One of innovations to come out of Bitcoin is the notion that every financial transaction that happens is recorded in a distributed public ledger. This ledger is called the “block chain”. Every bitcoin transaction that occurs, or has ever occurred, is recorded on the block chain. In addition the block chain is distributed by Bitcoin “nodes”. Nodes talk to each other (peer 2 peer) and that’s how the block chain is communicated throughout the bitcoin network (that will have to be another post). When you run a full bitcoin client on your computer, you become a node.
Collections of transactions are grouped together into “blocks”. And blocks are placed one after another into a long “chain” of blocks, thus the name “block chain”. If you try to alter a block then the cryptographic computations which make valid transactions would not work indicating that a block has been altered. Thus we are ensured that all the transactions are correct. As a new block is placed onto the chain a new computation is created (a hash) that depends on all previous blocks. This is why the blocks are chained together.
Since the block chain is available to everyone, anyone can check that a transaction has actually happened. Just like a regular financial ledger you can check the entire history of bitcoin transactions by looking in the block chain. The validity of transactions is ensured by the distributed network of bitcoin nodes and the cryptography used ensures that all copies of the block chain are valid. Purty cool ayeee!
What’s the deal spelling Bitcoin with a capital “B” versus bitcoin with a lowercase “b”. First of all, it’s not that important but on occasion the distinction helps clarity. When we use bitcoin with a lowercase “b” we are referring to the currency, that thing that is money. When we use Bitcoin with an uppercase “B” we’re talking about the Bitcoin network and overall ecosystem. Not a big deal but it is useful to at least be aware of the distinction.
Let’s try a little thought experiment. A little bitcoin Gedankenexperiment. Satoshi Nakamoto the inventor(s) of bitcoin creates this thing. Get the whole process going with an initial implementation, convinces some folks to continue development and then vanishes! What does this really mean?
Imagine (this is the gedankenexperiment part) that Satoshi revealed himself/herself (I will assume Satoshi is male for simplicity of writing but who knows!). He would be inundated with requests for direction, opinions of how to change the code, political opinions, financial regulation questions, you name it. They guy would have no peace. More importantly no matter what issue came up, and no matter who was working on the code or other related issues everyone would always be tentative until the great Satoshi weighed in.
This would have the effect of putting one person too much in control of the entire Bitcoin ecosystem. Of course this type of thing has happened in the past with other open source projects, such as Linux and Linus Torvalds being the “king”. Linux is clearly a wild success. Gavin Andresen, lead bitcoin core developer, has posted on several occasions that he doesn’t want to be put into the position where everyone is simply waiting to see “What Gavin says” as the last word, although I think that sometimes does happen despite his best efforts.
So the long and short of the anonymity of Satoshi has I think been quite helpful to Bitcoin, and has certainly spawned endless amusing speculation.
Congratulations! You’ve got bitcoin in your wallet! Now what.
What is a bitcoin transaction? (Of course if you actually have bitcoins in your wallet you’ve been on the receiving end of a bitcoin transaction whether you realize it or not.)
The short story is that a bitcoin transaction transfers the value of a bitcoin from the sender to the receiver.
A transaction is like pulling out some cash from a leather-wallet and giving it to you.
A better analogy is email. Except, instead of using email addresses we use bitcoin addresses. If it cost money to send email then the analogy would be even better since I would be charged, or money taken out of my account to send you that email. Similarly, I send you a bitcoin electronically by using a wallet program, just like an email program, to send you a message. In the case of bitcoin however the message is the money! That takes a little getting used to but it’s really very similar.
I’ll be going into transactions in much more detail in future posts but these posts are intentionally short, don’t want to hit the TL;DR (Too Long;Didn’t Read) threshold
As you may know Bitcoin came into existence with the publication of a paper in a cryptography (that the science of keeping stuff secret) mailing list by Satoshi Nakamoto. The technical details are fascinating and most is beyond my understanding but another fascinating point is that Satoshi is an unknown person or persons! After the introduction of the Bitcoin software and once things seemed to be moving along with bitcoin achieving some actual value, Sathoshi simply disappeared!
For a while, before he disappeared he was communicating with a few people on the cryptography mailing list. One of those people was Gavin Andresen who created something called the “Bitcoin Faucet” where you could go to simply be given bitcoin’s! Now remember that bitcoin’s initially were worth about 0.05 cents (USD). Gavin bought 50,000 bitcoins (for $25) and simply gave them away, initially in 5 BTC chucks just for solving a trivial captha (that proved you were human). It was actually a brilliant way to bootstrap the Bitcoin economy and as things turned out it worked. According to numerous accounts in the press Satoshi asked Gavin if he could add Gavin’s email as a contact for the bitcoin reference software to which Gavin agreed. Next Satoshi simply vanished! Since then Gavin has become the main core bitcoin software developer (along with several other people) and that’s where things stand today. No one knows who Satoshi Nakamoto is, or isn’t talking, fun fun!
Bitcoin the currency is simply a digital object. Computer files are digital objects, computer images are digital objects and a bitcoin is another type of digital object. What makes it actually worth some value? Simply the fact that people agree that the bitcoin object is worth value is really all that matter. It’s not that different that those colored pieces of paper in your wallet. I keep a 100,000,000,000,000 (100 Trillion) dollar Zimbabwe note (totally stealing the idea from Gavin Andresen lead bitcoin core developer) that is a very graphic illustration of the fact that paper cash with numbers on it is also an arbitrary value.
The fancy term for regular money is “fiat” cash which means that a government decrees by “fiat” that a particular piece of paper has value. There is no intrinsic value to that piece of paper as opposed to something like a bar of gold which does have intrinsic value and could, for example be reshaped into jewelry, or used as decoration or in electronic parts.
Now that bitcoin has value, as agreed to by many “exchanges”, we can use it to buy things. Bitcoin is still a new concept and most people don’t really understand what it’s all about so in fact most bitcoin’s are simply being held by people in the hope that its value will continue to go up. This tendency to hoard bitcoins is likely a temporary phenomenon until the crazy price fluctuations, the volatility, settles down.
This is still new experimental stuff, and personally I wouldn’t bet my savings on bitcoin just yet. More interesting then bitcoin the currency however is Bitcoin the network and system. The decentralized Bitcoin network ensures that no single organization can control Bitcoin. But more on Bitcoin the network, transactions, multiple signature requirements, anonymity and smart contracts (whew!) in future posts.
If you’re like me you are fascinated with bitcoin, the currency, and Bitcoin the system. The goal of this blog is to make bitcoin, which can get comlicated, understandable. I’ll be posting short pieces that explain all of the varies pieces of Bitcoin in simple, understandable language with no jargon, or as little as possible. Bitcoin is where the Internet meets money and is transforming many of our concepts of finance and contracts. It’s fun too!
I hope you enjoy. My name’s Sandy Ressler and I’m just a Bitcoin enthusiast having gotten into bitcoin in early 2013. Yes I’m kind of a newbie. I’m a member of the Bitcoin Foundation’s Education Committee, just for the fun of it and spend lots of my free time thinking about this stuff, yes I’m a geek through and through. I hope to help make Bitcoin more accessible and understandable, let me know what you think, via the comments (be gentle)!