You may have heard about Bitcoin and wondered what it really was. There is always a lot of news about this digital currency and especially how it rises and falls in price dramatically at times. Well here we will give you the complete 101 on Bitcoin.
As we already mentioned, Bitcoin is a digital currency. You may think that there are actual coins available but there are not. These are just fabrications. The original intention of Bitcoin was to send payments anonymously and securely online. This is still true to a certain extent today.
A Decentralized Currency
A number of countries around the world are scared of Bitcoin. It is a totally decentralized currency not controlled by any governments or centralized banks. Some countries have actually banned Bitcoin.
A major advantage that Bitcoin has over conventional fiat currencies is that it is not affected by any inflationary or deflationary measures imposed by countries. There is a limited supply of Bitcoin which increases its value – similar to gold.
The Technology behind Bitcoin
Blockchain is the technology behind Bitcoin. This is a public ledger system which adds to a large chain of confirmed transactions which is where the name blockchain originated from. Anyone can see the entire blockchain for Bitcoin since it began in 2009. This is a lot of data and will grow even larger in the future.
With blockchain technology after verifying a financial transaction you cannot change it. It creates immutable records. This is excellent for security but not so good if you make a mistake with a Bitcoin transaction. There is no turning back after verification and confirmation.
Thousands of computers (nodes) in the blockchain network for Bitcoin validate it all of the time. This means that it is virtually impossible to hack a blockchain network as you would require more processing power than all of the computers that make up the network.
The process of verifying Bitcoin transactions falls to Bitcoin miners. These are individuals, groups or companies that use high powered computer equipment to solve the complex cryptographic codes needed to verify each transaction.
Bitcoin miners receive rewards for this work in the form of Bitcoins. With Bitcoins being very valuable these days, mining can be a very rewarding task. The problem is that with the creation of new Bitcoins the number of new ones available falls.
You need a great deal of computer processing power to participate in Bitcoin mining now. A powerful desktop computer is nowhere near good enough. So if you want o be a Bitcoin miner you need to invest in high spec computer equipment (and lots of it), and be prepared to run them 24/7 with the electrical costs that that brings.
Where can you get Bitcoins?
You can purchase Bitcoins in your native fiat currency e.g. US Dollar by using a cryptocurrency exchange such as Coinbase.com. There are fees involved for buying and selling as you can imagine.
A cryptocurrency wallet stores your purchased Bitcoins. The cryptocurrency exchange will provide you with an online wallet and there are other forms of Bitcoin wallet such as a desktop wallet, a paper wallet and a hardware wallet.
The hardware wallet is the most secure because you do not leave it plugged into your computer or mobile device. An online wallet is the least secure because if you can access it online then so can hackers.
The 3 Pillars Of The Bitcoin Blockchain
Blockchain technology supports the Bitcoin network. It is extremely secure and now many organizations across the world are seriously looking at it for not just financial transactions but for their supply chain processes as well. In this article we will discuss the 3 pillars of the blockchain technology behind Bitcoin.
The Decentralization Pillar
Before the invention of blockchain most transactions over the Internet involved a central server. This server stored all of the essential data that supported the service that it provided. A good example of this is the banking system. Your bank stores your money and when you need to pay someone you have to use them and they charge you for this.
Client server technology is everywhere online. When you use a search engine to find something your query ends up on a central server which dispatches the information that you asked for. The problem with client server is that there are a number of vulnerabilities:
- The biggest and most obvious of these is that everything is stored in one place. This makes a central server a real target for hackers.
- If there are any operational issues with a central server the whole system grinds to a halt.
- The data held on a central server can be compromised which shuts down the whole operation.
The solution to these centralized vulnerabilities is decentralization. With a decentralized network all computers have the same information stored. If you want to interact with someone else on a decentralized network you can do this without any third party intervention. You can send and receive Bitcoins without the use of a bank and a centralized server.
The Transparency Pillar
A lot of people do not fully understand the concept of transparency when it comes to blockchain technology. Isn’t the Bitcoin network supposed to be private? Yes it is but it is also public for verification purposes.
You need to understand the concept of public and private keys here. A public key is used on the blockchain to show that you have made a transaction. Your private key is never shared. It is linked to your public key to make the transaction valid.
With the Bitcoin blockchain you can see the public keys associated with all transactions. No other financial system has ever had this kind of transparency. There is a much needed level of accountability with blockchain that financial institutions certainly want.
When you have a blockchain public address you can view all of the transactions made using that key. A lot of financial institutions are looking at blockchain because of this but some are concerned that it will force their hand to reveal all of their transactions!
The Immutability Pillar
Blockchain technology creates immutable records. This means that after verifying a transaction you cannot change it. Once your transaction is added to the blockchain there is no turning back. You cannot reverse the transaction.
The immutability in blockchain comes from the cryptographic hash functionality. The blockchain system takes input strings of any length and converts these to an output string of a fixed length. The Bitcoin blockchain uses the highly secure SHA 256 algorithm.
Blockchain is basically a linked list of transactions. Each block has a hash pointer connecting it to the previous block. If a hacker tries to change the details of a block it will affect the entire blockchain which is impossible to do.