Bitcoin for beginners: brief overview of the technology
Bitcoin. Blockchain. Mining. If you haven’t come across these words in the last few months, chances are that you may just be living under a rock. This year has been all about cryptocurrency—from the skyrocketing valuation of Bitcoin to the rise of mining farms around the world, to thefts in the tens of millions of dollars. Despite its rapid rise in popularity in today’s world, many still don’t understand the concept of cryptocurrency. Just an online search will leave you befuddled with the information overload, and I can vouch for that. When I first started, I was inundated with jargon and concepts, which left me more confused than I was at the start. But after scrolling through many forums, articles, and infographics, I realised that while learning the in-depth working of cryptocurrencies requires sound technical knowledge, learning its basics is rather simple.
In this article, I’ve covered the absolute basics of cryptocurrency: why was it created? How does it work? What gives it value? If any of these questions have ever crossed your mind, read on to find the answers.
The inception of cryptocurrency
Conventional digital money works on a payment network with balances, accounts, and transactions. A central entity or regulatory authority governs the entire network and is responsible for ensuring the legitimacy of all transactions. Preventing double-spending (when one entity spends the same amount twice), for example, is something that is under the purview of this central entity.
The problem with this system, however, is that all participants in the payment network are relying solely on the records maintained by the central server. The legitimacy of every transaction is based solely on the trust placed in this authority, who can easily exploit it for personal gain or be exploited by others. The quest to find a solution to this problem led to the creation of cryptocurrency.
In late 2008, a pseudonymous person/group of persons named Satoshi Nakamoto announced the creation of a new ‘peer-to-peer electronic cash system’ named Bitcoin. This invention changed digital payment systems through one key feature – it was decentralised. It redistributed the process of verifying the legitimacy of digital transactions from a central node to every single participant in the payment network, plugging the hole of misappropriations of transactions, and dividing authority. This new digital cash operated on an absolute consensus of peers and not the word of a third-party. A single disagreement about the smallest balance between the peers could now collapse the entire system.
But how is this absolute consensus reached? That’s where blockchain technology comes into play. The working of a blockchain is quite technical and difficult to understand, but this ‘Guide to understand blockchain in plain English’ does a great job of explaining the concept.
A brief explanation can be put forth thus: a block is a set of limited entries in a database that cannot be changed once it has been agreed upon by the peers in the network. These blocks link together to form a series of distributed registers that are known as a blockchain. The first application of this technology was to conduct financial transactions and the currency that was first transacted was Bitcoin.
On a side note, Blockchain has been touted as one of the most important technological advancements of the last few years. While it is primarily being used to operate cryptocurrencies today, there are several other possible applications of blockchain in fields such as IoT, data security, and smart contracts.
What is cryptocurrency exactly?
We’ve covered why Bitcoin was started and the technology it operates on. But what is it exactly? Where does it derive its value from? For that, we need to learn the difference between fiat and non-fiat currencies.
A fiat currency is a currency whose value is established by governmental decree, such as the Rupee or the Dollar; it has no intrinsic value on its own. A non-fiat currency, meanwhile, is one that is not legal tender but nonetheless has a value backed by a physical commodity, such as gold. It is the limited quantity of gold that makes it valuable.
Ethereum Price Chart Australian Dollar (ETH/AUD)
Ethereum price for today is A$1,156.5995. It has a current circulating supply of 97.6 Million coins and a total volume exchanged of A$2,318,364,735
Bitcoin is much more expensive than gold to store with a third-party custodial service, but there’s a good reason for that discrepancy.On Monday, the Motley Fool published an article analyzing how the cost of storing physical gold bars compares to storing bitcoin — the new “digital gold” with a third-party custodial service. Noting that the SPDR Gold Trust pays approximately 0.08 percent of the value of its gold for storage and custody, the publication found it “mind-blowing” that bitcoin custodial services such as Coinbase Custody charge 15 times more.As CCN has reported, Coinbase Custody — a regulated storage service targeted to institutional investors making minimum deposits of $10 million — expects to charge a $100,000 setup fee and a 10 basis point (0.10 percent) fee per month on the value of client assets after it launches in 2018.
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