How Bitcoin Works

Money is a symbol, visualised as a token, a coin, a piece of paper,  something we all agree on as to its intrinsic value. Without that agreement, it cannot function as viable currency.

Bitcoin is a crypto-currency, numbers in a computer.

There are several underlying problems with bitcoin.

For a currency to be viable it has to be widely accepted and stable. Bitcoin is neither.

The amount of energy required to generate or mine future bitcoins is not good for the planet, ie there is a real environmental cost associated with bitcoin.

Faircoin, which can be seen as BitCoin 2.0, attempts to address some of the problems associated with bitcoin.

We live in a world where we are connected instantaneously to everyone else in the world from a device we hold in our hand. We can communicate by voice or video, we can send files, pictures, music, books. The marginal cost of doing so is near zero. The marginal cost of the things we are distributing, sharing, is near zero.

Why then do we have antiquated methods of dealing with money, of paying for things, when we have a device in our hands that can do all of these things at zero marginal cost?. At street level, use cash. Within the internet us a crypto-currency. We do not need banks.

$500 billion is sent home by migrant workers. Typically they send these remittances home by walking into a Western Union Office, showing their ID, paying a fee of somewhere between seven to ten percent, the recipient walks into a similar office, shows an ID and recipient code, and picks up the cash. A very antiquated system.

Cheque clearing, was, maybe still is, even more antiquated. Cheques go the the head office, they are then literally couriered across to the head office of another bank.

If I wish to invest in the Robin Hood Hedge Fund, it costs 50 euros for membership, plus 50 euros each share, If payment goes across national boundaries, there are additional costs associated with each Central Bank.

If you own bitcoin, you can via the network, transfer to other accounts at zero marginal cost.

The internet runs on Open Software and Open Standards. The bitcoin blockchain is built on Open Software and Open Standards.

If I walk in a bank, and transfer money from one account to another, I do not have to take money out, then pay it back in (though I may wish to do that in the Cayman islands if I am money laundering and do not wish my transfer to be easily traced). What usually happens, the money is directly transferred from one account to another, in reality the sum is debited from one account and added to another account. But it means I have to trust the bank as a trusted third party.

The bitcoin blockchain allows the transfer of digital assets from one entity to another in a verifiable way (these assets may be viewed as a crypto-currency but do not have to be). A message is sent to the network, that enables the transfer of these assets from one account to another. The blockchain is a tamper proof ledger in the public domain. The asset transferred in the case of bitcoin, is a currency, but it does not have to be.

The blockchain has uses beyond bitcoin.  Singer-songwriter Imogen Heap has proposed Mycelia, a blockchain for tracking music. She has released Tiny Human to test out the concept.

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One Response to “How Bitcoin Works”

  1. keithpp Says:

    Bitcoin in Uganda
    https://keithpp.wordpress.com/2016/01/06/bitcoin-in-uganda/

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