A Guide to Understanding Blockchain & Bitcoin
We live in a time of change. As a result, we see buzz words crop up regularly. If you are like us, you eventually realise you need to know what they really mean.
Let’s have a brief look at blockchain and bitcoin. These are terms we already hear about occasionally in the news, but will become commonplace in the future.
Blockchain
Blockchain is a technology that allows digital information to be distributed, but not copied. Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology.
The blockchain is incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions, but virtually everything of value.
Information held on a blockchain exists as a shared database. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralised version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.
The blockchain network checks every transaction that happens in ten-minute intervals. Each group of transactions is referred to as a “block”. Two important properties result from this:
- Transparency – data is embedded within the network as a whole and is public.
- It cannot be corrupted – altering any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network.
There are many ways we will benefit from this technology:
- Smart contracts – contacts that will execute when specified conditions are met
- Peer to peer payments will be possible. e.g. you can pay a bill without going through a bank and just pay directly
- File storage – decentralising file storage will help prevent files being hacked or lost
- Internet of things (IoT) – a combination of software, sensors and the blockchain network will allow the exchange of data between objects and mechanisms in a secure environment
Blockchain technology is not just an interesting technical diversion; it is a potential game-changer. We will all feel its effects in the future as it brings greater security to online operations.
Bitcoin
Bitcoin, often described as a cryptocurrency, a virtual currency or a digital currency – is a type of money that is completely virtual.
It’s like an online version of cash. You can use it to buy products and services, but not many shops accept Bitcoin yet and some countries have banned it altogether.
The physical Bitcoins you see in photos are a novelty. They would be worthless without the private codes printed inside them.
Each Bitcoin is basically a computer file which is stored in a ‘digital wallet’ app on a smartphone or computer.
People can send Bitcoins (or part of one) to your digital wallet, and you can send Bitcoins to other people.
Every single transaction is recorded in a public list called the blockchain.
There are three main ways people get Bitcoins:
- You can buy Bitcoins using ‘real’ money.
- You can sell things and let people pay you with Bitcoins.
- Or they can be created using a computer.
This makes it possible to trace the history of Bitcoins to stop people from spending coins they do not own, making copies or undoing transactions.
In order for the Bitcoin system to work, people can make their computer process transactions for everybody. The computers are made to work out incredibly difficult sums. Occasionally they are rewarded with a Bitcoin for the owner to keep.
People set up powerful computers just to try and get Bitcoins. This is called mining. But the sums are becoming more and more difficult in order to stop too many Bitcoins being generated.
If you started mining now it could be years before you got a single Bitcoin. You could end up spending more money on electricity for your computer than the Bitcoin would be worth.
There are lots of things other than money which we consider valuable like gold and diamonds.
Bitcoins are valuable because people are willing to exchange them for real goods and services, and even cash. Some people like the fact that Bitcoin is not controlled by the government or banks.
People can also spend their Bitcoins fairly anonymously. Although all transactions are recorded, nobody would know which ‘account number’ was yours unless you told them.
Every transaction is recorded publicly, so it’s very difficult to copy Bitcoins, make fake ones or spend ones you don’t own.
It is possible to lose your Bitcoin wallet or delete your Bitcoins and lose them forever. There have also been thefts from websites that let you store your Bitcoins remotely.
If you are interested in dipping your toe in the water by buying and selling with Bitcoins, see this article for more information.
