Bitcoin – An Overview

This decade has witnessed a tremendous shift in technology. Perhaps the single most important development in this era is the introduction of Bitcoin along with other crypto-technologies, each of which aims to solve a particular problem, but still boils down to easing transaction.  While almost everyone might have heard about the term ‘Bitcoin’, only a handful of us have a full grasp on what the technology entails and what the technology aims to do and how it plans to do it. Generally, most of us misconceptions about Bitcoin that we learnt from people who do not know how the technology works. Some believe things like, ‘Bitcoin is a source of money for people with good computers’ or ‘To use Bitcoin, a lot of electricity will be wasted’.

This article was written to not only explain what Bitcoin is all about, but it will also address the two basic agendas related to Bitcoin i.e. What Bitcoin is and what problem it wants to solve.  It has been observed that there are not many articles on the internet that address these concepts and explains to people, the importance of crypto-technologies (eMansipator, 2011).

What is Bitcoin?

Bitcoin is a means of payment, agreed on by the crypto-community at large to use 21 million tokens to carry out transactions amongst themselves. The concept can be compared to old ages where people used barter system or like traditional African societies when people made use of the money cowry. Unlike the traditional methods, but unlike the cowry and other traditional means, Bitcoin is much more advanced. It is impossible to counterfeit Bitcoin tokens; they can be digitally divided into smaller amounts and can be transferred in a matter of seconds across the globe via a digital network such as the internet. Also, Bitcoins are limited in supply and there will never be more Bitcoins. The technology uses much more advanced cryptographic techniques which is stronger than the ones currently being used by banks and other financial institutes.

All Bitcoin transactions are digitally signed, instead of simply ‘sent’ and ‘received’. This cryptographic signature helps to place a key and a lock over each Bitcoin token so that information about each token is stored in multiple places known as a distributed ledger. This also provides a solution against creating new tokens by copying or counterfeiting and helps to maintain the original price of your Bitcoin token.

Bitcoin is operated on a decentralized infrastructure. Its price valuation is decided by the market activities of the community and does not need to be endorsed by any authority to succeed. Essentially, Bitcoin can be considered as a local currency, only much more effective and in the case of Bitcoin, the term local comprises almost of all the countries in the whole world. The community is very efficient in controlling the prices of the Bitcoin. This can be seen by the incident that took place on 4th April 2011, where a large buy order consumed nearly 30,000 Bitcoins at a go, dropping the prices to as low as one-third of the original. However, the market recovered within a couple of days, the prices went back to normal and trading activity once more returned to normal. Such speedy recovery for a market operating on a much smaller scale back then and its ability to maintain the trading activities clearly showed how perfectly it was working.

What problem does it aim to solve?

The whitepaper that laid the foundation of the Bitcoin mathematically suggested building a network that should be able to do all of the above, without trusting or relying on anyone. The thought of building a technology that achieves such a feat sounds amazing. Normally, a local currency needs the support of its users along with the controlling organizations like banks and regulatory authorities, and in most cases that support and trust gets abused. Bitcoin is different in this sense, as it does not rely on any single community or authority, and thus there are much lesser chances of the system getting abused. The system protects itself from counterfeiting as nobody can copy the crypto-tokens, nobody can create a Bitcoin of their own and nobody can have access to other’s Bitcoin without having their key. Even hackers who try to break these mathematical relations and pull on a con-show, end up creating a system of their own which is incompatible with the original Bitcoin ecosystem. With all the rules in place, the only way this technology can fail is if all the users back out and decide to stop using Bitcoin.

Bitcoins remarkable quality to not to depend on anyone for its success is generally achieved in two ways. The first way is through the use of cutting-edge cryptography techniques. Cryptography ensures that the Bitcoin is spent by its owners only and all the authority lies with them only. The network is backed by such complex cryptography techniques that compared to it, even the online banking systems are more likely to get compromised, and even then, it would be possible for the developers to upgrade the techniques to ensure further protection. Just to give a rough idea, think of a Bitcoin token as a dollar bill in your pocket that is secured through a combination of a 100-digit key combination, and the only way to remove the lock is by destroying it. It is that secure!

Secondly, the security of the system is achieved by the implementation of blockchain technology. The blockchain can be described as a single, authoritative record of the transactional history that is stored in a distributed ledger across the network. This system prevents a user from writing off more Bitcoins than he owns, something which is known as a double-spend attack. Compared to a bank, the blockchain network provides several benefits, as it does not depend upon any central record, does not depend upon the intentions of any single person who can abuse his position of trust, and it cannot transfer your money without your approval, which is an actual problem in traditional banking. Also, if a hacker tries to manipulate the blockchain record, he will have to do more computational work than the cumulative work of all miners across the globe, which is practically impossible.

The blockchain technology provides a solution against all the loopholes and the shortcomings of the traditional banking system, by creating a single master registry of the bitcoin transfers, verifying the transactions through a process known as mining. In return for this critical role, the Bitcoin community rewards the miners with a set amount of Bitcoins per block. When the total Bitcoin supply will run out, the Bitcoin reward will be replaced by fees to prioritize one transaction over another.

To conclude, although the mathematical detailing the technology seems like a mouthful, in simpler terms, it just works like cash. The system is designed in such a manner that the payments are intentionally kept irreversible, and there is no place for middlemen. For this reason, it is said to be a peer-to-peer network, as the transactions are completed directly between the receiver and the sender.

References

eMansipator. (2011, May 05). Bitcointalk. Retrieved from Bitcointalk: https://bitcointalk.org/index.php?topic=7269.0