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April 06, 2014, 04:56:55 AM |
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Hi,
I have written up a description of "What is Bitcoin?" and "How does it work?", which I am hoping will make sense to lay people. Initially I wrote this as an entry for a writing contest on another subforum, but I thought it would be better to keep this in the public domain in case anyone else wants to make use of it.
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What is Bitcoin?
Bitcoin is online cash. Unlike traditional cash which must be passed around physically in the form of notes and coins, bitcoin is purely digital and is passed around by users over the internet between their “digital wallets”. A digital wallet is simply an application running on a smartphone, laptop, tablet or other internet-connected device, which behaves like a wallet by storing bitcoins and allowing the user to send and receive bitcoins to other users.
Bitcoins themselves are a new form of digital content. Most people who have used the internet will already understand that digital files can be copied and shared (eg. pictures, music, videos). This ability to make new copies of files means that we could never use files as currency since there is no true scarcity to anything digital. The major breakthrough behind bitcoin is that it has done what was previously thought to be impossible, by creating digital “coins” which, like files, can be sent directly from person to person, but unlike ordinary files, they cannot be duplicated. The act of sending a bitcoin to someone else means that the sender no longer possesses it. Like passing a physical coin, it leaves your wallet and enters the wallet of the new owner. In this sense, bitcoin is the invention of truly scarce digital property. This scarcity allows bitcoin to function as a currency, as well as holding promise for many other innovative applications.
Just like physical property, bitcoins can be lost, misplaced, or stolen. However, properly secured bitcoins are, theoretically, impossible to steal, and a properly backed up bitcoin wallet will be protected from accidental loss.
The combination of being scarce, freely globally tradeable, secure, and impossible to counterfeit, make bitcoins highly valued.
The bitcoin system has been designed to have a limited supply of 21 million bitcoins. However, individual bitcoins are divisible into tiny pieces, even millionths of a coin can be transferred, so there is more than enough bitcoin to function as a full scale currency. Users are not restricted to trading whole bitcoins at a time.
How does it work?
Bitcoin is based on a “mesh network”. Rather than having a central server that all bitcoin wallets connect to, the wallets all connect to eachother. This is known as “peer-to-peer” networking and resembles a similar architecture to file sharing technologies such as BitTorrent. Peer-to-peer networking is highly resilient against censorship and control, since it has no single point of failure.
Bitcoin transactions and balances are derived from a shared global database called the “blockchain”. The blockchain is built and maintained collectively by all bitcoin participants. No single person, organization, or government can control this database. Instead, everyone collectively administers it under a pre-agreed set of rules which ensure fair and honest transactions. Any attempts to break these rules will be ignored by honest participants in the bitcoin network. So long as the honest participants collectively control more than 50% of the network, bitcoin payments will remain irreversible. When we refer to “control” of the network, this refers to computational power, which can be voluntarily contributed by anyone willing to do so. This contribution of computing power is called “mining”. Miners are rewarded for their contributions by sharing in the newly mined bitcoins. Miners are also paid voluntary transaction fees that other bitcoin users may attach to their transactions.
The first bitcoins were created by miners at a rate of 50 every 10 minutes. This initial period lasted from 2009 until late 2013. From 2014 through 2017 the reward is halved to 25 bitcoins every 10 minutes. The mining rewards will continue to be halved every 4 years until approximately the year 2140 when the last of the 21 million bitcoins is mined. Beyond this point, miners will continue to be funded by transaction fees paid by other bitcoin users.
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I haven't yet tested this on lay people to see if it makes sense to them and answers their questions. I'm not a professional writer, so this could probably be tidied up to be a bit easier to read. I'd greatly welcome any revisions and feedback. Thanks!
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