What is Bitcoin? [Video + Transcript]
Welcome to Episode 3 of “Talk Blockchain to Me”!
Today, I am covering a topic that I am sure a lot of you are interested in: Bitcoin.
A quick preface before I launch into this topic: I am providing a very high-level understanding here, which means that I am obviously simplifying some of the very technical details.
With that out of the way…
What is bitcoin?
Bitcoin is a type of cryptocurrency, which is a currency that is driven by computer code. There are currently over 7000 types of digital currencies, but Bitcoin is the most famous one. Think about Bitcoin like the Uber of digital currencies. There are other on-demand cab services, like Lyft or Gett or Via, but most people know and use Uber. Similarly, there are other types of cryptocurrencies, like Ethereum, Ripple, Litecoin, etc., but most people are familiar with Bitcoin.
The History & Origin of Bitcoin.
Immediately after the 2008 financial crisis, a paper was published by someone named Satoshi Nakamoto. (The name Satoshi Nakamoto is a pseudonym; till this day we do not know the true identity of Satoshi Nakamoto—h/she could be an individual or a group of people).
This paper is titled “Bitcoin: a Peer-to-Peer Electronic Cash System”, and was widely circulated online. Essentially, this paper established the framework for the Bitcoin system, and from it, kick-started the development of the blockchain ecosystem.
The problem that Satoshi Nakamoto’s paper solved is known as the “double –spending” problem that has stood in the way of digital currency development.
What exactly is the double spending problem?
When you send someone a PDF attachment in an email, that PDF does not disappear from your computer when you hit send. Or, when you take a photo and send that via text message to your friend, that photo does not get erased from your phone.
But when it comes to digital money, it is VERY important that if I send you $5 virtually, I do not have that $5 left anywhere afterward. If I can take the same $5 of digital money and send it to a bunch of people at the same time, that presents a very obvious problem—and this is known as the “double spending” problem.
Until recently, we never had a solution to the double-spending problem without the need for a central authority like a bank to verify that. But what Satoshi Nakamoto figured out is a way for me to send money to you without needing a bank to confirm that there is no double spending.
How do Bitcoin transactions work?
First, we need to think about a bitcoin transaction less like a traditional currency transaction, and more like a global ledger. If you watched my previous video, you know that a ledger is a public record of all of the transactions that are done—in this case, done on the bitcoin network. By keeping this public record, this ensures that the person who is spending the bitcoins really owns them, which prevents fraud—because there is public accountability.
Second, bitcoin transactions rely on the consensus, or agreement, of the people who are on the network. The consensus concept was also explained in my previous video, which is linked in the description box below. Let’s say, for example, you go to your local grocery store. At the checkout, you use your Visa credit card on a credit card machine. This means that the money goes from you, to Visa, then to the grocery store. In a bitcoin transaction, the money goes straight from you to the grocery store. The bitcoin process is where the agreement of people on the network validates payments and transactions, and the removal of any third party central authority (in this case, Visa) is really where the innovation here is.
At this point you’re probably wondering, okay, so how does someone even come to owning bitcoins?
So, the easiest way to own bitcoins is by going to an online exchange platform like Coinbase, and use USD (or whatever currency you use) to buy Bitcoins instantly from this online platform.
Or, you can also engage in something that is known as “mining” in the bitcoin world. Remember that a blockchain, as explain in my first video, is a chain of different blocks that contain transactions. Once a block reaches its size limit, another block has to be created. Because bitcoin is this sort of open and public network, it relies on its users to keep it going. There are users that basically are on their computers and they have to guess a sequence of computer codes in order to create the next block. Because this guess work takes a significant amount of computer power, those people—who are called “miners”, by the way– are rewarded 12.5 bitcoins for every block they can create. Basically, the software behind bitcoins set a limited amount of bitcoins at its creation. At the current rate of growth, the bitcoin money supply will be maxed out in the year 2140.
So, this was a ton of information that I just threw at you. I will post the transcript to this video on my website, talkblockchaintome.com to make it easier for you to refer back to if you wanted to watch this again. I will also post the link to Satoshi Nakamoto’s paper if you wanted to take a crack at reading it with some of the understandings from this video.
Like I said, this is a very high level understanding on what bitcoin is and how bitcoins transactions work, so the super technical details are glossed over. As always, feel free to reach out to me (firstname.lastname@example.org) if you have any specific questions and I will try my very best to answer them.
Until then, see you guys next time!
The above is a transcript for my latest YouTube video, which covers the basics of bitcoins.
As always, all opinions published on this blog are my own and do not reflect the opinions of any institutions that I am affiliated with in any capacity. None of this should be taken as financial advice. If you are interested in investing in cryptocurrency, please consult with your financial advisor.
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