Layman's bitcoin

 This post is all about bitcoin - what, why and how, purely for layman's out there. Its better to always "Start with why"

Why bitcoin:

It is obvious that there are certain problems with the existing currencies that paved the way for our bitcoin creator - Mr. Satoshi Nakamoto (Certainly Mr. X that's how the world knows him right now, Yes you are right! he is missing!) to create this secure, peer-to-peer transactable and decentralized currency - Bitcoin.

Mr. Satoshi Nakamoto (Mr. X or group of companies as suspected) don't want the currencies to be centralized. Centralized means governed by an central authority namely Reserve Bank of India or Federal Banks as in other countries. They own the full control over the money we own. Don't you believe? If No then you are dreaming! come on, let me wake you.

1. These banks can print as much money as they want. So with more money people will tend you buy products or avail services. So demand in the market increases paving the way for inflation i.e. the cost of the product or services gets increased due to increased demand thus the value of the money you are holding is getting dropped.

2. Demonetization - Boom! from tomorrow the currency you are holding is just a piece of paper and you cannot spend it to avail a product or service.

3. Third party involvement - If you want to transfer money to someone else you need to rely on the bank and they have the authority over all the transactions you make and also they charge a high transaction fees.

4. You cannot tender Indian Rupees in USA and vice versa. These currencies are not globally tenderable which means you cannot avail a service or buy a product using Indian Rupee in America and vice versa.

5. All the ledgers are maintained in the bank servers. So always there comes the threat that these servers can be hacked or it can be physically damaged (but most of the companies nowadays own a disaster management servers as a backup) resulting in a havoc.

I think you people are awake by now. So taking all these drawbacks of the traditional currencies and growing digital markets into consideration. Mr. X that is our group of companies or a person called Satoshi Nakamoto whoever it may be turned these drawbacks and invented a decentralized, peer-to-peer transactable, globally tendered, secured digital currency and here we are, we have bitcoin today!

So we got answers for our two burning questions why and what is a bitcoin. Now we can look into how the bitcoin works?

How bitcoins work:

So let us understand the process using a scenario. Let's say if I own a bitcoin. What does this mean? Since it is a digital currency I own nothing tangible instead I own the records in the universal ledger maintained by the bitcoin network. So all the credits and debits of the bitcoin happening all around the globe is maintained in this universal ledger. So whoever says I own a bitcoin it is that they have the credit record(s) in this universal ledger. It is very transparent that anyone can take a look at all the transactions happened in the bitcoin network from the very beginning of its existence. Though it is transparent that you could see all the transactions happening in the bitcoin network, you cannot determine the people who are engaging in the transaction since you could see only the public keys (something similar to a account number).

I hear a few questions from you like what is this bitcoin network? and who owns it? who maintains it? is it similar to a bank then how it is decentralized? Let me answer. The bitcoin network is simply a group of computers connected with each other through internet and each of them running the bitcoin software which was created by its inventor - Satoshi Nakamoto. So did Nakamoto owns all these computer? The answer is no. If the answer is yes then there is no decentralization over here instead it will be something similar to a bank. These computers are from the public i.e. the persons who are interested to make the bitcoin successful - Oh I'm joking. So you will owe your computer to run a software and make it successful without any benefit for yourself? I can hear it is obviously No! You will be paid for doing so with bitcoins if your computer joins the bitcoin network and helps to manage it. Yes you heard it right! It is the people like you and me who are involved in maintaining and managing this digital currency called Bitcoin and rewarded with bitcoins, eventually a service for people who uses this bitcoin. This is how the bitcoin is decentralized and it is used and maintained by public. Something similar to democracy - By the people, for the people and of the people.

So initially in the year 2009 - when the bitcoin was born. There was no popularity for this digital currency and there were only very few people who came forward to accept the offer by Nakamoto and added their computer to the bitcoin network. So what it means to adding a computer to the bitcoin network. It is simple, download the bitcoin software and allow it to run on a machine with internet connectivity. So what is the work that you have to do to manage the bitcoin transactions to get rewarded? Again the answer is so simple you don't have to do anything, the software will take care of itself. So what happens in the bitcoin network during a transaction and how the bitcoins are created since it is maintained by public and nobody creates it?

Bitcoins are created by miners, who actually help manages the transaction and updates the universal ledger by putting their computers to work and gets bitcoins in turn as a reward for their work. This is how the bitcoins are created or in other words mined and the person behind it are called the bitcoin miners. In 2 ways new bitcoins are born

1. As a reward from the bitcoin network for verifying the transactions and updating the ledger.

2. As a transaction fee from the users.

So let us understand the process behind a bitcoin transaction, updating the universal ledger and the technology behind this bitcoin transactions.

Blockchain and SHA-256 are the technologies behind the bitcoin. So first let us understand these two. In bitcoin all the transactions are maintained in the universal ledger as we all knew. This ledger is simply a chain of blocks for instance block is a page in the ledger book, if one page is filled completely we will start entering the details in the next page. Similarly all the transactions are maintained in blocks if the size of one block is filled then a new block is created and connected to its previous block and it goes on thus each block is connected to its predecessor makes a chain of block hence it is called a block chain. The first block that gets added to the bitcoin network is called "Genesis block" and it was added by none other than our bitcoin creator - Satoshi Nakamoto. So we have the answer now for two of our questions, which is what is a block chain? and what happens behind a bitcoin transaction. Yes, verifying all the transactions in the block and adding the new block to its previous block and publish this to the network is what happens behind a transaction.

Let us look into some more details - when a person transacts a bitcoin to another person what he actually does is submits this transaction to the bitcoin network. If all the transactions happened around the globe at a particular time is enough to fill a block then the bitcoin network sends this block of transactions to all the miners out there, then the bitcoin miners comes into play. If a block of transactions is received by the mining computers the bitcoin software running on the computers first verifies all the transaction. What it does is, it goes and checks the ledger whether that person has sufficient amount of balance and from whom he previously got the bitcoins to check whether the bitcoin holdings are real. If everything is well and good then that transaction is authorized. Similarly, it happens for all the transactions present in a block. If all the transactions are verified then adding this block to the existing blocks is the next step. So here comes a question - how one block is linked to the other blocks? SHA-256 is the technology that comes to rescue. SHA-256 is the encryption technology - whatever the input you provide it gives back a unique 256 bit sized key (a series of characters something like "E44AD2AD70E3EBE5CBF3DA2436870D2C3E0E6517CA25ADA9A974311A0177EBC1"). By whatever the input, I mean anything from a letter to a file of any size. For example: if you provide a block of transaction - then it gives back a unique key. So each block will have this unique key generated from its previous block and all the current transactions. Here the unique key that got added to the current block contains all the transactions from the very first block (Genesis) - so this is how the blocks get connected with each other creating a chain of blocks. That is why you cannot revert back a transaction once it is submitted to the bitcoin network. If you want to revert back then the transaction details in the block that is already added to the network. The transaction details present in that block has to be changed (first of all not possible but let us assume) resulting in a different key from the SHA-256 technology which will not match with the key that generated earlier by the same block where you made a mistake thus bitcoin network will not authorize.

So all the miners has received this block of transactions then who adds this transaction to the bitcoin network and who will receive the reward? To answer this question - all the mining computers will verify the transactions but only one mining computer is successful in adding this block to the bitcoin network. That one miner is decided by a competition. Yes this competition is called the proof of work. Bitcoin network will provide you a complex problem that the mining computer has to solve and submits this answer with the block that has to be added to the network. The first one to submit this answer gets to add the block to the network and gets the reward. As we are thinking this problem is not very easy to solve and it will take even hours for a powerful supercomputer to solve this. Thus in this way transactions are added successfully to the universal ledger and new bitcoins are born as a reward. So totally how many bitcoins can be created in this way. There is a limit - only 21 million bitcoins will be created. So post that, why miners have to spend their money to get the computers running to make the bitcoin work? Remember there is other way a miner can earn a bitcoin that is through transaction fees. So by the time there were 21 million bitcoins comes to existence the transactions happening will be huge thus the transaction fees as well, making it very sufficient for the miners. Also this bitcoin network is very brilliant that it makes the complexity of the proof of work problem easy when there are less miners in the network and only few transactions taking place and if the demand increases thus the complexity. So it regulates the generation of new bitcoins in a particular pace thus in an average each block gets added for every 10 minutes and the bitcoins are created for every 10 minutes thus keeping the demand for bitcoins in the market. 

So we are hearing this term - universal ledger a lot of times. If this is a universally centrally maintained ledger then it is also poses to threats similar to a bank's server right? but that's not the case with the bitcoin network. Here all the computers available in the network will have a copy of this universal ledger thus make it more secured. Nobody can simply go and make the change in the ledger since we have copies to validate and cross check thus the suspicious changes will not be authorized to get added to the ledger by the network. Moreover all these records are encrypted using SHA-256 as we already knew. Thus making the bitcoin the more "secured" digital currency.

Want to know what is the current value of a bitcoin? and how many bitcoins are available in the market as of now? Just google it. Since the values are changing rapidly if I provide you the details that will not be a real time data.

Here we have got a glimpse about bitcoin as a currency. In the next post we will look into an other perspective - "Bitcoin as an investment".