At this point, we’ve all heard about it, seen it on social medias and even on traditional medias, like the TV. And some of us have already been using it for a while, and I must say without a doubt, that those who have already tried it, can’t get enough of it.
But, what is Bitcoin? What makes it so amazing, and why it’s considered to be the game changer of the global financial system?
Those are just some of the questions we’ll answer in this video. So make sure to like and subscribe, and don’t forget to turn on that bell notification so you don’t miss out on any new video from the Crypto Odyssey. And if you’re real fan, join our telegram group and follow us on Instagram, links in the description.
Bitcoin is a decentralized digital currency. Compared with traditional online payment mechanisms, it promises to provide lower transaction fees, and unlike government-issued currencies that relies on the banking system. Its creation, distribution, transactions, and storage use a decentralized ledger system called blockchain. It is called a cryptocurrency because it uses cryptography to ensure its security. There is no physical bitcoin, only the balance on the public ledger that everyone can transparently access.
Since its beginning, back in January 2009, Bitcoin has grown its value in US Dollar from less than a penny to over 60 thousand dollars. It became the legal tender in El Salvador. Made more than 100 thousand new millionaires worldwide, and a few billionaires too.
All of that without any company, or government backing it up. Not even a known group or individual whatsoever.
Unlike fiat currencies, those issued by central governments, one bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, more on miner later on the video, Bitcoin could eventually be made divisible to even more decimal places.
But, before we dig into to how it achieved all that, let’s first understand why Bitcoin was created in the first place.
Why was Bitcoin invented
The concept of Bitcoin first came into existence in 2008, as a response to the Great Financial Crisis and the financial world’s reliance on banks as intermediaries of all financial transactions.
The identity of the person or group who created the technology is still a mystery and the creator is only referred as the mysterious and pseudonymous Satoshi Nakamoto, who had the idea of disintermediating the banks from financial transactions, creating a peer to peer payment system that did not rely on third party confirmation. This way, the banks don’t need to be involved in each and every transaction, validating them and guaranteeing their authenticity.
So that means Bitcoin is not safe? Actually, it’s the opposite, it’s safer than anything that came before it. And here is why.
In the traditional finance system, there is always a middleman, to check and store users’ wealth and data. I’m talking about the banks and credit card companies. So, a single company or person that we all must trust on to do the right thing, and not act for its own benefit. Doesn’t it sound risk to you? It sure does to me! In short, the traditional financial system is centralized, and centralized systems aren’t trustless since participants delegate power to a central point in the system and authorize it to make and enforce decisions.
In a centralized system, as long as the trusted third party can be trusted, the system will function as intended. However, serious issues can emerge if the trusted entity isn’t to be trusted. Centralized systems are subject to system failures, attacks, or hacks. Data can also be altered or manipulated by the central authority without any public authorization.
We trust this companies to protect and care for our wealth, and that they won’t do anything wrong.
None trustless example
Imagine the following. John and is friends love playing Monopoly, and all of John’s friends think that he’s an honest guy and means no harm to anyone, so he is trusted to be the banker in the game.
As they lost all Monopoly money, they decided to use a ledger, a single sheet of paper where John writes down all the transaction made in the game, handling it all and keeping track of everything.
When Amy stops at one of Michel’s properties, having to pay him $15, John writes on the ledger: Amy pays Michel $15.
And similarly, when Amy decides to build a house in one of her properties, John makes a new record on the ledger: Amy pays the bank $150.
The system seems to work great. Although neither Amy nor Michel have access to the ledger, and can’t control what gets written in it, they trust John will do the right thing.
Now if John decides to cheat on the game, he can add a new entry to the ledger saying:
Bank pays John $200. Or whenever John needs to pay any of his friends, he only pretends to write down the transaction on the ledger, but nothing is registered. As John is the only one with access to the ledger, he can change it the way he please.
The Monopoly game John and his friends are playing runs on a centralized and trust based system.
On the other hand, Bitcoin is trustless, verifiable, and decentralized. There is no single person who owns all the information and handles all the transactions.
All Bitcoin transactions are verified by a massive amount of computing power via a process known as mining. Bitcoin is not issued or backed by any banks or governments. Despite it not being legal tender in most parts of the world, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as altcoins.
And speaking of altcoins, a great way to exchange crypto to crypto is using Coinvertlly. Coinvertlly is a non-custodial crypto exchange, meaning you control your keys, where you can easily swap your coins for other coins without having to create an account or register anything, the process if fully anonymous. All you got to do is visit Coinvertlly.com, select the coin you are swapping from, the amount you want to exchange and, the coin you want to get in return. Then, just follow the on-screen instructions, where you’ll be asked to add the destination address, that is the wallet where you want your new coins to be sent to. Coinvertlly will then generate a unique deposit address, where you’ll send the coins you’re swapping from and in a couple of minutes, you’ll get your new coins sent to your destination wallet. Coinvertlly also offers the possibility to buy and sell crypto using your credit card or even Global Bank Transfer (SEPA or SWIFT). Visit Coinvertlly.com today and start trading!
Alright, back to the trustless system. You might be asking, how is Bitcoin mined, and how can you trust it. Well, first of all, as I mention, you don’t need to trust Bitcoin, it is trustless, meaning it does not need trust to be authentic and reliable. A trustless system means that the participants involved do not need to know or trust each other or a third party for the system to function. In a trustless environment, there is no single entity that has authority over the system, and consensus is achieved without participants having to know or trust anything but the system itself.
To achieve that, Bitcoin relies on the standard of “proof of work”, which employs mathematical algorithms to confirm transactions without using a central authority or banks. Instead of the central network, the blockchain comes into play, which is maintained by the so called bitcoin miners. Miners are basically computers all over the globe that run Bitcoin’s code and store the blockchain.
Each block of the blockchain is like a box filled with transactions. All the computers running the blockchain have the same list of blocks, and thus the same list of transactions, stored in the same exact order. Every time a new set of transaction is added to a new block, all these computers can verify the transactions before the block get written into the blockchain for all eternity. If any of the transactions is found to be a fraud, the block is not added to the network. This way, no one can cheat the system. We’ll discuss more about how this process works, later on the video.
Back to the Monopoly game example. Amy and Michel learned from their last not so pleasing experience, that John can’t be trusted. But they also can’t agree to trust on each other to be the new responsible for the ledger.
So, they come up with a solution, instead of 1 single ledger, they all will have their own copy of the ledger. And every transaction will be registered on all the ledgers. Each player caring for their own ledger.
Now, when Amy needs to pay rent to Michel, each one of the players write on their ledger: Amy pays Michel $15, and every time that is done, they verify each other ledger, to make sure nothing was added without everyone’s knowledge.
In this scenario there is no room for cheating. If John decides to write on his ledger that he got paid $150, this record will not exist on Amy’s or Michel’s ledger, thus will be destroyed from the ledger and not taken into consideration, like if it never happened.
You could argue that John and Michel could try to lie together, and force Amy to add a new line to her ledger as it already exists on John’s and Michel’s. That is a possibility in a scenario with only 3 players, or 3 miners. But that is not the reality for Bitcoin, where to do such thing someone would need to control 51% of all Bitcoin computer power in the world, which is quite unlikely.
In the Monopoly example, I just mention that John, Michel and Amy work like miners in Bitcoin. Well, in the way of registering the transactions, yes, but in our example, there is no reward, nothing is actually mined. So, let’s dive a little into what mining bitcoin is.
Mining is the process of releasing Bitcoin into circulation. The miner needs to solve computationally difficult problems in order to discover new blocks, or entries to the ledger, and add them to the blockchain.
By solving these puzzles, miners receive some Bitcoin rewards, Bitcoins that did not exist before, and are created out of thin air by this process. Like a gold miner that find gold and puts it in the market, a Bitcoin miner finds a new bitcoin by validating transactions on the blockchain and so adding more bitcoin to the market.
But how do they do that? How do miners mine bitcoin?
If you want to dive deeper on how mining bitcoin really works, you can check our video on this topic where we go to the smallest nuances of this matter.
But for this video, all you need to understand is that the miner’s computer is called a node, which collects individual Bitcoin transactions from the past ten minutes or so, and packs them into a block, that is 1 megabyte worth of transactions. What that means is that each miner creates a candidate block with unconfirmed transactions. This block includes a block header, that among other things, stores:
- A code that represents all the transactions in it.
- A code that points to the block before it.
- A target value.
- And a nonce, that is, a number only used once.
The code that represent the block is called hash number; a 64-digit hexadecimal number generated by a cryptography algorithm called SHA-256.
What the miner’s computer needs to do now is, guess the nonce that when added to the block’s hash number, will generate a code that is equal to, or smaller, to the target value present in the block’s header.
The first miner to do so, wins the bitcoin lottery, getting to add a new block to the chain, and a reward in bitcoin for validating the transactions in the block.
All other validators can then check if the nonce found really solves the problem. If it does, they also propagate the block in their own copy of the blockchain. If it doesn’t, the block will not be propagated and will eventually be discarded, and it will be like the transactions in it never existed.
All this process in bitcoin mining is called Proof of Work. It requires a lot of computer power and time to find the nonce that solves the mathematical problem, and so the miner’s computer has to work hard to find that solution and write the new block to the blockchain.
So, you learned that Bitcoin is a cryptocurrency because it’s uses the SHA-256 cryptography algorithm.
That it’s trustless, because you don’t need to trust on anyone to do the right thing, because the system is verified by nodes, also referred as miners. And that anyone can be a miner, adding even more security to the blockchain.
That it is a Proof of Work system, that demands energy, time and computer processing power to validate the transaction and maintain the blockchain.
And that it is decentralized, that no central authority controls bitcoin, that it can’t be stopped or hacked, and that no player in the market has the unilateral power to make any decision.
Many other topics were mentioned in the video that we barely touched their surface. If you want to get into more details on those, please check the list of related videos we left on the description. And feel free to comment on anything you wish to see here in the Crypto Odyssey.
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