Bitcoin explained for humans

Understand where resides its power and why it's considered by many as the new gold

The concept

Bitcoin was conceived as digital cash, but what's our idea of digital cash? Do we have one? In case we don't, let's imagine the following scenario: a member of your family proposes an intangible currency to be used by the family members, just for internal use. Then each member receives a notebook, and every transaction made by any member will be written down by every member of the family, so in the end all family members will share the same transaction history. You also stipulate to meet every hour to:

Something really interesting just happened right now, did you notice? There are no privileged people who issue currency. In fact, its control is not in a specific person but in all at the same time. That's what we call a decentraliced system. One can participate or not, but the entire system will follow the consensus previously stablished.

Now we should say that this is a brief idea about how bitcoin works, but that wouldn't be strictly true: this is actually how the blockchain works.

The technology behind

The technology where bitcoin relies is called blockchain, and it works similarly to the notebooks example, but digitally. Each node (member) keeps a full history of the whole network; that's the reason for the bitcoin client to use, at the moment of writing, around 300 GB of storage when you install it in your computer: it downloads all of that data. But going back to the concept of blockchain, imagine the inventor of the car releasing the first model and at the same time publishing the blueprints used to build it. That's what happened here: bitcoin is the first cryptocurrency and the blockchain is the blueprint to build one. Anyone who understands it will be able to make modifications and create a new cryptocurrency with custom and/or extended features.

The Blockchain

Let's start with the basics. Blockchain means a chain of blocks, right? Well, a block is just like a page of each notebook, while the blockchain is the notebook itself. The difference here is that a new block is created (a new page is turned) every 10 minutes on average. In our example, when a new page was turned, a randomly selected member received new coins, but that's not exactly how bitcoin works, we just omitted some details for the sake of simplicity. Read this article to know the specifics about the way the blockchain works.

Bitcoin mining

Keeping the notebook example in mind, bitcoin mining refers to the process of determining when and how each page is turned.

The concept itself suggests that bitcoins are being in some way extracted from somewhere, which is apparently in contradiction with the fact that bitcoins are intangible, but once we are familiar with the process we see that this term actually makes sense. Read this article to understand how bitcoin mining works.

Some rules

Apart from keeping an indentical transaction history, there are two more consensus in the network:

The two previous facts combined give an interesting and desirable result: we have a deflationary currency. In contrast with fiat money, which can be issued at will by central banks (in consequence diminishing the value of all existing money thus increasing prices), we can't print more bitcoins if we need to. In other words, bitcoin is scarce, and that's the reason for the upward trend the bitcoin price presents in the long term.

Practical view

Let's see how all of this looks when put into practice:

Wallets

If you want to use bitcoin, you will need to download a bitcoin client on your computer or smartphone. Just as a sidenote, the smartphone clients don't download the full history of the network for obvious and practical reasons. Your client will allow you to create a wallet where you'll be able to create bitcoin addresses to receive money.

Addresses

A bitcoin address is a unique hotchpotch of numbers and letters. It allows anyone to send coins to it, but only the owner can spend from it. Imagine a huge field full of post boxes. Anyone can go to any post box to chech how much money contains, along with all the transaction history regarding that post box, but not who owns it nor sending its money to another postbox. Only those with the key of a certain post box can move its money to another one. Bitcoin addresses are exactly that: post boxes to deposit money, and you can create as much of them as you want. In fact, it's considered a good privacy practice to not receive money twice in the same address.

Eureka!

If we look at the bitcoin with a deeper sight we'll notice that we have a currency that meets the criteria that Aristotle set for money more than 2.000 years ago:

  1. Durability: with millions of backups of the blockchain over the world, as long as you keep the keys of your owned addresses, your bitcoins will be there.
  2. Portable: need to say that you can carry any amount of bitcoins in any smartphone?
  3. Divisible: one bitcoin consists of 100 million satoshis. Even if the price of bitcoin reaches $1 million, a satoshi will still worth one penny. The Lightning Network made it even more divisible by bringing the millisatoshis.
  4. Scarce: Only 21 million bitcoins will ever exist, and it will happen in more than 100 years from now.

Surprisingly enough, the fiat money we use daily doesn't meet this criteria as it can be issued at will by the people with privileges to do so. to bitcoin, only precious metals met that criteria and, being the gold the most used and valued precious metal in history, many call it the teleportable gold or the new gold.

Why bitcoin?

Bitcoin's inception was motivated by the financial crisis of 2007-2008, as its creator stated in the first transaction registered. It aimed (and achieved) to be an international payment system not relying in any third party to be operated. Its creator always wrote under the pseudonym of Satoshi Nakamoto, although no one knows its real identity or even if it's a person or a group of people. Read this article to know more about Nakamoto and the motivations towards bitcoin inception.

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