HOW DOES BITCOIN WORK?
You’ve probably heard about the virtual cryptocurrency named “Bitcoin”. It has been the cause of globalized excitement for the past few weeks, mostly because it exploded on November 29, and exceeded a USD worth of over $10,000. Since bitcoin’s value is impossible to predict, many theories have formed, some of them including that the current bitcoin value is a “bubble that could pop any moment”. While many people estimated the price would go down at first, it actually rose to about $16,000 (At the current time of writing.)
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A short history of bitcoin / Summary
|A definition of bitcoin|
So what is bitcoin?
Money is only money because we make it so. In fact, a dollar bill is not too different from an ordinary piece of paper, except for the fact that we consider it as currency, which therefore gives it value. Bitcoin is the same, except there is no physical form of bitcoin, and it is only stored as hashes on the blockchain.
To understand bitcoin, we must first understand basic trading. Let’s say that Bob is currently in the possession of one apple. Should he decide to give that apple to Alice, Alice would have another apple and Bob would no longer be in possession of that apple. This method of trade is completely foolproof because the owner of the apple has transferred from Bob to Alice and Alice has received one apple. Now, it is the year 2042, where we can e-mail apples to our friends. This scenario is a bit more complicated. Once Bob sends an apple to Alice, how can Alice be sure she has received the actual apple, not just a copy of the apple? This is where the Blockchain comes in. The blockchain is a ledger, a database of all of the transactions that have been made by bitcoin. The blockchain is stored with every bitcoin user and is constantly updated. This eliminates the possibility of Bob being able to cheat Alice into thinking she has received a real apple, not just a fake copy, because every transaction is stored on the blockchain, and once Bob gives away the apple, he would broadcast it to the entire blockchain, there would be a history of him giving it away, and also a record that he does not own that specific apple anymore. Should he try to spend that apple again even though it is not his, the blockchain nodes would disagree, and the transaction would not be confirmed. It is highly unlikely that the blockchain will ever be cheated or destroyed because there are so many people using it. In a way, the community of bitcoin is the bank that controls bitcoin.
As I stated above, the blockchain is constantly being updated by people. These people use something called Mining, which uses processing power to process the blockchain. Miners keep the blockchain complete and unalterable by verifying and collecting newly broadcast transactions into a group called a block. Each block is linked to the previous block using a cryptographic hash, using the SHA-256 algorithm, thus giving the blockchain its name. By mining, the user receives bitcoins as a reward.
|How the blockchain works|
This is only the beginning of bitcoin, and bitcoin may even replace the currency we use today. No one knows for sure. I guess time will tell. If you want more information on bitcoin, I suggest you visit Bitcoin.org for more information. Thank you for staying tuned to my first blog post, and I hope many will follow! If you would like to receive regular updates whenever I make a new post, click the ‘subscribe’ button in the header!