What are Bitcoins? Simply explained



It is digital money

It is an amalgamation of two words, they are “Bit” that represent digital like zero or one and “coin” as in money, therefore it means digital money. But is it the first type of digital money? No! I am sure every reader of this post must have experienced at least 10 different examples of digital money. Examples of digital money include Jet miles, star bucks points, Café coffee day beans, etc. But 1 Bitcoin is valued at 7000 USD. There must be something special, what is it?

It is decentralized digital money

Therefore the secret ingredient in Bitcoin versus all other earlier forms of digital money is just one word: Decentralized. What does it mean? Decentralization means removing the need of a central authority from a system. Before attempting to understand the new decentralized system, Let us reiterate the existing centralized system.

Centralized payment system

Imagine Mr. Vinod, residing in Delhi, sending some money to John, in New York. Vinod sees money in the form of INR and John sees it in the form of USD. Also, Vinod can send counterfeit money or might try to send the same money twice (double spending problem), say to John and Charlie, who will stop him? The transaction will go through a bank say ICICI bank regulated by Reserve bank of India both ensuring Vinod stays honest. Therefore centralization or trust worthy institutions ensure everyone stays honest and these institutions charge for their services therefore to transfer money, some percentage is charged as fee.

In a nut shell

In the normal payment method, someone needs to validate each transaction in order to ensure everybody stays honest, and this is what bank does!
The genius of Satoshi Nakamoto, creator of Bitcoin, was to propose a system, which solves the problem of validation of transactions without having a central authority at the top, that’s exactly why one bitcoin is valued over 7000 dollars.

Coming back to the secret ingredient: Decentralization

Bitcoin transactions are not validated through a bank, yet they are validated. But the question is, now when Mr. Vinod sends money to Mr. John? Who validates the transaction? The answer is: Everybody else! It has an open ledger of transactions, which everybody can view and everybody validates each transaction (also called mining) and system shall stay correct as long as 51% of people are honest in the network. Therefore the attacker would need control of 51% of computing power of the Bitcoin network in order get a fraudulent transaction through. However, mathematically speaking, I don’t see that happening even if one would have control over few most powerful supercomputers of the world. Lastly, Is it a perfect system? Can it fail? Well, It is based on a voting system, which thrives on the consensus of the crowd, can’t comment on its perfection, but can certainly say it works! Come On, we choose the prime minister of the country using the same method.


Conclusion

Bitcoin is the first use case of the block chain technology, which is revolutionary. It can be misused as well, hence the notorious anonymous money transfers going across the globe. I think it is much bigger than that! It has the ability to validate a transaction without the need of a central authority. Therefore it may disrupt a lot of industries in the future, the BSFI industry being the beginning.

Lastly


Bitcoin must not be viewed as a money minting idea, an asset, a currency, a commodity, a method of terror financing etc. At the core, it is first use-case of the block chain technology. Everything else is its by-product.

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