Insane in the Blockchain: What Is Bitcoin and How Does It Work?

Published June 27, 2017

A hot topic in the tech community, blockchain’s applications may lead to implications for the global digital economy. We’ve bit just a taste of the apple with Bitcoin, and it’s here to stay.

_DRLsawgrOCG3OwH3VP4o9VuR4HMAsBeRGFZSo_7RPk — Image credit: World Economic Forum

Blockchain is The Membrane

Picture a spreadsheet that is duplicated thousands of times across a network of computers- think Google Drive. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain. Loss is lowered, collaboration is enhanced, and security is rock-steady.

A blockchain is a distributed database that is used to maintain a continuously growing list of records, called blocks. Each block contains a timestamp and a link to a previous block. Typically managed by a peer-to-peer network, blockchains, by design, are resistant to modification of data and are inherently secure. The first industry application is in big banking, and is the most prevalent today. Suitable applications also include recording of events, medical records, and other records management activities, identity management, transaction processing, and documenting provenance.

By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin, by Satoshi Nakamoto in 2008, the tech community is now finding other potential uses for the technology.

Like paper money and gold before it, bitcoin is a currency that allows parties to exchange value. Unlike it’s predecessors, bitcoin is digital and decentralized. For the first time in history, people can exchange value without a centralized middleman taking a piece of the action, which translates to greater control of funds and lower fees.

Key Properties of Bitcoin

Bitcoin is the currency of the Internet: a distributed, worldwide, decentralized digital money. Unlike traditional currencies such as dollars, bitcoins are issued and managed without any central authority whatsoever: there is no government, company, or bank in charge of Bitcoin. As such, it is more resistant to wild inflation and corrupt banks. With Bitcoin, you can be your own bank.

Limited Supply – There will only ever be 21,000,000 bitcoins created and they are issued in a predictable fashion, you can view the inflation schedule here. Once they are all issued Bitcoin will be truly deflationary.
Open source – Bitcoin code is fully auditable. You can read the source code yourself here.
Accountable – The public ledger is transparent, all transactions are seen by everyone.
Decentralized – Bitcoin is globally distributed across thousands of nodes with no single point of failure and as such can’t be shut down similar to how Bittorrent works.
Censorship resistant – No one can prevent you from interacting with the bitcoin network and no one can censor, alter or block transactions that they disagree with, see Operation Chokepoint.
Push system – There are no chargebacks in bitcoin because only the person who owns the address where the bitcoins reside has the authority to move them.
Low fee – Transactions fees can vary between a few cents and a few dollars depending on network demand and how much priority you wish to assign to the transaction. Most wallets calculate the fee automatically but you can view current fees here.
Borderless – No country can stop it from going in/out, even in areas currently unserved by traditional banking as the ledger is globally distributed.
Trustless – Bitcoin solved the Byzantine’s Generals Problem which means nobody needs to trust anybody for it to work.
Pseudonymous – No need to expose personal information when purchasing with cash or transacting.
Secure – Encrypted cryptographically and can’t be brute forced or confiscated with proper key management such as hardware wallets.
Programmable – Individual units of bitcoin can be programmed to transfer based on certain criteria being met
Nearly instant – From a few seconds to a few minutes depending on need for confirmations. After a few confirmations transactions are irreversible.
Peer-to-peer – No intermediaries with a cut, no need for trusted third parties.
Portable – Bitcoins are digital so they are easier to move than cash or gold. They can even be transported by simply remembering a string of words for wallet recovery.
Scalable – Each bitcoin is divisible down to 8 decimals allowing it to grow in value while still accommodating micro-transactions.
Designed Money – Bitcoin was created to fit all the fundamental properties of money better than gold or fiat