Most of the nerds around you are all into bitcoin while you have a big question mark in your mind… What is bitcoin and why do these people keep obsessing about this piece of code? Luckily, we from CoinGawk, are going to explain to you in one short article how Bitcoin works.
We all spend dollars on our daily needs or assets. It’s normal as the USD is the current world reserve currency. For us, cash is a common thing and we let banks (3rd parties) control this monetary power. It’s what our current monetary system is in a nutshell. But when you think about it, it’s actually not a normal thing. Let me explain to you why.
So, to understand money, you need to go way back in history. Back in the good old days, gold was a common thing used to pay for things worldwide. It is a rare stone (not unlimited), it has to be mined (putting in the work to get it), it can be molded (fungibility) and it is shiny and beautiful (jewelry etc.). So, it has a lot of concepts that make it ‘worth’ something.
The first banks started with a brand-new idea: they offered people to store their gold into their safe and they would get a piece of paper as proof that they indeed stored an ‘x’ amount of gold. So, if you come back to the bank with this piece of paper, you would get the amount that is written on that piece of paper. After that, people realized that it is easier to exchange these papers with each other rather than going back to the bank every time to withdraw the gold and pay for a service. That’s basically how the concept of ‘cash’ started to grow. The USD was pegged to gold which meant that your USD bills were actually worth gold as you could exchange it with the banks.
This monetary system was unfortunately destroyed in 1971. Richard Nixon (former US-president) decided to end the convertibility of USD to gold. This is a major thing because it technically means that your USD bills are worth nothing. It’s essentially a piece of paper that cannot be converted into anything and you are dependent on the economy. Yes, the economy is going fine, and you can use this medium of exchange. But what if there is a financial crisis? Would you be able to convert your hard-earned money to gold to maintain the value of your assets?
What is happening right now is that the monetary power is in full hands of 3rd parties. A group of banks can print money whenever they want, based on air. It causes inflation, which you can already see in countries like Venezuela. Another problem is that banks can block you from taking your money: Back in 2012, when the financial crisis in Greece happened, people couldn’t withdraw more than 50 Euro a day. Even if it’s your money, once the economy collapses, they will have the power to decide what happens with your money. You are trapped like a rat in a cage. The last major problem is the amount of resources (money and time) you have to pay to transfer money worldwide. You will pay an absurd amount of money (around 5% and even more) to send some digital dollars which are in the end a piece of code.
All these cumulative problems resulted in a new idea. A revolutionary idea. A coup d’état against centralized power.
In 2008, an anonymous person (or group) called ‘Satoshi Nakamoto’ released a revolutionary piece of code on the internet. Satoshi Nakamoto found a solution to the centralized monetary power: he released a peer to peer money system that is fully decentralized.
Satoshi proved that you don’t need a central power to have a trustless system. In other words: To use Bitcoin, you don’t need to trust an institution or a human being.
The concept of having an internet currency (E-Cash) isn’t brand new: E-gold was a digital currency launched in 1996 and grew to 5 million users worldwide before the US government shut it down in 2008. Which was easy to do as the FBI simply raided the centralized servers of E-Cash. You might already guess what happened after this event: the same concept was relaunched with a decentralized nature, so it can’t be shut down.
How does it work?
Bitcoin is rare (it has 21 million coins in total) and can be mined by solving difficult math puzzles with your computer (a server). Everybody can run the Bitcoin server on their computer and start mining.
The fastest person solving the puzzle (so the computer with the most solving power) will earn a fraction of a bitcoin as a reward. This reward is very important as it stimulates the decentralized nature of the network.
Before we are going to get into it, let me explain it to you why it’s so important by giving an example:
Look at the picture above. You see a woman working with bottles in a factory. Now let’s pretend for this example that this woman is a Miner (a server) and that the bottles are Blocks and the assembly line is the Chain (hence why the technology behind Bitcoin is called Blockchain)
If Alice wants to send 1 bitcoin to Alex. Once she does that, somebody has to put this transaction into the block, so the transaction will be delivered using the assembly line. Normally your bank does this (by using their server) but in this case, it’s the miner that has to do it. A miner will be rewarded a fraction of a bitcoin by putting Alice’s transaction into the blockchain, so the miner has an interest in doing it. A miner could be anybody and in this way, it reaches its decentralized nature.
The blockchain could be summarized essentially like a factory with an assembly line full of blocks containing transactions. This whole assembly line should work 24/7 otherwise people can’t send transactions. By replacing the server of a bank by random miners, the system is working.
What truly makes this ecosystem valuable, is that your wallet (that contains the bitcoins) is only accessible by you. Nobody can take it away from you (not even a bank or government) unless you give away your private key which is essentially your password to your wallet. You are essentially the bank of your own money.
Is Bitcoin money?
What is the function of money:
– a way of trading
– a unit of account
– a store of value
What are the criteria:
– It doesn’t expire
– Fungible: two half units are worth the same as 1 whole
– Accessible: in your pocket
– Rare: Not easy to remake
Damn, it looks like Bitcoin fits these criteria! So yes, Bitcoin is useful as a source of money.