August 20, 2020

Bitcoin, the origin of the decentralized economy. Part 2.

Bitcoin is two things at the same time: A payment system, such as Paypal, and a currency (€, $, etc). With a capital B is the payment system and with a small b is the currency, although it is commonly and mistakenly associated with the currency with the capital B.

One of the biggest controversies in our current system is the privacy of transactions we make over the Internet. When we make transfers by credit card, PayPal or other payment gateway, our personal data is exposed as it is a requirement for all service providers. In the case of bitcoin is different, and this is one of the features that makes it a completely disruptive payment system.

Thus, the use of bitcoin allows us to safeguard our personal data when making a transaction, because through the blockchain technology it is not necessary the participation of a third person to make a transfer, thus being born a payment system totally decentralized, without the need for intermediaries and with an incredible improvement in both security and efficiency. It should be noted that the bitcoin, and ultimately the Blockchain, is not 100% anonymous. Due to the transparency offered by the technology, it allows everyone to follow all the movements between wallets, being able to identify certain wallets such as those of the Exchanges or wallets previously identified by third parties, making privacy pseudo-anonymous.

It is said to be a currency that eliminates the middleman, but in reality it only eliminates the need for banks or governments to transfer value. This is because there are the so-called miners (intermediaries - machines) that execute the transactions and create new bitcoins, we will talk about them later.

Another big problem that bitcoin came to solve is the problem of hyperinflation. Many governments when they decide to print too much money devalue their own currency, with bitcoin that doesn’t happen, there will only be 21 million by the year 2140 and the coins are created on a regular basis and approximately every four years the creation of new coins is reduced by half (a phenomenon known as halving). With this system it was possible to create a scarce digital currency, which many already recognize as “digital gold”.

In fact, this last point is the most relevant of all, since it managed to avoid what is known as double spending, the main problem of any act executed on the Internet: it can be copied. Thanks to Bitcoin, each transaction in your blockchain is unique and unrepeatable, identifiable and cannot be deleted or removed. This is the real “magic” of Bitcoin.

Bitcoin Label

The Blockchain is the great gift to the world, a system that has an infinite number of utilities outside of crypto currencies, but simplifying a lot, it’s just a database on steroids, immutable and above all, decentralized. There are copies of the blockchain everywhere and for that reason it cannot be manipulated. Anyone can consult it at any time. Every transaction in history is recorded forever. The database consists of a record of all shipments and all existing wallets with the current balance available in each.

We understand the name Blockchain as its literal translation from English, chain of blocks. Each block includes all the transactions that fit in that block, every ten minutes or so, a new block is created. The new blocks are protected by very complex mathematical formulas that can only be solved by brute force, i.e. by testing results one by one. The larger the network, the more complex the mathematical puzzles to be solved by the miners and their difficulty is automatically adapted according to what has happened in the previous blocks, approximately every 2 weeks or 2016 blocks. The miners are sophisticated equipment created specifically to solve these complex puzzles. Today each computer does trillions of operations per second and there are hundreds of thousands of these computers spread around the world.

Once the problem has been solved, all the transactions that were on the waiting list are recorded within the block and the other miners must check that the puzzle has indeed been solved. The checks are much simpler and faster. When the first miner solves the problem, the block is added to the network and the one who has solved the problem receives a reward in bitcoins, and that’s how new bitcoins are generated and put into circulation. Every four years the rewards are halved.

So that the blocks can’t be changed, each block contains what’s known as a hash, which is like a unique, unrepeatable security number that, if you changed a single comma of information contained within the block, would change the hash completely and that block would be invalidated as fraudulent.

The blocks are linked together because the last block apart from its own hash includes the hash of the previous block (you begin to understand why this is known as a “block chain”, don’t you? This chain hash is what makes the blockchain incorruptible.

The blockchain works by the P2P (peer to peer) system, that is, one to one (user to user) which is the commonly known system for downloading movies or software from the internet and it works as follows: All users connect with each other and those who have the same movie from each other download a portion of it. Satoshi was inspired by this technology to create Bitcoin, but first he had to solve the well-known problem of double spending. In a digital world where everything can be copied, how could he create a currency that could only be sent once and could not be sent again? The solution was the key to everything. Actually, when we send bitcoins we are not sending bitcoins, because bitcoins never move, they just change hands (wallet).

The system works with two keys. One is the public key and the other is the private key. All the miners with the public key can check that you are the owner of that private key associated to your wallet without the need to know which is your private key, since the blockchain is open and anyone can consult it in real time. If a bitcoin is “sent” from point A to point B, the miners register that operation and when they validate the block assigned for that transaction, an accounting change is registered in the so-called general ledger and the wallet of point B becomes that bitcoin that it has received. In this sense, if the wallet of point A tries to send the bitcoin again, it will not be able to do so because the general ledger shows that it no longer has that bitcoin, only the wallet of point B will be able to send that bitcoin by signing with the private key of its wallet.

In short, through bitcoin transactions can be carried out without the need for private intermediaries, since it is the miners’ network itself and the community that does the work of verification to avoid the double expense.