Understanding Bitcoin and crypto-currency

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Have a very limited knowledge about cryptocurrencies. Many people often fail to even understand the basic concepts.

Satoshi Nakamoto, the unknown inventor of Bitcoin, the first and still most important cryptocurrency, never intended to invent a currency.In his announcement of Bitcoin in late 2008. Satoshi said he developed “A Peer-to-Peer Electronic Cash System.“  His goal was to invent something; many people failed to create before digital cash.

Crypto-currency is an attempt to replace money transactions with a digital medium of exchange using peer-to-peer networking. The first one, and still the most successful,

After seeing all the centralized attempts fail, Satoshi tried to build a digital cash system without a central entity. Like a Peer-to-Peer network for file sharing. The idea is that you use cryptography to control the creation and transfer of money, rather than relying on central authorities.This decision became the birth of cryptocurrency. They are the missing piece Satoshi found to realize digital cash. The reason why is a bit technical and complex, but if you get it, you‘ll know more about cryptocurrencies than most people do. Since the success of Bitcoin, there have been others which are starting to make names for themselves. Such as Ripple, Litecoin, Peercoin, Mastercoin, Namecoin, etc.

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Take the money on your bank account: What is it more than entries in a database that can only be changed under specific conditions? You can even take physical coins and notes: What are they else than limited entries in a public physical database that can only be changed if you match the condition than you physically own the coins and notes? Money is all about a verified entry in some kind of database of accounts, balances, and transactions.To realize digital cash you need a payment network with accounts, balances, and transaction. That‘s easy to understand. One major problem every payment network has to solve is to prevent the so-called double spending: to prevent that one entity spends the same amount twice. Usually, this is done by a central server who keeps record about the balances.

In a decentralized network, you don‘t have this server. So you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid or an attempt to double spend.

The transaction is known almost immediately by the whole network. But only after a specific amount of time it gets confirmed. Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies are all about confirmation. As long as a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in stone. It is no longer forgeable, it can‘t be reversed, it is part of an immutable record of historical transactions: of the so-called blockchain.

Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain. For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins.

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