What is this Bitcoin Thing?

The concept of money came into existence when there was a need for a verifiable record that could be trusted to signify payment trade or exchange of goods and services. we know it, came into existence between the 10th and 13th century AD, when the rulers of the Song dynasty in China decided to replace promissory notes.

Promissory notes had their beginnings when traders found it safer to deposit their precious metals with a trusted aide and get a note with a seal on it, in exchange. Promissory notes themselves had been in use since the 7th century AD. There, the foundation for the present day money was laid.

The barter system has been known to have existed since at least 10,000 BC. The barter system was a bit of a hurdle for commerce to progress. While a bag of rice could possibly be exchanged for a bag of wheat, what happens when one of the parties had a horse for bartering for a single bag of rice? Certainly breaking the horse down into smaller pieces for the sake of customized transactions was not a solution. That, coupled with the fact that goods of barter perished or died before the exchange created a need for a better transactional system.

Up until then, precious metals as a form of currency was the most important discovery in commerce. Although precious metals offered the possibility and convenience of transacting in customized values, they posed two problems — they could be stolen and carrying them around wasn’t an easy task.

Money has evolved across these three landmark systems of commerce. The one common factor to all these systems is that none of them were designed. They came into being more through convenience than design. Money has more or less performed 4 important functions:-

1. Medium — of exchange for immediate transactions
2. Measure — of value for settling
3. Standard — of deferred payment, for settling debts
4. Store — of value

As the world grew larger in population and reach so did the complexities around money; such as,

Centralization — Authorities could now decide the volume of money in circulation. Hence, more the money, lesser the value.

1. Middlemen — People now had to pay a middleman to transact using their own money!
2. Disputes — Arbitration became a long, tedious and expensive act since money itself became the topic of dispute rather than the solution.
3. Evolution — Technology all around evolved, money did not.

The advent of the internet meant that the world was now a smaller place. The world is moving faster and there is wider access than ever before, but money sadly remained archaic.

Until Bitcoin. Bitcoin is the money that was designed.

Read the next few lines carefully, it will change your life.

How did that money in your pocket come into existence? The government prints it at its printing facility using printing machines. Now, this money can be termed as unlimited in supply; it can be printed as and when the need arises. The decision to print is taken by a select few — and there is no need for a public consensus. The records of these transactions and the money held are stored on “centralized” ledgers that are held and accessed only by banks.

Let’s draw a parallel between the above process and Bitcoin.

All the computers that are involved in the Bitcoin transaction process are connected to the internet and have the following elements:-

1. A Bitcoin wallet
2. Unspent transactions output pool(UTXO)
3. The blockchain
4. The Bitcoin mining software

In essence, it is similar to the traditional financial system. Let’s draw a parallel between the above process and Bitcoin.

A Bitcoin wallet is like your bank account, it lets you receive and store your bitcoin, receive and send them to other wallets.

UTXOs are similar to clearinghouses, where your bitcoin is held, till the transaction is confirmed and verified by the blockchain.

Lastly, the blockchain is a ledger similar to the one at the bank where transaction details are noted. The difference is that it contains all the Bitcoin transactions that have ever happened, including the first ever (genesis block). The blockchain is open source, and can be on any computer, and thus, is a distributed ledger. The transactions are identified by alphanumeric codes, like bank accounts numbers, and hence safeguard privacy.

And finally, the mining software is like the printing machine, that runs the necessary algorithm to create new bitcoin.

Let’s suppose that, Sachin sends Jonty 1 Bitcoin; it is as simple as sending an email. Sachin also sends some Bitcoin to Shane, Sourav sends some to Jhulan and Anil sends some to Mithali and so on and so forth. Now all these transactions are pooled together and recorded on the UTXOs. These transactions sit in the UTXO and in the meanwhile, computers around the world with the mining software are given a problem to solve.

(For the techies and geeks:- it’s called a hash- it’s one-way encryption. The problem is in binaries that mask a hexadecimal number. The first computer to match the hexadecimal number by the way of permutations and combinations is the successful miner.)

On solving the problem two things happen:-

1. The transactions that were sitting in the UTXO is moved to a ‘block’. A block is similar to a sheet in the ledger book. Now, the block has been “mined” and transactions recorded on it will be pushed to the blockchain, stored there for eternity. The beauty of the blockchain lies in the fact that these transactions are what we call immutable — they cannot be edit, deleted or tampered with.
2. The computer that first solves the problem (I.e. he matches the hexadecimal number) gets what is called as a ‘Block Reward’. This block reward is in terms of Bitcoin. In other words, this miner/computer gets Bitcoin. And this is how BITCOIN IS MINED.

Now, Jonty, Shane, Rahul, Mitali and the rest of them receive their Bitcoin. They can use the Bitcoin to buy whatever it is they wish. They can keep it and use it as savings or spend it and use it as money.

This, is what the ‘Bitcoin’ thing is.

Leaving some Fun fact for you stat maniacs:-

The Bitcoin protocol has been programmed in such a way that for the first 2,10,000 blocks, the block reward was 50 BTC, it was 25 BTC for the next 2,10,000 blocks. 12.5 BTC for the next, 6.25BTC for the one after that and so on and so forth…The block reward halves every 2,10,000 blocks. That way, there will only be 21 million Bitcoin ever. The average time for a block to be mined is about 10 minutes.

Now, go calculate how long it will take to mine 21 million BTC.