Bitcoin For The Average Joe

The history of Bitcoin is interesting. It has its origin in 2008, which almost saw a complete breakdown of the US financial system. The fundamental cause of this breakdown was that financial institutions stopped trusting each other and the flow of money stopped. Luckily, the US survived the crisis and lived to tell the story. However, even today there is no clear explanation of the root cause and no guarantees that it will not happen again.

Satoshi Nakamato (or whatever his real name is), a brilliant cryptographer and programmer, was fed up with the current financial system. Governments could create money whenever they wanted and cause deflation and inflation when they liked. He thought of a currency which can not be manipulated and is transparent so that all transactions using the currency are visible and can be traced and verified by anyone. He wanted a currency not owned by a central authority but by everyone. It would be self-governed by a set of rules described and implemented in the software itself. Using a mix of programming, economics, cryptography (math), and game theory he created a digital currency and named it “Bitcoin”.

How does Bitcoin works?

The Bitcoin software is a program which can be installed by anyone. Clients on the Bitcoin network talk to each other on a peer to peer, production network. Today, anyone can install the client and be part of the Bitcoin network.

Bitcoin began at a time called "Genesis". At the origin, there were no coins and no transactions. The only way new coins can be produced was through a method called “Proof of Work”. Proof of Work requires all the nodes(computers) on the network to solve a math puzzle which is a game of chance. Any node which solves the puzzle first gets 12.5 bitcoins. The holder of the bitcoin can then send some of their bitcoins to other people and ownership would spread around.

You may be asking what is the point of mining or solving the cryptographic puzzle? Mining serves 2 main functions

1) It creates a new block. The new block contains all the new valid user transactions.

2) It secures the new user transaction on the distributed ledger or blockchain in a sequential manner. The ledger is considered secure because for anyone to manipulate the ledger, they have to do the work done by the miners all the way from the beginning. So, the more the time passes and new blocks are created, the harder it gets for anyone to manipulate the ledger.

How do users transact with each other? Anyone holding a bitcoin can decide to send some to an unknown person reliably and securely. All they need is the public address of the recipient party. Suppose you have no bitcoins but would like someone to send you some, all you need to do is to download a bitcoin wallet. There are many free ones out there. Once you download a wallet, it will create a public and private key for you. Think of a public key as your email address. Think of your private key as your email password. It is crucial to store your private key in a secure place so no one can touch it. Remember public key and private key are just random numbers but they are cryptographically produced and hold a lot of meaning in them.

Now someone who wants to send you bitcoins will take your public address and will create a transaction that gives you x bitcoins and will send it to the network. The network will then validate the transaction and some miners will include it in the newly mined block. Once your transaction is confirmed on the block, it will be announced to the world and you will know that you have bitcoin in your address. Voila, you are now a proud owner of some bitcoin which you can spend just like cash in your pocket.

Bitcoin has succeeded in bringing the first crypto-currency to the world where no single party controls it. It is all governed by software rules and no one can manipulate it single-handedly. All transactions are transparent and can be verified by anyone. The users can transact with each other anonymously without any trusted party. Bitcoin is the future of money.