Today cryptocurrencies have become a global phenomenon known by most people but understood by few. In 2018-2019, you’ll have a hard time finding a major bank accounting firm software company or government that hasn’t researched crypto currencies or started a blockchain project beyond the noise in the press releases many people often fail to understand the basic concepts so let’s walk through the whole story. What are cryptocurrencies ? Satoshi invented Bitcoin in 2008 as a peer-to-peer electronic cash system to realize digital cash you need a payment network with accounts balances and transactions, that’s easy to understand.
One major problem every payment network has to solve is to prevent double spending that is to prevent one entity from spending the same amount twice usually this is done by a central server who keeps records of all the balances in a decentralized network. You don’t have this server so you need every single entity of the network to do this job. Every peer in the network needs to have a full list with all the transactions to check if future transactions are valid or an attempt to double spend but how can these entities keep it consensus about these records. If the peers on the network disagree about one single minor balance everything breaks they need absolute consensus nobody knew how to achieve this until Satoshi proved it was possible.
In fact, it’s not the kind of coin you can hold in your hand or stick in a piggy bank. It’s a digital currency, which means it only exists electronically. I’m talking about bitcoin. Bitcoin doesn’t work like most money. It isn’t attached to a state or government, so it doesn’t have a central issuing authority or regulatory body. Basically, that means there’s no organization deciding when to make more bitcoins, figuring out how many to produce, keeping track of where they are, or investigating fraud. So how does bitcoin work as a currency, or have any value at all? Well, bitcoin wouldn’t exist without a whole network of people and a little thing called cryptography.
In fact, it’s sometimes described as the world’s first cryptocurrency. And here’s how it works. Bitcoin is a fully digital currency, and you can exchange bitcoins between computers in a worldwide peer-to-peer network. The whole point of most peer-to-peer networks is sharing stuff, like letting people make copies of super legal music or movies to download. If bitcoin is a digital currency, what’s stopping you from making a bunch of counterfeit copies and becoming fabulously wealthy? Well, unlike a mp3 or a video file, a bitcoin isn’t a string of data that can be duplicated. A bitcoin is actually an entry on a huge, global ledger called the blockchain, for reasons we’ll get to in a minute. The blockchain records every bitcoin transaction that has ever happened. And, as of late 2016, the complete ledger is about 107 gigabytes of data. So when you send someone bitcoins, it’s not like you’re sending them a bunch of files. Instead, you’re basically writing the exchange down on that big ledger – something like.
You don’t completely trust anyone else, so everyone keeps their ledgers separately. And at the end of every hand, you all compare what you’ve written down. That way, if someone makes a mistake, or tries to cheat and snag some extra money for themselves, that discrepancy is caught. After a couple hands, you might fill up a page of your notebook with notes about the money movement. You can think of each page as a “block of transactions.” Eventually, your notebook will have pages and pages of information – a chain of those blocks.Now, if thousands of people are separately maintaining the bitcoin blockchain, how are all the ledgers kept in sync? To stick with our poker analogy: think of the entire bitcoin peer-to-peer network as a really huge poker table with millions of people. Some are just exchanging money, but lots of volunteers are keeping ledgers.
So when you want to send or receive money, you have to announce it to everyone at the table, so the people keeping track can update their ledgers. So for every transaction, you’re announcing a couple of things to the bitcoin network: your account number, the account number of the person you’re sending bitcoins to, and how many bitcoins you want to send. And all of the users who are keeping copies of the blockchain will add your transaction to the current block. Having a bunch of people keep track of transactions seems like a pretty good security measure. But if all it takes to send bitcoins is a couple of account numbers, that seems like it might be a security problem. It’s a huge problem with regular money – just think about all the ways criminals try to steal other people’s credit card information. And with bitcoin, there’s no central bank to notice anything weird going on to shut down fraud, like if it looked like suddenly you spent your entire life savings on beef jerky.Bitcoins are kept pretty safe thanks to cryptography, which is why it’s considered a cryptocurrency.
Specifically, bitcoin stays secure because of keys, which are basically chunks of information that can be used to make mathematical guarantees about messages, like “hey, this is really from me!” When you create an account on the bitcoin network, which you might have heard called a “wallet,” that account is linked to two unique keys: a private key, and a public key. In this case, the private key can take some data and basically mark it, also known as signing it, so that other people can verify those signatures later if they want.