10 May 2021 · 6 min read
Bitcoin-101
As most of our journey of cryptocurrency/ blockchain/ bitcoin/ FastMoneyMakingAsset/ FastMoneyLosingAsset starts with Bitcoin. I thought let's start with this.
What is Bitcoin?
Bitcoin is a digital currency(cryptocurrency) that is independent of any bank, country, or authority and can be used by anyone connected to the internet. It is one of the many cryptocurrencies that are available in the market. Others are Ethereum, dogecoin, chainlink, etc.
Bitcoins are stored in crypto wallets. It just the same as you currently store your fiat money(government authorized money like rupees, dollar, yen, etc) in banks and your wallets.
Every crypto wallet has an address to do the transaction. This is a unique wallet address to ensure the anonymity of transactions which helps keep you safe. you can install the crypto wallet on your phone or computer and do transactions using the wallet address.
Let's see some terminologies I mentioned here-
Crytocurrency, Crypto wallets
First, we have to understand what is digital money and digital currency for that.
Digital Money
Whatever we are using today (Rupees, dollar, yuan, etc) money when that is transferred digitally through phone, laptops, etc.
Fun Fact - Only 5 % of Money is in physical form.
Digital Currency
A currency that doesn't have any presence in the physical world. It can be regulated or unregulated.
ex - digital yen(experimentation phase) - regulated, bitcoin -unregulated
Have you heard about digital yuan. Let's see how that works?
So, China is testing this digital currency but it made me thinking aren't we all using digital currency as only 5% of currency is the physical form.
But I was wrong. Maybe you too.
So, It's basically programmable money. The Chinese government will be able to track it about the whereabout of money and how you spend it. As of now, the Chinese government has told us that they are not going to track the transactions but we all know what's going to happen.
How does it work - Let's assume the government is giving money to certain students to buy a laptop. So, they will only be allowed to buy a laptop with that money; if you broke a traffic signal, money will be deducted automatically from your wallet.
Yes, we are thinking the same. Privacy and the Chinese government don't shake hands.
Cryptocurrency
Cryptocurrency is a subset of digital currencies. They are decentralized and controlled by a cryptographic mechanism called the hash function.
Now you are like what the heck is hash function.
Hashing in Blockchain
Hashing means taking input of any length and converting into output of fixed length. Bitcoin uses SHA - 256 algorithm for hashing. Ex- From hello to 50 mb video all will be be fixed length of 256 after hashing.
what is blockchain and how does it work?
Blocks that are linked in a chain are called a blockchain. So, basically, it got its name from this.
The blockchain is the digital ledger used to keep track of the location of each Bitcoin. Anyone can download a copy of that ledger, which is updated automatically as new transactions are added. Because copies of the ledger are distributed across thousands of computers, it's impossible for anyone person or group to change the entries or spend the same Bitcoins twice.
What I just told you is not even the B of blockchain. It has tremendous usecases. we will come to those later.
How Does Bitcoin Work?
Bitcoin is powered by blockchain technology, a revolutionary, decentralized, electronic database or distributed ledger that stores all transaction details within the Bitcoin Network. This network consists of over a million computers called nodes.
Being on million nodes makes it decentralized, indestructible(only if you shut down the internet). What makes it decentralized also makes it slow. But will come to this later!!
Indestructible - Basically all the nodes carry the same data. If you shut down some nodes or even change data in some nodes. It will not be reflected in other nodes
Each node mathematically verifies each transaction, which is then stored in a block. When a block becomes full of transactions it gets appended to the blockchain, an infinitely long history of all previous transactions.
Is Blockchain hackable?
Yes, in words it is but for now, it would take billions of years. I don't think any human can live that long but yeah once quantum computer or artificial superintelligence comes up then it's a different thing. Until then we are safe.
Who created Bitcoins?
Satoshi Nakomoto is the name of a pseudonymous developer or group of developers, who released the Bitcoin white paper in 2008 and released the Bitcoin protocol in 2009. Satoshi Nakomoto disappeared a few years after the launch of Bitcoin, and his identity is unknown to this day.
I think this was essential for the rise of bitcoins because if there would be someone behind it, It would be like other currency with some centralized authority.
Fun Fact - Satoshi Nakamoto holds around 980,000 bitcoins. Yep, he is already a billionaire(if alive)
How do bitcoins come into existence?
Satoshi Nakamoto got the first 50 bitcoins for help in running the bitcoins. Since then, you can get bitcoins only through mining or if someone gives you. Whenever a transaction happens, it has to be registered in the blockchain.
Process behind it-
1) whenever some amount of transaction happens, they are written to a block
2) To add these blocks to the blockchain, someone has to solve a complex mathematical equation.
3) The equation is basically a guessing game in which you have to guess a number
4) whoever guesses the number first and adds it to blockchain gets bitcoin as a reward
5) This block has to be confirmed and verified by other users as well
How can you get Bitcoins?
1)Mine it(explained above 5 steps) - It is not feasible now for normal users. Now, you need mining computer(rigs) to mine bitcoins
2)Somebody sends it to you - Somebody sends it to you for your services just like money or you can buy through exchanges ex - Binance, Wazirx, coinDCX etc.
How Does Bitcoin Make Money?
Bitcoin brought back the free market, where the value of assets is determined by supply and demand and market sentiment, free of any artificial or manipulative stimulation which can result in hyper-inflated assets.
The value of Bitcoin itself fluctuates daily and is quite volatile as it is still in the early stages of adoption. While there is Bitcoin to be mined and people on this Earth, the value of Bitcoin is intended to increase to a stable peak - though what that price will be is unknown to anyone.
Bitcoin was designed to eventually be a stable and reliable, decentralized global currency, an alternative to government-controlled and manipulated fiat money.
Why do we need cryptocurrency?
I cannot explain better than what this image can. That is how a bank transaction works and as a bank work, like a middle man, they take charges for that.
okay but what can be the problems with banks
1) Demonetization - As Money itself doesn't have any intrinsic value, if the government says it just a piece of paper, it is a piece of paper.
2) Misuse of our money - When we deposit our money in banks, they assume it is their money and give loans and sometimes default on that( I know they are giving us interest but still they can't misuse it)
IL&FS, Diwan Housing Finance Corporation (DHFL), Punjab and Maharashtra Cooperative Bank (PMC), and Yes Bank are four other banks and financial institutions that have collapsed since 2018. IDBI is another bank that was on the brink of a collapse before it was rescued by LIC through capital infusion.
3) Hefty Transaction fees - Banks charge a fee for every transaction whether it is small or big. For small transactions, banks are good and they charge as of now less than cryptocurrency but as transactions of cryptocurrency will increase, they will get lower
Disclaimer - UPI is not free. companies like phonepe, Paytm, etc pay of behalf of us to the government.
Next , will try to answer these questions-
different cryptocurrencies and there uses?
Blockchain and it's million use-cases
Why do we need cryptocurrency for other than monetary based use-case(Web 3)
Different types of crypto wallets
How hashing makes crypto immutable?