Some claim it is the most important invention since the Internet. Others call it a safe haven for criminals and drug dealers to provide their illegal services. This extremely disruptive technology that has been making waves across the world is Bitcoin.
Bitcoin is the first completely decentralized peer-to-peer digital currency ever. Those are a lot of confusing words, so let us break them down. When someone currently purchases goods from an online retailer such as Amazon, he or she has to pay with a debit or credit card or go through a service such as PayPal. Each one of these payment options is controlled by a corporation, which completely controls the flow of money from consumer to business due to the centralization of these payment systems. Because the central corporation controls the money, users may encounter excessive fees and long waits to receive and send payments. Bitcoin solves this problem because there is no central bank or corporation in charge. The network as a whole controls the flow of money (or bitcoins) without the need for a central authority.
Now some may be asking how this is possible. Can people just create bitcoins themselves to spend endlessly? The answer is no. Bitcoin is programmed so that users cannot simply print themselves money out of thin air. So how is a bitcoin created, then? There are special users called miners. Miners secure the network by solving complex math problems, which in turn creates bitcoins. The more miners there are, the more difficult it becomes to cheat the network and to print new bitcoins. There is currently enough computational power from miners that if all of the supercomputers in the world tried to compete with the miners, they would still be outrun by the miners. Without getting too detailed, these miners essentially confirm or deny the validity of all transactions by doing complex math problems. It is essentially a race to solve one of these math problems and the first one to do so is awarded 25 bitcoins. The reward is halved every four years. The system is designed to have a miner solve one of these math problems on average every 10 minutes. This is how new bitcoins are created and entered into the network: at a predictable and determined rate until the cap is reached at 21 million bitcoins, which is projected to happen around the year 2140.
Bitcoin helps merchants and consumers send transactions around the world instantly for little or no fee. It takes central banks completely out of the picture. Every bitcoin transaction ever made is stored on the network and can be looked up at any time. Bitcoins can never be frozen by authorities and are always stored on the user’s computer – users are in complete control of their own funds.
One bitcoin is currently trading for around $500. People see the potential this system has to disrupt the current financial world. Bitcoin only has value because people believe it does, similar to the paper bills found in a wallet; on the other hand, those paper bills cannot travel around the world in less than a second.
By Alex Hoffman