Demystifying Bitcoin, Block By Block
By Devika Bharadwaj on ALTCOIN MAGAZINE
Unless you’re living under a rock, you sure must have heard of the words — bitcoin and blockchain. Sound familiar, don’t they? It’s that thing millennials pretend to understand and baby boomers never want to try to understand.
How is this article different from a million others out there? It’s because until I wrote these 1000+ words on what bitcoin and blockchain are, I was one of the millennials who only pretended to understand these terms but did not actually know what they actually meant.
So What Is This Bitcoin And Is It For Real?
When they say bitcoin is an open book, they really mean it. Bitcoin is a digital ledger that aims at righting many wrongs in our current way of transacting and trading. While for most of us the system we have today may seem pretty good as it is; it still involves going through a third-party i.e. the middleman such as a bank — who we have to trust completely with our money, and give some of it away to so that we can use it.
Enter bitcoin — a peer-to-peer technology that allows you to transact directly with another party; so instead of a company or bank doing the transaction, there’s a bunch of software codes that run the show.
How Did This ‘Bitcoin’ Come Around?
What we love most of all is a mystery, and there is nothing more mysterious on the internet today than ‘Satoshi Nakamoto’. In 2008, when the world was dealing with the global financial crisis and its effects, Nakamoto — an identity that remains unknown even today (unless you believe the whole Craig Wright charade) — wrote and published a whitepaper called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ on a blog.
What Nakamoto proposed is a simple system where instead of banks recording all digital transactions in one place, all users can record all transactions at the same time. So if any of us try to get naughty with the system, it would be noticed and the transaction would be rejected.
So How Can I Trust Bitcoin And A World Full Of Strangers On It With My Money?
As Satoshi puts it in his paper, “the only way to confirm the absence of a transaction is to be aware of all transactions.” All transactions are announced on the digital ledger and are visible to everyone. Which brings us to another important aspect of the technology, is it safe to put all my information out there? While all bitcoin transactions are public and open for anyone to see, it is encrypted and cannot be read by an unauthorized user.
Who controls it, you ask? You, me, everyone using the network. No government, bank or any person controls its flow or can charge a fee on it. What Satoshi proposed is for “two willing parties to transact directly with each other without the need for a trusted third party.”
The result? A quicker, easier and cheaper way to transact and send money, anytime, anywhere.
Enough About Bitcoin. What’s This ‘Blockchain’?
Blockchain is the underlying technology that allows bitcoin to operate. Many people, I included, think bitcoin is synonymous with blockchain. However, blockchain is the technology whose primary application has been Bitcoin, but it can be used in various sectors such as healthcare, supply chain management, financial services, retail loyalty programs, and so on.
So a blockchain really is a decentralized, digital ledger that continuously keeps updating and tracking record of digital transactions being made across the world.
What’s makes it tougher to manipulate is that it’s a ‘write-once, read-only’ database where transactions can only be added and never be edited or deleted. Once something is up there, it’s there forever.
So to sum it up, blockchain is an underlying technology that makes Bitcoin work.
Is Transacting Using Bitcoin Safe? What About My Data?
Traditionally, you’d need a third party you trust to limit information about your transaction and your data. Since the purpose of Bitcoin is to eliminate the third-party, cryptography is applied to Bitcoin transactions.
Transaction information is encrypted in a bunch of random codes and thus cannot be tied to one particular source or identity. Members of the Bitcoin network will only be able to see random letters and numbers string together, while authorized parties involved will be able to see the information.
Additionally, every new transaction is shared with each and every person on the network so that everyone is enabled to keep a tab on the system and ensure no fraudulent activities take place. With an ever-increasing number, surely not everyone will wait to check every transaction. It would take forever! Also, how would you know someone you’re buying from also hasn’t used those bitcoins on another previous transaction?
Proof of Work i.e. mining is applied on the blockchain to enable transactions and prevent attacks from happening by dodgy members. Additionally, if someone tries to send the same set of bitcoins to multiple recipients at once, only the first transaction recorded is taken into consideration and the rest are rejected. This ensures there are no discrepancies.
It’s All Making Sense Now, But I Need An Example.
Let’s say I want to buy a guitar from Drogon. But Drogon lives in another city, so he asks me to transfer 10 bucks to him. Now I initiate the transaction through my bank, called XYZ, which updates its system to deduct 10 from my account and adds the same to Drogon’s. All this was obviously a fair bit of effort for XYZ and so they charge me a commission fee for their services.
Now with bitcoin, I simple transact using 10 ’coins’, which are transferred from my account to Drogon’s directly. 10 bitcoins are deducted from my account on the ledge, and 10 are added to his. No banks involved. No government involved. No gold bars or stacks of cash involved. All this magic happens digitally. The transaction is verified by multiple users on the system.
So What’s In Store For Bitcoin And Blockchain?
While many think digital currency is the future, many consider it to be the Darth Vader of the financial galaxy, out to destroy our economy. All said and done, Bitcoin is a young and volatile currency, still being tested by many worlds over, but in one format or another, looks like it’s here to stay.
