Oversimplified explanation of Cryptocurrency and Bitcoin

2008 recession caused due to bad mortgage investments by banks ,made many people loose their jobs and money.One among those was Satoshi Nakamoto.

Not an actual Coin!!!

Citizens trust the authority of government and banks to prevent fraud and bad investments .

So,He decided to give a transaction system which would be alternative to  centralized system of banks and government . 

 Before  'fiat money' gold was considered to be the base for printing money.

So, a country with more gold reserves would be rich and the country with less reserves would be poor.

To avoid this FIAT MONEY was introduced.

What is 'Fiat Money'

Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity.

Fiat in latin means "it shall be" .
Government is in control of printing money .This means it is centralized.
Paper `fiat` currencies have no intrinsic value and are used solely as means of payment.

 Some Problems associated with paper money:

1.Record of a transaction is either between two or group of person(bank) .
Ledger is not maintained publicly.

2.Transaction takes more time to be validated and entered in ledger.

3.Since a third party is involved to validate i.e bank ,we have to pay the bank processing charges.

4.More the system prints than is needed , the value of a currency decreases which gives rise to inflation ,depression and recession.


As an alternative to payment through paper money  ,virtual token was created called Cryptocurrency.

 The technology behind Cryptocurrency is  called 'blockchain'.

A blockchain  is a distributed database that is used to maintain a continuously growing list of records, called blocks.

Theory for blockchain has been around for a while ,but it was first implemented in Cryptocurrency Bitcoin in 2008 .

In bitcoin , the transaction is validated and maintained on ledgers by miners on the network.

The ledger can be accessed publicly and each transaction can be tracked to it source ,which goes down till the first transaction in bitcoin.

Miners are the person who provide their machine i.e computing power to validate transaction and maintain distributed database,in return they are rewarded by allowing to generate bitcoins.

Generating Bitcoins is solving complex mathematical problems whose input are the transactions and the output is a hash number(Bitcoins) in a specific format.

More the number of miners on the network more difficult it gets to solve the problem and less coins are generated as time passesby.

Now the interesting part ,How does bitcoin gets its value?

Bitcoin ,here is considered as commodity ,but is not backed by anything physical.

Suppose , a form of rock pops up and is in fixed quantity but it is to be mined.

Slowly it's demand among the people increases ,more the demand more the value.

A limited amount of supply in fixed quantity causes its value to keep on increasing ,until the all rocks are mined.

So ,a country with more rock reserves will get rich ,whereas a country with less reserves will get poor and it will be controlled by government.

Only 21 million bitcoins will be generated and it will be tracked through a  decentralized system of miners.

The ledger would be available to public.

The system is such that double spending can never be performed.

Stealing bitcoin ,would require immense amount of computing power.

Transactions would be super-fast!!!!!!!!

What happens when all the Bitcoins are mined?
No One knows.

Will Bitcoin maintain its value?
No Idea.

Is it a pump and dump scheme for crafty traders?
Probably.

Is it a Ponzi/get rich scheme?
You decide.

arun dakua | LinkedIn