On October 31, 2008, while I was trick or treating and eagerly awaiting my 10th birthday, the entity known as Satoshi Nakamoto released the Bitcoin whitepaper. I say entity because Satoshi has never been identified. Satoshi may be an individual, but also could be a group of people. Several people have come forward claiming to be Satoshi, but never have been legally confirmed as the writer of the whitepaper. This document may in fact one day be looked back on as a shaper of human history, but for now, let’s just unpack what the buzz this whitepaper generated.
Satoshi’s whitepaper proposed Bitcoin, a peer to peer electronic cash system that allowed for the transfer of money without a financial institution. Bitcoin was the first cryptocurrency coin ever heard of. Bitcoin was a virtual currency, based on a ledger, that is decentralized and secured by cryptography. Each of these pillars gets progressively harder to wrap your head around in my opinion. The following is how these pillars work for Bitcoin — variations to these pillars are what differentiates the cryptocurrencies in the market.
Bitcoin is a peer to peer electronic cash system that allowed for the transfer of money without a financial institution.
Main takeaways
Bitcoin was the first ever cryptocurrency. It is based on four main pillars:
- A virtual currency
- Based on a universal ledger
- Decentralized, requiring no bank or institution
- Secured by cryptography to ensure valid transactions
– Virtual Currency
The U.S Dollar, along with other fiat currency, gets its worth from individuals believing it will be accepted to purchase things they want and need. Supply and demand drive the value of a paper currency. Cryptocurrencies have value and grow in value because users believe they will be acceptable payment in the future, requiring no physical exchange of funds, and near real-time, low cost transfers.
Cryptocurrencies have value and grow in value because users believe they will be acceptable payment in the future.
– Based on a ledger
Imagine you are maintaining a spreadsheet for your friends to track expenses for a group trip. Each transaction is a row on the spreadsheet, showing an exchange between two friends of who needs to pay the other, in paper currency, after the trip. Cryptocurrency is based on a ledger much like this, with each “row”, or block, showing transactions between two users that involve the transfer of a coin’s ownership. However, with you being the only person adding to and maintaining the spreadsheet, trust and validity are at stake if your group gets too big.
Cryptocurrency is based on a ledger, with each row being a transaction.
– Decentralization
So now we have a problem. Let’s say, the entire state of New York is adding transactions to this ledger. You can’t be in charge any more. How can you ensure transactions are valid? People that don’t know you aren’t sure if they can trust you. The ledger must be decentralized. Now instead of just you, everyone in the network has a copy of the spreadsheet. Maintenance is not done by a single entity, like in the traditional sense, a bank, but rather by all those with a spreadsheet. With so many copies of this shared ledger, knowing which ledger is the correct version relies on proof that “miners” have used computing power to ensure the validity of the blocks before it. This offering of compute power by an individual is rewarded with Bitcoin in return, hence the term “mining”.
The ledger must be decentralized. Now instead of just one maintainer, everyone in the network has a copy of the spreadsheet.
– Secured by Cryptography
Cryptography drives the verification process of cryptocurrency transactions. A few key players are involved — a public key, a private key (also known as a secret key), and hash functions. Let’s go back to our decentralized spreadsheet. A new row is added but we need to verify the transaction between the two parties and then tell everyone in the network that it was a valid exchange. We need an approval ‘signature’ on each transaction, or message, that cannot be forged. A digital signature is created using the data of the transaction and the owner’s secret key as inputs. To then verify a signature is valid, the data of the transaction, the digital signature, and the owner’s public key are used to declare true or false, confirming whether this signature was produced by the secret key associated with the public key that is used for verification. It should be impossible to find a valid signature if you do not know the secret key. And just like that, the secure, valid transaction is added to the blockchain and becomes a part of the history of transactions.
Just keep it simple.
The main takeaways are:
Bitcoin, the first ever cryptocurrency, is:
- A virtual currency
2. Based on a universal ledger
3. Decentralized, requiring no bank or institution
4. Secured by cryptography to ensure valid transactions
Now that you’ve got the basics…
Understanding the nitty-gritty of crypto can be really hard. Knowing the basics is a crucial place to start in improving your financial literacy and comfort with a topic crucial to our world today. The first time I sat down and truly dug into the Bitcoin white paper was a pretty big breakthrough for me. It is only eight pages describing revolutionary innovation to the way we think about money today. I learn something new about cryptocurrency and how the field is evolving every week, and I hope, with the foundational knowledge from this article, you can too.
Let’s understand cryptocurrency better together. I’d love to hear any feedback, thoughts, or ideas on this post.
WHERE TO CONTACT US
Website : www.forextrade1.com
Twitter : www.twitter.com/forextrade11
Telegram : telegram.me/ftrade1
Facebook : www.facebook.com/Forextrade01
Instagram : www.instagram.com/forextrade1
YouTube : www.youtube.com/ForexTrade1
Skype : forextrade01@outlook.com
Email ID : info.forextrade1@gmail.com