What is Bitcoin? Explanation For Beginner's | Jerry Tech

What is Bitcoin? Explanation For Beginner's

What Is Bitcoin

So in this blog we’ll make sure to cover all the bases but also to keep it simple. And if you find anything interesting that you feel I didn’t talk enough about, there’s lots more to read about it if you search for it – I urge you to. The correct answer to the question is “The first decentralized digital currency”, but that’s quite a mouthful. 

So before we begin to understand this, let’s start with a more basic question that most people usually don’t ask themselves and that is: “what is money?” Money, ultimately, is simply the tool that we use to exchange value. Throughout history we’ve used lots of things as money, from seashells, to precious metals, and salt… The most popular money, historically, has been gold. And there's a good reason for this: gold works really well as money. 

It’s rare – so it’s not worthless, and it’s tangible so if you’re holding it in your hand it’s probably yours. Pretty simple, right? This worked for thousands of years, no matter what social institutions exist around you, no matter who the king or government was at that particular time. Gold just worked. Then came along a new invention: paper money. Now when you think about it, for someone who uses gold their whole life, paper money is a hard sell. Trust paper instead of metal? Well, paper money actually started out as just a representation of gold. For example, in the US, by law, the only money allowed was gold and silver.

 So the US Dollar was originally just a “gold certificate” which is a piece of paper saying you own some gold that’s sitting in a vault at the treasury. In other words, people never trusted the paper money, they trusted the government to hold the gold for them. Now time has passed since then and the US has abandoned the so-called “gold standard” in the 1970s. Today the US Dollar is actually “fiat” money and “fiat” is a Latin word for “it shall be” which is another way of saying “forget about gold, let’s all just agree that this paper is worth something.” And that apparently works, because we’re all using fiat money these days and we don’t have to have the “hard currency” or “tangible money”.

 Now paper money has some advantages and disadvantages over gold. The biggest disadvantage is that paper is easy to counterfeit, something that’s practically impossible with gold. Almost anyone can simply print paper at home. 

But there must be advantages to make this worth the trouble, right? So fiat money is actually just a form of digitization. That is, we’re dealing with numbers, not metals or materials, and this makes money much easier to count, manage and move. In fact, the vast majority of money these days are actually just numbers in a computer, believe it or not. Wait a minute, so if money today is digital, how does that even work? I mean, if I have a file that represents a dollar, what’s to stop me from copying it a million times and having a million dollars? This is called the “double spend problem”. The solution that banks use today is actually a “centralized” solution – they keep a ledger on their computer which keeps track of who owns what. Everyone has an account in this ledger and the ledger keeps a tally for each account. We all trust the bank, the bank trusts their computer, and so the solution is centralized in the bank. 

Computer scientists though, weren’t pleased. Decades later in 2008, an anonymous researcher publishes a paper describing how to solve this problem without a centralized solution – that is, without a bank. He called it “Bitcoin” and went on to describe how you can make a ledger that doesn’t rely on a single particular bank – this is a decentralized solution. Now this may sound confusing, or at best like science fiction. I mean, how does something work if it’s decentralized, if there’s no one person managing it? Well, you actually already know the answer to this. 

You’re intimately familiar with a decentralized solution which you’re using right now to watch this blog: the internet. Think about it: nobody owns the internet. It’s the most vast and powerful network that humans have ever created – but there is no “Internet, incorporated.” So it’s decentralized. There are lots of individuals and private companies all over the world holding the infrastructures for the internet, across companies, borders and even ideologies, and it works – much thanks to profit motives and economic interests.

 So if the internet decentralizes information technology, how does Bitcoin decentralize money? Now at this point many blogs would start getting technical and complicated, but we want to keep it simple. In Bitcoin, the coins or rather the transactions are all recorded in a ledger, much like with other currencies; so, so far, nothing new. The big deal with Bitcoin is that this ledger is public and shared, and that also it’s maintained by the public.

There are thousands of people who have copies of this ledger all around the world and anyone can download and verify this ledger. And in Bitcoin, instead of accounts, money is moved between addresses – kind of like with email and other internet services. Now, usually people get concerned when they hear about this ledger being public. Isn’t this a privacy problem? Well, like most privacy issues, it’s complicated. Whatever you may have heard about Bitcoin – it’s not really inherently anonymous or identifiable. We will touch on this in a later blog.

 OK, so maybe it’s not anonymous or something, but isn’t this a security problem that it's so public? Well, if you think about it, it’s not a security problem. If you think that this public ledger is easy to hack, try to imagine hacking the English language. You can probably hack into some Oxford Dictionary computers and change some definitions, that wouldn’t really be a big problem. There are lots of copies of dictionaries all over the world. You can’t fool everybody by just hacking some of the copies. 

In Bitcoin, the dictionary that helps everyone stay on the same page is the ledger, and this ledger is called the “Blockchain”. So now that we understand how Bitcoin is digital, and how Bitcoin is decentralized, we can finally say confidently that Bitcoin is the first decentralized digital currency. But what does this all matter? Is Bitcoin going to change the world? Well isn’t that a question we’d all like to know the answer for, eh? Let’s start by considering that Bitcoin is non-geographic. 

So if economies fall or governments change, Bitcoin won’t be affected like fiat currencies. Also it’s much more internet friendly, which means online commerce will improve significantly. But the biggest winners here are probably the billions of people across Asia and Africa and other places that have an internet connection but have horrible banks. I mean, with my bank I can shop online and I can send money across the world even though it’s really slow and quite expensive and Bitcoin can help me with that. But in Kenya, they use cell phone minutes as money. 

As in, they buy groceries with air time. In Argentina people are exchanging money in the black market because of inflation that makes it impossible to save for a rainy day or for retirement.

 Non-geographic, global money is exactly what these people need. It works even if your government or banks don’t work. Of course, Bitcoin isn’t only offering an economic alternative, it’s also a technological alternative. After all, think about it, Dollars today are just numbers on a computer which represent numbers on a paper which used to represent hard metals, all according to laws written hundreds of years ago. Bitcoin on the other hand was born in the 21st century, which is why it is able to do lots of things that make people call it “smart-money”.

 For the same reason phones today are called “smartphones”, because they have more features than phones had a decade ago. Of course, businesses have started accepting Bitcoin all around the world, some big names include Microsoft and TigerDirect and a whole bunch of airlines. There are websites which will help you find Bitcoin-accepting businesses. In fact, I got my paycheck in Bitcoin for over a year, and there are lots of people offering professional services in exchange for Bitcoin.

 The implications for Bitcoin are obviously hard to measure. In reality there is a whole industry, fields of research, and grassroots movements growing – much like there was when executives from AOL and students were all trying to explain to people what this “internet thing” was back in the ‘90s.

Anyway, I hope you’ve enjoyed our very first edition of Bitcoin Whiteboard Tuesday and I hope to see you in the next blog. If you still have any questions or comments on the blog please feel free to leave them in the comment section below. That’s it for now. See you next time.