If you are reading this, chances are you heard about Bitcoin or Blockchain from somewhere and wanted to know more. But wherever you go, you find it difficult to understand what it exactly is, and how it works, and why people are so crazy about it.
Don’t be sad. In this article, we will try to let you know about Bitcoin and Blockchain in the simplest terms possible.
Before starting about Bitcoin, allow me to begin with Blockchain. Let’s first focus on the words with which Blockchain is made, i.e. Block and Chain.
Consider a cube, a cube made of transparent glass, let’s call that a Block. Each block contains about X amount of a precious asset, let’s call it Bitcoin or BTC. Whoever finds that block, gets X amount of BTC.
Like Gold is a scarce material, which is one reason why it is valuable. Similarly, these blocks are also limited. Only one block can be found every 10 minutes, and every four years, the X amount which person get for finding a block, gets half. From 2009-12, it was 50 BTC per block. Then from 2013-16, it was 25 BTC per block. And until 2020, it is 12.5 BTC per block.
Also for getting gold, we mine. Similarly, to get these blocks also, we mine. But instead of mining physically, we mine using our computer.
Now let’s see what mining is. Mining as we said above, in this technology is done through computers. So, how do we do it? There is a software which we download to our computer and run, simple as that!
But what does that software do? And can I also get some BTC if I mine?
Well, the software tries to compute a calculation, called “hash”. A hash is a string of alphanumeric characters of fixed length which contains various details, like when a block was found, details of the previous block, etc.
Like a drill can only drill based on its power and technology, a computer can also mine based on its computational power. So, a computer with less computational power may not be able to find a block faster than the one which has more computational power.
A Blockchain is a chain of those kinds of blocks, interlinked by a unique link, called hash about which we read above. Imagine each block as a bogie in a traditional train for better visualisation.
These blocks are linked such that, if any tampering is done in between this chain, it makes the entire blocks after that link/block invalid. Thus, making sure that no one tampers with it.
But what if someone does?
POW & Value
Here comes POW to the rescue!
Wait! What is POW?
POW or Proof of Work, as the name suggests is the “Proof” that a certain amount of work is done. Here, by “work”, it means the computation of hashes, or just ‘mining’.
A computer takes a certain amount of time, ideally less than 10 minutes in Bitcoin’s case, to find a hash and add another block to the blockchain. Thus, if a person tries to tamper with one block, he has to recalculate the hash for all the other blocks in front as well, and also he has to do this all before any computer in the network find the latest block.
And as each block takes a considerable amount of resources (Computational Power, Electricity, Equipment, etc.), the value of BTC is always around or more than that amount.
Transaction & Fee
Ok, so I learned a bit how this technology works. But how can I send BTC to someone? And what happens when I do so? And is there any fee associated with this?
Like in a bank, to send someone money, you need three things.
1) You require an account in a bank which allows you to send money to anyone
2) You require enough money to send it to someone and also pay any fees if any.
3) You need the details of the bank account of the receiver as well.
Similarly, in Blockchain also, you require the same three things.
1) You need a wallet address.
2) You need enough BTC for the payment and fees
3) You need the wallet address of the receiver.
In a bank, when you send a transaction, what your bank does is, it checks your account whether you have enough money to send, say $100 and the fees associated. It then adds two transactions, one from you to the person whom you are sending and another from you to bank, as a fee, if there is any. And all this information is stored with the bank only.
In a blockchain, when you send a transaction, you send the transaction to a pool. Then the miners, the ones who mine, take as many transactions as possible which can be added to the (glass) block, checks whether the person who is sending has enough money to send this transaction, if yes, then deducts that amount from the sender and adds that amount to the receiver, and then adds it to the block. These details though are stored with every miner in the network, only you and the receiver know that you have sent X amount to the receiver.
Wallet, Anonymity & Availability
One of the best features of Bitcoin & Blockchain is anonymity. As said above, to send someone some BTC, you need his/her wallet. A wallet is an alphanumeric string to which only the respective owner has access and which requires absolutely no detail from the owner to create one.
Any person without any identification documents can create a wallet and send or receive BTC. Thus, offering anonymity as well as ease of access & availability.
In places where there is no bank or similar facility, Bitcoin and Blockchain can be a saviour as at this point; any decent smartphone can send and receive bitcoin. And as this network of computers are distributed, and every miner has a copy of all the transaction, your money is safe unless you do something stupid (share your private key, installed software from unverified sources, stored your private key in an unsecured or unsafe manner, etc.).
So, who manages this network and software?
You, me, we! Yes, you read that right. Anyone with an interest to improve this software can propose an update to this software. You don’t require a Computer Science degree to recommend things, but only well thought and healthy ideas are welcomed to the software, as billions are at stake. And if you do have enough skill to write the implementation, then propose it right away, if it is viable and has tested enough, then that might be looked. And if at least more than 50% of the people (miners) approve that this update is better than the previous one, then the network updates itself with your proposal. And if there are different opinions, then there might be forks as well. Let’s keep the subject of Forks for another article which we will write in the future.
With that, we have covered some of the basics, if not all of Blockchain and Bitcoin which might get you started, emphasis on “started”. This article is just the beginning, stay tuned with more pieces from us. Also, start reading more about Bitcoin and Blockchain if you are interested in this. Remember, knowledge is power.
Did this article help you at all? What improvement would you suggest? What new material on the basics would you like to see?