Easy to understand breakdown of bitcoin and cryptocurrencies in general.
The recent hype over the DOGE coin, the internet meme coin with a market cap of close to $80.5Bn as of May 06, 2021, can no longer be shrugged off as a joke. DOGE has been touted as a shit coin(no long-term sustainable use case) by many but is now going off the charts based on speculation and sensationalism. How many times have you heard the phrase “DOGE to the moon” among your crypto friends? Confused? To the moon signifies when the price of a coin is going to explode upwards. That should clear it. Whatever has been said of DOGE, it deserves recognition as it is one of the best manifestations of the power of the internet.
Note that, as of this writing I do not hold any DOGE but the upward trend has got me re-thinking my decision. In fact not holding any DOGE has set in FOMO and my immediate peers jumping onto the DOGE train is not helping my case. Everybody wants a piece of that pie! If you find yourself in such a position and now you wish to learn more about the cryptocurrency world look no further. In this article, I try to break down some of the common terms in the crypto economy like blockchain, distributed ledger, decentralisation and an analogy for how bitcoin works. I skim over all these topics and I have tried to explain in terms that can be easily understood by anybody. I have made this callout to ensure hardcore crypto enthusiasts do not come for my head, just kidding, for the most part, the crypto community is very friendly.
As is common with learning anything new these days, there are several resources online to help you understand but it is this very abundance that can leave you feeling overwhelmed. Yo, where do I even begin?
What the bloody hell is a bitcoin, Monjunath?
I got you. Bitcoin first came to the fore in 2008, when a person or a group of people that went by the pseudonym Satoshi Nakomoto released the bitcoin whitepaper on a cryptography mailing list. To this day, the identity of this person or group of people has remained a mystery. Here is the message that was received in the mailing list:
This message then set forth a revolution in the way money is perceived and also the booming crypto economy that you see today.
All that is cool but what is bitcoin actually?
Bitcoin is an open-source(open source is when the code is published online for everybody to see) project that seeks to become the world’s global currency. It’s a network that keeps a track of transactions between different parties. There is no central authority governing and regulating the bitcoin network. It is maintained by computers all around the world called nodes. These nodes perform something known as mining. (Generally, this is where I would expect people to drop off, to you my friend I’d say skip to the section on the boardgame Businessman to skip the jargons and understand in easy terms). Mining is nothing but validating transactions in the network by solving some complex math puzzles. When a mining node successfully solves a puzzle and broadcasts the solution back to the bitcoin network, that node is rewarded with Bitcoins.
But why is this so revolutionary as everyone says it is?
- Bitcoin is a deflationary asset, what that means is there is only a limited supply of 21million bitcoins that will ever exist, unlike the dollar or rupee which is controlled by the central bank that is printed on the whims and fancies of the government. This leads to something known as inflation. Inflation is nothing but the buying power of your money. If in 2010 you could buy a tennis ball for Rs.25, now the same ball costs you Rs.75. The buying power of your money reduces over time owing to inflation. So in the case of bitcoin which is limited in supply, the value of bitcoin rises over time as the demand increases.
- Another unique property of bitcoin is divisibility. 1 bitcoin = 100000000 satoshi(sats). So the next time you feel bummed you can’t buy a complete bitcoin because it’s too costly, get some sats instead.
- The bitcoin network is completely transparent, one can look at any transaction that’s happened in the network.
Time to draw a parallel to understand bitcoin.
One of the best examples I give my friends when I try to explain bitcoin is with the example of the board game Businessman. You can consider Monopoly too.
Let’s assume A, B, C & D are playing a game of Businessman. What they are doing will be a highly simplified version of the bitcoin network. The fake money that gets distributed is their currency in the game. They can transact and buy properties with this money. Zoom out a little bit here, this money only has value in this game because A, B, C & D have collectively agreed that this currency has value and can be used to transact. That is essentially what’s happening with any monetary system in general. Tomorrow if we all just collectively agree the rupee has no value, it’s just a piece of paper and it has no intrinsic value. (There is more to it, this is a very simplified version of state-issued currency also called fiat currency)
For the purpose of this game let’s consider the fake money distributed are bitcoins. The players have agreed the bitcoins distributed have value and can be used to transact.
Let’s say A lands on his friend B’s property ‘Bangalore’ and according to the rules of the game, he has to pay him 5BTC now. He pays B in BTC(bitcoin) as previously agreed. All four agree to keep an account of the movement of the bitcoins in the network. “A” volunteers to keep a record on a piece of paper. The first entry is made, A pays B — 5BTC. What A is doing as the game progresses is nothing but maintaining a ledger to track and validate the transactions that happen in the game. (We will later see how what A is doing is actually the task of mining.)
Let’s take this game up a notch. In the previous case, all four players were in the same location. Let’s assume they want to go international. All four players distributed across the world. This brings in a whole lot of complexities.
If A were to be dishonest, he can make wrong entries in the ledger and the others will not know. To solve this all four need to have a distributed ledger in which A, B, C & D must agree a particular transaction has taken place. So now each person will have a copy of the ledger in which an entry should be added after they reach a consensus about the transaction. Now that’s what is popularly known as a distributed ledger. Seeing that his work got harder, A wants to step down from doing the task of keeping a track of transactions and telling everyone to update their ledger. Now how does one encourage someone to take up this task?
Bitcoin protocol solves this problem by incentivising the person who is willing to verify the transactions. The term mining you might have heard often is nothing but the verification of the transactions. When a miner completes the validation he/she broadcasts to the network saying, — Yes, this particular transaction has taken place. This new entry is then added to the register. The miner gets paid in bitcoins for their effort.
So if we were to take the same approach in this game, now all 4 players will be willing to take up the task of keeping account of the transactions because they will be paid for it. Now when all 4 want to validate how do we decide who gets to keep track? The Bitcoin network solves this by sending a complex math puzzle that needs to be solved. The fastest to solve the puzzle gets to add a new entry to the ledger and gets awarded in bitcoins. Congratulations now you have a vague idea of what mining is.
So what is a blockchain in all this?
The piece of paper in which A was keeping track of transactions, he comes to the end of that particular sheet and has to take a fresh one. As the game progresses, he decides to stack 5 sheets into a bundle. This bundle is the loose analogy for a blockchain. The bundle is sealed forever and any player can dig it up to look for past transactions.
An interesting feature of a block in the bitcoin world is that each subsequent block that is generated is linked to the previous block. So it’s a continuous chain of blocks hence the term — blockchain.
I hope I have helped clear some of your doubts regarding cryptocurrencies. What you just read above is a highly simplified version. I’m sure now you’re brimming with questions more than before. It is this very curiosity that keeps us going. I am fascinated by the crypto economy and it’s hard to stay abreast of the fast-moving nature of this ecosystem.
I hope you’ve made it till here and have derived value. If this was a good stepping stone in your journey to the crypto world, when you make it big, think of me and help a brother out. Revisit this blog when you’ve made some big money 1 year, 2 years or maybe 5 years from now and make a small contribution to me. Here is my ETH address: 0xBDEdbc62dd98F0fdFfd1046EFd33E7CF3C02eaEC