Definition of a bitcoin
In this article we will look at the work of Bitcoin how it functions using a very basic real life scenario. So let’s start by understanding the definition of a bitcoin Bitcoin is a digital de-centralized. This intermediated trustfulness fiat currency. Now I’ve highlighted each and every one of those words because they’re each individually very important in describing the bitcoin. But let’s get to that later.
Let’s take a basic scenario.
A real-life simpler case if you may call it A B C D E and F are six individuals and their friends. They hang out regularly and love going to pubs. They all believe in going dutch with their beliefs. However, the pubs in their area usually refuse to make separate bids due to the extra hassle. Thus every time the bill arrives one person pays the entire amount and keeps the bill to figure out later what amount everyone Ozen this system worked for a while.
But soon they started having conflict. Some members disagreed with the amount they owed each other and other people drank more than they could afford and thus couldn’t pay up later. This was an issue so he suggested that they keep a common record in a notebook that created accounts and common Ledger in a notebook and added to that after every session. They used to keep this notebook in a place accessible to everyone but one day it realized that some of the numbers didn’t match up and some values had been altered.
This meant that they couldn’t trust each other anymore and he realized that having a common book simply wasn’t enough. He thought about it a lot and came up with a brainwave. So next day he called for a meeting with all the friends to introduce the new system.
He said Hi guys.
I’ve come up with a feel-proof method to ensure that we all manage this issue he says I’d hand everyone a notebook. We will all keep a record of every bill and who owes whom how much. This way we will all know how much you have in your account whether you really or someone that money etc. Next time for example if C O’s f a cumulative amount for the past two times we went out will check out
our entries to see if this is right. When we’re doing this we will add up every value and calculate the remaining balance. But we shall not Durrett if more than 51 percent. That is a majority of us agree that the proposed transaction is valid and approve of it and a better books with a permanent marker and validate this with our signatures. This will ensure that no entry is erased and every entry is validated. And entries effect can only be reversed by proposing a new transaction to all of us. Thus if someone wants to cheat the system he must beat a minimum of four books.
In this case, without the original owner’s permission, the effort and cost required to do this itself will negate any benefits he hopes to make this way we don’t need to trust each other. We simply need to trust the system.Now imagine that what they’re exchanging isn’t physical money but the form of digital and fictional cash. This is the bitcoin.
Let’s examine some of the characteristics that we mentioned in the definition.
The first is that it is a digital currency. Bitcoins have no physical form. There are only digital. However there are slightly different from digital cash digital-cash is stated in its local currency whereas Bitcoin is like any other currency. It has its individual value which is denominated in terms of every individual currency out there for example the rupee the yen or the dollar.
The second point it is de-centralized notice how our group in the example shifted from maintaining a common record to maintaining individual records. This is what we call a decentralized database system could it was dis intermediated which meant that there was no one central person who used to oversee the approval of transactions.
Now Every Group in bitcoin network.
Everyone in the group gets involved in the approval process and a minimum consensus of 51 percent is needed to approve a transaction. Fourth the system is stressless and anonymous no friends in that group needed to trust each other to participate.
They simply needed to trust the system. Now the bitcoin network unlike our example don’t have public identities everyone’s identities are hidden.And their identities appear as a random alphanumeric code.This is achieved by a process called hash cryptography which people look at in detail in a different articles.
The system is immutable which means no previous transaction can be edited to reverse the effect of a previous transaction and time your transaction must be proposed to the system. Feet just like most free market currencies today. Bitcoin is a fiat currency.
This means that it is not backed in value by a tangible good but an intangible good that distrust it has value simply because the member of the group believes it has value. They believe that everyone participating in the network will accept the value of this Bitcoin and use it, as legal tender just like any currency except in a currency the individual involved, is the trust of the government that issues it 7.
It’s cheaper since there is no middleman in this picture. And the friends are just using their own currency. They can exchange money at a minimum cost without being an intermediary. It is also more secure. And there are examples the friends use signatures to identify themselves with the proposed transaction of over Bitcoins use a much more complex cryptographic method called hash cryptography to do the same thing. Next, it is deflationary.
There is going to be an upper limit of 21 million bitcoins that will ever be mined. Also, each bitcoin can be further divided into 10 million units and ensuring that the Bitcoin doesn’t fall prey to inflation while ensuring that the sufficient quantity to transact.
Now, this wasn’t the first time that the concept of a digital currency was tried out.
However previous attempts feel that solving the issue called the double spending problem this problem is present with physical money. That’s one unit of digital currency that can be replicated allowing the user to use it more than once. Bitcoin solves this issue using a de-centralized verification model.