JPC’s tech lead, Simon Ward, demystifies the mysterious bitcoin in simple English. What is a bitcoin? How does it work? Why does it work? Is it safe to use? Is it ‘too big to fail’?
In the previous article, we left off with the disappearance of Satoshi Nakamoto, bitcoin’s creator who remains untraced to this day.
You might expect that something as complex as a virtual currency might need a central body to run and maintain it. However, probably one of bitcoin’s greatest assets is that it requires no such thing. It is a decentralised network (a peer-to-peer network), with no one person having complete control of the currency. Like email, the currency is controlled by a protocol. If a country decided to outlaw email and replace it with something else, the decision would be unenforceable internationally, with everyone else still able to happily send and receive messages.
The same applies to the bitcoin protocol. As long as there are just 2 single bitcoin clients in the world able to trade, the currency is still alive.
So, even though its creator disappeared, the currency still flourished and carried on, and whilst there may be many different bitcoin clients, they all run on the one, decentralised bitcoin protocol – bitcoin cannot be ‘outlawed away’.
Michael Hiltzik, a senior economics writer for the Los Angeles Times, suggested that bitcoin’s popularity is a function of “people convinced that money under the control of governments and their central banks has been systematically devalued for political advantage.” As such, it is more resistant to wild inflation and corrupt banks. With bitcoin, one can be one’s own bank.
So what actually is a bitcoin? If I receive a bitcoin in my wallet, can I touch it? How do I use it?
Think of bitcoins simply as messages. As every bitcoin transaction is recorded in one huge public log, everyone knows you have that message (well, not you but your account), and there are people willing to buy it or exchange goods for it. That is more or less what a bitcoin is, a cryptographic message sent to your bitcoin account. Like using email, you can simply send it to someone else’s account, which is how you pay for goods.
This is where one of bitcoin’s vulnerabilities lie. Like physical currency, if someone loses his/her bitcoins, they are lost forever. There is no way for retrieving them if they are destroyed or stolen. Given bitcoin’s current high value, this is a risk some people are not willing to take, since the average computer isn’t as secure as the average bank. To further complicate the matter, you can steal bitcoins without actually having them in your possession. In one recent high profile heist, a news anchor showed a QR code (private key) of his bitcoin on air, and within minutes it was scanned from the television by reddit user “milkywaymasta” and spent. (Click here for details.)
In the next article, we will talk about how to stay anonymous despite every transaction being public (aka tumbling), and provide an overview of popular bitcoin clients.