What is Bitcoin

What is Bitcoin

This will be a quick overview of bitcoin.  The world of bitcoin is a comlex, and multi-faceted.  Each of the many layers of bitcoin is highly technical by nature, and most people don't necessarily need to understand every aspect of bitcoin.  Most people don't understand the technical aspects of fractional reserve banking, yet if you have a bank account, you play a important role.

A brief synopsis of a few important aspects of bitcoin will be touched upon.  With a handful of resources at the end to further your education.

Bitcoin intro

Bitcoin is a decentralized digital currency that resides online (internet). The software was created by Satoshi Nakamoto as a means to create an alternative system to centrally controlled economies. It's much like your online banking, except you are essentially your own bank.

Bitcoin can be broken down into a couple of areas.  They go as follows:  Blockchain, Peer to peer network, Network protocol/Triple entry bookkeeping, Cryptographic algorythms, Users, and Miners.

The block chain

Think of the block chain as an accounting database for the bitcoin network.  All of the transaction data since the beginning of the bitcoin network, is stored in the block chain.  Each bitcoin-Qt software client stores the block chain, as well as relays new transactions to other users & miners on the network.  The end result is a distributed, public, accounting ledger that is the data storage foundation of bitcoin.

Triple entry bookkeeping

Triple entry bookkeeping is what happens with each bitcoin transaction.  An example would be: "Alice purchases a pair of socks for $1.00 from Joe.  She receives a receipt for her socks purchase, as her account statement reflects the $1.00 debit.  Mary, an anonymous bystander, reviews the purchase, verifies it as correct, then signs the transaction receipt.  The signed receipt then becomes the transaction and is stored in the block chain"

Another good explanation is found on this website: http://financialcryptography.com/mt/archives/001325.html

 

 

Triple entry is a simple idea, albeit revolutionary to accounting. A triple entry transaction is a 3 party one, in which Alice pays Bob and Ivan intermediates.

 

Each holds the transaction, making for triple copies.

To make a transaction, Alice signs over a payment instruction to Bob with her public-key-based signature [3]. Ivan the issuer then packages the payment request into a receipt, and that receipt becomes the transaction.

 

This transaction is digitally signed by multiple parties, including at least one independent party [4]. It then becomes a powerful evidence of the transaction [5].

 

 

The final receipt *is the entry*. Then, the *collection of signed receipts* becomes the accounts, in accounting terms. Which collection replaces ones system of double entry bookkeeping, because the single digitally signed receipt is a better evidence than the two entries that make up the transaction, and the collection of signed receipts is a better record than the entire chart of accounts [6].

 

The bitcoin network

The bitcoin network is a decentralized, peer-to-peer network.  Tech Terms describes Peer to Peer as:

In a P2P network, the "peers" are computer systems which are connected to each other via the Internet. Files can be shared directly between systems on the network without the need of a central server. In other words, each computer on a P2P network becomes a file server as well as a client.

Bitcoin.org describes p2p as:

Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.The bitcoin network is the communication layer, and is very important aspect of bitcoin.  

Cryptography

The cryptographic layer of bitcoin ensures its integrity, at the same time protecting the network.  The cryptography that is used in bitcoin is SHA-256.  

Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user's wallet or to corrupt the block chain. It can also be used to encrypt a wallet, so that it cannot be used without a password.   ~bitcoin.org

 

Bitcoin users

A bitcoin user is a person who buy/sells, trades, or conducts transactions using bitcoin.  As a bitcoin user, it's beneficial to run the bitcoin-qt client, when your computer is running.  This helps the bitcoin network, by relaying transactional information to the rest of the network.  With any p2p (peer to peer) network, the more users connected, the more robust the network becomes.  

Bitcoin miners

Bitcoin miners play one of the most important roles inside the bitcoin network.  The miners are responsible for the inclusion of transaction records into the blockchain.  They solve highly complex cryptographic equations.  When these mathematical computations are solved, the miner receives a reward of 25BTC.  This is how bitcoins come into existence.  There are only 21 Million bitcoins that can ever be mined.

The more network power the miners provide, the higher the difficulty in solving these complex problems become.  As the bitcoin network becomes more powerful, this by design, increases the security and reliability of the entire network.  

More reading

If you wish to discover more of the intricacies of bitcoin, here are some good resources.  If you have specific questions, you may go to our forum and ask the community for explanations: CoinAxis Forum

The bitcoin wiki

bitcoin.org

Informative videos

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  • Guest - Ziad K Abdelnour

    Nice collection,
    Bitcoin has become one of the hottest new topics to hit the financial world in the last year or so.Bitcoin, which is merely one of a growing handful of virtual or electronic currencies, remains a very young and highly unknown instrument.

    Comment last edited on about 1 year ago by sdczen

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