to provide identification before any activity can take place, and they get that identification based on how we are recognized as a person by the government (example:- identity card).
The most important thing in banks is they provide TRUST!
Banks are run by educated professionals and under the consultation of your country’s government. So, if you trust the standards of government, then you can trust the bank. But if you don’t, you have to look for alternatives. This is where Bitcoin comes into play. One of the main aims of Bitcoin is to create a trustless system. Meaning that you don’t have to trust entities made of professionals, instead if you have trust in logic and mathematics, you can trust the Bitcoin network.
So you might be wondering what is Cypherpunk movement and how Bitcoin was inspired by them.
Cypherpunks advocates for the protection of privacy using cryptography. They don’t trust governments or large organizations like banks to respect privacy. Centralization gains a great deal of power over society by collecting unimaginable information from millions of users. The Cypherpunks were some of the first to be concerned about this issue that central entities are stripping away the freedom of the general public.
So, however, back to the topic.
Bitcoin is not backed by any central entity. Instead, it is built by users for the users. The Bitcoin network is a group of users communicating with each other as part of the Bitcoin protocol. This network substitutes all the functionalities of the central bank.
So how does it do that without a central entity? How this system keeps records of the history of transactions? How it controls the behavior of user accounts? How it censors and get rid of malicious users? The most common attack is known as the double-spending attack, which means that some value is used for more than its worth. As an example, consider there are three users A, B, and C. A’s account has ten coins. A wants to buy two vehicles each worth ten bitcoins, and B and C are suppliers of those vehicles. So A makes two transactions with both B and C which are worth a total of 20 coins. So that is malicious activity. In a centralized system, you know how these kinds of problems are avoided. Because there is a third party that keeps track of transactions and regulate them. But in a free decentralized system, there is no such entity that acts as a “watchman.” These kinds of problems happen in the context of the complete removal of centralization. This is why so many decentralized cryptocurrencies before Bitcoin failed.
So how Bitcoin overcome these problems and become the first successful cryptocurrency?
Because of these two things:
1. The Blockchain
2. Proof-of-work consensus protocol
What is Blockchain ?
Blockchain is the data structure that is used to record the history of the transactions in the Bitcoin network. Confused!?
Before starting to talk about databases that are used in Bitcoin, let’s recall again the requirements of the Bitcoin protocol: No central entity must control the information and a way to able to read and write to the history. So we must use a distributed database. Information must be stored in some kind of a distribution manner. It means that the information is not stored by only one entity or only one location. But then, if we choose some entities instead of a central entity to store information, still there is some centralization sneaks. Because we have to trust the maintainers of those entities, which violates one of the main aims of Bitcoin protocol that is to build a trustless system.
Therefore the solution is to provide everyone a copy of the ledger. In other words, every user in the network act as a part of the database. So every person has control of their own data, and no person can decide for anyone else because every person has an equal right and legitimacy to vote on the validity of transactions. Therefore, no person can be bribed, no person can hack, and no person can cheat to alter the database. This is the maximum stage of individual independence. The maximum stage of decentralization!
But, in such a large network, many transactions happen every second. Therefore, it is hard to deliver this information to all the users in the network.
This is where blockchain comes to the scene.
Every update to the database is a batch of transactions grouped into what are called blocks. Every block is connected to the previous block. This forms a magical data structure known as “Blockchain.” Every block is an update, and a chain of blocks represents a history. Nakamoto mined the very first block on the 3rd of January 2009 on the Bitcoin Blockchain, now known as the Genesis block. Now I hope you got an idea about what the blockchain is.
What is proof-of-work consensus protocol?
So I think now you are having a question that how everyone agrees on what is stored on the next block? How do we decide which transactions are valid to make sure that no corrupted information is accepted by the network because there is no central entity to do this.
In Bitcoin network, users must come to a consensus (agreement) on the next valid update.
The solution is proof-of-work consensus protocol. “Proof of work” means that users provide evidence of spending resources. It is the method by which computing power is translated into voting power. The method of voting that made Bitcoin the first successful cryptocurrency and inspired voting mechanisms for practically every other cryptocurrencies to follow. Therefore if some user tried to make a lot of identities to get a big voting power it is not possible because the CPU power of that user is scarce and he/she will get a voting power according to the CPU power they have (There are special algorithms to detect the CPU power).
So I hope that now you are having a rough overview of cryptocurrency and Bitcoin. I hope to discuss more about these topics in upcoming articles. So let’s meet again with another interesting topic like this.
Stay Connected, Stay safe!
