A Little Bit Of Perception to a Little Bit Of Coin: Everything You Needed to Know About Bitcoin But Were Afraid to Ask
Currency - a medium of exchange, nothing more
Why would money send shockwaves throughout the global market in case the day gold expired, in what afterwards became known as the Nixon Shock, has not stopped the financial world from spinning? Since the beginning of its existence, money has constantly transformed and evolved, but at its core it always stayed a medium of exchange. Money is seen by economists as broadly approved legal tender circulating within an economy of a nation and issued by a government. However, what would happen if "authorities" and "state" were taken out of the definition? Up until not long ago, that was scientifically impossible and not technologically practical.
And a mysterious new technology emerged
Apparently out of nowhere, but really the result of a couple decades of development and research by many unknown computer science scientists around the world. In fact, the notion, or at least the first digital currencies, existed as early as the mid 90s, across the time the Internet was fully commercialized. Essentially, they all suffered from one major drawback that caused their inevitable death. They all required a central, trusted third party to administer the issuance of new units and reconcile payments at the end of the day.
So is Bitcoin different?
Bitcoin emerged in 2009 under the pseudonym Satoshi Nakamoto as the creation of a person. It became the world's first fully functional, decentralized, peer-to-peer, digital money system. Being decentralized, intrinsically means being self -organizing, a phenomena in which local individuals attain international aims without sway or essential planning. Although decentralized systems are available in nature, the theory isn't easy to get in its pecuniary circumstance, as we are used to the voice of fiscal institutions and central governments orchestrating our economic lives.
Computer networks and the Byzantine Empire
From a computer science viewpoint, establishing trust between unrelated parties over an untrusted network (like the Internet), is part of a group of issues known as the Byzantine Generals Problem. Because it'd suffered repeated treacheries among the high ranks of its military command, the Byzantine army was chosen to exemplify the difficulty. Imagine several divisions of the Byzantine army camped around an enemy city, each department is headed by its own general. As a result of geographical barriers, the generals can communicate with each other only through messengers. To be able to attain victory, a strategy that is common must be decided upon by the generals unanimously. Nonetheless, a number will try to stop the loyal generals from achieving consensus and of the generals may be traitors. If the traitors triumph the attack is doomed to fail.
Fast forwarding 561 years to the time of this post
So just how did Bitcoin manage to build a trust element that can avert unfair dealing in a decentralized, peer-to-peer network? The easy reply is by combining and implementing two mechanisms known as 'digital signature' and 'evidence of work'. The former demonstrates the credibility of each trade, so you have to prove you are the rightful owner of the cash to spend cash. The latter manages the issuances of new Bitcoin units (aka "mining") and harmonizes all transactions over a fixed time period (aka "blockchain").
The theories that lie behind Bitcoin - simplified
Bitcoin address in its most abstract kind is the parallel to a bank account. It's identified by a long sequence of letter and numbers, similar to your bank account number. Each Bitcoin address has its own balance of Bitcoins. Since we're coping with a network that is decentralized but remember, there are no centralized things like banks in the graphic.
Bitcoin wallet is a piece of software that runs in your computer, mobile device or hosted online. The wallet grants you access to your set of Bitcoin addresses. In a similar way to email addresses, you can use your wallet to "open" as many "accounts" as you want at no cost. The truth is, it does not even need an Internet connection as the amount of available addresses is nearly as high as the number of atoms in the whole world to create a new Bitcoin address. So that the chance someone else already taken your address is virtually zero.
Ledger balance. At this point you have to wonder, if there's no fundamental thing in the picture, who keeps track of the accounts as well as their corresponding balances? Well, a duplicate of the ledger is maintained on each and every wallet that forms part of the Bitcoin network. Otherwise than your bank account, where you've got access only to your trades, your Bitcoin wallet stores all the Bitcoin transactions made since it all started in 2009.
Bitcoin trades. In order for you to send X units of Bitcoin from your address to a receiver address, all your wallet must do is broadcast the network that X units ought to be subtracted from your address and respectively added to the recipient address. Wallets, or "nodes" in the how to buy bitcoins with credit card network, will apply that trade to their copy of the ledger, then pass on the trade to other nodes, until all nodes in the network are upgraded.
Et voila - this is all there is to it.
The concepts that lie behind Bitcoin - less simplified