Bitcoin and Cryptocurrencies Explained

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Photo via www.cafecredit.com

By Osiris Godwin

If you’ve been paying attention to the Internet longer than just swiping through Facebook and Instagram, then you are sure to have heard mention of Bitcoin. Bitcoin is a popular cryptocurrency that at its heart relies on something called a blockchain.

Bitcoin has had some historic rises and falls over the past six months, and to the layperson that might seem like another real estate bubble. For the most part, Bitcoin could be a bubble because of the way it has been handled rather than because of faults in the system itself.

To understand Bitcoin or any other cryptocurrency, you first must understand how it was created and how it is maintained. A cryptocurrency stems from blockchains, which are best explained as Legos with information stored in each Lego cube. Because of this simplistic design, it is easier to secure and track.

Theoretical. Why is cryptocurrency so popular online and in unstable or developing nations? This is mainly because cryptocurrency is a decentralized currency that can be traded online and as it is decentralized it will be secure.

Attempts to centralize it or control and regulate it subject it to becoming a target for hackers and scammers. It’s essentially a way for people to trade openly peer-to-peer without need of a third party (e.g., banks, PayPal, MasterCard or Visa). Transactions are person-to-person so there is a lot more freedom, and even though the ledger is public and trackable whatever is purchased is encrypted and for your eyes only. This system isn’t flawless yet, but it is all essentially a test market to see the practical use of blockchains and cryptocurrencies in con-temporary society.

Practical. To get to the practical use of cryptocurrencies and block-chain systems, we must understand why the current system can be flawed. The purpose of cryptocurrencies originally was to get rid of things like the need for a depreciating currency such as the U.S. dollar, which has an agreed-upon value and can be printed to the point that the agreed-upon value crashes as has happened often in the past.

A good example of this was the German mark after the end of World War I, which inflated to the point that bread increased 1,000 times more than the original agreed-upon value. Cryptocurrencies protect against this by having a set limit on how many Bitcoins, for example, are in existence. This set limit means that instead of the agreed-upon value decreasing over time it will increase because the availability will become scarce.

This could mean that we can create a sustainable and scalable trade system in the future that isn’t reliant on banks or government thus giving more freedom to the people. What is exciting and intimidating about this system is that we don’t necessarily need currency to do trades in the future; we can adapt blockchains to trade goods directly (as in a resource-based economy) with others for goods or services. Blockchains can be used to create a universal ledger. However, there are several hurdles in getting to a perfect system of trade that is decentralized and secure.

Encryption. The most important aspects of crypto-currencies are the encryption and security of the systems. They are secured using a system called blockchains, which create a universal ledger tracking the owner and even the creation of a cryptocurrency.

Blockchains can be understood simply by compar-ing them to Legos that only fit to other specific blocks. This is achieved by hash points at the bottom and top of the actual block. The core of these blocks would be the actual transaction or creation, which is encrypted; only the numbers are public record, but the names of people and whatever is sold are encrypted so one’s privacy is ensured. They form a chain of blocks so that the currency can be tracked all the way to its creation to validate that it is a legitimate chain.

Although the blockchain doesn’t need to verify that the currency was created every time, it needs to confirm that one has possession of the currency before it can be traded. To cheat or fake chains, someone would need to control at least 50% of the computing power of the whole system to possibly beat the rest of the system.

Another thing that secures cryptocurrencies is that the system will believe the chain with the longest strand rather than a chain that was created falsely or duped (i.e., trading the same coin more than once). This is why a transaction should be not be considered fully complete until a few more blocks have been added on top of the transaction.

Bitcoin mining. Miners are people who join the system and aid in the computation of the ledger (verifying and encrypting the network), and for this the algorithm will reward them with Bitcoins. The Bitcoin reward halves itself every year to keep from overinflating the market. With this model, by 2140 Bitcoin will cease to give out new coins and will start relying heavily on transaction fees to pay miners.

Miners who attempt to pool together or to spend more to gain more computational power are risking centralizing the whole system, and this could be an issue because the more computers under one’s control means more portals for a single bot net to DDoS or takeover, which would hurt the rest of the system.

Bitcoin was meant to be a decentralized system so attempts to centralize, regulate or manipulate the system will only end up hurting the people attempting to undermine the system itself. The software necessary to mine Bitcoin is open source, which means that it is completely free, so be wary if someone attempts to sell you software to mine coins faster or dupe because it is likely a scam that is attempting to control your network and make the scammer money.

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Osiris Godwin is a 25-year-old computer programmer who is passionate about all things tech and is attending school to become a biochemical engineer. Contact him at gekkodevs@gmail.com.