Blockchain and Bitcoin are two words that are used increasingly in today’s lexicon, its everywhere and has become increasingly newsworthy with the recent fluctuations of Bitcoin – on Christmas day, 1 bitcoin was worth $13,975, today (2nd February 2018) 1 bitcoin is worth $8,150 it’s a very volatile market and there is differing opinion on whether it will be the next oil or gold or whether it will become the next .com type bubble to burst.
In this article we will briefly describe what they are and try to use a metaphor to explain how they work. The first thing to say is that Bitcoin is an example of Blockchain, that is to say it utilises the processes through which Blockchain works and uses it as a digital currency, in fact Blockchain was essentially created to power Bitcoin, other potential future uses of Blockchain include anything around sorting records, data or events so for example our medical records.
What is Blockchain?
It is essentially a continuously growing list (or block) of records. These records are linked together and secured via cryptography. Each record has a link to the next block on the chain. Blockchain is decentralised meaning it’s not stored in one location or controlled by any one person/ company. As such when any data is recorded it is recorded across lots of computers in the network. This makes it very difficult to modify records once data has been recorded; to retrospectively alter any data would mean you would have to alter it on every computer in the network which is next to impossible.
What is Bitcoin
Bitcoin is an example of how Blockchain technology & processes can be used; Bitcoin is a digital currency (or cryptocurrency) which is made up of a sort of token (like a virtual IOU) and the network upon which all the transactions are recorded. Bitcoin enables payments to be sent by users without having to go through a “middleman” like a bank or a payment gateway like PayPal. It was created in 2009 by an unknown person who using the alias of Satoshi Nakamoto. His aim was to do for currency what the internet did for news, liberate it and make it free and open for everyone without any controlling parties governing it. Its anonymity and lack of a controlling central authority has made it attractive for the use of criminal activity, it was the payment method requested as a ransom after numerous NHS systems were hacked in the UK in late 2017.
Unlike regular currencies Bitcoin only has a finite supply, whereas in the real world governments can choose to print extra currency or withdraw it to manipulate its value this cannot happen with Bitcoin. There will only be 21 million Bitcoins ever made available. The Blockchain ensures that only a few trickle out every 10 minutes, the amount diminishes as time goes on. This is partly why it’s so popular, there is heavy demand and supply will be limited, pushing its value up.
What is mining
Every 10 minutes the Blockchain adds all the transactions in that 10 minute period to the end of the block they are heavily encrypted. Bitcoin mining involves the processes taken to validate the transactions within this 10 minute window and add them to the Blockchain ledger of public transactions. Mining is a very complicated and difficult process requiring the miner to solve complex mathematical equations that are part of the bitcoin program and then including the answer in the Blockchain.
It’s a very intensive process with multiple parties competing against each other to be the first to solve the equation. As a reward for doing this the quickest, the successful miner gets some bitcoins which are included within the block of transactions released, hence the term mining, you are mining the Bitcoins out of the block of transactions. The number of Bitcoins included in a block reduces slowly over time, at the time of writing the reward for successfully mining a block is 12.5 Bitcoins (approx. £150,000). The process of mining requires a lot of computing power, so expensive kit is needed to do it well and it is very energy intensive so your electricity bill is going to astronomical.
Bitcoin as a metaphor
The best metaphor that I came across that attempts to explain how Bitcoin works was to imagine a bunch of safes all securely welded together, all the safes have unbreakable, bulletproof yet see through glass doors enabling anyone to see how much money is stored in it. All the safes have a one way slot in them enabling people to post money into them (but not retrieve any money). All the safes have a unique reference number on them allowing people to identify them. Anyone can put money into any one of these safes should they wish to do so. If you have a bitcoin account you are given one of the empty safes along with the combination to open the safe, if you want someone to send you money all you need to do is tell them which reference number your safe has. Using your combination allows you to open the safe and withdraw the money. If you lose or forget your combination you are up the creek without a paddle – there is no way of accessing the money without that combination. The safes are publicly available which means that anyone can look at them and anyone can see what transactions have been put into what safe but they will not be able to determine either your identity or the identity of the person who paid you. It is very easy to transfer money because A) there is no regulatory steps you need to go through to put money (or withdraw it) from one of these safes so there is no scrutinisation or interference from any government and B) it doesn’t need any middlemen so banks are not involved in the process.
Disclaimer: Red Robot Systems have nothing to do with Blockchain or Bitcoin – we are not involved with it in any way, shape or form. We’re only interested in it because we are nerds and it concerns software and coding!