The first in a series of articles written to help people take an initial look inside the weird & wonderful world of bitcoin.
There is no doubt about it, getting bitcoin can be tough. Understanding monetary economics and blockchain technology at a pretty advanced level has almost been a pre-requisite to getting to grips with this new form of money.
The 'Getting Bitcoin!' series aims to simplify this, taking small pieces of the puzzle and explaining in a comprehensive and straight forward way, always using a real world metaphor where possible!
First up, What is Bitcoin?'
"What is Bitcoin?"
First lets look at money.
To understand bitcoin we need to understand money. Money is a scorecard.
It represents the labor we have been paid for and the economic value that we have created. When we are paid, it is an acknowledgement that you have created economic value. The more money you have, the more value you have created.
If you’re work shy, you likely don’t have any. It really is that simple.
Our system of money is a scorecard on who has and hasn’t worked and then what they have subsequently done with that money, (whether they have spent it).
The role of banks
Banks are the current masters of these scorecards (read excel spreadsheets).
As money is transferred from person to person it is done by the banks making adjustments in the scorecards, otherwise known as their ledger of accounts.
Money in your bank account is an acknowledgement from the bank that they owe you an amount, no actual account where your deposits are held exists, that is merely fictional.
If you transfer money from your account to a beneficiary, the bank makes an entry into the ledger to recognise that they owe you less and now owe the beneficiary more. The notification of ‘Funds Received’ really just means they have adjusted what they owe from you to them, there is no actual movement of funds.
If a transfer is made to someone from a different bank, it increases the size of the chain. The senders bank reduces what they owe you, setting up an amount owing to the beneficiary bank, who sets up an amount owed from your bank and then an amount owing to the beneficiary, the person you paid.
The ‘iOU’ is passed from person to bank to bank to person. This chain-effect can become quite convoluted; throw in an international payment and it is possible the two banks don’t ‘know each other’ or put another way, have accounts with each other.
In that case, the chain goes from person to bank, to intermediary bank, to bank, to person. This can become quite a lengthy process and is the reason international payments can take over a week.
With over 30,000 bank branches around the world we can consider the banking network to be a group of ledgers each holding lists of who owes who and how much. The function of the banks is to maintain these ledgers.
So if it is really as simple as ledgers held by each bank, what bitcoin is proposing is why not flip that on its head and have just one master ledger?
A new way of banking
By removing the various banks and their ledgers and merging them into one global ledger a lot of the inefficiencies of the banks are instantly removed.
It becomes as straight-forward to send money to someone across the world as it is your neighbor; takes the same time and costs the same in fees. For the internet-age, this seems like a revolutionary step forward.
Instead of having bank branches where we go to open accounts ,we can open a bitcoin account from anywhere in the world. Consider it like plugging into one centralized ledger and having your money sent from person to person as you so chose. That centralized ledger you will hear referred to as the blockchain.
Bitcoin is not solely a digital currency. Bitcoin offers more by means of a payment network that has the potential to fully displace the entire banking system.
Instead of going to the bank, opening an account and transferring money through the chain of banks and individuals, bitcoin can do it all in one simple entry - meaning you can do it from the beach, the mountains or the comfort of home! Direct, sender to beneficiary, no middle-man, with just one small ‘miners’ fee.
Bitcoin dis-intermediates, it simplifies what is an outdated system of banking that once worked but no longer serves our needs.