A short introduction to bitcoin

Bitcoin is a revolutionary digital currency, and has the potential to transform other industries, sectors and markets.

In how you might save and spend it, Bitcoin isn’t too different from how you already save and spend. Increasingly we use credit cards or our phones to pay for things in person or online. We check our balances and move money in and out of savings accounts on our phones.

We rarely touch physical money, and this trend is likely to accelerate. So using money digitally is nothing new.

Traditional money – a brief story of pounds sterling

A government has been the single central authority that can create a ￡ or a $ or any currency.

British pounds sterling (GBP) are born when the UK government prints them, and other traditional currencies are also issued by their respective governments. The pound sterling is the world's oldest currency still in use and which has been in continuous use since its inception. At various times pounds sterling was backed by an equivalent amount of gold or silver at Her Majesty’s Treasury.

If the government wanted to create additional currency in those days, it meant coming up with the equivalent amount of gold or silver to guarantee the value of the money in people’s hands. This is partly why gold mining and other Empire-like activities were carried out in the name of the Crown. The more gold that was mined, the more the government could choose to expand the amount of pound sterling and the economy.

Bitcoin

Bitcoin is different because no central bank or government has the authority to create a bitcoin.

A bitcoin is also created through a process called mining. It’s digital mining, accomplished with computers and software rather than explosives or a pickaxe.

In order for a new block of transactions to be added to the blockchain, a burdensome mathematical problem must be solved, and the “miner” who solves the problem first is rewarded with brand new bitcoins. That’s how bitcoins are mined.

In other words, mining does two things: it adds blocks to the blockchain and it creates new bitcoin.

How the currency works

Let’s take the example of what happens if I send you a photo over the internet. I attach a file to an email, and once I send the email, you have it. You can look at the photo or delete it. You can do what you want with the photo.

Don’t forget though: I still have a copy.

This is how digital information typically moves around the internet. Content is not transferred, it is copied.

But you can’t copy money.

If you could, the whole system would collapse. If I send you ￡20, I don’t get to keep a copy, otherwise inflation would wipe out the currency and the economy. Not good news.

So institutions such as banks typically verify who owns how much pounds sterling and keep the records in a database. The bank ultimately has complete control over your money, which is how people can lose money when a bank collapses.

There is another way to verify who owns what money. A way not controlled by a single authority that is fallible in a way that banks made so very clear in 2008. A way that uses the power of mathematics and cryptography to imbue the currency with a level of trust that ensures that it is of value.

Welcome to bitcoin.

All transactions on the Bitcoin network are permanently recorded in a long list called the blockchain. This is not a secret list guarded by a central authority. It is a widely distributed public list, and every participating computer has a copy of it.

The Bitcoin blockchain is an immutable, public, distributed ledger:

Immutable: once a record has been in the blockchain for a couple hours, changing or erasing it is pretty much impossible. This happens primarily because so many other transactions have been built on top of it by then.

Public: anyone can look at the blockchain. This doesn’t mean that you can see exactly who is sending or receiving money, because records are pseudonymous — personal identities are obscured through the use of pseudonyms, which are typically time-limited. Distributed, synchronised and simultaneous copies of the blockchain are held by computers all over the world. All copies are created equal.

Ledger: the blockchain is a list of transactions like having an accounting book with a column for bitcoin in and a column for bitcoin out.

This distributed ledger is called the “blockchain” because individual transactions get grouped into larger “blocks,” which are chained together in a sequence. This is faster than adding transactions one-by-one, and a new block of transactions is created every 10 minutes or so.

As a side note, the word Bitcoin refers to the system created in 2009 to operate a new form of currency, but the units of currency are referred to as bitcoin (no capitalisation) and are being generated continuously through mining.

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This is the fifth article in a mini-series looking at the potential of blockchain to drive innovation and impact in business models. The other articles are:

1 Blockchain is the engine that will drive Impact Co's

2 What is blockchain? (A ludicrously simplified example.)

3 The potential of blockchain (and 3 use cases)

4 8 benefits and 6 challenges of blockchain

It is drawn from a part of the Futures work we do at Frame Labs where we work with companies that seek to understand, interpret and invent the future.

Other articles will be published in the next few weeks.

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