Blockchain, Bitcoin, and Cryptocurrencies the Bare Basics
Let’s get down to the bare Bitcoin basics and answer the pending questions. It’s first important to understand where did Bitcoin come from and what was the original purpose of its invention. From my research and findings, I have concluded that Bitcoin came as a direct result of the global financial crisis of 2007.
At present, if you stopped a person in the streets and asked them to name me a “Cryptocurrency” the answer that you would most likely get back is “Bitcoin”. Then if you asked them to follow up questions such as “what exactly is Bitcoin” and “How useful is it to the average person”? the most likely answer you would get is “I don’t know”? Conversation stops right there!
The global financial crisis (GFC):
In a nutshell, the GFC occurred in America because American banks were lending out too many mortgage loans to home buyers who were deemed to be high risk (Sub-prime) in the sense that they had no form of a deposit to secure the mortgage loan and the chances of them being able to service the monthly repayments were very low. Interest-only loans were regularly given out to new home buyers in the hope that the housing market would continue to increase in price. Basically, the home buyers started to default on their mortgages when the time came for them to start paying back the principal of the loan (the total amount borrowed) which then forced the banks to now start to repossess their houses. House prices throughout America started to depreciate and the banks were stuck with a house that was worth much less than the original price that was paid for it and no one wanted to buy these houses. To makes matters worst the banks began to sell these mortgages off in the forms of government bonds to other foreign banks around the world, effectively moving the debt off to other parts of the world and doing this without the permission of the homeowners (think of play a game of catch with a live hand grenade and the pin has been pulled!) Between the periods of 2007 and 2009 during the peak of the crisis major banks within America and throughout the world had filed for bankruptcy, they were unable to recoup their funds which had been lent out and the modern banking system was close to failing. Instead of letting the market go through a natural course of correction by letting these banks go bankrupt governments around the world made the move to bailed them out using taxpayer’s money. My own opinion on this matter is that the governments should not have intervened, the banks were irresponsibly lending out mortgage loans to people with bad credit history in the hope that house prices continued to grow in value. Clearly, this did not happen and the average taxpayer had to foot the end bill because of the mistake that banks had made.
Satoshi Nakamoto white paper:
In 2009 an internet domain was registered under the URL name of bitcoin.org by a person calling themselves “Satoshi Nakamoto”, within the webpage was a link to a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. It is within this white paper that the idea of a “peer to peer” transaction method of sending “Electronic cash” from one computer to the other is discussed without the need for any 3rd party financial institution using a new technology called “Blockchain”. It must be noted that peer to peer transactions is not a new idea as they were it was first used back in 2002 by PayPal. However, what is a new idea is running the “peer to peer” transactions on a blockchain platform that is independent of any 3rd party. The paper is set out in a standard university layout such as an abstract heading, the body of the review, the discussion, and ending with a conclusion proving that whoever wrote this paper must have already been a post postgraduate and had a good working knowledge of computer science. Whether Satoshi Nakamoto is a man, women or a group of people this person remains anonymous to this present day. There is speculation that Satoshi Nakamoto is in fact a British national due to the slang British words that were written within the paper and the perfect grammar and spelling due to very few Japanese people able to speak perfectly good British English. Throughout the Cryptocurrency industry, Satoshi Nakamoto is credited with creating blockchain technology where a bitcoin is able to travel on the blockchain to its intended address.
What is blockchain?
The technical explanation is that the blockchain acts as a storage of blocks containing data linked together in a chain that is open source in the sense that any person on the system can view the data within the blockchain.
So, to put that into more layman terms let’s play a game. I’m going to invite 10 of my friends around to my house to play a game of cards. The type of card game that we are going to play is irrelevant to this scenario but this game will involve all 10 of my friends having to put down physical money to bet whilst playing the game.
But just by sheer coincidence all 10 of my friends have all forgotten their wallets and so no one has any money to play the card game including myself. However, I come up with an amazing idea, I get a huge piece of paper and I place it into the centre of the table, this piece of paper is now called a “Ledger”, and this ledger is going to track every single time a person who is playing the card game places down a bet, how much that person has bet and who has won the round. The ledger is going to be open source meaning that anyone who is currently playing the game can see all the information written into the ledger.
So, let’s start the first round and my bet is going to be $5,000, remember that I also have forgotten my wallet, so I can’t physically put down $5,000. So, I then physically write the number $5,000 into the ledger so that everyone else can see that I have just made a bet (open source). Now my other 10 friends do exactly the same thing of writing their bets into the ledger (open source) and we can now play the card game.
So, let’s just say that I won the first round of the game and the total amount that I have won is now $50,000, I do not physically collect $5,000 I do the same again of writing my total winnings of $50,000 into the open-source ledger, I hope that you’re all with me so far. Now we play a second round but this time I lose the round and my friend “Bob” wins the round. Bob then writes his total winnings into the ledger. Do you understand what’s going on here? At no point can I, Bob or any of the other 9 friends that are playing the game have the ability to cheat the system by means of changing around the numbers on the ledger to make it seem that they have won more money than they really have. Why? Because everyone playing the game will see straight away that the numbers have been changed. It’s basically the responsibility of the players within the game to make sure that every transaction is legitimate and that no one tampers with the open-source ledger in the centre of the table, also if one of the players makes a mistake within the game then we have the ability to go back through the ledger and resolve any discrepancies. So, let’s take this one step further if I hand over my car keys to my friend Bob everyone within the game has all seen what I have just done and they all write within the ledger that “Rob gave his car keys to Bob.” What we have created here is a system where I can hand over anything to any 10 of my friends within the game and every one of those players will effectively sign off on to the ledger allowing the transaction to go through.
So now let’s replace all my friends with computers and now let’s call these computers “nodes”. Every single time a person on the network sends any sort of data it’s the responsibly of these nodes to validate the integrity of every single transaction. If there are any discrepancies flagged by just one of the nodes on the network then the transaction fails. All of this transactional data is then timestamped or stored up into something called a “block” hence the given name “Block-Chain”.
The first-ever blockchain that Satoshi Nakamoto proposed within the white paper was for the movement of digital currencies called “cryptocurrencies”. Bitcoin is called a cryptocurrency because of the very clever mathematics it uses called cryptography which is beyond the scope of this blog to explain. The basic concept is that Bitcoin moves on the blockchain the same way a car drives on the road.
Is Blockchain a secure network:
As with anything digital one of the first things we typically think of is security, how safe is this Blockchain system and can it be trusted? So, let’s just say that a hacker wants to alter the blockchain to their advantage and steal some Bitcoins from other people. If the hacker somehow tried to alter the blocks of data the other blocks would no longer align with everyone else’s copy. When the nodes cross-reference their copies against each other they would see straight away that there is one copy outstanding and that the hacker’s version of the chain would not be seen as illegitimate. Yes, it is theoretically possible to hack Bitcoins Blockchain however such a hack would require the hacker to simultaneously take control and alter 51% of the copies on the blockchain. For such an attack to succeed it would require an immense amount of computing power which is impossible even for the world’s fastest computer of today. It is a fact that to this present day the Bitcoin Blockchain has never been hacked or taken control of. Where people are talking about a “Bitcoin hack” most likely they are talking about the exchange where their Bitcoin has been stored has been hacked which has nothing to do with the Bitcoin Blockchain. Blaming an exchange hack on Bitcoin would be like blaming the Australian dollar because your bank account got hacked, it’s not the dollars fault it’s the bank’s fault. So, I would like to reiterate again that Bitcoin’s Blockchain has never been hacked.
The case for Bitcoin:
So, what do we have here? We have an open-source blockchain that can send a bitcoin (Cryptocurrency) to anyone in the world securely. So how can that be beneficial to the average person?
- Because there is no middle entity when sending a bitcoin (peer to peer), the overall cost of sending bitcoin is far cheaper than that of sending fiat currency the traditional way whereby the transaction has to go through a 3rd party to be authorised.
- Bitcoin is universal the fact that it does not matter if you are from Australia, Europe or South America. Bitcoin holds its value no matter where you are in the world.
- Once you own Bitcoin you truly become the owner of that Bitcoin and have autonomy over your own wealth whereas fiat currencies are controlled by governments and banks.
- The Bitcoin Blockchain has proven its self to be a reliable security sound.
- There will only ever be 21 million Bitcoins in circulation meaning that Bitcoin is becoming a scarce asset and is immune to inflation as central banks cannot just print more of it as they can do with fiat currencies. This means that in theory, the purchasing power of bitcoin will go up over time.
Bitcoin was the first-ever cryptocurrency to use a Blockchain network. Since its invention in 2009 Blockchain technology has improved drastically and at the time of 2020, there were 861 other Blockchains operating completely independent from Bitcoins Blockchain. Bitcoins Blockchain can be seen as a proof of concept that the idea works and it is slowly gaining adoption throughout the world. However, what if we could take this to the next level. What if instead of just sending individual Bitcoins to each other on a very limited Blockchain what if we could have a full contract on a blockchain where that contract stated that a real-world asset belongs to an individual such as a house or a car and because the contact is on a Blockchain it cannot be altered or changed, it could be called a “smart contract”…………….. Ethereum. Before you start buying bitcoin its important to have the right mindset to help you make the right decisions, take your time to learn education is an investment that will last.
That’s for the next blog!
Written by Rob Lavington, to check out more of his blog visit