“Chaina bhai, Eclairs laijau na lah!”
“Aee huncha da. Bhai halcha.”
It’s strange, how less we value the coin in our daily transactions. Ignorant of its small value, we forget that saving it can actually yield a hefty sum by the end of the month. After all, isn’t a penny saved, a penny earned. Now, imagine you have a coin. A coin not made up of Gold, Silver or Adamantium. A coin impermeable to touch and safer than any bank system can promise. A coin that is not issued by any banks, private or government controlled. ‘Le Bitcoin’.
Often hailed as the first proper digital currency, the bitcoin is a volatile currency. It also lacks a central issuing authority or regulatory body to govern it. This means that there is no organization deciding when and how many bitcoins to produce. A very different set of rules govern the working of a bitcoin and the addition of value to it. A bitcoin wouldn’t exist if not for a huge network of people and Cryptography. As a digital currency, transactions occur in a Peer-2-Peer network of computers. That’s the internet. The whole point of the internet is to make super-legal copies of songs or movies to download. So, what’s stopping anyone from making copies of bitcoins and growing rich?
Unlike a song or the movie you download from the internet, a bitcoin isn’t a string of data that you can duplicate. Its an entry on a huge global ledger called the “block-chain”. The block-chain records data about every Bitcoin transaction that ever happened. So when you are sending bitcoins to someone, you aren’t sending some files. Rather you are adding a transaction in a big central record. This central record does not have any official group of people to update itself. Yet, anyone can volunteer to keep the ledger up-to-date. So a lot of people keep record of the same thing, to make sure that all transactions are accurate.
To get a better understanding, let’s say you are playing a game of “Teen Patti” with your friends and everyone is broke af. You know you can’t trust anyone. So everyone takes note about who bets how much, who wins and who loses and keeps the note with them. At the end of every hand you compare what everyone has written down. That way even if someone is mistaken or is trying to cheat, that act gets caught. After a couple of hands you may fill the page of your notebook with data about the money movement. Considering each page as a block of data, soon you will have pages of information, a chain of those blocks. Hence a blockchain. This system makes the whole ledger decentralized, yet updated.
As a decentralized system, all it takes is an account number to send or receive bitcoins. Since there is no regulatory body to check for fraud or mishap, this poses as a security threat. I mean, anybody could steal your money, right? Well, this is where cryptography joins the equation, with keys. Keys are chunks of information that can guarantee the authenticity of a transaction. Whenever you make a bitcoin account, aka a bitcoin wallet, it gets linked with two keys, one public and one private. The private key is accessible, only to the owner. So if ‘A’ is sending ‘B’, 3 bitcoins; ‘A’ will have to sign it with his private key and send it to the network. This makes the message unique and unreplicatable. Once on the network, everyone can use the public key to find if A’s signature checks out. So if the public key works, that’s proof that the message originated from ‘A’ and the transaction checks out.
Considering that everyone in the network is keeping copies of the blockchain. Network delays will mean that the receiving transaction requests are out of order. So each person maintaining the ledger, will solve a cryptographic puzzle to add that bit of information to the ledger. This puzzle generated by an algorithm, the SHA256. Which stands for Secure Hash Algorithm 256-bit, was developed by the NSA of the United States. A computer designed to solve such problems usually take 10 minutes to solve each of them. Whoever solves the puzzle, gets to add the next block of transaction to the ledger. People spend tons of money for computers that can solve SHA256 problems to keep the ledgers updated. It’s not all community service though. For bitcoin actually has a built-in reward system. For every puzzle you solve and add to the blockchain, 12.5 bitcoins are rewarded to your account. These people are better described as miners. Since trying to solve a puzzle is proverbial to swinging an axe, hoping to strike it rich.
When bitcoin was first invented by Satoshi Nakamoto in 2008, they had very little value. As of today, a bitcoin is valued at 8351$. So 12.5 bitcoins converts to a hefty sum. Apart from the big payoff, miners are also tipped a small value of bitcoin for every transaction they add to the ledger. It is also interesting to note that for every 210000th block added to the ledger. The reward value decreases by half.. So what started as 50 bitcoins per block,is reduced to 25 and is now 12.5. This will keep decreasing, until there are so many transactions in a block that miners are only paid in tips. This decreasing rate of generated bitcoins is actually modelled after the rate in which gold is excavated from the surface. So keeping a limited amount of bitcoin will actually raise its value over time. At least that’s the idea behind it.
Is it safe to invest in bitcoin? For now, its experimental and volatile. Some of us love it, some say it will go down in flames. I think its a very interesting idea. One that often keeps me pondering what interesting technology will show up next.
Written by Ajottam Das.