Behind Bitcoin Blockchain Basics is something everyone needs to understand. Everyone is talking about Bitcoin. But really, Blockchain is the real innovation.
Currency is a medium of exchange. Government sponsored currency has been around since 600 BC. Before that, we just traded or bartered. Bitcoin is a modern private currency. You don’t need government to have currency. There are thousands of private currencies in use around the world. But most people don’t use them.
Although we don’t think much about it, keeping track of balances and transactions is the really interesting story.
Deep in human history, we invented the ledger to keep track of transactions. Ledgers are written records of how we count things. Simple tally sticks were used around 30,000 BC. Since then, there have always been accountants keeping and checking records for truth and accuracy.
The really big innovation created by Bitcoin ten years ago was not the currency itself, but the underlying technology that made it work. That underlying technology is Blockchain. Start with this two-minute video about Blockchain. In short, Blockchain let’s us share the same permanent and unchangeable ledger with everyone in our network. No need for banks or other intermediaries.
Let’s compare how things work with banks versus a Blockchain.
First, with banks keeping ledgers for us. Mary wants to buy something from John. She writes a check or does an EFT to him for $100. That transaction is recorded in her bank account. John receives the check or EFT and it gets recorded in his bank account. At this point, a transaction is recorded by no payment is actually made. Later that day, the two banks get together in a clearinghouse and compare their ledgers. The Mary-to-John transaction is discovered by both banks, who also very that Mary actually has the $100 in her account. Thus, the transaction is verified by the two banks and the transfer is actually made. The next day, John has his money.
Now let’s look at Blockchain. Mary and John are both subscribers to the same Blockchain. Each of them has the complete Blockchain ledger on their computers or phones. When Mary makes the $100 transfer, it shows up as an unverified transaction on all the computer ledgers in the network. Some network members make a small fee by running algorithms on the ledger every ten minutes or so. They check all the balances and transactions and verify that Mary’s payment to John is legitimate. At the same time, they bundle all of the recent transactions into a digital “block” which is chained together with all the previous “blocks” and everyone’s computer ledger is updated. The update is permanent and unchangeable. That’s it. No banks involved but a compete audit chain is shared with everyone.
If you want more detail, check out this Gentle Introduction to Bitcoin and Blockchain. It has good articles on the subject, both with and without the math.
Behind Bitcoin Blockchain Basics – About Bitcoin Value and Mining
Since most people will need to do currency conversion with Bitcoin, expect its value to fluctuate wildly. Conversion rates depend on demand, supply and usefulness of a cryptocurrency. This has nothing to do with the underlying Blockchain.
The way Bitcoin has been set up, an incentive is provided to some users to conduct the ongoing Blockchain reconciliation. Since there are millions of Blockchain ledgers that need to be checked all over the world, this takes a lot of computer power (and electricity.) With Bitcoin, the systems that do the work are called “miners”. A miner gets either a new bitcoin or a transaction fee for each published reconciliation. The first miner wins the reward.
You cannot become a miner without a huge investment in computing power and electricity.
People have some trust in the public Bitcoin Blockchain because the software is open sourced and everyone can check how it works. You can check it out yourself here.