What is Bitcoin?

 

What is Bitcoin?

Bitcoin is the original cryptocurrency. Invented in 2008, it was proposed as a ‘decentralised digital currency’. That means it is not issued by any state, government or authority. Instead, it’s issued and distributed among users by the Bitcoin network itself. 

And, while a fiat currency such as Sterling depends on payment providers, banks or other third parties to transfer money from one account to another, Bitcoin is truly peer to peer.

Bitcoin holders can send funds to the digital wallets of others in return for goods, services or other currencies. There are online and offline retailers that accept Bitcoin payments and one country, El Salvador, even adopted it as its official currency.

Fiat currencies, like Sterling, operate using ledgers held by financial institutions like banks, building societies, payment platforms and so on. These ledgers record how much money people are owed. They are trusted because they have to meet regulatory obligations and, often, have been around for a long time.

Cryptocurrencies eschew these trusted institutions and instead place trust in users to hold, maintain and update their ledgers, and to do it honestly.

How does a new currency work?

Imagine someone started a new currency with a group of friends, trusting that everyone would be honest about how much of the currency they and others held.

Let’s say everyone starts with 1 coin of the new currency. We’ll call our imaginary currency Forbescoin. Let’s then imagine someone in the group gives someone else in the group 0.5 Forbescoin in exchange for a lift to work.

Each group member would update their ledger (records) to show that the sender now has 0.5 Forbescoin remaining, and the recipient has 1.5 Forbescoin.

Let’s then imagine that as a reward for their honest record-keeping, each group member has the opportunity to make their copy of the ledger the ‘official’ version and, in doing so, earn more Forbescoin. 

To do so, all they have to do is correctly guess a number from 1-100 within 10 seconds. If nobody guesses correctly, the closest guess wins. The clock starts and everyone makes their guesses. A winner is declared.

Everyone checks the winner’s copy of the ledger and, so long as 51% of the group agree the winner’s ledger is accurate, the record is made official and the winner is rewarded with 1 Forbescoin. Everyone updates their ledgers to show that the winner holds an extra Forbescoin.

Everyone can trust the ledger is accurate because there was consensus agreement. The requirement for consensus acts as a disincentive against cheating, while the chance to earn a reward for honestly updating a copy of the ledger incentivises participants.

This is effectively how Bitcoin operates, but on a global scale. Instead of guessing a number from 1-100 in 10 seconds, however, participants guess a long, random string of letters and numbers within 10 minutes.

This alphanumeric string has trillions of possible permutations, which makes guesses off the top of one’s head impossible. Instead, participants use computers to generate guesses. 

The more computing power you have, however, the more guesses you can make within this window, and the greater your chances of winning.

When someone successfully guesses the string, they have the opportunity to add their version of the ledger to the blockchain, a 500-gigabyte-plus history of all transactions up to that point. 

In doing so, they’ll earn an amount of Bitcoin as a reward, but only if 51% or more of all participants agree that the record is accurate, after having mathematically cross-referenced it against their own ledgers.