What is Bitcoin ?

Bitcoin - Explained  with a simple use case 

   

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Let’s imagine it’s a great evening and we are sitting in a pub.

I have one 100 dollar note* with me. I give it to you.

You now have one 100 dollar note and I have zero.

That was simple, right?

Note* : Here 100 dollar note is a banknote (often known as a bill, paper money or simply a note).  I will refer it as note, please read it as note or bill based on your local convention.

Let’s take a closer look at what happened.

• My 100 dollar note was physically put into your hand.
• You know it happened. I was there. You were there. You touched it.
• We didn’t need a third person there to help us do the transfer.
• We didn’t need to pull in a judge to sit with us and confirm that the 100 dollar note went from me to you.

The note is your now, you can do anything you like, you can use it to buy something for you or you can give it to someone else. You have the full ownership of the note.   I can’t use the same note as I no longer have it with me.

This is the beauty of transaction of physical goods be it banknote , dollar bill, apple, bike or anything else.  All these transactions are Trust(less).  By nature of the transactions you don’t have to worry about whether you can trust me or not, as soon as the note is in your hand, it’s completely your, I can’t buy oranges from the same note (as I don’t have it anymore).

Back to 100 Dollar Note!

Now say, I have one digital 100 dollar note. Here, I’ll give you my digital note.

I take out my phone and send you an email with the 100 dollar note as an attachment, if you like I can do WhatsUp as well or I can transfer it through Bluetooth if you want.

Well sounds interesting now, right?

Now let’s look at this transaction closely

• How to ensure the note I have given to you, I will not give to someone else.

• What if I have made 1000 copies of the note on my computer?

• What is the guarantee that, the note I given to you was mine?

• What is the guarantee that I will not upload the same note on internet for others to download?

So digital transfer is not as simple as physical one, it’s cool but complicated, isn’t?

Some brainy computer scientists actually have a name for this problem.  It’s called the double spending problem. But don’t worry about it. All you need to know is that, it’s confused them for quite some time and they’ve never solved it, until now. Ok let’s try to think of a solution on our own.

                           Hurray!! We got the solution

Right, we can track  these digital notes  in a ledger. It’s basically a book where you track all transactions - an accounting book.

This ledger, since it’s digital, needs to live in its own world and have someone in charge of it.

Who can be in charge of this digital ledger? We can go to the firm called computerGeek, they have been doing an awesome job in the digital space. They can maintain this ledger. Problem Solved!

Problems

There’s a bit of a problem though:

• What if some guy over at computerGeek created more? He could just add a couple of digital notes to his balance whenever he wants!

• It’s not exactly like the 100 dollar note I had given to you in the pub . We didn’t require any third person. Now we need a third person (ComputerGeek firm) to validate the transaction. It’s more complicated and we are dependent on the ethics and values of everyone working with the firm computerGeek.

• Can’t we just make digital transaction as exactly like that physical one ? It’s just between you and me, with full transparency and trust.

Hold On, take a break, aren’t we are using digital money even today?

We are smart people, we don’t carry cash all the time, we use credit/debit card, we use net banking, we also use payment app on our smart phone. So where is the problem?

Where is the problem?

Yes, we do use digital money today. However if you compare real world transactions with the example transaction of 100 dollar digital note that we discussed above, you  will notice that Our Central bank/government is playing the role of computerGeek firm here.

Do you think there is a possibility of someone working with central bank or someone in the Govt, may potentially add more money in the system (for their undue benefit ) in a non-transparent way?

Well I will let you guess the answer ☺

Ok maybe I can agree that someone can generate money w/o my knowledge, but how does its impact me? I am using online banking from a long time, my account is intact, and I can fully trust my bank.

Yes we can trust our personal account is safe with the bank as we follow the security guidelines.

Let’s look at the problem of someone adding money in the system in a non-transparent why, how it can impact us.

If the Money Supply increases faster than real output then, inflation will occur. The detail link of inflation and the money supply is outside the scope of this book. What we need to take away is, if there is more money added in the system in a non-transparent way, it can increase inflation significantly.

How inflation impacts me?  Let’s say you have $ 10,000 in your bank account, if the inflation is 10%, than in 5 years the real value of your $ 10000 will be less than $ 5000. So no one is taking out money from your account , but the actual value of the money can go down.

Well this problem is less apparent (though it’s present) in developed and stable country, but its impact can be easily see on country like Venezuela, Zimbabwe, Argentina etc. It’s not uncommon to find county having inflation in 8-10% level.

Ok than what is the solution? How can we make sure everything happens

The Solution

What if we gave this ledger to everybody? Instead of the ledger living on a ComputerGeek's computer, it’ll live in everybody’s computers. All the transactions that have ever happened, from all time, in digital note will be recorded in it.

You can’t cheat it. I can’t send you digital note I don’t have, because then it wouldn’t sync up with everybody in the system. It’d be a tough system to beat, especially, if it’s got really big.

Plus it’s not controlled by one person, so I know there’s no one that can just decide to give himself more digital notes. The rules of the system were already defined at the beginning. And the code and rules are Open Source. It’s there for the smart people to contribute to, maintain, secure, improve on, and check on.

You could participate in this network too and update the ledger and make sure it all checks out. For the trouble, you could get like 10 dollar digital note as a reward. In fact, that’s the only way to create more digital notes in the system.

well we over simplified it  

…but that system that's explained exists. It’s called the Bitcoin protocol. And those digital notes are the “bitcoins” within the system.

So, What does the public ledger enable?

1. It’s an open source. The total number of notes was defined in the public ledger at the beginning. I know the exact amount that exists. 
2. I know how and how many notes will be added in the system. It’s transparent and known to everyone. No person can go and generates more notes as he/she would like.
3. When I make an exchange I now know that digital note certifiably left my possession and is now completely yours. It will be updated and verified by the public ledger.
4. Because it’s a public ledger, I didn’t need ComputerGeek (third-party) to make sure I didn’t cheat, or make extra copies for myself, or send same note twice, or thrice…

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In other words, it behaves like a physical object. But what’s cool about it ? It’s still digital.

Bitcoin is the first implementation of Blockchain (what is blockchain?)

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If you are looking to get started with blockchain or want to build basic concepts on blockchain, you may like to review this book.

Building Blocks Of Blockchain

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