I shall try to simplify what bitcoin is, so that anyone can understand Bitcoin and its possible implications on the world. In today’s world you have money in your bank. For this example we shall say £1000. This £1000 is stored on a banks computer. Nearly everyone’s money is stored electronically on a bank computer. When we make payments via debit card, credit card, online bank transfers, no actual money exchanges hands. One bank computer is exchanging data with another bank computer.
Bitcoin is essentially the same in the sense it is digital money. However, instead of this money being stored on a banks computer it is stored on many computers around the world that are all networked together allowing them to communicate and share data about transactions. These transactions take place on the Blockchain which is in essence a ledger system(A ledger is the principal computer file for recording and totalling economic transactions).
Every time you make a transaction, instead of it being recorded on one central bank computer, it is recorded on tens of thousands of computers worldwide! These transactions take place on tens of thousands of computers using a ‘peer to peer’ ledger(the ‘Blockchain’, as mentioned above think of it like a database file or book).
On top of this Bitcoin uses a peer-to-peer network which is similar to Bit Torrent. Bitcoin is similar but instead of sharing music or videos it is sharing ledger entries that represent value(Bitcoin transactions).
This ledger is very secure and it is impossible to falsify transactions with others thanks to ‘math’. Bitcoin uses very complicated mathematical algorithms called ‘cryptography’. No one can hack this system thanks to the power of math. The digital values you send through the Bitcoin network act as a currency just like the Pound. Bitcoin the currency and the Bitcoin network are tied together. One would not function without the other. With out the currency you would have nothing to transact with and also to reward those who keep the network running safe and secure (‘Bitcoin Miners’). And with out the network you would have no way to send a transaction in a safe manner. The two are intertwined.
So this in essence is what Bitcoin is. An open source protocol for transactions with a currency built on top and Bitcoin the currency is just the first app. You may be thinking ‘well that is all well and good, but why use this system over a bank system?’. And I shall answer this question in my next blog post.
(Photo by epSos. de)