Hello everyone! Since this is my first post, I figured we would keep it simple and start out with the basics . So today, I want to talk about the basics of Bitcoin and the Bitcoin blockchain! If you are already familiar with Bitcoin and its technology, most of this will seem simple and redundant, but I think it is important for everyone to have a strong understanding of the basics before moving on to anything more complicated!
So what is Bitcoin exactly? Well, on a very basic level, Bitcoin is a peer-to-peer digital currency where all transactions are tracked on a public ledger and all users are simultaneously aware of all transactions whether they took part in that transaction or not. Now, this is a tough sentence to wrap your head around if you have no experience with Blockchain or Bitcoin technology so let’s break it down piece by piece.
By Peer to Peer, I mean that any Bitcoin or fractional bitcoin can be sent directly from one user to another without any third-party intermediary. This is quite unique compared to traditional monetary systems where usually a bank facilitates the exchange. I could send 1 BTC to my friend in China without worrying about exchange rates, government intervention, or tracking. This is the concept of decentralization and is one of the key advantages that cryptocurrency offers.
The next aspect is the concept of recording all transactions on a public ledger. This is a big one. The ledger is a series of blocks where each block contains a reference to the previous block (creating a chain), a time stamp, and data about the Bitcoin transactions being added to this block (See above Diagram). This blockchain is encrypted using advanced cryptography and is incredibly hard (impossible more or less) to change the content of the block once it is written. This ledger is also public meaning it is distributed amongst all Bitcoin users so anyone can see past Bitcoin transactions. Anyone can see transaction amounts and addresses associated with such transaction, but not who the addresses belong to keeping the parties involved anonymous. This further supports the idea of decentralization because no one party is controlling or overseeing all transactions.
Finally, all users are simultaneously aware of all transactions. This derives from the concept of the distributed ledger and every user being aware of previous transactions. When a transaction is initiated, third-party miners confirm that the transaction is not a duplicate by reviewing the content of the ledger. This solves any duplicate spending issues without the need for centralized management because any person can mine and confirm these transactions. Miners are incentivized because they are given the transaction fees associated with the transaction as well as a reward for creating the next block in the chain.
Now you understand the very basics of Bitcoin and blockchain technology! One last thing I want to talk about is what exactly a Bitcoin is because this is often hard to rationalize. Bitcoin is not a physical coin or note. It exists purely in a digital world as data on a long public blockchain. Therefore, it really has no intrinsic value. Unlike traditional companies, there are no assets or intellectual property that creates value for the coin. It’s only value is what we as owners and users believe it is worth and what we are willing to pay for it. This is very key to understand because it is the nature of most criticisms of Bitcoin. Any day, at any moment, users could lose faith in Bitcoin because a flaw in the technology is exposed or because something faster or better is released causing the value to plummet or even go to zero. That is why Bitcoin is and should always be considered a risky investment until mass adoption is reached.
That is a very basic description of Bitcoin and blockchain technology. Unfortunately, it only scratches the surface of the intricacies of this technology, but in future posts I hope to go into each aspect in more depth as well as introduce different cryptocurrency technologies that are not blockchain based.