Bitcoin / Blockchain 101

Posted by James 27/02/2018 0 Comment(s)

I spent some time answering questions about Bitcoin today, so here it all is together...

 

Bitcoin / Blockchain 101

 

The basics:


We use stuff every day that most people don't understand - microwaves, WiFi, cars, food, medicine, etc. we trust it works and we use it. Bitcoin is digital money. It exists only on computers - but rather than carry a computer around, you can access it through a phone app. To send Bitcoin, you open the app and scan in a QR code (like the square barcode attached - that's mine). You then say how much you want to send and click send. The big benefit of Bitcoin is that banks can't dilute its value by making more and you're not dependent on a bank or a company to access your money. ...but, by using an app you give the app company access. You can get physical wallets but they're close to £100 at the moment - it does mean you still keep complete control. Please let me know if any questions. Something very similar will be the norm in a few years.

 

Blockchain, miners and nodes:


Blockchain is the name given to the data. It is also known as a "public ledger". It's like everyone having access to multiple copies of the same document. "Mining" is the process where computers create a new, empty block - ready to receive information. In order to be eligible to add a new block to the network, mining computers have to solve a cryptographic puzzle. Their reward is some Bitcoin. The more computer processing power you have, the more likely you are to solve the puzzle, and the more likely you are to be rewarded with Bitcoin. I often see people say that the miners add the new transactions to the network - this isn't quite right as there are other computers on the Bitcoin network called "nodes"... it's nodes that add data to the blocks that the miners create. Nodes are rewarded the transaction fee that a sender pays when transferring Bitcoin from one wallet to another. The price depends on how busy the network is... but you can choose to pay more and jump the queue or pay less and wait for it to slow down. Bitcoin does take a lot of computer power to create and manage, which is why I don't think it will be the coin people use to buy low value items... It's more like digital gold. An easy way to know where your stored wealth is stored.

 

A bit more:


Security is a big issue and Bitcoin does have vulnerabilities... and it's only as strong as the weakest link. The cryptography that keeps the actual Bitcoin network secure is called SHA-256. It's strong! A very slight worry is that it was designed by the NSA so it is possible they have already cracked it and use Bitcoin as a public front so they can hack other governments that use SHA-256... but nobody has publicly come close to breaking it and that is expected to be the case for a long time. The blockchain is based on everyone having the same information... it IS possible to trick the network by sending out lots of conflicting data but the computing power needed to do that would cost so much more than the Bitcoin anyone would get from the hack so hacking the network just isn't a major concern.

 

Bitcoin is recorded against wallet addresses - similar to how £s are recorded against your bank account number. The difference is that Bitcoin wallets don't always map directly to a person or company. Some currency exchanges (where you can sell £ for Bitcoin or Bitcoin for Litecoin or $s for Theresa May Coin, etc.) have "hot" wallets and sometimes have millions of bitcoin from lots of people in one wallet, whereas a regular user of Bitcoin might use a new address for every transaction.

 

You can see exactly how much Bitcoin is registered against every Bitcoin wallet - there are lots of websites that provide a window to the blockchain or you can download the whole thing yourself and look at the raw data - but it's publicly available! That's how it works... by everyone being able to see at any time exactly which wallet has Bitcoin and how much... it also shows where it came from... all the way back to 3rd January 2009 when the very first block was added to the blockchain. It didn't contain any Bitcoin transactions but instead recorded the message: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" Whilst the encryption of the wallet can't easily be hacked, a lot of people access wallets through an app that only needs a 4 digit code... so that then becomes the weakest link.

 

When you create a new wallet you are asked to select 12 random words (the random word generator IS more random than you can be... really.) These words are your ultimate access to your funds. If you can remember them then you can access your Bitcoin anywhere in the world! You can also print them out and store them in security boxes. YOU have complete control of how you store them. Not a bank or a Prime Minister or a company... YOU!

 

Blockchain being the data is the reason that blockchain is attracting more attention than Bitcoin. Bitcoin is just one blockchain. There are now lots of blockchains that are being used for lots of different purposes. The other major one is Ethereum, which is used to record "smart contracts"... unchangeable code that says do x if y and z are achieved, etc. This has lots of real world applications including being an easy way to create new currencies... so a lot of the "alternative coins", sometimes called tokens, have all of their transactions recorded on the Ethereum blockchain... its equivalent to Bitcoin is called Ether. When you see adverts for ICOs (Initial Coin Offering) or TGE (Token Generation Event) these are groups trying to raise funds for a project... you pay them in £ or Bitcoin or Ether and they give you tokens. Some have practical use, like the Hotel Coin I'm buying (*cough* https://dashboard.blockchainhotels24.com/?ref=76ef30) this is a coin that will be used in BlockChain Hotels. It is something I can sell to people staying in those hotels or I can use myself, or I can hold on to them in the hope that the chain is a massive success and the value of the tokens increases (this is speculating or gambling and isn't protected by anything much at all). The really important thing to take from this bit is that the number of tokens is pre-determined! Nobody can make more if it becomes popular... nobody can print money or type numbers in to a computer to increase the supply!! For Bitcoin, there will only ever be 21 million Bitcoin. There is currently about 16 million with 2-4 million thought to be lost in inaccessible wallets. For Hotel Coin it will be 350 million. For the Dragonglass gaming platform it is 1,111,111,111 DGS but each one can be turned in to 10 by completing levels in the game (https://dragonglass.com/#token-distribution - so the maximum is actually 11,111,111,110. With a single Bitcoin costing $20k at Christmas '17 a lot of transactions were for 0.0001 Bitcoin so the number of tokens isn't really important - just that there is a number and it can't be changed.

 

 

 

What else? What do you want to know?

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