Been there, done that
Bitcoin simply explained
Over the past several years, terms like Bitcoin, cryptocurrency and blockchain have made their way into headlines. In a nutshell, Bitcoin is a completely digital currency. It allows secure, anonymous transactions to take place over the Internet without the oversight of any government or centralized system.
It wasn’t until 2009 that the first fully-fledged independent digital currency was released in the form of Bitcoin. Its value wasn’t backed by any other currency, government or commodity. No governing body or regulatory authority has ever controlled it. How was this accomplished: through the use of the blockchain.
The simplest way to describe a blockchain is as a shared record or ledger maintained by the users. When someone gets set up to use Bitcoin, they become a member of the blockchain and get a copy of the shared ledger on their phone or computer. This ledger contains all the transactions between people who use Bitcoin. The ledger uses one-way encryption to ensure the transactions stay untraceable and anonymous. Copies of the blockchain are sent to all the users when a transaction has taken place. The transaction is complete when ledgers update with the new records of who owns what.
If one of the ledgers is tampered with or edited in any way, hundreds of thousands of other ledger copies correct the errors to ensure accuracy in record keeping and security. This is how the system of exchange is managed and maintained without the need for a centralized authority.
Now, it’s time to explain mining. When Bitcoin was first conceived, there was a problem with how to release it into the world. The creators of Bitcoin couldn’t just give it away because the currency would have no value. They decided to release a huge incredibly complex mathematical problem with 21 million solutions. When someone finds a solution, they are awarded a Bitcoin.
Finding all the solutions kicked off a sort of technology arms race to find the fastest and most efficient way to solve the problems using specialized computers, but this math problem is so ludicrously complex and large that in 10 years only around 17.8 million of the solutions have been found.
Releasing the currency in this way keeps the value of a Bitcoin at a minimum. The cost is reflected in computer usage and the electricity required to solve one of the math problems.
When all 21 million solutions are found, all the Bitcoins will be in circulation and the mining will cease. The actual data that makes up a Bitcoin, called a Bitcoin address, is an encrypted string of information that gets connected to your account in the blockchain.
As a member of the blockchain, each user has an encrypted key, similar to a heavy-duty password that is used to authenticate all the user’s transactions and keep the network secure. If a user loses their key, all Bitcoins belonging to that user are effectively lost or permanently frozen. It is estimated that nearly 20 percent of all Bitcoins in existence have been lost this way. There is no way to recover them without the key. When people talk about having Bitcoin on a hard drive or computer, they are generally talking about their key or addresses.
When making a purchase, it is common for tiny fractions of a single Bitcoin to be used. If you wanted to sell something for a billionth of a Bitcoin, it would be no different than any other transaction amount. Many online retailers have started accepting Bitcoin in the last several years, but physical stores have been much slower to start using it. This is partially due to a lack of paper bills or credit cards for Bitcoin. As smartphone payment options become more common, it is likely that a similar solution could be adopted.
For right now, cryptocurrencies are still in their infancy. With more time, they will become more and more commonplace. Who knows? You just might be buying your newspaper with Bitcoin in the future.