What is Bitcoin and why should you care
Last weekend I was at my friend’s son party. Out of nowhere we found ourselves discussing Bitcoin. I didn’t really do the talking though; I was listening the whole time because I was at awe with the whole misconception. My favourite was how Bitcoin works like a lottery and buyer can choose the “Bitcoin number” they want, come next week you can change your “Bitcoin” with more money. Well I know there are a lot of Ponzi, HYIP, and quick rich scheme utilising bitcoin in their scheme but this level of understanding was shocking (to me at least). But when I think about it, I shouldn’t be surprised. Even if we’re talking about our current monetary system, I don’t think 9/10 of the readers here have a deep understanding on how they work (even I don’t… too complex) where it come from? Who control it? What a central bank do? What is fractional reserve? And so on. We’ll save that discussion for later, for now let us talk about Bitcoin. I’ll try to explain it in the simplest way and I really hope the analogy used will help you guys understand the core concepts that make Bitcoin a sound global money.
So Bitcoin is money huh
But what is money? Is currency considered money? Is gold money? Is Ringgit Malaysia money? Here’s a clue-Money can be a currency, but a currency is not necessarily money. For something to be considered as good money it need to be
1.Medium of Exchange(MoE)
2. Unit of Account(UoA)
3. Store of Value(SoV)
Of course there are other characteristics of money such as portability, fungibility, and scarcity that set good and bad money apart. However money is not defined by its physical properties but rather the way it functions. Regardless whether it is a rock, shells, leaves, water or teeth if these items are use as MoE,UoA and SoV they are indeed money, simply because people use them as money. A currency serves as a good MoE and UoA, but is it a good SoV?
The answer is-No, why? Because when I was 6 I bought Nasi lemak for 50 cents, today it cost me RM 1.50 for the same thing. If I was to keep my 50 cents from 20 years ago, I can only afford 1/3 of that Nasi Lemak today. Good thing I don’t listen to my teacher advice ‘menabung menjamin masa depan’ I wasted them on junk food instead . Okay, now you have a brief idea what is money all about and where this whole article heading to, lets get into the ‘not so technical’ details.
Instead of definition let us focus on what kind of problem it can solve. Imagine you have a friend; Ali , who is visiting France, he run out of money, and called you “Bro I need 1000 USD can you send it to me” because you’re rich you don’t ask much question, and you called your bank manager (internet banking are for normies, you’re rich remember) “Hello mr banker can you transfer $1000 to Ali’s Account”. He replied “Yes sir, will do!” He later checks your account balance to make sure you have the $1000 before sending to Ali’s account. As expected you have way more money than that so he continue to update your account ledger as follow:
Later you called Ali “Yo bro, done. Now you can go take the money from the bank”. So, what just happened? You and Ali trusted the bank to manage your money. By editing some records onto the ledger, now Ali have some money to spend. Bear in mind, this ledger records neither you nor Ali controls or owns. So now you’re thinking “What’s wrong with that?” well there is nothing wrong until
1. The banker make a mistake and send $100,000 to Ali, (knowing Ali he will never return it back)
2. The banker edits your account ledger and left only $1000 in your account.
3. Its holiday nobody working at the bank.
To better see a significant implication, lets talk about the worst case scenario. Say the bank was actually own by some evil guy (this is totally impossible right? Because bankers are all good people) and he decided to edit your account ledger, and because they are very good at it, you can’t provide any evidence to the authority. Just imagine you’re reporting to the police “The bank just stole $500,000 of my money, unfortunately I don’t have any evidence. I’m sure they edited my transaction record without my knowledge”. How do you think the police will respond? Can they even do anything? While you might think this is unlikely to happen (like I used to think government will never print more money to devalue my savings), you really need to start asking yourself; should I put so much trust in the bank?Unfortunately for you, the current financial system requires a central entity to facilitate transfer of money between 2 parties. The next question you should ask, Is there any other way to do this? Is it really necessary to have a third party when doing financial transaction with my peers? After giving a long thought on how money transaction is done (and after reading this obviously) you’ll come to the right question
Is there a way that we can manage our own ledger instead of having some stranger doing it for us?
Lucky you, the answer is YES, block chain is the answer to your brilliant question. It is simple really, instead having some clerk in a bank doing it for you why don’t we manage the ledger records on our own. In fact, to make it better and more trustworthy why don’t we have more participants (other users) to join keeping those ledgers together. The more participants we have the better, why? So that we can have more ledger copies. Just imagine we only have two participants, and one of participant lost his copy, he must now trust the other ledger keeper to not temper with the only ledger available.
Compared to if we have 10 participants, even if we have 2 ledgers lost or corrupted we can still have a higher level of trust that the other 8 ledgers are true (because they have the same exact entry). In the case of Bitcoin we have an estimated of 10,000 nodes (ledger keeper) distributed all over the world, so we can safely say that it is a decently safe system as it would require an enormous amount of effort and resources to corrupt or destroy these scattered ledgers all around the globe.
So there you have it, in a nutshell Bitcoin is a network of distributed ledger that keep all of the transaction history for you, using this protocol it is now possible for us to have a peer to peer transaction without having to rely on a trusted third party. You can stop here if you think this is all too much for you and come at a later time when you’re ready to learn more. If not lets continue.
Blocks and Proof of Work (POW)
Like writing on a piece of paper, there are only limited lines of entry that can fit into each block. Miners (ledgers keeper/editor) task is to select which entry to put into blocks and usually miners will prioritise entries with high fees attached to them. Yes, when a user wanted to broadcast (tell everyone in the network) their transaction on the block chain they will need to attach some fees on it so that miners will be incentivised to consider their ‘entry’ and put it in the block. These fees are necessary as to prevent users to flood the block with worthless data, work kind like spam protection feature. As you should realize by now miners are important part of the system, they are the ledger keepers and help manage the users transaction on the network. While it is hard to tell how many miners operate out there, we can track the computing power that backing up the bitcoin network accurately. At the moment of writing Bitcoin hashrate has climbed up to 60million TH/s. To put things into perspective that kind of computing power is equivalent to 4 million of the latest gaming PC working together to keep the network safe. So how actually the miners keep the network (and all the transaction records on it) safe? They accomplish this by providing POW for every completed block, in simple term they will need to “seal” every block before the network can be allowed to continue with another new block.
In Bitcoin term this seal are just a bunch of numbers and letters. This “bunch of numbers and letters” are proof that the miners have done the required work in order to reach to that solution; this seal will proof that the current and previous block had never been tempered. Miners will need to use their computing power in order to solve some puzzle in order to get the required “seal”.
Imagine trying to solve an extremely hard SUDOKU puzzle every time you want to complete a block, and if you manage to get to the answer first (you are racing against other miners) you will be rewarded with 12.5 bitcoin. In order to solve this puzzle you just got to do intensive try and error (try out any numbers as fast as you can). While some nature loving activist might think this is not an elegant way to do computing,it get the job done and that’s what matters. (checkout SHA-256)
And that are the reason so many people around the world is contributing their CPU power to solve the Bitcoin puzzle. When come to this puzzle, it is all about probability; miners with higher number of computing power will have higher chance to solve the puzzle first which mean they will acquire a higher proportion of the 1800 bitcoin daily rewards (USD 13 million). And this process will continue on and on until the last Bitcoin scheduled to be mined somewhere in 2140.
And that my friend is Bitcoin. Honestly, I think I only covered 1% of it, if you’re interested to know more, do your own research (DYOR). Don’t trust, verify.
disclaimer: this is not a financial advice. Contents are author’s personal opinions.