Bitcoin is a cryptocurrency. “Crypto” meaning encoded; “currency” meaning money. It was invented by someone named Satoshi Nakamoto in 2009. He was trying to solve the problems of digital currency such as using money online for shopping or banking. His solution was so thoroughly thought out that one could say he gave birth to Bitcoin whole and fully formed. In 2008 he published a white paper describing his invention, then formed a group of programmers who could create and follow his design. He then disappeared and no one knows who he is or where he is to this day.
Bitcoin is the result of something else Nakamoto created called a blockchain. A blockchain is a distributed, decentralized network. You all know what a centralized network is where every node in the network is directly attached to a central hub. Our online banking systems work like that. Every transaction goes through a central hub. A decentralized network might have several hubs scattered throughout the network. This would be what you would imagine our fire department looks like with stations scattered throughout the city. A distributed, decentralized network is slightly different from these. With a distributed, decentralized network there are no hubs. Every intersection in the network between two or more users is considered a node. Each node has several neighbors. A blockchain is a distributed, decentralized network of nodes. The Bitcoin blockchain has over 11,000 nodes at the moment.
In Nakamoto’s design for Bitcoin, each node would have a computer running the Bitcoin blockchain program. The program would do several things. It would each a ledger of every transaction made anywhere on the network at any time from the beginning of the network until the present. It would communicate with its neighbors. A typical node might have five or six neighbors. Remember, this is all running on the Internet so a cyber-neighbor on the Internet does not mean it is a physical neighbor. The nearest neighbor for a node in New York could be Chicago, London or South Australia. The time for a signal to travel around the world is a small fraction of a second.
When some at node A gives a Bitcoin to someone at node B that is called a transaction. A transaction would be written as “A gives B one Bitcoin”. The program at node A tells its neighbors this transaction. Let’s say its nearest neighbor is node C. The program at C receives the message “A gives B one Bitcoin” and records it as a new transaction and marks it as “Pending”. It then checks all previous transactions to see if A really has enough Bitcoin to give one Bitcoin to B. If it finds the current amount of Bitcoin at A is sufficient to pay B one Bitcoin it sends a message back to A and B and says “Transaction confirmed” meaning that transaction can proceed. Node A and B record the confirmation and write “Transaction pending. 1 confirmation”. C then goes on to tell all of its neighbors about this new transaction. Node C tells D, E, F, G, and H. They, in turn, check their ledgers to confirm that the transaction is authentic and allowable and send back confirmations if they do. The process continues until Node A and B have 1000 confirmations. At that point the transaction is considered authentic and allowed to proceed. “Pending” status is changed to “Confirmed.” The 1000 confirmations make the network very, very difficult to cheat. You would have to get 1000 strangers whom you do not know in advance to collude with you in order to cheat the system.
The transactions continue until there are a sufficient number of transactions to fill a block. A block is about 1 kilobyte of data. When that happens the block is attached to the previous block to continue the chain. Now, Satoshi Nakamoto realized that he would have to get people to maintain all of these nodes, with a computer and a large disk drive at each one. He created a very unique method for doing that. These people would be called “miners.” A Bitcoin miner had 1) to be motivated to do the work, and 2) be chosen at random so that no one could take over the system for themselves. His solution was this: he would pay them (in Bitcoin) for doing the work, and, he would create a very difficult mathematical problem for people to solve. The problem was so difficult that even with a super-fast computer the miner would take about ten minutes to solve the problem. And, the solution would be totally random so that even smart, fast computers did not have an advantage over anyone else doing the same thing. The problem was to guess the password for the next blockchain. This would be a random thirty-character password that took even the fastest computer about ten minutes to guess and looked something like this: 00RasOd2FsM5Gsdfd88up8pUs5QdWss:426SD38E1a.
The miner that guessed the password correctly was paid 12 bitcoin and had the privilege of creating the next block and communication that to the network. Twelve (12) bitcoin today is worth over $100,000 so there are many people who want to do mining. There are a total of 21,000,000 bitcoin in the system. There will never be any more than that. 16,800,000 have already been distributed and there is enough bitcoin to pay miners for the next 100 years. In the year 2108, the miners will have to charge fees to do the work.
Bitcoin is just one cryptocurrency. Since it was created in 2008, there have been many more cryptocurrencies created. To date, there are over 1500 cryptocurrencies recorded. Not all will survive. Each one was designed to do something different from the others. There are currencies which are just for real estate. There is one just for contracts. There are several for online gaming, sports gambling, international finance and so one. Their creators hope that they become popular and successful. Some will. Some won’t. The most popular ones today are Bitcoin, Ethereum, Litecoin, and Ripple. To see the Bitcoin network in action take a look at bitlisten.com. Since all transactions are public, at this URL the programmer created a bubble for each transaction and displays the size of the transaction in the bubble as they appear.
So what’s the big deal about Bitcoin? Why all the fuss? How to get Bitcoin? How to keep Bitcoin safely? What are bitcoin wallets? These and many more questions are subjects for future discussion. You can read more about Bitcoin at bitcoinARL.com.