A few days ago l wrote an explainer thread on NFT, and just moments later a friend asked me to explain Bitcoin similarly. He wanted to understand bitcoin from scratch, so here is this thread for him and others like him-
To understand what makes Bitcoin so special, or what exactly is bitcoin let's understand money first -
Q. What is money?
A. Over time, money has evolved a lot, like in a barter system people used to exchange bags of rice or similar stuff which they believed had some value.
Then came those precious metals like gold and silver. The whole society agreed that gold is valuable, thus everyone used gold as money - you do something for someone - you get some gold in return.
The problem with the gold was - it was not easy to carry & not easy to mold (for coins).
With the inefficiency in the gold exchange system, people agreed to give power to governments about this, and the government came with the currency notes. If you see a rupee note closely, something like this is written in the center- which and I quote says 'promise'
This means that the money we are dealing with is just an essential 'promise' of value by the government. This means that at its core cash is just a representative of trust. We all trust that it is 'valuable and we deal with it.
But as society expanded, governments started printing more cash, which means that the value of one currency note had to fall. Also, the currency system gave a lot of power to banks, govt, and bureaucrats, which meant- few wrong decisions by them, and your money will suffer.
This exactly happened in the 2008 global financial crisis- a few banks made bad decisions and gave loans to the wrong people, and when it all came out - the stock market was crashed, people were losing their jobs in a recession and the public had to suffer.
While everyone was suffering, a guy with a pseudonym- Satoshi Nakamoto, published the first white paper of #Bitcoin in 2008. Here he explained how his idea of a new currency would work.
The whole idea behind bitcoin had 2 main things -
1. No one authority will have control of this currency at any time. Which means it'll be decentralized.
2. It'll be limited - which means it'll stay finite In quantity and hence valuable forever.
Now let's try to understand decentralization in a more exhaustive way -
suppose you book a cab, now there is an authority like uber between you and the driver, and this central authority is handling all the operations. Hence, they have control over the service.
Similarly - when you go to YouTube to watch a video, youtube is the central authority between you and the creator, hence they have control over the content and its revenue.
The same happens with banks, when you make a transaction with someone, the bank is the central authority, as all the processes involved will be done by the bank, and hence bank controls your financial fate.
The same happens with banks, when you make a transaction with someone, the bank is the central authority, as all the processes involved will be done by the bank, and hence bank controls your financial fate.
But you can keep your money in a centralized bank, So where do you keep this decentralized bitcoin?
Basically, bitcoin is a form of digital money, and being decentralized it gives you all the power, thus you can keep it in your computer or phone or any other device.
It is stored in your device with help of a blockchain Wallet which gives you two keys-
1. Public key - consider this similar to your bank account no. - Which is your identity for being a part of the transaction.
2. Private key - this is a sort of password to access your wallet.
Fun fact(for us not for him)- a german programmer Stefan Thomas has lost All his bitcoins worth $220M, just because he forgot the private key to his wallet. Something which tells you how secure a blockchain wallet can be - no other way to enter - just your private key!
So yes, you can store bitcoin on your computer and buy it from some sort of exchange, but where does this Bitcoin come from?
It comes from a process known as bitcoin mining.
So what is bitcoin mining?
To understand this in easy words - It's like a competition where people deploy their powerful computers to solve complex mathematical calculations. For eg - 10 computers compete to solve one complex calculation, and the one who does it fastest wins.
This winner gets rewarded with some #Bitcoin. Now let's say this winner wants to sell his bitcoin, so he will sell it on an exchange platform, a place where people buy & sell cryptocurrencies. There this bitcoin comes into the market and people like you and me can buy it.
But wait? Why exactly they do a complex calculation in the first place to mine a bitcoin? What is the significance of that calculation?
Basically, this calculation is for updating transaction records(Like a bank keeps your transaction records). Even here such records are needed.
But a bank or any organization cannot be involved in decentralization remember?
So individuals across the globe take this Responsibility to maintain these transaction records by process of mining and in return for their contribution, get rewarded with BTC.
These records are maintained in a public ledger, which means every transaction is visible and transparent for the community. But this doesn't mean that your identity will be shown. Only the amount and region of the transaction are visible while maintaining anonymity.
This anonymity is sometimes misused by people for purposes like money laundering, but the fact is whether we admit it or not such stuff used to happen with normal currencies as well. With crypto, we can get more transparency about the presence of such transactions and investigate ahead.
Now that we understand so much about bitcoin, the question is why bitcoin?
3 major reasons -
1. Decentralisation - no one understands this better than the Indians, how? Because bitcoin is out of scope for someone to Come live at 8 pm and demonetize it :-)
2. Security- the public ledger on which transactions are recorded is unalterable, because the ledger is being maintained publicly so more transparency comes, and the person-to-person transactions are secure.
Also, because of anonymity, you get more privacy.
3. Limited amount of bitcoins- for a fact, there are only going to be 21 million bitcoins ever, and it's estimated that the last one will be mined in 2040, which means no one can add more no. of bitcoins and reduce their value, this is why it is compared with a good asset like gold
Though the data may show how bitcoin is so valuable because of the returns involved, it is also true that it is indeed very volatile. Before investing in it, Consider it as a high-risk asset, in which you should only invest a considerable amount and not all your life savings!
Also, bitcoin is not the only one at the party, you can consider it as a brand ambassador of a whole class of assets called cryptocurrencies. There are also other types of cryptocurrencies like Ethereum and others which are known as Altcoins.
I've tried to explain most of the things I knew and I could recall while writing this explainer thread. If you think I may have missed something, then please feel free to DM and I will explain that as well.
I plan to write more of such explainer threads in the future so you can follow me for more of such pieces, and also if you're financially capable, then you can now support me by buying me a coffee.