Every single day does not pass without being asked what Bitcoin is by a total stranger who was referred by a friend or relative. Sometimes it becomes so overwhelming that I can’t even handle the number of messages that flood my messaging platforms. So to make it easy, I will get down to writing something anyone can read. So lets get down to it.
In this blog I will try to translate Bitcoin into plain English that you can understand, so basically you don’t need any technical background to understand. To make this possible, I will start from something you have used before: MONEY.
What is Money?
Money throughout history has gone through evolution. From Barter Trade to use of coins including the Rai Coins from the Yapian Island to use of paper money and finally credit and debit cards. However I haven’t mentioned all the stages money has gone through. I hope to pen down a blog in the future that summaries the evolution on money.
The real question is, what is money? Money in simple terms represents value. If you have some work to be done, and you hire my services, you give me money in exchange of my services. Once I get that money I can use it to get a service or purchase something of value to myself.
Trust is however very important in order for something to represent value. People have to agree that it is indeed valuable. Another question would be, at what point does money loose value? At what point does it lose people’s trust?
The Gold Standard
Paper money was created a very long time ago. The creation of paper money introduced what was termed the Gold Standard, which was abandoned in 1931 by the British Government followed by the United States in 1933. The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold. However, no country uses this system currently. The gold standard was replaced by fiat money. Fiat money describes money that is used based on government orders. So whether one dislikes it or not you have no choice but to accept to use fiat currency. Fiat money is what is currently used, which includes the US Dollar, Pound and South African Rands, just to mention a few.
The appeal of the gold standard is that its arrest control of the issuance of money out of the hands of imperfect human beings. With the physical quantity of gold acting as a limit to that issuance, society can follow a simple rule to avoid the evils of inflation. The goal of the monetary policy is not just to prevent inflation but also deflation, and to promote a stable monetary environment in which full employment can be achieved.
The existence and abandonment of the gold standard gives us a picture of how money gains and loses both value and trust. However that is not what we will focus on.
Fiat is a Latin word that means “by decree”. This means the dollars, or euros or any other government currency has value because the government orders it to. It’s what is known as “legal tender” – coins or banknotes that must be accepted if offered as payment.
So the value of today’s money actually comes from a legal status given to it by a central authority, in this case, the government. And so the trust model has changed, from trusting some-thing to trusting some-one (in this case, the government). Fiat money is centralised which mean, its issuance is controlled by a central authority. That alone has alot of disadvantages. Although we might trust the currency, there is little trust to give to those controling it. What if they print more than what they are supposed to? This causes problems for the individual in the streets. If the government prints more money, they are basically devaluing it. So your dollar becomes less and less valuable.
At every stage in the evolution of money, a problem was created. Have you ever thought of the kind of problems people who were in ‘Barter Trade’ age experienced? If you ever wanted to barter trade with someone, then you had to have something someone wants. That is what is termed the ‘double coincidence of wants’. Both parties had to be interested in the item being offered by the other party. Fast forward to use of gold and other precious items, the problem is you couldn’t walk around with them where ever u will going. Fast forward to fiat money. I am sure you have bumped into counterfeit notes. Digital money came with its own problems too, double-spending being the biggest of them all. Double spend problem is basically when one spends a single dollar twice digitally. Yes someone can easily manipulate the system of credit/debit cards to spend money twice. Double spend problem is hard to solve if the authority remains centralized.
Giving someone control over money supply will give them enormous power and creates a number of problems that include corruption, mismanagement and giving away control of the system, only to mention a few.
Bitcoin as a Digital Currency.
In October of 2008, a digital document was published online by a person/group that gave themself a name that goes by Satoshi Nakamoto. The document which is termed a white paper suggested a way of creating a decentralised currency, and he would name it Bitcoin. This system would solve the double-spend problem without the need for a centralised authority.
Remember we spoke about banks being centralized and being in control of everything. What this basically means is the bank and the banks only has access to the ledger of records and they can do as they please with it. You cannot have a peak at the ledger as an individual, suggesting it is definitely not transparent.
Bitcoin on the other hand is a transparent ledger that shows all the records from the first-ever transacted bitcoins. That means at any moment I can sneak a peek into the ledger and see all transactions and balances that are taking place at any moment. The only thing is there are no names, ids or home addresses involved.
This means Bitcoin is pseudo-anonymous – everything is open, transparent and trackable but you still can’t tell who is sending what to whom.
To get a little bit of understanding of the Bitcoin ledger(termed the blockchain) take a look at the transactions as they happen in real-time here: https://www.blockchain.com/explorer
The Blockchain Explorer will give a summary of transactions as they happen. The transactions on the explorer are always constantly changing since transactions are done every second.
Below is an example of a bitcoin transaction that I just picked randomly on the Bitcoin blockchain.
From the above image, there is a handful of information we can pick up about this transaction.
Time Stamp: Every bitcoin transaction has a time stamp attached to it in the format Year/Month/Day and the exact time the transaction was recorded on the bitcoin ledger(The Blockchain).
Hash: A hash function is simply a mathematical function that can take any form of date or any size(numbers, alphabets, media files) and produce a fixed-length output for that particular input. This output of the hashing function is called Hash. I will expand more on the hash function in a different blog.
Bitcoin Address: A bitcoin address which also goes by the name as simply “address”, is used for representing an identifier consisting of 26-35 alphanumeric characters. A typical bitcoin address begins with the number 1 or 3. Any user can generate this address in their wallet, and use it for receiving funds. In the image above, the address to the left is sending bitcoins that amounts to the value of $60.72 to the address on the right. However, since the transaction involves a fee, the recipient of the bitcoins receives the value as $60.14.
Fee: In order for any bitcoin transaction to be processed and added to the blockchain, one should pay a small fee. The sender pays the fee. Fees vary with transaction size but it can be customized to suit the needs to the sender.
Characteristics of Bitcoin.
The bitcoin ledger is not held or kept at a centralized computer. With bitcoin, every computer that participates in the system will also possess a copy of the ledger(Blockchain). That makes it completely impossible to take down the system or hack it, because if you are to do so, then you have to take down thousands of computers which are keeping a copy of the blockchain.
2. Bitcoin is Digital
There is no single bitcoin that is physical. Everything is digital. When you “own” Bitcoin it means you own the right to access a specific Bitcoin address record in the ledger and send funds from it to a different address.
Bitcoin vs Banks
Let’s compare the Bitcoin system to the Banking system.
When ever you process a bank transaction, there is a bunch of middlemen that are involved in processing the transaction. This means you pay more. With Bitcoin there is no single middlemen and that means it is cheaper to send money through bitcoin.
Anyone can use Bitcoin
According to a report from the World Bank, the estimated number of people with no access to banking accounts is 2 Billion. This is because opening a bank account comes with complicated processes that everyone cannot afford to go through. With bitcoin, there are no questions asked, if you need bitcoin you can use it without going through a process of being asked your private information.
I am sure at one point you had problems with your bank account. The bank will do what they please with your funds, from freezing them to limiting how much you can send/spend. With bitcoin, you don’t have any of those restrictions. No government, bank or institution can decide to freeze your account or confiscate your holdings. You and you only have power over your funds.
Congratulations if you made it to this point. You are now part of the 1% that know about bitcoin. To summarize it all, bitcoin was created to give control of money back to the people, because it is your money right!?
I will be writing more blogs on bitcoin and the blockchain, so make sure you hang around and do not forget to share. It will go the extra mile to making me smile and give me the motivation to keep writing. Let me know what you think! If you have any questions, do not hesitate to contact me!
Until next time.