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Table of contents
- Bitcoin explained in layman's terms
- So, what exactly is Bitcoin?
- Bitcoin explained in layman's terms
Blockchain: As you can probably tell, blockchain is made of two words: block and chain. So blockchain simply means a chain of blocks linked and secured with cryptography. Cryptography is a practice that allows information to be encrypted. And since it uses cryptography for encryption, it cannot be edited and it protects user information. Cryptocurrency: A cryptocurrency is a digital money that operates on the blockchain technology. Cryptocurrency Exchange: Pretty much like in the traditional financial system, a cryptocurrency exchange is a platform where you can buy and sell various cryptocurrencies.
Think of it as a forex trading platform for cryptocurrencies.
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Some popular cryptocurrency exchanges include coinbase, bitfinex and bittrex. Cryptocurrency wallet: Similar to your mobile wallet where you have stored your payment details including your cards, bank accounts and the like, a cryptocurrency wallet serves to store your cryptocurrencies. A blockchain is decentralized in that each computer that is connected to the blockchain has a unique version of all the data received and stored on the blockchain network and not just a copy of the data.
Fork: A fork in the blockchain space refers to an upgrade or changes in the rules governing a blockchain network in order to render previously valid transactions invalid — or vice-versa. As a result of a fork, a blockchain splits into two paths, one following the old rules and the other following the new rules. A person who wants to receive encrypted messages will generate both a public and a private key.
The public key is given out to anyone who wants to send a message. The sender will use the public key to encrypt the message, and it can only be decrypted by the person who has the corresponding private key. Once someone encrypts a message with the public key, anyone who finds the encrypted message won't be able to understand it without the private key. If this sounds complicated, don't worry.
Bitcoin explained in layman's terms
Just understand that private keys are are what give a person the ability to unlock a message, while public keys give a person the ability to lock a message. Bitcoin uses this type of encryption, which is called "public key" or "asymmetric key". As you can imagine, the public key is used as a public address. Other people can send you bitcoin if you have a valid public address. Every single public address has a corresponding private key that allows the owner to "spend" the value stored in that public address.
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Fortunately for the average user, all of this happens behind the scenes by whatever software they are using to manage their bitcoin. But it is nice to know a little bit about what is going on so you can gain confidence in the technology. The blockchain is nothing more than a public ledger of all bitcoin transactions.
Every time bitcoin is exchanged, this transaction is first validated by the blockchain and then recorded on the blockchain. It's important to understand that no one owns or controls the blockchain. The blockchain is shared by all computers on the network. This means no one can reasonably hack or alter the network. In fact, mathematically speaking it is a much more efficient use of processing power to mine bitcoin than it is to steal bitcoin so there is virtually no incentive to steal.
At a basic level, a bitcoin wallet is a file that keeps track of your public and private key pairs. As you might recall, your private keys are the secret that only you have that allows you to "spend", and public keys are the addresses used to "receive" bitcoin. A wallet can exist on any device. Many people choose to use online wallets so they don't have to maintain the software on their computer.
This keeps their computer from being used as a node on the Bitcoin network, and prevents them from having to worry about security or backups. This is a fine option as long as you choose a reputable company to maintain your wallet. Others choose to download wallet software and manage it locally. If you choose this option, it's important that you remember to backup your wallet in case of some disaster and keep it as secure as possible. A transaction in bitcoin is nothing more than a transfer of value between one bitcoin address and another.
When you send bitcoin to someone, the transaction details are signed using your private key, and it includes details such as the value you want to send, an address to send it to, and other pertinent information about the transaction. Although the technology behind Bitcoin is exciting, the entire reason it was created was to decentralize control of currency and allow for a stable economy. For thousands of years, gold, silver and other precious metals were used as currency. This was ideal for many reasons, but one important reason is that no single entity could take control over it.
Right now, no government is using the gold standard which means that each countries currency is backed only by the peoples' trust in their governments and banks. This has failed over and over again. This fiat money system allows governments to stimulate the economy artificially and temporarily, but ultimately fails in the long run because it is dependent upon the goodwill and competetence of politicians. Zimbabwe is a great example of how the fiat money system is destroyed by incompetency in leadership. In the 's Zimbabwe gained its independence from Britain, and it's dollar was even more valuable that the American dollar.
Their economy was thriving and growing. Think of the problems like a slot machine. Because, I can adjust the difficulty of the problem, I can ensure how long it will take you to solve it on average.
In the same way, Bitcoin ensures that as computers become faster and more miners enter the playing field, coins are still produced at a predictable, consistent rate. Oh, and one side benefit to incentivizing new blocks with Bitcoin is that it encourages people to use their energy to help the system rather than hurt it.
So, what exactly is Bitcoin?
I want to keep this post short and accessible, so I am deliberately avoiding the discussion of too many topics. The value of Bitcoin. The value of Bitcoin is whatever someone is willing to pay for it. Like stocks and other currencies, Bitcoins can be traded on an exchange. An exchange just brings a bunch of people together and allows them to purchase and sell things with others. Think of it like eBay: the value of an item is based on how much someone else is willing to bid on it. That seems impractical.
They can be split up into smaller units. Will Bitcoins be indefinitely generated? The production of Bitcoins is scheduled to decrease over time. This makes Bitcoin a deflationary currency.
Bitcoin explained in layman's terms
There are different viewpoints on what this means. What is Ethereum? Since the Bitcoin gained popularity, many dozens maybe hundreds of other cryptocurrencies have been introduced. They all claim their unique benefits, but to my knowledge, they are all based on variations of the concept of a blockchain. Ethereum is currently the second most well-known currency after Bitcoin.
I am fascinated by Ethereum and I believe it offers some unique, new benefits. Ethereum allows its blockchain to be used for more than trading money though you can use it for that purpose as well. This ensures that a contract will be executed without alteration. This may seem like an obscure use case, but it has many practical applications.
Being able to execute these contracts without a central authority opens up many possibilities. It allows contracts to be defined and executed without the need to trust anyone. I hope you have found this post helpful in understanding Bitcoin and the world of cryptocurrencies. Manager at Amazon on Alexa Language Technologies.
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