Basics of Bitcoin and Blockchain

I recently came across the Movie : The Rise and Rise of Bitcoin. And since I’ve been following the development of cryptocurrencies and blockchain for the past year or so, I wanted to share some relevant insights from the movie about the definition and history of bitcoin.

Hopefully this article would help you understand why blockchain has become so popular in the modern vocabulary and allow you to graduate to some nuanced analysis and other advanced concepts / use-cases thereafter.

Technology must be used to liberate the individual.

Some definitions

Bitcoin and other cryptocurrencies are called the mother of Financial renaissance; they’re a money of the future — an alternative to the banking system. The potential of cryptocurrencies is so immense that they fall under the crossroads of technology, philosophy and politics.

Internet changed the way the world communicates. Bitcoin changes the way money works. You can basically put a bank in your pocket. In other words, it’s global decentralized money.

The technology behind bitcoin and other cryptocurrencies is called Blockchain. Blockchain is a brand-new way of transmitting or exchanging money(payments)/assets/health records or commodities (basically something of value) over the internet without the need for traditional banking networks, as well as a means to store data in a transparent and unalterable way.

What is Bitcoin ?

Bitcoin is a new electronic cash system that’s fully peer to peer, with no trusted third party.

Bitcoin is based on a technology called the Blockchain. Blockchain is an open accounting system where thousands of computers over the world work together to track ownership of digital tokens called Bitcoins or any other cryptocurrencies or any other commodities for that matter.

Unlike most currencies, Bitcoins are issued according to a set of fixed rules. The idea was to create money whose value couldn’t be manipulated by a central authority.

When you send someone bitcoin, a transaction is logged, broadcast and sent to the entire network of computer nodes.

After the transaction is verified, it’s recorded in a public ledger called the Blockchain. The blockchain contains a record of every bitcoin transaction that has occurred since its inception (system began) and it’s shared and maintained on the network, so everyone keeps the book so to speak.

Most currencies are issued by some central authority that controls the money supply. Bitcoin is a peer to peer system, so there is no central authority. Instead bitcoins are issued to users who help process transactions in the network. This is known as bitcoin mining.

Bitcoin miners are specialized computers that do the work required to verify and record transactions in the blockchain.

As a reward for their work, the miners earn bitcoin, and this is how new bitcoins are released into circulation.

The system is programmed so that only 21 million bitcoins will ever exist. And as time goes by, the mining reward decreases — the result is a predictable supply that’s governed by scarcity, making bitcoins somewhat like a digital gold.

It’s the first currency of the internet and everyone is free to use it. It is also a solution to the double spending problem.

With bitcoin, you can send any amount of money to anyone anywhere in the world as easily as sending an email.

Some of the protocols used for bitcoin are distributed peer to peer networking, proof of work and public key cryptography. And some of the characteristics of Bitcoin are -

  • It has Computational proof of the chronological order of transactions over the network
  • There is Positive feedback loop induced by the increase of value of bitcoin since its supply is fixed
  • As users increase, the value goes up ( increased demand — > limited supply [capped at 21 M]— > price goes up)
  • With bitcoin, every transaction is public, everyone can see the amount that’s been sent without necessarily knowing the identity of the sender.
  • Bitcoins can be broken down to 8 decimal places 0.00075563 BTC — This means you can send fractions of a bitcoin, so any amount of money can be represented.
  • A bitcoin address looks like a long string of characters, similar to an account number, where your bitcoins are stored. When you send or receive bitcoins, they are sent to this address.
  • The addresses are long and hard to remember. Using a phone to scan a QR code is a fast and easy way to read them.
  • If somebody steals your bitcoin, there are no consumer protections. They are gone and you’re not going to get them back.

History of Bitcoin

2009

The bitcoin and its related technology blockchain was invented in 2009 by a fictitious pseudonym called Satoshi Nakamoto.

The first exchange rate of bitcoin in Oct 2009 was 1309 BTC = $1 USD

Bitcoins were cheap and through the following year, they continued to trend for a fraction of a cent.

2010

In the spring of 2010, The first commodity or tangible good transaction took place when a guy from Florida named Laszlo decided to try using his bitcoins to purchase something. He offered $10000 bitcoins to anyone who would buy him pizza. A man in London accepted and ordered him 2 pizzas through a long distance phone call.

Bitcoin was gaining momentum but in order to thrive, the coins needed to be more widely accessible.

A Tokyo based exchange named Mt. Gox was the first on the scene to take hold on the marketplace and trading volumes started to pick up.

By Nov 2010, already 4M out of 21M bitcoins had been mined and the exchange price briefly spiked to 50 cents per coin.

The market awoke and it seemed bitcoin might have a real potential as a currency.

Around the same time, Julian Assange (the founder of WikiLeaks) came under scrutiny following the massive release of secret US diplomatic cables through Wikileaks.

Funds/donations were blocked to Wikileaks by Bank of America, Visa, MasterCard, PayPal and Western Union.

Bitcoin early adopters proposed using bitcoin to fund Wikileaks.

Two months later, the silkroad, an anonymous marketplace was launched on the dark web. It functioned as an online black market for drugs and other illicit commodities and activities. It used Bitcoin exclusively, because it made the money trail nearly impossible to trace.

2011

By Feb 2011, bitcoin reached parity with US dollar. 1 bitcoin = $1 USD

2012

By 2012, Wordpress and Reddit were the first major sites that accepted and incorporated bitcoin payments.

2013

Libertarian conference in New Hampshire saw attendance from some of the super early adopters of bitcoin.

Closing thoughts

Bitcoin is the biggest socio economic experiment ever conducted on and by mankind.

It is touted that Bitcoin will do to the banking industry, what email did to the postal service. Bitcoin didn’t make the postal industry irrelevant, but it forced it to focus on its strengths, not its weakness.

Cryptography in general can bring fairness to elections. The technology behind bitcoin can be used to build decentralized systems with rules that can’t be cheated.

Stay tuned for more in the upcoming posts!

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