Bitcoin became the breakout star of fintech and an internet
Bitcoin became the breakout star of fintech and an internet sensation back when its prices spiked to incredible heights at the end of 2017. Since then, the media attention towards the pioneering cryptocurrency may have faded but it still continues to command a great deal of interest. Even though there is still so much talk about Bitcoin, some laymen are probably still wondering: what is a Bitcoin in simple terms?
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In this article, we try to break it down for you in the simplest possible way, so that even a beginner who has very little idea about the crypto space can understand it.
After this, you should be able to explain what a Bitcoin to any other layman like you. Given education and awareness are key factors needed to boost Bitcoin adoption, we will try to keep our explanation free from jargon and complexities as far as possible.
What Problem Does Bitcoin Solve?
We all know that necessity is the mother of invention. This means that most inventions came into being to meet a certain need or solve a certain problem.
Before delving into the details of what Bitcoin really is, we must understand what problem it tries to solve.
In a world where most things are becoming digital, payments must catch up as well, right? Well, yes, but there is a tiny problem with that.
On a digital medium, you can make countless copies of the same asset or document, which means you could end up in a loop of what is called “double spending”.
If your digital payments are managed and tracked by a centralized authority as it is in the case of PayPal, then this problem can be taken care of effective.
But having a central authority comes with its own set of problems: possibility of errors on the part of that singular authority, abuse of power and so on.
To address these issues, Bitcoin as a cryptocurrency was born out of the ideas of an anonymous creator: Satoshi Nakamoto.
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What is Bitcoin?
Bitcoin, to put it simply, is a form of money that cannot be owned in a physical tangible form.
It is stored virtually, on hundreds of computer servers, powered by what is called blockchain technology.
It is a decentralized cryptocurrency which can send in a peer-to-peer, direct way without having to worry about double spending.
How Does Bitcoin Work?
All Bitcoin transactions are tracked via a single ledger or database. This database is naturally huge, and so as to prevent centralization of control, it is also a widely distributed one.
It is stored across hundreds of computers all at once. So, you can’t just edit an old transaction record and spend it somewhere else again, without alerting all the other nodes. All copies are simultaneously updated.
Who will be in charge of updating a transaction and why it will be acceptable to all the other nodes at any given moment, is decided by a consensus mechanism.
Bitcoin uses the Proof Of Work mechanism, where you get to validate transactions and update the ledger if you have a certain capacity in terms of mining equipment.
At this point, you are probably thinking: “Mining? Wait, what?” That is a very pertinent question and to answer it, we will take you to the next section, which discusses mining: how Bitcoins are produced.
How is Bitcoin Made?
At the very outset, Satoshi Nakamoto decided that Bitcoin would have a total supply cap of 21 million and it will be met by the process of “mining”.
Blocks of transactions are added to the ledger through this process called “mining”.
Miners must solve complex cryptographic (high order mathematical) problems to be able to validate transactions and create blocks. In this way Bitcoin is produced. The mining difficulty goes up with time, making sure less and less is produced.
For their work, miners are compensated by means of a certain number of Bitcoins that they get for themselves.
The Bitcoins, the price of which is dependent on demand and supply, can be sold off for fiat, or used in the context it was meant to be used.
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