What is Bitcoin?
Blockchains as we know them are still less than a decade old. Bitcoin (BTC) popped up in 2009, two whole years after the first modern smartphone, but, like the smartphone, its breakneck rate of progress and fast worldwide adoption make it feel like it’s been around a lot longer. Some already see it as outdated tech—though it is making efforts to scale up and match its exponentially-multiplying competitors—but whether or not it will play a significant role in the future, it is undeniable that its invention has sparked a technological and financial revolution.
How does Bitcoin work?
There are a lot of complex acronyms and buzzwords that get thrown around about cryptocurrency, but it is important to understand the basics first. In that vein, this explanation will focus mainly on building an intuitive understanding of how the core technology works.
First, as with all cryptocurrencies, it is important to realize that Bitcoins aren’t actually coins. When you buy it, that information is sent to be recorded in a big book that lists every transaction that has ever happened. Your crypto token exists because the ledger (the blockchain) shows that your account number (address) received X number of BTC. If you spend it, you don’t actually “send” it anywhere—you send information to the ledger telling it to subtract some value from your account and add it to another account.
Unlike traditional bank records, this ledger can be downloaded and accessed by anyone who wants to see it. The record is stored by many independent computers across the world, and if one computer’s copy conflicts with the others, that copy is rejected as fraudulent. This is why cryptocurrencies are secure: nobody can change the agreed-upon ledger without being able to change at least 51% of the other ledgers.
The ledger works using blockchain technology—but what exactly is that? The cryptographic and technical details get very abstract, but the basic concept is fairly easy to picture. Think of it as a tower of stone blocks, each of which is inscribed on four sides with information that says something like, “Subtracted X tokens from Address A; Added X tokens to Address B.” The bottom is inscribed with information about the last block, and it will only connect to the block that matches this information. This is the “chain” part—blocks are not allowed to be removed, switched around, or in any other way tampered with.
Miners are people who use their computing power to dig for the next block. If their computer stumbles upon the solution that unlocks it, they get a reward in Bitcoins. As they work, they check to make sure that the transactions stored in this block are in line with the rest of the blockchain. Once the block is discovered and all the other miners agree that the transactions look good, it’s connected to the block below it, where it will stay as a permanent record.
To recap the basics:
- Bitcoin exist only as records of value being added and subtracted from addresses in a ledger.
- This ledger is stored on lots of privately-owned computers all over the world
and is completely transparent.
- Miners do work with their computing power to confirm blocks of transactions and are rewarded with BTC.
- Each block contains (and will permanently contain) a set of validated transactions.
- Each block is built on top of (chained to) the previous block, and cannot be moved.
What does all this mean? Essentially, that as long as one computer (preferably more) retains a copy of the blockchain, everyone will still have their coins. To access your coins on the blockchain, you need a cryptographically generated key (a long string of letters and numbers), which only the person who creates the account is given. Anyone who holds that key holds the Bitcoin associated with it.
Though there is always more to learn about the world of crypto, and the technical details are fascinating, starting with a solid intuition will help you work through the more complex concepts.
Bitcoin has been struggling to scale in recent months. Starting in November 2017, the number of people using the network began to slow down transactions and push up the fees. A “Lightning Network” upgrade has been planned, but it is not yet known when it will be released.
In August 2017, “BitcoinCash” separated itself from the main blockchain. This crypto runs on the same technology as BTC, but it can process more transactions in a single block.
Only 21 million BTC will ever be produced—and it has been estimated that as many as 3-4 million of these may have already been lost. Private keys stored on hard drives, paper, or now-defunct exchanges are gone forever, and anything that was locked behind those keys, while it still exists in the records, cannot be accessed by anyone.
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