Bitcoin has been kicking around for more than ten years now, but it turns out a lot of people are still perplexed by it and how it works. Folks still hassle me about it all the time. What is bitcoin, they ask with their perplexed little faces. Welp, let me try and explain it to you as best I can.
Bitcoin is a kind of digital currency which is not tied to any bank or country, making it completely decentralised in nature. It exists as one of the thousands of digital currencies referred to as cryptocurrencies, all of which aim to serve different purposes. In other words, bitcoin is just the cryptocurrency everyone knows about, mostly because of its meteoric rise in value and subsequent crash earlier this year.
Let’s explore some of these ideas separately.
What is cryptocurrency?
Cryptocurrency, or crypto for short, is simply an overarching term given to any digital currency which operates on a blockchain. Bitcoin is the biggest, but you may have also heard of Etherium, Litecoin, Monero, or Zcash. These are often referred to as altcoins.
Each crypto generally aims to serve a specific purpose. For example, Titcoin is used exclusively by the adult entertainment industry.
What is blockchain?
In basic terms, blockchain is a public digital ledger that is designed to be un-hackable. While it’s most notably used as a way to track and verify monetary transactions, it can also track and verify almost any kind of data, making it an incredibly secure platform which has the potential to change the entire internet.
Each chronological change on the ledger is referred to as a block, while the larger string of changes is called a chain. Blockchain. Makes sense, no?
What makes blockchain so secure is its decentralised nature. A master ledger does not exist on any one server and instead, exists on everyone’s computer at the same time. That means that every time it’s updated with new information, every computer using the platform must agree that the change is legit.
That means if someone wanted to falsify records on the blockchain, they would need to hack every one of these computers at the same time, as opposed to a single centralised database.
Everyone has access to the ledger at any time, but without any identifying features.
Ok, so what is bitcoin then?
Like I mentioned earlier, bitcoin is just one type of cryptocurrency, but it’s the one that started it all, so it’s the one that got whacked into all those headlines you’ve read over the years, which is why you’re asking, “what is bitcoin?” rather than, “what is cryptocurrency?” It’s kinda like asking “what is Facebook?” instead of asking “what is social media?”
Bitcoin was the first digital currency to use blockchain technology.
Yeah, but why does it have value?
Bitcoin has value because it can be used as money. Its value is mostly tied to how many people are using it and is backed by mathematics, along with having a capped amount. The amount of bitcoins which can be mined is capped at 21 million.
Whoa, what is bitcoin mining?
Mining is a competitive process where computers process transactions on behalf of a blockchain in exchange for the currency itself. This is essentially how bitcoin and most cryptos function.
When you send money to someone using a blockchain, that transaction is processed and verified by every member of that blockchain, and in return for completing that work, you earn a portion of the currency. As time goes on, these processes become more complex, which means the processing power required to “mine” becomes greater, which is why it’s now mostly done by corporations who can afford to run big hulking room-sized computers.
In other words, mining boils down to earning small amounts of money in exchange for running a very powerful computer.
Why bother with bitcoin or any crypto?
There are plenty of advantages to using crypto and many of them boil down to its decentralised nature. Some like to use it for purchasing drugs or other illegal things on the darknet because it can’t be traced. But it’s also great for secure transfers simply because of how blockchain operates.
Because a crypto’s blockchain exists on all of the computers associated with it, it’s impossible to create fraudulent entries. To explain, let’s pretend that blockchain is Google Docs and a regular financial database is Microsoft Word.
For a Word document to be amended by another person, you have to send it to them, they change it, then they send back the amended copy. In this scenario, neither one of you can view or make a change while the other has the document. You are locked the hell out.
With Google Docs, both of you can edit and view the document at all times. No one is playing silly-buggers because both of you can see and verify the changes, along with everyone else within that group (blockchain). Everyone has to agree on the outcome for it to work.
It also has the potential to shake up a whole number of industries, particularly in the financial sector. Because blockchain can securely verify transactions between two parties, it effectively cuts out the need for a middle-man in many cases.
So there you have it, folks, hopefully, there’s enough info in there to pass on to your uncle at Christmas lunch when he asks, “what is bitcoin?” just as you once did.Image: Getty Images