Bitcoin in Layman’s Terms
Bitcoin can seem a little daunting if you attempt to understand it. For the average person, trying to make sense of the Bitcoin whitepaper isn’t easy, and isn't even necessary.
Some say it’s just as difficult, and at times worrying, to use as to understand, but for those who would like a general idea of how it works, this post unravels the technicalities and utilities of Bitcoin and helps digest the most exciting innovation of the century, and put it in layman's terms.
What is Bitcoin and Where Does It Come From?
In short, Bitcoin is the soundest, hard money ever created. It is an open-source, decentralized, independent of any central authority, peer-to-peer, trustless, immutable, cryptographically secure, payment network and public ledger.
A lot of adjectives there, but what is Bitcoin?
The underlying technology is known as a blockchain, which is a digital chain of blocks, each connected to the previous one. The blocks store every single transaction, and a new block is added to the chain roughly every 10 minutes.
Each bitcoin 1.00000000 is divisible by one hundred million, and each of these units 0.00000001 is known as a satoshi. The bitcoins are a reward paid out to people who use their computing power to mine the blocks that make up the blockchain. A lot to digest? Let me explain.
Who Created Bitcoin?
Bitcoin was created by pseudonymous software engineer, Satoshi Nakamoto, who authored the Bitcoin whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System. It was published on 31st October 2008, and Bitcoin itself was launched on 3rd January 2009.
Satoshi mined the first block, known as the genesis block, and a reference to the ongoing banking and financial crisis was embedded into it:
‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’ was the headlines of British newspaper The Times that day, and it’s thought that Satoshi embodied it into the genesis block as a timestamp and as a reminder for the necessity of a decentralized money like Bitcoin.
The first transaction on Bitcoin was on 12th January 2009, when Satoshi sent 10 bitcoins to Cypherpunk Hal Finney.
Finney was a known cryptographer, who had been involved in several past attempts to create a digital currency. After receiving the bitcoins, Finney decided to start mining them on his computer, but was put off after a short while due the heat his computer was generating. Something, he says, he regretted at a later date.
How Does Bitcoin Work?
Bitcoin is an open-source distributed software network. This means it’s collaboratively developed, all code is open and shared freely so any person can audit it and build on it.
Nobody owns it, it’s not a company, it’s a transparent network that’s openly auditable, and the blockchain is basically an immutable, secure, and distributed public ledger.
The fundamental infrastructure of Bitcoin is a network of thousands of globally distributed full nodes, and many more miners.
A full node is a hardware storage device that has the Bitcoin Protocol downloaded onto it. Every full node has the entire blockchain installed and running on it, and their job is to validate every block that the miners send. Once they come to agreement, the new block is added to the chain.
Miners can be a single person, a mining company (mining farm), or thousands of people mining together (a mining pool). Miners are the ones who use their powerful computing power to help validate the transactions, by hashing them and sending them to nodes to seek confirmation that the sender has enough bitcoins or satoshis to send.
Once nodes have confirmed this, the miners pick up the transaction and add it to the newest group of transactions. They then shrink the transactions into a cryptographic hash of 256 bits, which is what is known as the block.
The block is then sent back to the network of full nodes, which then have to come to consensus that all transactions are the same in every block. Once the full nodes are in agreement, the block is added to the blockchain and a block reward is sent to the miners. This process is known as Proof of Work (PoW) consensus mechanism.
The block reward is the creation of newly minted bitcoins for every block added to the blockchain. At time of writing, the block reward is 12.5 bitcoins, which is added to the total bitcoins in circulation.
After every 210,000 blocks (about four years) the block reward is halved. This event is known as the Halving, or ‘Halvening’, and is predetermined and will continue until the last fraction of Bitcoin is mined in around 2140.
There have been two halvenings previously and the minting rate went from the original block reward of 50 to 25, and then it was cut to 12.5 at the last halvening. The next halvening will take place around 20th May and the block reward will then be 6.25. The miners are also rewarded with transaction costs.
How Secure is Bitcoin?
The encrypted blockchain that is distributed globally on the network of nodes ensures that Bitcoin is the most secure network ever created.
The Bitcoin network and protocol uses the most secure hashing algorithm, SHA_256, to secure its encrypted blocks. And as long as 51% of nodes are in agreement there can be no rogue block or even transaction on the chain.
If somebody tries to manually corrupt the transactions their node’s version of the blockchain will not align with the public version and it will be refused part of the public chain.
If say, 51% of the nodes agree that their version is correct, but the other 49% disagree, the 51% remains as the Bitcoin blockchain, and the 49% will form another chain. This is known as a hardfork, and has happened before, but not with 49% of the network.
In the past, a small percentage of miners decided to create their own version of Bitcoin and so we now have other versions such as Bitcoin Cash and Bitcoin Gold. So, if you’re new to Bitcoin and want to buy some, make sure you buy only BTC!
Can Bitcoin be Hacked?
The decentralized nature of Bitcoin means that there is no central server to attack. This is a problem all centralized databases such as Google, JP Morgan and even the Pentagon have suffered from in the past.
To hack Bitcoin you need to take control of 51% of the network, which is distributed on thousands of computers dotted around the world.
While nothing is ‘unhackable’, it can be said with near certainty, that ever since Bitcoin came into the public realm cyber criminals of all levels from single persons to nation-state hackers have tried and are continuously trying to hack Bitcoin.
It is technically possible to take control of the blockchain. But to do this it would need a conglomerate of nodes (billions of dollars of computing power) to even have a chance of seizing control of 51% of the network. Even then, due to the extremely high costs and low probability, it’s unlikely that anybody would attempt this.
And as more people get into Bitcoin and start mining or running their own full node, the more secure the Bitcoin Network will become.
How to Buy Bitcoin?
Bitcoin is a peer-to-peer network, and anyone wanting to buy Bitcoin will buy from anyone wanting to sell it. The easiest place to do this is by sending money to a centralized exchange, such as Coinbase, Binance or Kraken.
There you can buy satoshis or bitcoins if you have enough money. On these exchanges, you’ll have a wallet interface, which shows how many you have. You will also be given a public key in these wallets, which is connected to the address you want anybody to send them to. You can add and withdraw from this address as much as you like.
The owner of any bitcoin has an address with a public and private key, which are randomly generated alphanumerical strings.
The public key is as it states: public. The user will give this to any person who wants to send them some bitcoins or satoshis. There is no third party involved and no trust is needed. The sender will send an amount of Bitcoin to the receiver and the miners, nodes and Bitcoin protocol will do the rest.
Once a transaction is verified and added to the blockchain, it cannot be reversed, and as long as the user sends it to the correct address, the bitcoins cannot go astray. There is no need for a middleman or even trust, maths and a decentralized network takes care of everything.
A private key, like the public key, is a string of letters and numbers, but private means private. There is a saying in the Bitcoin world’: ‘Not your keys, not your Bitcoin.’ This means, if you don’t have sole ownership of the private keys, you do not own the Bitcoin.
Basically the private key is the combination to your Bitcoin bank vault. It’s utterly important that you don’t share these with anyone. If you do, they will technically have as much right to the bitcoins in that address as you do.
And don’t lose your private key either, because if you lose it, you will have no chance of ever getting your Bitcoin back, even if you have the public key.
Where to Store Your Bitcoins?
Where to store Bitcoins should be the first thing you find out, when getting into Bitcoin. The most popular places to store your bitcoins is a hardware or software digital wallet.
A digital wallet is basically an interface that makes Bitcoin easier to use, and can be either software or hardware. You will have a password for the wallet and a backup seed phrase if you ever forget your password. But wallets are centralized and that weakens the security a bit. But they are relatively safe and are the best bet for the average user, as long as you don’t fall for rogue phishing attempts.
You can also store your bitcoins on a Crypto exchange, although this isn’t advised. There are a good few respected exchanges, but they are centralized and more susceptible to being hacked.
There have been a few cases, Mt. Gox being the most infamous exchange hack, and people holding their bitcoins on the exchange lost them all. There have been a few other hacks, including Binance, but the exchange covered the losses of over $40m and made sure all customers who lost their bitcoins, were fully refunded.
Probably, the safest way to store your private keys is to write it down a few times on separate pieces of paper, and store it in a few different locations like a safety deposit box, your mum’s attic, and maybe one under your floorboards. This doesn’t make your bitcoins as accessible as a digital wallet, so is probably only recommended for those wanting to hold Bitcoin for the long term.
If your memory is strong and you’re confident you can memorize your private keys, you can also store it in your brain. This is without doubt the safest way to store them, but remembering a hexadecimal number is a challenge for most people, and one I wouldn’t contemplate.
Wherever you choose to store them, always be safe and cover all bases, and remember to never share your private keys, ever.
Bitcoin - The Most Transformative Innovation in History?
Bitcoin is the most secure network ever created, it’s a distributed, immutable, public ledger that takes the need for a middleman away. You don’t need to trust anybody because every transaction is secured by code, maths and a distributed network that powers the most secure hashing algorithm ever created.
Bitcoin is not a company or owned by any central entity. It’s a network and it’s owned by whoever wants to participate in it. It doesn’t have a marketing team promoting it, it promotes itself.
It is 11 years old, but it is still in its infancy. The possibilities it brings to the world are endless. Bitcoin is here to stay and disrupt, and it could quite easily become the most transformative technology ever.
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