What is bitcoin, how does it work and what are the advantages?

By now everyone has heard about bitcoin at one point in their life. Once in a while, it even shows up in daily news, but what is bitcoin? Bitcoin is a form of digital currency that is saved and created electronically. In order to receive or send bitcoins, you need an account for it. In the world of bitcoin, this is called a wallet with an associated bitcoin address. A wallet can be made here. The creation of a wallet is completely free of charge and very easy to do.

Here you can find a detailed step by step tutorial to create your own wallet. After you’ve created your wallet, you get a bitcoin address that’s nothing but yours. The bitcoin address is the public key of the wallet and with this address you can receive and send bitcoins.You also create a private key which you should keep a secret at all times! More on this private key later in the article.

 Where do bitcoins come from?

Bitcoins aren’t issued by a central bank but are generated by people and companies. The bitcoins that you own or buy, aren’t managed by any bank. Bitcoins can be used to buy things online just like euros, dollars or pounds. But compared to these currencies, bitcoins aren’t printed on paper.

 Why is bitcoin useful?

More and more companies are embracing bitcoin and are accepting them as a method of payment. Big companies like Dell, Microsoft, WordPress.com, Expedia.com,… already accept bitcoin as payment and more and more companies join every day. When paying in bitcoins you don’t have to wait days until a payment is processed, like you sometimes have to do with euros and dollars. The bitcoins are visible on the account of the beneficiary in a matter of minutes. From as soon as the bitcoin network has processed the payment. International payment, for which banks sometimes ask a lot of money to process, are practically free when using bitcoins.

When paying with bitcoins, you don’t have to fill in your personal information every single time you want to do a payment like for example with a credit card. This saves time as well as some money that you otherwise have to pay as a transaction fee.

Bitcoin are used by some people to add to their investment portfolio and when we look at the price of bitcoin for this year, we can only agree with them!

Safe bitcoins Is bitcoin safe?

Bitcoin is a completely safe method of payment and it is impossible to copy because of the way the technology is built.

what is blockachin What is blockchain?

Blockchain is a technology that was developed together with bitcoin. There isn’t one but multiple blockchains which have been and are being developed for lots of different purposes. But to explain the principle of blockchain, we’ll use the bitcoin blockchain as an example.

You can imagine blockchain as a big public ledger. All the bitcoin transactions that have ever happened are being kept safe here. Every computers connected to the blockchain network downloads a copy of this ledger and knows for sure that their copy is correct.  Because it is impossible to corrupt the ledger due to the way blockchain works.

Block chain Being part of the blockchain

If you want to do a transaction in bitcoins, the first thing you need is a wallet which also has a private key that is unique and should be kept private. Every time you do a transaction, it is this private key that adds your personal signature to the transaction. Every transaction you do, will have its own unique signature. This signature is always linked to your own private key. Once you confirm the transaction, the network of computers checks if the transaction is real by verifying the private key. And because all previous transactions, outgoing as well as incoming, that are linked to that key, are already in the ledger, the blockchain knows if there is enough money on the wallet to actually complete the transaction. The transaction only goes through when all predefined parameters are met.

bitcoins Blockchain procedure

Now let’s find out how the blockchain actually works. Every 10 minutes on average, all new verified transactions are bundled into a new block of data. This gets added as a new line in the blockchain. This new block of data gets added linearly after the previously new block. It gets a date stamp and a hash-code from itself and from the previous block. A hash is a short digital representation of a large block of data. You can imagine these blocks as one part of a chain. The newest part always gets linked to the last existing part of the chain.

Forgery isn’t possible with this system because even a small adaption in the data of a specific block will change the hash codes and then the block won’t correspond to the previous one anymore. And because every computer in the peer-to-peer network has its own correct version of the ledger, the false one will be rejected.

Third part in blockachin The middle man no longer needed?

When we compare this to a bank, we immediately see a big difference. The bank is the only one who can see the transaction and the accounts. The bank is your confidential third party who makes sure the transaction gets done. In a blockchain system, there is no need for a third person anymore. Everything gets checked and executed by the blockchain and you get a decentralised system. Because of this, since the start of bitcoins in 2009, not a single transaction has been lost or counterfeited. The function of banks, verifying the identities to prevent money laundering and registering legitimate transactions, can be done and saved much faster and more reliable by a blockchain. The bank as middle man isn’t needed any longer.

bitcoins The next level

But this is only the beginning. Blockchain can be useful is many other ways! When we disconnect blockchain from bitcoin, the possibilities are endless. Not only a unit of value can be saved securely, but all digital information which is then verified automatically and impossible to tamper with. Because of the technology, people can now make ‘smart-contracts’ which work on the ‘if-then’ principle.

Software Programs are being developed that work on blockchain and are in this way unique compared to other types of software. Firstly, all transaction and contracts are saved securely in a blockchain. Changing the contract is only possible when both parties agree. Secondly, the program has the ability to put crypto money or encrypted data into escrow. The transfer will only go through when all the predefined parameters are met.

example of bitcoinsExample

Think about renting a car in a digital world. The contract is between two parties which is signed by their own private keys and is kept safe in a blockchain. The contract states that the digital key of the car will be delivered upon payment of the predetermined monthly fee. This payment has to be done every month or the digital key is no longer valid and the car won’t start any longer.

When the owner of the car puts the digital key into the blockchain, he has completed his predetermined terms.  The digital key is put safely in the blockchain but not yet delivered. When the person who wants to rent the car has paid his monthly fee through the blockchain, the contract parameters will be met. The blockchain will automatically finalise the transaction and save everything. Meanwhile the key and the money will be delivered into the rightful hands. And as you can see, the ‘if-then’ principle is complete. The middle man who normally owns the contract in a centralised way is replaced by everyone participating in the blockchain and costs can be cut to almost nothing this way.

Some other examples of technologies being developed with blockchain:

-being able to vote without having to worry about corruption,

-medical data can be safely stored in the blockchain and only be made visible to some people with your private key,

-safely secure your identity online to prevent identity theft.