Bitcoin: A Real Introduction
Bitcoin is a bit of a media star at the moment, you’ve probably heard about how its the go to currency for people buying illegal drugs online, how it’s being demanded as ransom for hijacked company data by hackers, how it’s recent price spike will be short lived or even how it’s use funds terrorism. Bitcoins illustrious reputation within the media has usually been negative or fatalistic in most cases. Few articles have recognized it as the best performing investment asset of the last 7 years (bar 2014). The technology behind it is often ignored; the reasons for it’s climb are never examined; information on how it works is often obscure.
When I speak to people who feel they know everything about Bitcoin due to media exposure and I ask them; what is Bitcoin? How does it work? Where is it’s value? I never get a straight answer. So in 2010 (yes 7 years ago); I decided I was going to find out for myself; and this is what I found…
So what is it and how does it work?
Well in essence; Bitcoin is a decentralised international cryptographic payment network. That’s a mouthful right? Well it get’s easier to understand from here. Bitcoin relies on something called the block chain, All the blockchain is; is an un-hackable peer to peer program; that holds a ledger that records cryptographical data. This could be any data, from medical records, to your bank account details, even music or film.
Bitcoin is only one cryptocurrency; out of over 1000 other types of crypto-currency/networks (not all crypto’s are currencies, different data for different fields). Bitcoin is the first cryptographic blockchain and currently the most popular; holding just under 50% of the cryptocurrecny market share, a market currently valued at over $150 Billion Dollars.
Could this figure be tantamount to the beginnings of a shift in Global Internet Infrastructure/Economic Technology?
Well firstly let’s try to understand what this means? To do this, lets compare Bitcoin and other Cryptocurrencies to an ‘international payment network’ that you are dependent on and use every day. Your Bank Account (part of the Swift Network).
97% of pretty much everyone’s’ money is currently held in a consumer bank account owned by a private bank, sponsored and subsidised by your local government. Your bank account and it’s contents are currently held in the form of digital 1’s and 0’s on your banks’ database; a programmed ledger, along with everyone else’s. In an ideal world only you and your bank have access to your bank account. However this is not always the case.
Legally the ledger and it’s contents are directly owned by the bank (possession is 9/10ths of the law).
Ever wondered why on some debit and credit cards; there is a disclaimer stating that the card is owned by the issuer (usually Visa or Mastercard); did you ever think the same applied to your bank account too?
Ever wondered when the programming used by your bank to store and send your money, was first coded? Well; I’m gonna tell you. Way back in the 70’s, it was written in obscurity on a computer with less than 1% of the processing power of your current smartphone. And to say the least, it’s extremely vulnerable. Why? Well because computers simply weren’t powerful enough to run the encryption that is employed today; the code needed to be cryptographically basic for the hardware employed.
On top of being extremely vulnerable; banks also maintain an ability to create money, or money like ‘credit’ that can be transacted and spent just like money. This can have fatal consequences on banks, as well as the economy. This was witnessed with the ‘credit crisis’ and the ‘sub prime mortgage crisis’ starting in 2006. If you still don’t get it, watch the movie ‘The Big Short’ Christian Bale, Brad Pitt and Ryan Gosling do an amazing job at showing the audience what really happened from 2005–2009.
Have you ever wondered why banking fraud, accumulated money scams, like these: (BBC article, Daily Mail Article, as well as others; Types of Banking Fraud) cost the economy up to a 100 Billion pounds a year?
Well, like all my other questions I am going to tell you; it’s literally because our current international banking network is ancient technology; that accommodates invasive technological innovations created by hackers.
On top of this most Commercial banks tend to have one central super secret server located in Silicone Valley and two super secret back up ones in China. This is to try and mitigate hacks, with some success. But if all servers are destroyed, corrupted or hacked at the same time (like in Mr. Robot) all of everyone’s money, debts and financial assets could be lost/corrupted in an instant.
This is why data security firms are able to grow so rapidly and perform extremely well in the current economic crisis; because banks literally depend on them for their existence.
So how does bitcoin compare ?
The main difference in this respect between blockchain and current banking systems; is that bitcoin/blockchain requires no bank or central authority for continuity.
Blockchain is brand new technology (like email was to fax in the 90's). And unlike current banking; It is democratically regulated through decentralised voting. And changes to the mathematical principles and the core program can be commissioned if a consensus of 80% of the miners on blockchain is reached; achieved in June this year to increase Bitcoins capacity to handle transaction traffic.
In a similar fashion to your bank; the blockchain or programmed Bitcoin ledger, also stores everyone’s account data & wallets and how much money it contains. But blockchain isn’t owned, controlled, managed by any one entity; it is purely community owned, controlled and managed 24 hours a day, 7 days a week; no downtime. It is a de-centralised distributed ledger that operates with democratic autonomy.
How this is achieved, is through a peer to peer trust system/gloabl network. If you’ve ever torrented movies or music in the past, you’ve probably heard of peer to peer downloads, where you download/seed the same file, that is stored on up to 50 ‘peers’ computers connected to the network, (live visualization here).
The peer to peer aspect of the blockchain ensures that each user/node holds and maintains an autonomous copy of shared file or in this case, the Bitcoin ledger. So that a complete copy of the blockchain is stored on every ‘node’ (a users or ‘peers’ personal computer/server) and each transaction is verified by a number of ‘nodes’. If there is an attack on one node; it would not effect the entire network; because the corrupted node fails to match 99.999% of the network it’s compromised content would be rejected by the network.
A ‘Miner’ (a person that donates their personal computer processing power to the bitcoin network) maintain the network in return for a dividend paid in Bitcoin.
If a ledger on one persons computer fails to match the others on the blockchain; a democratic consensus automatically maintains that the failed user corrects their ledger instantly. The more people that use bitcoin; the more that nodes start popping up; the more impenetrable and democratic it becomes; but more on this later or click here for detailed info from the Bank of England.
For any entity to hack Bitcoin; they would need control of over 50% of all the global nodes and at least 50% of the mining network at the exact same time; considering that there are 10’s of thousands of nodes and 100’s of miners currently; it’s more likely that your banks super secret servers are found and destroyed.
Unlike the money or ‘credit’ your bank can create when making loans; Bitcoin is finite There will only ever be 21 million Bitcoins in existence. They cannot be created out of thin air. In a similar fashion to the gold standard used until 1973. The supply of Bitcoins is regulated by how many miners are on the network, how many blocks/transactions are being processed. There are only 19 million Bitcoins currently in circulation. Mathematical algorithms dictate how fast the rest go into supply.
Unlike Gold Bitcoin is infinitely divisible; for example one, one, one hundred millionth of a Bitcoin or 0.00000001 Bitcoin is known as one Satoshi. It would be possible to have further denominations if supply and value of Bitcoin demanded it.
Bitcoin should inherently rise in Value due to it’s limited supply. And maths doesn’t lie because this has been witnessed with a meteoric rise in Value from under $0.0001 in 2009 to almost $3000 today; for each bitcoin. Granted it’s not been a smooth ride; but each time all of the major banks, funds, media have predicted its demise in it’s short 9 year life; Bitcoin keeps coming back stronger.
So how anonymous is Bitcoin?
You’ve probably heard that it is an anonymous currency used for crime within the media. The fact of the matter is; Bitcoin is completely transparent. Even to the point that it is possible to work out how much each user owns in Bitcoin, and who they’re transacting it with, almost instantly.
You can see all transactions happening live or even look up each and every transaction made with the transaction address (a unique alphanumeric address that identifies each single transaction). If you want to see transactions contained within blocks being processed; click here!
Bitcoin is not inherently anonymous, but there are methods to launder transactions. So that the original purchaser and seller are more difficult to identify via a direct transaction on the blockchain. The process to do this is called tumbling and usually requires a third party to ‘tumble’ the Bitcoins through various wallets ‘masking’ the original buyer and seller.
. On top of the protection that a distributed ledger provides, Bitcoin uses the latest technology in encryption and cryptography, the program itself is extremely versatile and open source; allowing anyone to create their own Bitcoin based currency.
With your bank, only you, your bank and hackers would have access to your transactions.
With bitcoin only the person who owns the wallet has access to their coins, and can decide what to do with them.
This includes everything from international payments, to providing peer to peer loans, to legally transferring possession of deeds of ownership or contracts. Essentially allowing you to become your own bank; and being able to never require a bank in the future. Bitcoins can be programmed, for example; if you wanted to give your daughter some money, but wanted to control what she could buy or where she could spend it, you could program your money to accommodate this.
Bitcoin requires no central server or authority to store everyone’s data. it is powered and maintained by mathematical principles and the users on a peer to peer network (live visualization here).
Like I said for someone to hack bitcoin, or try to steal someones Bitcoin; they would need to hack 51% of all of the ‘peers’/’nodes’ at precisely the same time, and make sure all the miners are offline. Considering that the vast majority of these are PC’s within people’s homes; using a shared IP address; it’s more likely that someone will blow up your banks 3 servers.
This is in essence where it’s value lies. There are no inherent vulnerabilities. This is why hackers prefer this form of currency. It is transparent; this is contrary to the media narrative that it is anonymous.
What other applications are there for this technology?
Being a financial ledger is one use of blockchain technology; if you want to learn more about blockchain technology and how it could be used within other industries (for example like to avoid what happened with British Airways) please stay tuned, and look out for my next article.
Thank you for reading. Please feel free to add your own thoughts, comments or questions And if you can’t wait for my next article; please check out my blockchain twitter feed: https://twitter.com/raphaelshalaby
The pictures and content provided within the links are not owned by the author of this article; but are used on a fair use basis for commentary and education.
Raphael Shalaby — Community Manager for Wirex