Understanding BitCoin – Layman’s Version

Understanding BitCoin – Layman’s Version

Evolution of Money (a.k.a exchanging goods and services)
Barter System – > Gold Standard -> Fiat Currency (Current System) -> Digital Currency (Bitcoin)

Excited !!! – I explored a bit about Bitcoin this morning. Here is an attempt to lay out a layman’s version”.

Nickname “Satoshi Nakamoto”, real name unknown. solved an “impossible” problem (how to make a trustworthy network out of nodes that individually cannot be trusted), published the paper to some cryptography mailing list, and then lots of people got together to write programs that implemented the ideas from the paper.

Yes, we are talking about Bitcoin, started in 2009.Bitcoin is the world’s first decentralized Digital Currency. It can be used anywhere in the world anytime and anywhere. When he started he didn’t visualize converting it into a currency, he only wanted to show that money can be transferred directly without intervention of third party.

Now people can send money directly to any other person who is anywhere in the world without needing help of your bank or any other third party. You can directly transfer from your bitcoin wallet to other person’s wallet.

Bitcoin is a way to allow people to transfer value in a peer-to-peer fashion without having to trust, to depend on and to pay middlemen like banks and financial services companies. In May 2010, for the first time it was used to buy a pizza in exchange of 10000 Bitcoins.

We all know world has different countries, culture, language but one thing is common, money. It’s high time world has a currency which is universally accepted without or with very less intervention of any middlemen.

So, what would be a breakdown of transaction using a cryptocurrency look like?

  • Let’s say I had a physical bill of $100, which I gave to, say Mr. A. Now, I have zero and Mr. A has $100. Bank is the guarantor of that 100 dollar bill.
  • Now suppose I am doing the same transfer using a digital token without using the service of a third party like a bank or government. Since digital token is essentially a file, it’s very easy to duplicate the Token.  Mr. A or I can create multiple copies and we can send the same digital token to multiple people.
    This is called the Double-Spending problem (when we can spend a single digital token twice).
  • To solve this problem we need to track it. We need an accounting book to track it, usually called ledger.
  • Now we need to make someone to take charge of the Ledger. Handing the ledger to a single person could again led to manipulation.
  • Solution is to give ledger to everyone. All transactions that have ever happen will be recorded so there is no chance of manipulation or duplication. Because it’s a public ledger, I don’t need third-party to make sure I didn’t cheat, or make extra copies for myself, or send digital notes twice, or thrice.
  • People can therefore trade bitcoin with the peace of mind, that it’s not fake or duplicate.

Well, fundamentally this is Bitcoin from a layman’s perspective. What does the future hold for Bitcoin, particularly in terms of legal or regulatory aspect is anybody’s guess.