What is Bitcoin? How does it work? Osama case scenario.

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oaksupreme
Tech and Anything in between.

Maybe you’ve heard the word before. Maybe not but if google search results are anything to go by then about 6.5% of the world population is aware of the noun “Bitcoin”.

But what is it really? In its simplest form Bitcoin can be termed as an international currency which unlike the Dollar, Kenya shillings and others, is not controlled by any given state/country, corporation, organization or by any individual. Like Democracy, Bitcoin is the money of the people, by the people and for the people.

Bitcoin.

Bitcoin is a math-based electronically transferred currency which is a creation of an anonymous person (or group) by the name Nakamoto Satoshi.

Having used Bonga points, telco airtime and of course, then understanding Bitcoin should be quite easy as all are forms of virtual currencies since they can be converted or exchanged for real-world products.

Bitcoin has evolved to become the true real transfer of value between two parties without a central intermediary. Essentially, parties communicate value over the internet, making it the Internet of value.

As defined by the creator(s) Satoshi Nakamoto, in a white paper that was released in 2008, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” It is evident that Satoshi was not a fan of the modern-day financial system as he goes on to say, ” The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” in the first Block of the Bitcoin Blockchain. (I’ll explain Blockchain later). That quote comments on the problem of financial institutions imposing a great cost on the people they were supposed to serve and that, Satoshi was bringing a whole new financial order.

The Blockchain.

In its simplest form, a blockchain is a database of transaction records that is distributed across a network. In the Bitcoin case, the Bitcoin blockchain hosts all the Bitcoin transactions and is held by so many computers across the world. Transactions stored on the blockchain cannot be changed making the ledger immutable and the records permanent.
A blockchain has an inbuilt protocol or set of rules that dictate how coins are generated, transactions are processed and coins are transferred from one party to another.

Blockchains have so many use cases apart from digital coins and assets as shown below;

The Protocol.

The Bitcoin blockchain runs on a Proof-of-Work mechanism or consensus algorithm which means that for every transaction to process all the computers in the network have to verify and approve the transaction.

For computers to append a transaction on the Blockchain, a lot of electricity and computational power is needed to solve some complex cryptographic maths. Thus, Bitcoin is a math-based Crypto-currency.

This reason makes it difficult to edit the Bitcoin blockchain records or reverse transactions.

The Currency.

This is the controversial digital token used for transactions and to reward miners who secure the network. The bitcoin token is used to reward miners and also as a means of exchange of value on the network.

How they all work together to make a finance system.

A successful transaction scenario;

  1. Osama needs to send Wamahiga some money from Kenya to UAE. And like Satoshi Nakamoto, Osama hates banks and all the processes involved he opts for a simple solution.
  2. Osama downloads a wallet app and so does Wamahiga. Osama will the as Wamahiga to send him her wallet address which is a combination of 26 alphanumerics to which he’ll send the digital coins.
  3. Osama pasts the address on his wallet which has just enough amount to top up Wamahiga and facilitate the transaction.
  4. Once he clicks send, the transaction is broadcasted to all the computers connected to the Bitcoin Blockchain called Nodes. These computers will then check Osama’s last balance, then proceed to solve some form of computer puzzles.
  5. At this time, there are thousands of transactions happening would wide so all these transactions have to be checked and grouped together in blocks every 10 minutes as per the protocol (set of rules).
  6. Once grouped, the computers (miners) solve a given mathematical puzzle in their thousands till one lucky bastard gets it right.
  7. On getting the right answer, the computer again broadcasts the answer to all the computers again so they can verify its the right answer. Upon approval, the successful computer is rewarded new Bitcoins – this is how new Bitcoins are produced (mined) – and the transaction to Wamahiga is marked as successful and appended on the blockchain as a transaction record forever and ever.

This process has been in work since the 3rd Jan 2009 when the first-ever Bitcoin was mined. The protocol dictates the only 21 million Bitcoins will ever be mined and so far the system is at 18.7 million since 2009 and the 21st million will very likely be mind in 2140.

Why 21million Bitcoins.

This capping creates scarcity which works in favor of the Demand and Supply law thus creating value for Bitcoin. That’s why prices have seen such a huge rise as more and more people adopt Bitcoin in their daily transactions.

This will someday make it difficult to own one whole Bitcoin (1 BTC), and it’s already expensive owning one. Nakamoto was smart enough to know this so he denominated one Bitcoin into smaller units called Satoshis to facilitate small payments. Thus, 1BTC = 100,000,000 Satoshis.

So when next you buy or want to buy Bitcoin, don’t sweat it going for 1BTC which is currently trading at Kes 830, 000 (as of the time this article was written) when you can test the waters with 0.00061000 BTC at Kes 500 on Paxful – one of the leading Bitcoin marketplace in the World.

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