Demystifying Bitcoin & The Blockchain
In our last article, we discussed the problem that bitcoin solves. We covered the fact that all transactions that occur between any two parties usually require a great deal of trust.
We then mentioned that central authorities such as banks are institutions designed to facilitate transactions between unfamiliar, untrusting parties. This means we no longer need to trust the party we are dealing with — but rather, we place our trust in institutions to make sure the transaction goes as expected.
However we also raised the concern that these institutions can sometimes get corrupted, or fall victim to attack — thereby leaving us and our value vulnerable.
Whom then can we trust to make sure that we are not cheated? This is where we proposed that bitcoin was essentially a platform that we could use as a means of creating trust so as to facilitate business transactions and more.
So How Does Bitcoin Enable Trust?
The Bitcoin system does not rely on a vulnerable, corruptible central authority to manage value transfer. Instead, the bitcoin system relies entirely on secure mathematical calculations that must be performed correctly by not one but every computer in the system — this way it has no central authority that can be attacked, corrupted or manipulated but still allows for a trusted means of transacting between unfamiliar parties.
Bitcoin, In One Sentence
This technology is fairly young and not yet intuitive so explaining it requires some level of patience. If it were possible to summarize bitcoin into one sentence it would go something like this:
Bitcoin is a unit of currency that resides as a native digital asset underpinned by the blockchain.
This means that even as the blockchain gives us a trusted platform, bitcoin then exists as a trusted form of money that exists entirely on the blockchain. Bitcoin isn’t stored in a file somewhere. It is actually represented by transactions on a blockchain.
The blockchain is similar to a global spreadsheet or ledger which uses the computers of volunteers in the bitcoin network to independently verify and approve each and every bitcoin transaction. The blockchain is distributed, meaning that it is maintained on the computers of volunteers around the world leaving no central database to hack or tamper with.
The blockchain and its transactions are completely public, so anyone can view it and no single institution is charged with auditing the transactions and keeping the records. In fact, all the computers have the exact same copy of the blockchain and they have to all agree on the transactions that are added on it. This makes the blockchain a full and accurate representation of every transaction that has ever occurred as agreed upon by the entire network. A trustworthy record of every transaction.
This blockchain is also protected by heavy-duty encryption that maintains it’s virtual security. Every single transaction in the bitcoin system is made in plain sight for anyone to independently check through by the execution of simple, secure verification rules to make sure that every transaction is valid. So no one can manipulate or cheat the system because there is full transparency — and all this is done without a central authority.
Every ten minutes, all the latest transactions that have been made are verified, cleared and stored in a block which is securely linked to the preceding block —creating a chain of these blocks that make up the blockchain. Each block MUST refer to the preceding block for it to be valid. This is done in such a way that the entire structure permanently time-stamps and stores each exchange of value, preventing anyone from altering the ledger and so past transactions are irreversible.
Now those last few paragraphs are quite a lot to digest. At its core, Bitcoin is the digital money that is secured by the technology called the blockchain. This technology replaces the job of the central organization of managing this money by decentralizing this task by making everyone on the network part of the validation process and performing this validation in full view of the entire network.
Bitcoin Through A Series Of Questions
Over the next few articles, we are going to logically build out bitcoin and it’s blockchain through a series of questions. Remember when we mentioned that the blockchain is actually a combination of several different ideas and technologies all unified into one to create a trusted platform? Well, we’ll take a cursory look at each of these components and you’ll soon realize why they are important and what functions they serve.
Paying For A Coffee ☕️
Let’s consider an example. Say you want to pay for a coffee at a Café. After making out your order, you would normally simply use a bank card to make the payment.
To greatly simplify the function of banks, let’s say their main job was that they kept your money for you and facilitated the making of payments such as this.
How could they do this? What if they maintained a piece of paper that recorded how much money each person had and every time a transaction occurs and someone sends another person money:
- The paper was checked to see that the person actually had that money
- The transaction was noted down on the paper — and the payment made by removing the amount from the sender’s account (debit) and adding the amount to the receiver’s account. (credit).
What if the bank couldn’t be trusted to keep the money safe and not tamper with it? What if the piece of paper was destroyed? Well, we might have a solution to this…
As a parting remark, I’d just like to mention that I’m extremely excited to have you join me on this journey as I explain and build on this technology. I certainly believe that it will be incredibly impactful to you and I, in how we interact and function in the coming years. I’d love to connect more with you, so make sure you leave a comment, question or critique below!