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Tags: Cryptocurrency and Bitcoin
So, what is “cryptocurrency”?
For starters, it only exists on the internet. You can’t hold a bitcoin. You can’t put a bitcoin in a computer file. What you can put in a computer file is a key to send or receive bitcoin.
This key is a cryptographic key. What does that mean? Cryptographic? It’s a puzzle of sorts. Cryptography can be used to hide information from others who want to eavesdrop - such as the Caesar cipher which was used by Julius Caesar to protect military messages from the enemy. Cryptography can also be used to prove that you have secret information without revealing what that information is. The key you use to control your bitcoin is this secret information. With the key, you can “sign” transactions like you would sign a check.
A key? Send and receive bitcoins? But you can’t keep them in a file? Where are the bitcoins? The cloud ;). There is no one person in charge of keeping track of where bitcoins are, the delegation of bitcoin is overseen by thousands of computers working in unison. These computers, or miners as they’re called, receive messages from people with the aforementioned keys. The messages contain instructions to send bitcoins to a different key. Miners read the messages and verify that the message is authentic.
Where are these bitcoins that are being sent? Bitcoins only exist as numbers on paper. The miners keep track of a giant balance sheet which contains a tally of how many bitcoins each key has. When a key sends bitcoin, the miners take away the sent number of bitcoin from the key and add that amount to the receiver’s key. Only the numbers on the sheet changed, nothing “physical” was exchanged.
That’s great and all, but how do I know people won’t cheat the system? How can I trust these miners? With the key you have, only you can prove that you want to send bitcoins. It is probabilistically impossible that someone else can pretend to be you with your key. Can the miners fudge the books? It would take more than half of the miners working together to alter the giant balance sheet. But they are not incentivized to do so. It costs money to run a mining rig, and what you’re getting is an amount of the cryptocurrency you’re helping to keep track of. In order for your investment into mining to be worth it, you need the system you’re a part of to work. If people lose trust in the system, it is worth nothing. And it would be very difficult for an adversary to take control of more than half the mining power due to the high cost of doing so.
Phew. That’s all there is to know! Just kidding, this only scratches the surface and drastically simplifies what’s happening. But maybe you now have some more questions.