To understand bitcoin, start with blockchain technology.
If you read investment and tech journals, interviews of venture capitalists and CEOs, blockchain has been popping up a lot lately. Banks, stock market managers and credit card companies are experimenting with it. Walmart hopes to use it to help improve food safety. IBM pitched it to the British Columbia government as a way to keep track of marijuana, from grower to bong.
So, what is it?
Why, it’s “the world’s leading software platform for digital assets.” Blockchain.com It “has the potential to change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables.” Goldmansachs.com
No, really. What is it?
Blockchain technology is the public online ledger that makes Bitcoin possible.
Bitcoin, as most of us know, is imaginary money existing in the ethernet. It is one of several cryptocurrencies out there. People buy it with real money (also mostly imaginary these days), use it to trade online, and when it has increased in value, sell it back for cash.
Early adopters were darknet criminals who laundered money and traded illegal drugs. In 2012, and again in 2013, the FBI shut down what was probably the biggest illegal platform, Silk Road. The founder, Ross William Ulbrict aka Dread Pirate Roberts is now serving a double life sentence.
There have been subsequent raids, shutdowns, arrests, and trials of various purveyors of contraband, but that hasn’t dampened the cryptocurrency trade.
Here’s what Bitcoin is worth today*:
Bitcoin’s success is attributable largely to blockchain technology.
Blockchain, in (overly) simplified terms, works like this:
In any transaction, everyone involved has to:
- Know the parties are who they say they are (authentication), and
- Trust all parties have the right to and are able to do what is being done (authorization).
Ordinarily when you go to the grocery store and pay with your credit card, this is what happens:
- A credit card reader connects to a third party, which
- Confirms you are (probably) who you are
- Approves the payment
- Transfers money to the grocery store
- Sends you a bill, and
- You transfer money from your bank to the credit card.
In other words, most of us depend on a centralized system, which requires third parties to confirm transactions. It’s expensive because the outside authenticating party charges for their service, vulnerable because hackers only have to access one system to attack sensitive and valuable data, and cloaked in secrecy.
Blockchain technology, on the other hand, is decentralized. Everyone involved has a record of every transaction, and all transactions are confirmed by everyone. The most popular record becomes the official record and is kept by all of the “nodes” in the network. Since each record is held by many, records are almost impossible to tinker with, and transparent to anyone who cares to look them up.
It works a little like Wikipedia, where many writers contribute and update entries. The difference is that Wikipedia data is controlled on a central server. Blockchain uses the participants to authenticate and store records. If you try to alter one record, it is immediately flagged as fake by all the other true records.
Transaction information is stored in electronically connected “blocks.” When one transaction is complete, a new one is added to the “chain” of blocks. Each block carries a bit of identifying information from the prior block. It’s kind of like a line of people, where each tells the person next to them a secret. Every secret is both in the head of the holder and the holder’s neighbor, and thus harder to lose, forget or deny.
The mechanism for how transactions are authenticated and tamper-proofed is not clear to me. If I have it straight, it involves “miners” who compete to figure out the truest information, who then store the information in blocks and plant a “hash,” a secret code to both identify the transaction and to connect that block to the next block. Winning miners get a bit of cash for each correct solution. Expert miners can do very well. Many are college students who work out of dorm rooms, trying not to trip circuit breakers and alert college administrators.
Not everyone is high on blockchain technology. Detractors say it is too complicated, too slow, too expensive and dangerous. One of the early users, Stefan Thomas describes how blockchain works small scale, but becomes uncontrollable when lots of people get involved and lots of money is at stake. It is clunky, frustrating and potentially unstable. Better, writes Thomas, to figure out ways to keep mainstream systems from getting too centralized in the first place (coincidentally, he sells software that does just that).
Blockchain technology is also an energy hog. All those miners verifying and tagging all those transactions takes a lot of mega-wattage.
Unstable and energy inefficient it may be, but big names are pouring money into blockchain startups. Investment bankers — who love complicated systems which hide profits from ordinary schmucks and tax collectors — are particularly interested. That alone is probably reason enough to know at least a little about it.
A bubble? A revolutionary technology? The mechanism that brings a future dystopia?
On the edge of my seat.
*Update: Bitcoin value 1/10/2018, Source: Coindesk
Sources, resources and dire warnings:
Thank you Descryptive.com for the header image.