By: Aaron Erber  | 

Understanding Bitcoin

Cryptocurrencies, specifically Bitcoin, have created quite the buzz over the past decade, especially this past week with Tesla purchasing $1.5 billion worth of it. Yet the focus has mainly revolved around the price. Since Bitcoin’s inception in 2009, created anonymously by a man or group under the name “Satoshi Nakamoto,” owners of Bitcoin have seen extreme returns. However, what actually is Bitcoin, and what value, intrinsically, do they possess?

On an overall level, Bitcoin is a decentralized currency, which means that there is no overarching authority watching over or influencing and maintaining its price — it is not the subject of a corporate power’s policies. Because Bitcoin is peer-to-peer, a transaction of Bitcoin doesn’t go through a financial institution. In order to compensate for the lack of an authority that will back the currency and the authenticity of transactions, Bitcoin uses many advanced technological methods to ensure the securitization of each account, transaction and overall network.

Bitcoin is fully digitized and stored in a virtual wallet on a device such as a computer. Each user must create a secret key that serves as their own personal “digital signature.” A secret key is the equivalent of a physical signature or password. This secret key is then paired with a public key that, as the name implies, is public. The private key/public key connection is vital to the security of accounts. 

When a user creates a private key, a public key is automatically generated that corresponds to a private key through a method known as “hashing.” Hashing associates a long string of numbers and letters with the private key. The most important concept with hashing is that it’s nearly impossible to know what the private key is based on the public key. For example, suppose someone makes their private key “password,” The generated public key might be “21HE9932T08L”. It is crucial for the system that no one can determine the private key from the public key —  someone cannot deduce that “21HE9932T08L” means “password” — the reason being that if it could be deduced, anyone can sign a transaction in another person’s name using their private key. Now, creating a system that functions in such a way that cannot be reversed engineered (public key converted to private key) requires a lot of mathematics and use of computer power, yet Bitcoin has been able to achieve this through its cryptography and the use of the elliptical curve.

Now that the users are secure, the Bitcoin network needs to ensure that transactions are secure and that there is trust in the overall network between all of its users. This is where the blockchain comes into play. The blockchain is a ledger open to all users that stores a history of transactions. Each “block” in the blockchain represents a certain amount of transactions. When a user wants to use their Bitcoin and make a purchase, they must send out a request. These requests are seen by miners who are incentivized to create a block in the blockchain. Creating a block requires solving a complex mathematical problem that uses up a significant amount of computing power. Once a miner completes it, others will verify its correctness, the miner will be rewarded fractions of a bitcoin, and a block will be added to the blockchain with the original request and completed transaction. Every user can see each transaction and which public keys are associated with them. When a new block is added to the chain, all of the content of the previous block is used to create a formula for generating the next block. This creates dependency as each block is linked to the previous one. Therefore each successive record created makes it increasingly difficult to hack the blockchain, as it would require the entire chain to be hacked, which would entail using an exorbitant amount of computing power in a short amount of time i.e. before the next block is created.

Bitcoin is extremely mathematical, but on top of that, it relies heavily on its user population. The way it was created was to the point that the more Bitcoin is used and trusted, the more secure it becomes. It uses people’s self-interest and their strive for money to ensure the future of its worthiness. More recently, Bitcoin and its community have been seeing increasingly more attention and demand which has increased its price to all-time heights.


Photo Credit:  Pixabay

Photo Caption:  An inside look at the inner workings of bitcoin and its blockchain