Simplified explanation of Bitcoin

Simplified explanation of Bitcoin

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Bitcoin is a digital currency that has gained widespread popularity in recent years. It is a decentralized currency, which means it is not controlled by any central entity like a government or a bank. This gives users greater control over their money and enhances their digital privacy.

Bitcoin is easy to use and can be accessed through a digital wallet, which functions like a bank account or a digital banking application. Users can move their money quickly and efficiently, with transactions taking just a few minutes to complete.

One of the key advantages of Bitcoin is its availability, with transactions possible 24/7/365. This makes it a popular choice for people who want to move their money quickly and without any restrictions.

Bitcoin has also improved the way money is created. Unlike traditional currencies, which are printed by central banks, Bitcoin is created through a process called mining. This process involves solving complex mathematical equations, which adds a layer of security to the currency and ensures its authenticity.

What is bitcoin

Bitcoin is a digital cash system created by Satoshi Nakamoto. It is different from traditional cash because it exists only as digital data, and it is not controlled by any central authority. Bitcoin is created by computers through a process called mining, which turns energy into money.

In a peer-to-peer network, every participant in the system has equal privileges, and there is no central authority that is more powerful than any other participant. Bitcoin users can participate in the system at any level they choose, from simple users of the currency to auditors of the system through node software on their computer, or even issuers of currency through mining equipment.

In summary, Bitcoin is a digital cash system that operates on a peer-to-peer network without any central authority. It is created through a process called mining and exists only as digital data. Bitcoin users can participate in the system at any level they choose.

Here are some details about how it all works:

Bitcoin is a decentralized digital currency that works on a peer-to-peer network. Transactions on the network are verified and processed by a distributed network of computers, rather than a central authority like a bank or government.

Every Bitcoin transaction is recorded on a public ledger called the blockchain, which is a chain of blocks that contains information about all previous transactions. Each block contains a list of several transactions, and once a block is added to the chain, it cannot be altered. This makes the Bitcoin network secure and resistant to fraud.

To use Bitcoin, a user must first create a digital wallet, which stores their Bitcoins and allows them to send and receive payments. The user’s wallet contains a private key that is used to sign transactions and a public key that other users can use to send Bitcoins to the user.

When a user sends a Bitcoin payment, the transaction is broadcast to the network and verified by several computers, known as nodes. The nodes check that the transaction is valid and that the user has enough Bitcoins to make the payment. Once the transaction is verified, it is added to the blockchain and becomes part of the permanent record of all Bitcoin transactions.

Miners are like the security guards of the network. They check that transactions are valid and add them to the blockchain. To do this, they have to solve a really hard math puzzle, which takes a lot of computer power. When they solve the puzzle, they get rewarded with new Bitcoins.

Overall, Bitcoin operates on a decentralized, secure, and transparent system, which makes it an attractive option for users who value privacy and independence in their financial transactions. include proof of work.

Pre-Scheduled Supply

Bitcoin operates as an electronic cash system, defining both how to manage money and the money itself. Like a central bank, the Bitcoin system controls the supply of coins and at what rate they are issued. However, unlike a central bank, Bitcoin does not modify its programming to adjust the supply based on demand. This eliminates the problem of random and disproportionate printing that leads to the loss of purchasing power of money over time.

By pre-scheduling the supply of new coins and defining it from the beginning of the system, Bitcoin ensures that the danger of loss of purchasing power due to random and disproportionate printing disappears. The demand for bitcoins logically and predictably affects the price of money in the long term, and thus the purchasing power of those who hold it. If more people use BTC than before, the price will rise, and if fewer use it, the price will fall.

Moreover, unlike a central bank, which is managed by a few people, Bitcoin is managed by anyone who wants to participate in the system. This decentralized approach ensures that anyone can work in the system, secure it, keep the accounts, and issue new coins.

The Bitcoin underlying algorithms fix the total supply of coins in the system at 21 million, which is expected to be reached by 2140. The rate of new coin issuance, or supply expansion, began at 50 bitcoins created approximately every ten minutes. The units issued halve every four years, with the reward amounting to 6.25 BTC in 2020 and decreasing to 3.125 BTC by 2024.

Bitcoin: The Fourth and Best Way to Handle Money Today

There are three traditional ways to handle money: cash, bank accounts, and companies like PayPal. Cash is great for small payments in person, but it becomes inconvenient for larger amounts and international transfers. Banks and companies like PayPal solve some problems, but they have high costs, lack of control of money, and privacy issues.

Bitcoin is the fourth and best way to handle money today. It offers the privacy and convenience of cash, the ability to save and move money digitally, and low costs. With Bitcoin, you can open a digital account for free, store as much money as you want, and move it anywhere in the world at any time, with costs approaching zero. Bitcoin provides greater security, control, and privacy for the owner than any other system. You can even use Bitcoin to buy goods and services directly from businesses. In summary, Bitcoin makes money more accessible, cheaper to store and move, and provides greater security and privacy for the owner.

Why bitcoin is so unique

Scarcity

Things that are scarce are often valuable, and this is especially true for money. Money needs to be scarce, or else everything else would become more expensive, making it difficult to use in trade.

There are two types of scarcity: centralized and decentralized. Centralized scarcity is when a central authority produces or issues an item. This includes things like numbered prints or taxi medallions. However, counterfeiting can be a big problem with centralized scarcity.

Decentralized scarcity occurs naturally and takes a lot of effort to produce, such as gold or seashells. These items are not easily counterfeited and have been used as money in the past. When the cost of producing these items becomes too low or something else replaces them, they stop being used as money.

The difference between the two types of scarcity is essential. Controlled scarcity can lose value if the controlling authority decides to change it. Uncontrolled scarcity is more difficult to lose value, and usually requires significant technological breakthroughs or forced confiscation to do so.

Digital

Before Bitcoin, there was only one type of scarcity in the digital world, which was centralized, artificial, and controlled. This is because the digital world is entirely created by humans, so it’s not surprising that there are no decentralized, natural, or uncontrollable digital items. Digital items can be divided into two categories: infinitely copyable items and centralized, scarce items. For example, mp3s can be replicated infinitely, while items such as World of Warcraft gold are scarce but controlled by a central authority.

Proof-of-Work

Bitcoin brought decentralized scarcity to the digital realm through the innovation of proof-of-work, a process often referred to as mining. Proof-of-work involves solving a difficult mathematical equation to add new blocks to the blockchain and receive newly created Bitcoins as a reward. The cost of solving this equation is similar to the cost of producing gold, but verifying the authenticity of the resulting Bitcoins is much cheaper and easier.

This mathematical process provides the decentralized, natural, and uncontrolled scarcity necessary for a reliable form of digital currency. Before Bitcoin, the digital realm was limited to centralized, artificial, and controlled scarcity, with items like mp3s being infinitely copyable and items like World of Warcraft gold being controlled by a central authority. Proof-of-work allows for the creation of a digital asset that is scarce and secure, making it an attractive option for users who value privacy and independence in their financial transactions.

Properties of Money

Money has certain properties that make it useful and worth having. These properties make it easier to use money for buying and selling things. The important properties are:

Divisibility

Having a money that is easily divisible is important for precision in trade. Money that cannot be divided easily can cause inconvenience in trade as one side ends up with slightly less value. For instance, an expensive baseball card is not easily divisible and fractions of a card do not trade at the same proportion. On the other hand, the US dollar is pretty divisible and can be divided down to the penny when using physical cash.

Bitcoin is highly divisible down to 1/100,000,000th of a Bitcoin, which is about $0.000035 as the smallest unit on-chain. Lightning channels allow even finer divisibility down to 1/1000 of that or $0.000000035, which is about the cost of a grain of sand. This is 300 times more divisible than the US dollar on-chain and 300,000 times more divisible than the US dollar in a Lightning Channel.

Securability

Securability refers to the difficulty of seizing money from someone else. Ideally, good money should be hard to confiscate or take away. Physical gold is relatively difficult to seize since it has to be physically located and taken, whereas money in a US bank account can be easily confiscated by the government to deter what they deem as bad behavior. Anything that relies on a third party is more susceptible to confiscation compared to a bearer instrument. Bitcoin is a bearer instrument, meaning that possession equates to ownership rather than what a third-party registry indicates. Therefore, it is less likely to be confiscated.

In addition, Bitcoin can be secured using Script, which offers various methods, such as m-of-n multisig, timelocks, and more. Unlike physical assets like gold, Bitcoin provides a wider range of security options.

Irreversible

Bitcoin is like cash, in the sense that transactions cannot be reversed by the sender. In comparison, credit cards, conventional online payment systems, and banking transactions can be reversed after the payment has been made—sometimes months after the initial transaction—due to the centralized intermediaries that complete the transactions. This creates higher fraud risk for merchants, which can lead to higher fees for using credit cards.

Recognizability

Recognizability refers to the ease of recognizing and verifying the authenticity of money while also being difficult to counterfeit. Gold is recognizable as there are reliable chemical tests to verify it, while concert tickets are easily counterfeited and hard to recognize.

The cost of producing money is closely related to recognizability since if money is expensive to produce, it is not worth counterfeiting, and vice versa. As gold is challenging to produce, it has good recognizability, whereas concert tickets are easy to counterfeit due to being pieces of paper.

However, even large gold bars can be made to look like gold but not be 100% gold. Bitcoin, on the other hand, is recognizable through its proof-of-work system, which makes it difficult to counterfeit. Bitcoin is hard to produce because finding proof-of-work is challenging, and counterfeiting involves isolating a node and giving it blocks with expensive proof-of-work that spend differently than the main chain. This is a difficult and uneconomical attack to execute, making Bitcoin recognizable through block explorers or full nodes. Counterfeiting Bitcoin is challenging due to the expensive proof-of-work involved, making it easy to recognize.

Portability

Portability refers to the ease with which money can be transported. Goods with high value density, such as spices, are easy to transport and make for good trade items. In contrast, land is difficult to transport and lacks portability, making it a poor choice for money.

Value density is closely related to portability, but it can be at odds with divisibility for physical items. Gold, for example, is highly value-dense, but this also makes it less divisible.

However, even highly value-dense items can become unwieldy for large amounts. For example, carrying $5 million in $100 bills would require over 100 pounds of physical currency.

Bitcoin has essentially infinite value density since it weighs nothing. This means that any private key can contain any number of Bitcoins, and their value and weight are not correlated. Additionally, since Bitcoin can be sent digitally, there is no need to physically transport the private keys. Bitcoins can be sent anywhere in the world at the speed of email, making it a superior choice for portability compared to other bearer instruments.

Durability

Durability in the context of monetary mediums refers to their ability to resist degradation over time. Gold is highly durable as it does not react with other chemicals, while perishable items like mackerel do not have much durability.

Traditionally, durability has been associated with physical durability, which is why metals like silver and gold have been used as money. However, even gold bars can lose weight over time as flakes come off.

In the case of Bitcoin, durability refers to the durability of the ledger. Since Bitcoin is not centrally controlled, the durability of the ledger is near-infinite. However, if a ledger is centrally controlled, the durability of the coins is not guaranteed since the central authority can delete or steal the coins at any time. Bitcoin’s durability depends on its decentralized nature.

Fungibility

Fungibility refers to the ability of two items to be interchangeable with one another. While dollars and gold are generally considered fungible, diamonds are not due to their uniqueness. Achieving perfect fungibility is difficult because humans have preferences for almost everything, and even with items like gold or dollars, subtle differences can affect their value.

For example, a gold bar that is 99% pure may trade at a lower value than a bar that is 99.99% pure, even though both weigh the same. This is because the latter bar is rarer and harder to obtain. Similarly, crisp and clean $100 bills may trade at a premium compared to older, worn bills, particularly in countries where they are given as gifts.

In the case of Bitcoin, certain coins such as those from reputable sources like Coinbase may be preferred and trade at a premium, while others that may be linked to illegal activity may trade at a discount. While the Bitcoin protocol itself does not distinguish between coins, people do, and perfect fungibility is difficult to achieve unless every coin is perfectly hidden with privacy.

However, overall, Bitcoins are reasonably fungible, and instances of coins being discriminated against because of their source are relatively rare in the market.

How to get Bitcoin

There are several ways to get Bitcoin:

Purchase it on a cryptocurrency exchange: This is the most common way to get Bitcoin. You can buy it using fiat currency or another cryptocurrency on a cryptocurrency exchange like Coinbase, Binance, Kraken, or Gemini.

Accept it as payment: If you have a business or offer services, you can choose to accept Bitcoin as payment. This is a great way to accumulate Bitcoin without having to buy it.

Mining: Mining is the process of verifying transactions and adding them to the blockchain in exchange for newly minted Bitcoin. However, this requires a lot of specialized hardware and electricity costs.

Bitcoin ATMs: Bitcoin ATMs are machines that allow you to buy Bitcoin using cash. They are located in various places around the world and are becoming more popular.

Peer-to-peer transactions: You can also buy Bitcoin from other individuals through peer-to-peer transactions on platforms like LocalBitcoins or Paxful.


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