A question that still perplexes many: how did a single piece of code take over the world a few years ago and is now evaluated at 153620840000 US dollars. Now that’s a huge number right? Let’s break it down to how it all began with an idea from an anonymous coder who chose to make a currency that’s completely decentralised.
To start off my blog, I would like to talk about how cryptocurrencies work and why they became so popular. Bitcoin relies solely on several lines of code and uses several algorithms to ensure the safety of all consumers and merchants. The most unique aspect of cryptocurrencies is the fact that they’re decentralised. Now, what does this mean? This means that the currency does not belong to a single government and transactions with it cannot be traced back to anyone. For example, if you were to buy 10 phones(because who doesn’t need 10 phones) off a website using 0.5 bitcoin(4518.3 dollars), they would not be able to trace the order to you specifically. The phones would be delivered to the address chosen by you and your transaction would be noted on the global ledger kept intact by millions of people. This decentralisation of currency allowed people to make illegal transactions on the internet without being traced and hence made the concept of cryptocurrencies extremely popular.
People began to buy all sorts of illegal items such as guns and drugs upon the black market of the Internet. The most popular market for illegal goods and services was known as ‘The Silk Road’. This platform was used mainly for money laundering as well as for the sale of illegal drugs of all kinds. The idea of complete anonymity, as well as the fast transaction speed, hooked the billions of internet users. Upon the silk road and other such platforms, anyone with a crypto wallet and some cryptocurrencies could either make a purchase or sell off any good/service they wanted. However, soon after the Silk Road gained popularity the Federal Bureau of Investigation shut it down and seized over 26,000 bitcoin, which would now be worth over 17.5 billion US dollars. The silk road, however, was one of many ‘stores’ on the black market of the internet. To this date, various cryptocurrencies are being used to buy and sell illegal goods and services.
Many people then come to the question, how does bitcoin work if it’s completely anonymous? The answer may seem complex but I’m here to break it down. Bitcoin was created by Satoshi Nakamoto, an alias for a trailblazer no one knows the true identity of. Ironic, isn’t it? Satoshi had in mind the idea of creating a currency which could be used worldwide for fast and efficient internet transactions using completely digital currency while keeping your own identity anonymous and hence protecting your own privacy. This inspiration sparked the flame of bitcoin in 2012. Bitcoin works on the idea of using public and private keys as well as the concept of blockchain.
Public and Private keys can be thought of as your signature on a check. These keys are normally stored in your crypto wallet(which can now be obtained using a plethora of platforms that help you manage your crypto assets and your keys). Now when you buy a certain good from the internet using your cryptocurrency, you have to input your public key. This public key is visible to all and acts as your signature on the official transaction itself. However to authenticate the transaction you also need to enter your private key to make sure your public key is not forged by anyone else. Now the transaction goes through and the items are bought and the equivalent bitcoin are deducted from your account. These public and private keys are generated randomly and one user may have millions of them. Hence this conceals your identity and it cannot be traced to you in any way. The address you entered is not revealed upon the transaction bill. The one downside of using bitcoin or any other cryptocurrency for your transactions is that if you forget your public or private key, they cannot be restored and all your money in your wallet is then gone. Hence many firms handling crypto wallets hold this data for you.
Moving on, blockchain is the ledger upon which all transactions of BitCoin are kept; it extremely fascinating as it relies on puzzles as well as encryption. Blockchain is a technology that works by connecting one block of transaction data to another. Each block has 3 faces or types of data. The first type is the previous hash. A hash denotes the transaction number and is produced randomly and never ever repeated. The first part of the block, the one that stores the previous hash, acts as the bottom of a lego piece that perfectly fits onto the piece below it. The way this connection takes place is that the hash of the previous block( the transaction number of the previous block) connects to itself on the next block which stores that same data. The second part of every block is transaction data. This states the transaction that went through (for example “HappyBoyUsername sent HappyGirlUsername 50 bitcoin”). This part of the block also includes the public key of the person transacting the data. The last and third part of the block is the hash of the block itself. This denotes the transaction itself in the form of a random string such as “fheufn35nss”. This acts as the top of the block and will connect this block to the next one and this process repeats for every new transaction.
Once a block has been created it cannot be edited or changed. This is sole because the data present in the block creates the unique hash and hence editing the data within the block will change the hash completely and would require the hash of every subsequent block to be changed as well.
Every time a transaction takes place, people who want to place that transaction into the official bitcoin ledger are informed. This can be anyone and everyone. This transaction is encrypted using SHA256, secure hash algorithm 256. This basically generates a puzzle/riddle of sorts only computers can understand. It is a 256 digit number that the computer has to find. This process of finding the correct digit takes 10 minutes normally and the first computer to crack it is allowed to place the data into the block. This data is then verified and the transaction goes through. The user that records the transaction is rewarded in bitcoin for doing work and hence is incentivised to work. This process is more commonly known as bitcoin mining and requires a computer that can sort through billions of numbers fast(This is almost impossible to do on a common laptop and needs the proper equipment). Each miner is rewarded based on the bitcoin mining reward at that time. Bitcoin works on the concept of a limited supply as each miner has rewarded 50 bitcoin when the transactions began; after every 210,000 transactions, this value is halved.It is now 6.25 bitcoin per transaction recorded and will eventually become 0.
Bitcoin is extremely fascinating overall but also extremely volatile(it dropped by approximately 5000 dollars within 3 days). As it is primarily just a code on the internet, it has no intrinsic value and is held up by the demand the people have for it. This is the reason as to why it is considered to be more of an asset as compared to actual currency. With the fall of several fiat currencies of the world, Bitcoin and other cryptocurrencies may actually have a chance of becoming more widely used but most investors are sceptical of this situation as it places trust on a decentralised currency and the anonymity allows for criminality to be curated. Bitcoin may be the face of the financial world or may be just another trend. Either way, it acted as the spark that ignited the world of cryptocurrencies.
