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Blog » What the F*%k is Bitcoin?
To be honest, there is no reason you need to know how bitcoin operates unless you want to join the game. Do you need to know how a credit card transaction works when you buy pop-tarts at IGA? Having said that, it’s a new way of sending and receiving payments and I’m going to try to explain what bitcoin is, although I’m not an expert.
Bitcoin is the first – that we know of – DAC which stands for Digital Autonomous Corporation, also known as Decentralised Autonomous Corporation: basically a company with no directors. It’s a virtual currency that doesn't exist in the real world, nor does it have a federal reserve. Decentralised Autonomous Corporation’s follow a pre-programmed business model and rely completely on something called a block chain. To cut a long story short, the idea of bitcoin has been accepted in the free internet community as it cuts out the red tape of a transaction, including that fat cats that profit from all the red tape.
For a new user it’s a matter of downloading a bitcoin wallet then generating your first bitcoin address: you can create more when you need them. You can give your address to your friends and they can pay you, or vice versa. It’s basically how email works, except a bitcoin address should only be used once.
Ok, so you want to know more. As mentioned earlier, I’m not a bitcoin expert, so if you are and feel the need to correct anything in this article, feel free to comment below. I’ll add an update to the article if needed.
First thing is first, let me put it all into a timeline for you.
Let’s say that Janine and Nick have bitcoin wallets on their computers and Janine wants to pay Nick for an article he wrote. First Nick would create a new bitcoin address for Janine to send her payment to. Janine then tells her bitcoin client that she’d like to transfer the purchase amount to Nicks bitcoin address. Janine’s client then signs her transaction request with the private key of the address she’s transferring bitcoins from. Anyone on the network can now use the public key to verify that the transaction is coming from a legit account owner. A group of miners then use their computers to bundle the transaction into a block: the miners computers are specifically setup to calculate cryptographic hash functions. The miners don’t know what nonce will produce the hash value, so they’re forced to generate heaps of random hashes until they find one that works. Each block includes a “coinbase” transaction that pays the winning miner 25 bitcoins: a new address is created where the miner receives the reward. Once all this is done, the transaction is verified, Nick has received bitcoins from Nick and the miner has some newly minted bitcoins. Done.
The block chain is a huge list that hold balance information: a secure ledger that tracks all the coins across the internet. It’s a shared public ledger and the entire bitcoin network relies on this: all transactions are confirmed through the block chain and those transactions are verified by miners. Anyone who holds bitcoins have an exact copy of the block chain, so forgery is impossible.
A bitcoin transaction is nothing more than a transfer between bitcoin wallets, and is included into the block chain. All wallets keep a private key – also known as a seed – which is used to sign the transaction: so keep your computers secure. Private keys prevent transactions from being altered by anyone once issued. All transaction between wallets are confirmed by the network within a few minutes, this process is called mining.
Bitcoin mining is a system used to confirm waiting transactions by including them into the block chain. The chronological order of the block chain protects the network, it also allows different computers / servers to agree on the state of the system. Miners are people that run the bitcoin software and randomly generate the hashes that compete to complete a new block chain in order to receive a reward, which is a bitcoin payment – currently around 25 bitcoins which as an Australian dollar value of $16,000 (at the time of this article being written). These days it’s impossible to mine coins on your own or manipulate transaction, and it’s quite expensive to run the powerful machines you’ll need dedicated to generating hashes. You need to join a group to mine coins and share the payment.
People that hold bitcoins essentially are shareholders in the bitcoin company – where nobody is in charge – which offers financial services and generates revenue from transactions fees and pays a “salary” to the workers (aka miners). Coins can be purchased from real money at an exchange.
The reason it has raised some conversation recently is because a few years ago, bitcoins were worthless and nobody wanted to give them to time of day, then the price skyrocketed and people went from owning a few thousand dollars worth of bitcoins to a few million dollars worth of bitcoins. Yep, people got rich over night, kind of. If everyone was to start cashing in then the price would plummet and bitcoins would be worthless again. Now you know this, the Winklevoss twins don’t seem so stupid now, do they. Cameron and Tyler bought 11 million dollars worth of bitcoins at $120 USD each, now they’re worth around $600 USD each.
Even more information
Not enough information? Dude, you’re a nerd. Well if you need to check out more information, then you may as well read the original paper written. https://bitcoin.org/bitcoin.pdf
Bitcoin.org actually provides tonnes of information and getting started with bitcoin is as simple as visiting and reading up. Another great article that covers three scenarios of bitcoins future can be found at New Scientist, or going to http://www.newscientist.com/article/mg22129554.000-bitcoin-three-scenarios-forecast-the-future-of-money.html
I'm a digital marketing and SEO consultant based in Sydney, Australia. I drink a lot of coffee and spend most of my time working on clients websites and improving their search visibility.