Bitcoin Whiteboard Tuesday – What is Bitcoin?

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Hello guys and gals, I’m Ariel from 99Bitcoins and welcome to your very first lesson about Bitocin!

In today’s video we’ll be asking the most popular question – the #4 most searched query on Google in 2014 – “What is Bitcoin?

 

This sounds like a simple question but it tends to get some complicated answers. In this video we’ll make sure to cover all the bases but also to keep it simple. If you find anything interesting that I didn’t talk about enough, there’s lots more to read about it if you search for it – I urge you.

The correct answer is “The first decentralized digital currency”, but that’s quite a mouthful. So before we begin to understand this, lets start with a more basic question that most people usually don’t ask themselves: “what is money?”

Money, ultimately, is simply the tool that we use to exchange value. Throughout history we’ve used lots of things as money, from seashells, to precious metals, to salt… The most popular money, historically, has been gold. There’s good reason for this: gold works really well as money. It’s rare – so it’s not worthless, and it’s tangible so if you’re holding it in your hand it’s probably yours. Pretty simple. And this worked for thousands of years, no matter what social institutions exist around you, no matter who the king or government is at that particular time. Gold just worked.

Then came along a new invention: paper money. When you think about it, for someone who uses gold their whole life, paper money is a hard sell. Trust paper instead of metal? Well, paper money actually started out as just a representation of gold. For e.g. the US Dollar was originally just a “gold certificate” which is a piece of paper saying you own some gold that’s sitting in a vault at the treasury. In other words, people never trusted paper money, they trusted the government to hold the gold for them.

Time passed and the US has since abandoned the so-called “gold standard” during the 70’s and today the US Dollar is actually a “fiat” money. “Fiat” is a Latin word for “it shall be” which is another way of saying “forget about gold, let’s all just agree that this paper is worth something, ok?” And that apparently works, because we’re all using fiat money these days and we don’t have to have “hard currency” or “tangible money”. Paper money has some advantages and disadvantages. The biggest disadvantage is that paper is easy to counterfeit, something that’s practically impossible with gold. Almost anyone can simply print paper at home. But there must be advantages that make it worth this trouble, right? Fiat money is actually a form of digitization – that is, we’re dealing with numbers, not metals. This makes money much easier to count, manage and move. In fact, the vast majority of money these days are actually just numbers in computers, believe it or not.

Wait a minute, so if money today is digital, how does that even work? I mean, if I have a file that represents a dollar, what’s to stop me from copying it a million times and having a million dollars? This is called the “double spend problem”. The solution that banks use today is a “centralized” solution – they keep a ledger on their computer which keeps track of who owns what. Everyone has an account and this ledger keeps a tally for each account. We all trust the bank and the bank trusts their computer, and so the solution is centralized on this ledger in this computer. Computer scientists though, weren’t pleased.

Decades later in 2008, an anonymous researcher publishes a paper describing how to solve this problem without a centralized solution – that is, without a bank. He called it “Bitcoin” and went on to describe how you can make a ledger that doesn’t rely on a single particular bank – this is, a decentralized solution. This may sound confusing, or at best like science fiction. How does something work if it’s decentralized? You actually already know the answer to this, you’re using a decentralized solution right now to watch this video: the internet.

Think about it: nobody owns the internet. It’s the most vast and powerful network that humans have ever created – but there is no “Internet, inc.” – so it’s decentralized. Lots of individuals and private companies all build the infrastructure of the internet, across companies and border and even ideologies, and it works – much thanks to profit motives and economic interests. So if the internet decentralizes information technology, how does Bitcoin decentralize money?

At this point many videos would start getting technical and complicated, but we want to keep it simple. In Bitcoin, the coins (or rather the transactions) are all recorded in a ledger. So far, nothing new. The big deal with Bitcoin is that this ledger is public and shared. Not only, it’s also maintained by the public. Thousands of people have a copy of this ledger around the world, and anyone can download and verify this ledger. In Bitcoin, instead of accounts, money is moved between addresses – kind of like email.

Usually people get concerned when they hear about this ledger being public. Isn’t this a privacy problem? Like most privacy issues, it’s complicated. Whatever you may have heard about Bitcoin – it’s not really inherently anonymous or identifiable. We will touch on this in a later video.

OK, maybe it’s not anonymous or something, but isn’t this a security problem? Well, if you think about it, it’s not a security problem. If you think that this public ledger is easy to hack, try to imagine hacking the English language – you can probably hack into Oxford Dictionary computers and change some definitions, but that wouldn’t be a big problem. There are lots of copies of dictionaries all over the world – you can’t fool everyone by hacking only some of the copies. In Bitcoin, the dictionary that helps everyone stay on the same page is the ledger, and this ledger is called the “Blockchain”.

So now that we understand how Bitcoin is digital, and how Bitcoin is decentralized, we can finally say: “Bitcoin is the first decentralized digital currency”.

But what does this all matter? Is Bitcoin going to change the world? That’s a question we’d all like to know, eh? Well, let’s start by considering that Bitcoin is non-geographic. If economies fall or governments change, Bitcoin won’t be affected like fiat currencies. It is also much more internet friendly, which means online commerce can improve. But the biggest winners here are probably the billions of people across Asia and Africa and other places that have an internet connection but have horrible banks.

I mean, with my bank I can shop online and send money across the world even though it’s really slow and quite expensive.  But in Kenya, they use cell phone minutes as money, they buy groceries with air time. In Argentina people are exchanging money in the black market because of inflation that makes it impossible to save money for a rainy day or for retirement. Non-geographic, global money is exactly what these people need – it works even if your government or banks don’t work.

Of course, Bitcoin isn’t only offering an economic alternative, but also a technological alternative. After all, Dollars today are numbers on a computer which represent numbers on a paper which used to represent hard metals, according to laws written hundreds of years ago. Bitcoin was born in the 21st century, which is why it is able to do lots of things that make people call it “smart-money”. For the same reason phones today are called “smartphones”, because they have more features than cellphones from a decade ago. We won’t get into details, but Bitcoin has some advanced features that you don’t get with the old money that we have today (things like colored coins, smart contracts and multisig).

Of course, businesses have started accepting it all around the world, some big names include Microsoft and TigerDirect and a whole bunch of airlines. There are websites to help you find Bitcoin-accepting businesses. In fact, I got my paycheck in Bitcoin for over a year – and there are lots of people offering professional services in exchange for Bitcoin.

The implications for Bitcoin are obviously hard to measure. In reality there is a whole industry, fields of research, and grassroots movements growing – much like there was when executives from AOL and young students were all trying to explain to people what is this “internet thing” back in the ‘90s.

So I hope you’ve enjoyed our very first edition of BWBT and I can’t wait to see you in our next video. If you still have any questions or comments on the video feel free to leave them in the comment section below. Bye for now!

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Ariel Horwitz

Ariel Horwitz is a Bitcoin activist, educator, and consultant. He has been involved with the Israeli Bitcoin Association, The Bitcoin Embassy in Tel Aviv, and has founded AlefBit - the first Bitcoin education website in Hebrew.

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48 Comments

  1. Edwin-john Anebi Agbo on

    good evening,
    is it really possible to earn free bitcoin online?
    i also saw a bitcoin mining hardware on alibaba, how real can it be and how does it work?

  2. As a lawyer and (former) programmer and sysadmin I am intrigued by Bitcoin and Blockchain technique. Keep up the good work!

  3. Awesome lesson.
    This is my first lesson about bitcoin.
    Hope i can understand all about this type of new coin (bitcoin). Thx for this awesome website.

  4. Thank you 99bitcoins. It was an enlightening viewing. I noticed you imply that the value of bitcoins is not influenced by geography but how come merchants here in Nigeria exchange it based on the black market rate for dollars. So we pay more per bitcoin than people in the US for instance. Are there trusted merchants who can sell to one at the CBN rates in but are not based in Nigeria?

  5. Great video, thanks for putting it together. You’re all doing great work here which gives me some hope for our world’s financial future.

  6. Thank you for the explanation, I feel a little less confused. Looking forward to the next video.

  7. Hi! i want to know that the transactions in bitcoins are safe or not, I mean that could it be tracked and hacked?
    and another thing how do i use my bit coins?

  8. Great and understandable video, thank you so much for sharing… one question:

    You say you get your paycheck in Bitcoins, so how do you pay your rent, electricity, phonebill and all the other normal monthly expenses?

    • Hey Henrik, today you can pay practically anything with Bitcoin using a Bitcoin debit card like Xapo or e-coin.

  9. Making so exciting sense even to me! Now I’m wondering how I can go ahead and make my hypnotherapy business accept bitcoin?

    Bitcoin also helps to change everything else. The world is not anymore seeing older folks in suit teaching the public, but young people in T-shirt doing the teaching. Love it.

  10. I like this simplified explanation of bitcoin and I look forward to the next videos. One question though, why, if this is a beginners guide are people talking about hacking and nodes and other migraine inducing computer language based words. Can ye please keep it simple and stop the brain from entering into a parallel universe.

    • Thanks for the feedback, we try to keep it as simple as possible without using technical jargon, but I guess Bitcoin is just too hard to explain in one or two sentences.

  11. Chaitanya Bapat on

    It was a great read. However you still didnt answer the question – You said bitcoin works with public ledgers that can be viewed by anyone. However its not hackable since “one can hack 1 copy of dictionary but not all other copies” However still question remains.
    What if i hack 1000 copies of ledgers…how will we differentiate between hacked and true copy..
    and how does hacking still not matter?. isnt it wrong?

    • It doesn’t matter if you hack a 1000 copies as well. As long as you don’t hack more than 50% of the copies (which is a lot) the system is pretty safe. Also, in order to “hack so many copies” you’ll need so much computing power that the cost of it will not be worth it probably. You’re probably better off just using that money to buy bitcoins than to hack the system. Hope this makes it a bit clearer.

    • Hi Chaitanya,

      Even if someone were to hack all the copies, the “changes” they could make would be very limited. In fact, they could make almost no changes whatsoever if you are a fully verifying node, since the cryptography wouldn’t allow you to control coins that aren’t yours. If you are not a fully verifying node, you are essentially trusting other nodes on the network and a hacker could possibly fool you, however that would also be limited.

      Bitcoin itself, the blockchain, would still be quite secure. In fact, even if there is only 1 remaining copy of the blockchain on Earth, that is still enough and theoretically allows you to notice that all the others are not legitimate. This is explained by the Proof of Work system used in Bitcoin mining. The Proof of Work system essentially makes mining costly and so a hacker who wants to actually fork the blockchain would have to out-compute the whole network for a successful hack, and that is quite a challenge. Hopefully a new episode on Bitcoin mining will be published soon.

      • Nareshreddy Kola on

        Hey Ariel,

        It was a great read and thanks for the clear explanation.

        Since discussion going on hacked copies so thought of adding my query here itself instead of publishing it as a new comment.

        What would happen to hacked and modified copies of ledger? Is there any internal mechanism to restore everything to sync with all other copies.( I doubt it as you need to centralize one copy and its not the base for Bitcoin).

        Can someone get access to other users wallets?

        • Well, that really depends on what kind of “hacking” is done. It really makes the question hard to answer. For details on security weaknesses you can find more information here: https://en.bitcoin.it/wiki/Weaknesses

          As for how is the system immune to modified copies, well that’s easy. The modifications themselves are very limited because everyone verifies the cryptography so information can’t really be spoofed (such as owning money that you don’t actually own). And even if something is changed (such as the order of transactions), having at least one “legitimate” copy will allow everyone to compare and see which is legitimate and which isn’t. So really, “hacking” copies of the blockchain is quite useless. This is thanks to Proof of Work which is used when mining and writing the blockchain. We’re working on the next video which will be exactly about this.

          Getting access to other users wallets can only be done by having access to the private keys. Theoretically this can only be done via digital theft or social engineering, and this is a problem we have been dealing with for a while, with passwords and identity theft (though private keys generally should have better security than passwords). It is a very complicated field of information security and probably has more to do with computers in general rather than Bitcoin specifically.

          I think the biggest security issues Bitcoin faces are more about securing personal wallets, rather than system-wide problems. Securing personal sensitive information in our age is a big deal and lots of people have been working on it way before Bitcoin showed up. Bitcoin may prove that this is a bigger deal than most people think because until now you didn’t have to secure cash inside your computer.

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