Bitcoin was conceptualized by an anonymous person or group that identified themselves as Satoshi Nakamoto. Part of the myth around Bitcoin is that we still don’t know who this person is, and that makes it cooler. Anyway, he, she, they… essentially brought together a bunch of concepts, technologies- such as cryptography… and write a white paper that was published in 2009. This was the middle of the real estate market crash, so it inevitably rode a wave of mistrust in the banking system.
By the way, we haven’t talked about the 2008 market crash… we figured you all already watched the Big Short. But let us know if you’d like us to cover it. So in this whitepaper, this proposed cryptocurrency offered theoretical solutions for many problems with centralized banking. The fees to send money or accept payments, the trust problem with banks, even the Central banks ability to print new money based on political decisions. So Bitcoin, as a currency that can be used to pay for things… is built on top of a blockchain. And the blockchain is in essence a ledger, just like the one banks keep.
We are going to use the Bitcoin example because it was the first successful implementation of a blockchain, and because it was the cryptocurrency that sparked everything. The Bitcoin ledger, again, that document that keeps track of every single transaction… doesn’t depend on a single entity, or server, or book: it’s rather- distributed. It was designed as a way to have multiple computers working together, each one of them with a stored copy of the ledger, and with a creative and super secure system to ensure that none of them can tamper with the data. So this ledger is not just a list of transactions… instead, it’s divided into blocks, which was a clever way Satoshi figured out to allow this to work. Each block contains a batch transactions. Whenever you send money to someone using the blockchain, what you are essentially doing is adding an entry to the ledger saying that a certain value moved from one account to the other. In traditional banking, the bank itself is the only entity that can add an entry to the ledger, THEIR ledger; but in a blockchain, anyone can do it, thus making it free… and the technology uses an incredible system to be extremely secure and make sure all transactions are real.
So In a blockchain transactions are grouped into blocks. On Bitcoin specifically, each block is about 1MB in size, which means that it can store about 2,400 transactions. A transaction is again, a log or a record saying a certain amount of value moved from one account, to the other. Just like with your credit card transactions, in order for a transaction to be valid, the origin account needs to have enough funds, and the record needs to be signed by the owner of the account to verify it’s real.