A simple explanation for Bitcoin’s revolutionary technology
Bitcoin will hit 50k — 100k! Blockchain is set to revolutionize the world! Get on the boat or miss out! It’s the new internet! The rallying cries echo from proponents of all types from all corners of the industry and internet: on Reddit, Twitter, Forbes.
Bitcoin is a scam! ICO’s are fraudulent! It’s a bubble! It has no real value! For every supporter of this market and technology there seems to be an opponent with just as convincing arguments, just as big company affiliations.
So what is the truth? I plan to write a series of articles both to highlight my role and interaction with this new industry, as well as to try to explain this technology in a way that everyone can understand: from your beloved grandma (I’ve tried to explain it to mine) to the deadbeat living in your garage.
Why should you care?
From catching up on the newest Stranger Things season on Netflix to reading about the next political piece, you’re a busy person. So first let me make a compelling case as to why you should spend your precious time caring about this. The reason you should care is because cryptocurrency, blockchain, and Bitcoin solve a real problem in our world. The internet revolutionized peer to peer interactions. Suddenly, people could communicate, transact, and share information with other people from all around the world: revolutionary. The issue is that this platform is not socially scalable. By socially scalable I refer to the idea that there are certain limitations to large groups of people working together. In villages of 150 people, potential for shame, reputation within the community, and intimate relationships ensured that most participants stayed largely ethical and trustworthy. Don’t play by the rules and you starve alone and outcasted — quite the disincentive.
Now take a city of 100,000 people. How can a society ensure that people play by the rules when no one knows one another? Therefore, even in this setting, we have sizable assets like a home and bank account, and institutions like courts, credit agents, and police that enforce the consequences of not playing the game properly.
Now think of the internet — people can transact over enormous distances, anonymously, and with virtually no repercussion for bad behavior. Just read through your favorite Twitter troll or CNN’s latest digital bullying article to see a fine example of this at play. Scam someone on eBay? Bad feedback will ensue, sure, but do it wisely and no one can arrest you — and you can probably keep both your new Air Jordans and your money.
Blockchain solves this issue. It allows for the average person to manufacture trust in a digital world.
“Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.” — Marc Andreesen, inventor of the first browser, thought leader, and top VC.
Great. You kept reading. Now we get to the good stuff.
To understand this tech, we have to understand a few of the frequently used terms: Bitcoin, blockchain, and cryptocurrency. Bitcoin and blockchain are commonly confused — or more than likely, you’ve simply only heard of Bitcoin and think blockchain is what your three-year-old nephew leaves around the house for your innocent bare feet to find during late night bathroom trips. But Bitcoin is not the same as blockchain. Blockchain is the underlying technology behind Bitcoin. Just like Google and the internet are not the same thing. In this metaphor, Bitcoin is Google — a product built on the the internet — and the internet is the blockchain. Bitcoin is a cryptocurrency — it’s a digitally encrypted currency — but it’s not the only one as you will subsequently learn.
Back to Bitcoin. Since it was the first major cryptocurrency and application of blockchain, if we understand Bitcoin, we’re well on our way to understanding blockchain. Bitcoin emerged in early 2009, just after the economic crash. The world’s confidence in our financial institutions and centralized currencies (currencies maintained and issued by a central body: dollar, euro, yen, etc. — also known as fiat) was at an all time low. An unknown figure, or possibly group, under the pseudonym Satoshi Nakamoto released Bitcoin as open source software. He also released a white paper — a document describing the technology. The world loved it immediately! Just kidding…
Bitcoin had a rough beginning. Hardly anyone saw the value. Early on, 10,000 bitcoin was once used to pay for a pizza; looking at its recent price of $8,000, I think we’ve found the most expensive pizza ever sold (80 million dollars)! …and you thought you regretted spending $39.95 on As Seen on TV Sauna Pants.
But Bitcoin’s price eventually climbed to $1,000 in the winter of 2013 and saw an explosion in 2017. Bitcoin was revolutionary because it solved the two inherent issues with a digital currency.
- You can copy and replicate code — if I can copy and paste this image of Emma Watson into this article, why can’t I just copy and make more bitcoin?
- The “double spend attack” — since it’s not a tangible asset, why can’t I send the same bitcoin to two people?
Bitcoin’s brilliant solution:
The solution Bitcoin developed for problem #1 was, wait for it: to make bitcoin not exist. Just imagine being a fly on the wall when that idea was pitched…
Here’s what I mean. Bitcoin isn’t a piece of code. It’s not a picture of Emma Watson. There isn’t anything to copy. It’s a digital ledger. Just like your local bank keeps a ledger of your account, tracking all your withdraws and deposits, Bitcoin does the same. A ledger is sort of like a checkbook where one records their transactions. Except this ledger is decentralized. Instead of one company holding the ledger, every computer that participates in the Bitcoin network holds a full copy of this ledger. And this ledger tracks the transactions of all 16,682,562 bitcoin in supply today. When you create a digital crypto wallet (we’ll talk more about this later), you are creating a digital identity for yourself on this ledger. So when someone sends you a bitcoin (or more likely, a fraction of one), it’s not that you suddenly have the code for a bitcoin, it merely means that the ledger reflects a transfer of one bitcoin to your address. If you want to spend that bitcoin, all you need to do is broadcast a message to the network to update the ledger, effectively transferring that one bitcoin to the wallet of your choice. That’s why you can’t just replicate or steal a bitcoin — there isn’t anything to replicate or steal! If you want to “steal” a bitcoin, you need to effectively alter the ledger.
But you’re clever — that’s why you only buy beer during happy hour and still use your student email to get cheap Spotify even though you graduated last year — so here you ask: “Ok, why can’t I just alter the ledger?” First, don’t interrupt me — this is my spotlight. Second, the answer is because you need to convince 51% of the network that your transaction is legitimate. Read on to fully understand why this is preventative.
“[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lot’s of people will build businesses on top of that.” — Former CEO of Google Eric Schmidt
When a transaction is broadcasted and approved by at least 51% of the network, the transaction then needs to be confirmed. This is where the blockchain comes in. The blockchain is a collection of transactions. The transactions are lumped together and placed in a block as part of a long chain. It’s called a chain because each new block references every block before it — so changing one block corrupts the whole chain. Each block has approximately 2,000 bitcoin transactions. To place this “block” into the chain, computers have to solve a puzzle. It’s basically a combination lock where the only way to unlock the puzzle is to find the correct combination. The only way to find the combination is to literally guess numbers randomly. The faster and more powerful the computer, the faster the computer will find the solution. Solve the combination, confirm the transaction. Confirm the transaction, get bitcoin as a reward. These participants who use their computers to confirm transactions are called miners. No, not like the minors in your local sex offender’s fantasies. Miners in the sense that they do work on behalf of the network and receive rewards in compensation.
Once this transaction goes into the block, it can be seen by everyone, forever. It can’t be edited, deleted, or modified. To change this ledger, one must be able to override 51% of all the computational power on the network. To do this, you better have one powerful computer — at this stage, no one does.
So you can’t “double spend” because the network wouldn’t allow it. One transaction would be approved and the other rejected depending on which was broadcasted to and processed by the network first.
Unlike with most assets where a higher value makes it more difficult to secure against theft, Bitcoin works inversely. A $10,000 bitcoin is more secure than a $500 bitcoin. This is because a higher price means that their is more incentive to secure the network; more incentive corresponds to more miners and much more powerful computing power.
I know this was long and we didn’t even cover everything I wanted to. But that’s why there’s no limit to how many “parts” you can have. Just talk to any Hollywood blockbuster director today. Hopefully you now have an understanding of the why Bitcoin’s development was revolutionary, what the difference is between Bitcoin and blockchain, understand how Bitcoin uses the blockchain to maintain its security, and are convinced to keep reading. In subsequent articles, I’ll delve deeper into bitcoin, discuss its uses, intrinsic value, and whether it’s a bubble; explore the many other use cases of the blockchain; and look at the future of this industry.
Now get back to that Stranger Things episode and stop being so productive.
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Disclaimer: This is not investment advice. Do your own research.
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