Since you guys are still (presumably) stewing over what article to write and how to take on the posting assignment, I’ll post one up as a primer to how it should look like and how this entire thing works1.
What is Bitcoin?
Bitcoin is a Crypto-currency, which depends on the Bitcoin protocol that regulates how it is transferred and generated across a network of computers. Being a crypto-currency means that it is virtual money that depends on an encryption algorithm for its transactional value2. The problem that it tries to solve is that of the centralized authority on which most currencies on the FOREX depend on for their value. Bitcoin advocates say that it is the only currency in the world that is without a central controlling authority, since it depends on a peer-to-peer3 network of computers to not only generate but to validate its value and transactions. Picture it something like this:
In a humongous room, there’s an endless jigsaw puzzle being put together. Everybody in the room is sifting through a pile of jigsaw pieces in the center of the room. These people will each pick up a piece of the jigsaw and try to fit it into the puzzle. Each time someone finds a puzzle piece that fits, a picture is taken of the whole jigsaw puzzle thus far, and is given to the person who finds the piece as a unit of currency, a Bitpuzzle (for example). The value of the Bitpuzzle is determined by supply and demand, i.e. the amount in “real” money someone is willing and able to pay for a Bitpuzzle pitted against how many are available for trade. Every Bitpuzzle is also tracked by a radio chip so that no duplicates can be created, and every expenditure is tracked by a central record that the Bitpuzzle has to be returned to in every transaction so it cannot be double-spent. As more Bitpuzzles are created (by finding fitting puzzle pieces), its value may initially deflate quickly. But its deflation is arrested because it gets harder and harder to find fitting puzzle pieces and so the creation of new Bitpuzzles slows down and stabilizes after a period. Everybody is able to verify that the Bitpuzzle that they own is a valid Bitpuzzle by comparing it to the existing jigsaw puzzle that everybody is adding to.4
That’s basically how Bitcoins and the Bitcoin protocol works, just that the Bitcoin protocol is what regulates this process of generating block-chains5and recording transactions across the entire peer-to-peer network on which it is run.
While the protocol has a solid crypotographic algorithm that is completely open and (because of its open-format) is very secure6, it is still open to what the official Bitcoin FAQ calls “user error”. This means that while the Bitcoin protocol and encryption itself is secure, you are still not safe from your Bitcoin wallet or the exchange itself being hacked, or being robbed at knife-point at a Bitcoin ATM. While being heralded as a mile-stone in digital security practices, it still has its flaws.
The most important thing to come out of the creation of the Bitcoin, hence, it’s not that it can potentially create a true crypto-currency, but that it has huge potential applications outside of virtual currencies7.
- Just so you know (and someone was eventually going to ask this), the specific workings of the Bitcoin is not tested as it is not within the scope of this course. ↩
- https://bitcoin.org/en/faq#who-created-bitcoin ↩
- http://en.wikipedia.org/wiki/Peer-to-peer ↩
- Disclaimer: This is a highly reduced account of how Bitcoin works. I take no responsibility for any of your Bitcoin mishaps based on this article. ↩
- https://bitcoin.org/en/faq#how-does-bitcoin-work ↩
- https://bitcoin.org/en/faq#security and https://bitcoin.org/en/faq#why-do-i-have-to-wait-10-minutes ↩
- http://www.wired.com/2014/03/decentralized-applications-built-bitcoin-great-except-whos-responsible-outcomes/ ↩