The latest technology that has got Silicon Valley folks buzzing is Bitcoin.
I'm sure you've probably heard the name and probably even know that it's being
valued at about $4000 per Bitcoin right now. You're also
wondering whether this is a fad or whether this is something you need to
pay more attention to. Well, one thing is for certain, cryptocurrencies are here
to stay. So today we're going to learn a little bit more about Bitcoin basics.
Over the last month I've seen a ton of articles in the mainstream press and had
more than a couple of dinner conversations on the topic, so it's
definitely in the forefront of people's awareness. At a high level bitcoin is a
cryptocurrency. Cryptocurrencies are digital monies that are the equivalent
of physical currencies like the US Dollar, the British Pound, and even the
Japanese Yen, Cryptocurrencies use a type of cryptography or encryption in
order to secure their online transactions.
Like fiat currencies cryptocurrencies are not backed by
any other type of asset meaning if you buy and
hold on to it you are not guaranteed an
exchange for an equivalent asset like
gold or US Dollars.
While fiat currencies actually take on some real life form
in coins and bills, cryptocurrencies are online only.
They only exists on the ledger's of their account holders.
Also unlike fiat currencies it is a worldwide asset that
can be spent in any country so long as all the parties in
the transaction accept it.
Currently countries vary in terms of whether their
governments actually recognize it as legal currency.
Another major difference is that cryptocurrencies are
not managed by a government, bank, or any other type
of agency. It's essentially a decentralized system that
is completely controlled by the broader collective.
In 2008 a paper outlining the operation of Bitcoin
was published by a guy named Satoshi Nakamoto and
the next year it was implemented as a full-fledged system.
Now I say guy in quotes because it's generally agreed that Satoshi Nakamoto
is a pseudonym for an individual or a group of people who are trying to retain
anonymity because as of this date they own about 1 million Bitcoins which is
worth about $4 billion and if they were identified they
would be open to attack and theft.
Prior to Bitcoin, cryptocurrency systems had a lot of
problems managing the timing of their transactions
which in a decentralized system is the whole basis for legitimizing their
transactions and preventing fraud. So for example, if John had 50 bitcoins what's
to prevent him from transferring those 50 bitcoins
to two different people at the same time?
Bitcoin was the first system to solve for this type of double-spending,
Which is why it's gotten so much more traction than other cryptocurrencies.
Hang on to this thought, we're gonna come back to it in a little bit.
Bitcoin and other cryptocurrencies generally operate as a peer to peer or
P2P network, kind of like Napster and LimeWire, and essentially all this means
is that all of the files and all the computing power are provided by the
individual end user like you and me and that when we are connected over the
internet on to a network there's not a central server or something somewhere
managing this connection, we're dealing directly with each other.
To track your activity you install a software application
called a digital wallet onto your computer or your
smartphone, and this secure wallet contains two pretty
critical pieces of information. The first one is called a public key, and this is
essentially your account number. The second piece of information is called a
private key and this is essentially your passcode that allows you to validly
conduct transactions against your account, so it's very important for you
to keep your private key private.
You can also use your wallet to make
transactions and to keep track of your own personal ledger.
There are four ways to get a Bitcoin.
The first way is to purchase a Bitcoin from an individual
or off an exchange.
The second way is to barter for that Bitcoin via services
goods, much like being a merchant of record.
The third way is to either trade or invest in Bitcoin
much like a stockbroker would.
And the fourth is to be a miner of bitcoins,
and this is essentially running the software that is
necessary to keep the Bitcoin system afloat and earning
Bitcoins as a fee for doing so.
To explain the process of mining let's now go back to
the beginning of the discussion when we were talking
about cryptography and double spending.
As mentioned before, all transactions have to be
validated through an encryption process.
Bitcoin has a series of algorithms that attempts to
first of all validate the transaction and then second
check that transaction against past transactions as well as other
transactions happening in parallel. Once validated transactions are packaged
into a data set along with a unique identifier in what is known as a block
in programming. Each block is then added to a historical progression of blocks in
what is called a block chain and that block also will reference the previous
block's unique identifier thereby validating its position in the blockchain.
Together these block chains comprise a living historical ledger and
by the way each person has a copy of this ledger on their own individual
computers. Now in order to process all of this programming computing power is
needed and in a P2P network the computers are provided by the end users
and miners are just those people who allow the broader system to leverage
their own personal hardware in order to carry out this work.
The miners are compensated for this work with new
Bitcoin and the more computing power you're providing
and therefore the more transactions you're actually
processing the more Bitcoins that you get.
The generation of these virgin bitcoins is built
into the algorithms that is running the entire Bitcoin system and so
long as transactions are continuing to occur
new Bitcoins will continue to be generated and produced.
In order to never have the system be devalued by having too many coins in the
market, Nakamoto built a ceiling into the number of
Bitcoins that can be generated or produced.
As it is, already the rate at which Bitcoins are being generated has
slowed down tremendously and at some point when the well dries up Bitcoin
miners will then be compensated by actual fees being paid by the end-users.
One last point one of the reasons why the schema is genius is that the
blockchain design makes it very difficult for an individual to beat it.
In order to alter any of the transactions to create fraud you
actually have to also touch all of the other surrounding blocks around it which
requires an increasingly large amount of computing power in order to process.
As Bitcoin has gained traction over the last couple of years I've seen all types
of exchanges as well as other derivative financial products being built around it.
So this is a good space to keep your eye on even if you don't intend to get into
the market right now.
If you have taken the plunge and are a bona fide Bitcoin
owner please do share your knowledge with the rest of us in the comments below.
Thanks for watching this video and until the next time
peace out Geeksters!
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