What is Bitcoin you ask?

So you are considering dipping your toes into the wonderful world of cryptocurrencies but a bit unsure what you’re getting yourself into? Don’t sweat it, because if they are anything like me(dum… errrr umm.. uniformed) I would hazard a guess that a large portion of new investors really don’t have any idea what they bought into.

Well luckily for you my friend, you have taken a step in the right direction. For in googling “what is bitcoin” you have stumbled upon this gem of an article where I will learn you good on exactly what you need to know about this magical internet money that is changing the world as we know it.

Not so at a Glance..

If I was to sum up bitcoin as short as possible, it would go something like:

Bitcoin is the first decentralized digital currency written into an internet protocol which allows users to send value across the blockchain over a communications channel.

Buzzwords everywhere.. so let us unpack that a little bit shall we?

Decentralized: Distributing administrative power from a single entity(think banks and corporations) over a network of users(think the size of the internet). This means the currency is not owned or governed by a single organization.

Digital Currency: Although the monetary value of Bitcoin is only a fraction of what is capable of, bitcoin is best known for its store of value(think digital gold). As with all currencies/resources, Bitcoin is bought and sold at a price discovered through the subjective value theory(think of valuing a new TV more than the $1000 it costs). There are several benefits to completing transactions using bitcoin including:

No Middleman: By having a collective digital ledger which is open and verified by all users of the network the need for trusted third parties(banks, governments, accountants, federal reserves) is no longer required. This results in severely reduced fees to the users as well as entirely transparent bookkeeping.

No Physical Boundaries: Bitcoin is written into an internet protocol which allows users to access/transact funds as long as they have a connection to the web. This means that if I wanted to send a transaction to a friend in say, Africa, I would either have to go through a bank or send cash by mail. Now you might be thinking to yourself, wait… What about online banking or E-transfers? I will get to that next, for now, let's just hammer home that Bitcoin allows payments across both national currency conversions and land boundaries.

Arbitrary Limits: A 2016 report from the World Bank estimated that 2 Billion adults do not have access to traditional banking services with a majority citing lack of money as to why. Now, let us compare that to the upwards of 50% of the population of developing nations having daily access to smartphones cited in this 2016 article. Now those two numbers together equals BIG opportunity. With Bitcoin, which does not set arbitrary wallet limits or sign up requirements, individuals in previously unbanked economies will finally have access to inexpensive financial services. This opens the door to both sending money back home(currently done expensively through traditional banking institutions) as well as new international businesses(small businesses without financial services now have methods to send/receive payments). With Bitcoin paving the way, the economies of these developing nations will see large sustainable growth which will lead to increased development and quality of life.

Internet Protocol: Bitcoin is a new internet protocol(a whaaaat…) or in simpler terms a set of governing rules which are established for operations on a network. Although you might not understand the concept we use these protocols each and every day of our lives be it:

HTTP(Hyper Text Transfer Protocol): So if you take a look at the search bar at the top of your screen, you will see http://xxx. This protocol is the basis for defining both the exchange and formatting of data across communication networks. Its governance decides what actions websites and browsers when given various commands(clicking a link, button, ect…)

SMTP(Simple Mail Transfer Protocol): Whenever you send an e-mail you are using the governance rules set forward for the transmission of electronic mail. At a glance, SMTP defines the steps our emails take in going from an application layer(HTTP) to encapsulate data packets which are being sent over the internet protocol(IP) through our hardware. To be received the route is reversed eventually ending with the recipient accessing the data contained in the e-mail through again the HTTP.

Now Bitcoins protocol was defined in 2008 by an individual using the name Satoshi Nakamoto in an 8-page whitepaper. This white paper outlined a protocol which allowed transactions of value across the internet. It was proposed as a solution to the problem of double spending over a peer-to-peer network. It used cryptography to establish trust over a fully transparent digital ledger distributed across the blockchain. 

Now this is a very basic explanation of the protocol, but if you are interested in learning more I would recommend watching this video which walks you through the entire whitepaper.

The Blockchain: As stated above, the blockchain is at its heart a transparent decentralized ledger or database which records and verifies all transactions across the network. This ledger is taken as an absolute truth, free from deletion and revision, with every transaction being validated and stored since its creation into forever.

This theory of absolute truth is confirmed by a series of individuals termed “miners”. These minors use massive amounts of computing power to verify transactions as well solve complicated mathematical problems to which the are rewarded for “mining” with bitcoin.

Verifying Transactions: At all times copies of this distributed ledger exist on all computers across the network. With each and every transaction a record of the transaction is produced which must be agreed upon by the miners through consensus. If an attempt is made to corrupt the ledger(think creating  Bitcoin, double sending, sending bitcoin you don’t have) miners will not arrive at a consensus and refuse the transaction into the ledger.

Mining: Using immense computing power miners compete to solve a completely transparent, openly available software specially created to mine “blocks”. Blocks are released about every 10 minutes at which point miners compete to successfully create a hash(A seemingly random series of numbers and letters created by applying a mathematical formula to the information of a transaction). Bitcoins protocol demands that each blocks hash must look a certain way(start with 0000….ect). But the production of hashes is such that you have no information as to what it will look like until it is produced and therefore miners must attempt hundred of thousands of computations to solve for an acceptable hash. This is called “proof of work” and is the method at which bitcoins are created. As defined in bitcoins protocol, there is to be no more than 21 million bitcoin in circulation, with new bitcoin being mined ever 10 minutes for block rewards. Block rewards began at 50 bitcoin per block solved with the reward halving approximately every 4 years. This means that in 2012 the block rewards halved to 25 and in 2016 the block reward halved to 12.5 which is its current state.

Again this is a glossed over version, for a more fully complete explanation of the blockchain I would recommend this video which perfectly visualizes the concept.

Value Over a Communications Network: Money, or a store of value, is really only the first application of bitcoin and the blockchain. 1 Bitcoin is divisible by 100 Million units, with each unit being labelled a “Satoshi” after Bitcoins creator. Each Satoshi is both programmable and individually identifiable via digital signature allowing it to represent whatever an individual requires(stock in a company, certificate of ownership, a quantity of a commodity, or even a vote).

Additionally, bitcoin allows “smart contracts” to be written into the code which applies if/or/than statements to form a digital contract. This allows for various applications to be constructed that again skip the step of a middle man. Smart contracts can be programmed to give shares of a company upon the deposit of bitcoin, withdraw bitcoin monthly for payment of bills/services, or even program a service upon completion will be paid; or refunded if uncompleted or completed late.

Soooo yeah… That at a glance is Bitcoin

To reiterate, Bitcoin is a digital currency without boundaries written in the form of an internet protocol allowing the transfer of value(both monetary and intangible) over a communications network ensuring complete transparency and accuracy through the use of blockchain technology.

Pheeeewwwww… I think I got it all

Now you get to decide what you think, world changing technology or a flop? Only time will tell.

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Thanks for Reading