Cryptocurrency 4Thought Studios Medium

cryptocurrency /kriptkrns/ noun noun: cryptocurrency; plural noun: cryptocurrencies; noun: crypto-currency; plural noun: crypto-currencies 1. a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a centralbank.

This is the answer Google will give when asked What is cryptocurrency? While this answer/definition is absolutely correct; it reads like an excerpt from a complex finance document or engineering patent. Suffice it to say that this definition may not explain much to the average person with little to no experience with the professional field of information and technology.

As the computer person of my family, I often find myself explaining technical concepts to individuals with less exposure than myself. Sometimes these concepts are simple enough to use a real-world concept that more people are familiar with for direct comparison (look for my post on how to explain how the internet really works to anyone); but occasionally I need to explain a difficult to grasp concept that is comprised and built from equally difficult to grasp concepts. The difficulty in understanding computers is generally not the actual concepts themselves but in the true understanding of the processes. You can be a veritable genius at arithmetic; but if you are given a word problem to solve that is written in a language you cannot read; your amazing analytical skills are for naught (at least in this particular case analytical skills tend to never be completely useless).

This blog post is my attempt to quickly and succinctly explain the somewhat mysterious concept of cryptocurrency to anyone. This concept has managed to elude even some of us who are technically inclined, so this may be a bit of a challenge. There are many types of cryptocurrencies that exist but almost all of them are based on the original: bitcoin. For the sake of simplicity, this article will focus on bitcoin.

The IRS considers Bitcoin as property. Taxable property. To the average person this means that owning and trading bitcoin is basically the same as owning and trading gold. Boom. This is understandable. Bitcoin is a (digital) commodity that we can use for trade. True to its name, cryptocurrency is digital money. One of the biggest arguments against the feasibility of digital money is the fear that if a person is clever enough they could copy existing digital money like a file a give themselves infinite money. Cue the maniacal mad scientist laughter. This problem actually has a name; Double-spending. The inventors of bitcoin created a way to solve this problem. The solution is built into the way bitcoins are created, which leads us to the question, So where exactly does one get these bitcoins of which I speak?

Bitcoins are produced by bitcoin miners. Yes, just like a gold miner. No, not at all like someone too young to see an R-rated movie. The bitcoin mining process is similar to the way real life mining works. Bitcoins are generated by solving an increasingly-complex computational problem. Were not talking long division here. Think more along the lines of counting the grains of sand on a beach in a thunderstorm levels of difficulty, and the storm only gets worse. This complex problem is the mud or rock wall that gold is buried in. Once the problem is solved, the miner who solved the problem is rewarded with a mining fee (paid in bitcoin) and actual bitcoins the same way the gold miner is rewarded with gold after working through the mud or rock.

When bitcoin was first introduced in 2008 there were not a lot of bitcoin miners. The powerful computers required to solve the problems quickly became cost prohibitive to the average person. This trend has only increased as the popularity has grown and now it is common for miners to work together as a group. Think of several gold miners partnering together and buying a dump truck and other heavy duty equipment to sift through the mud and rock for gold. They will have to share the profits with each other but they will find more gold and find gold faster than they did as individual miners. This practice is called forming a mining pool and is one of the more popular ways to start producing bitcoin.

When bitcoins are collected via mining or a transaction they are stored in a digital wallet. The digital wallet keeps track of how many bitcoins a person has and is used to send or receive bitcoins for transactions. Digital wallets are provided by online services but the data they contain can also be stored offline on USB keys for safety.

In my opinion, one of the most interesting concepts about bitcoin is the inherent security built into the way all bitcoin data is stored. Every bitcoin creation and transaction since the cryptocurrencys introduction is stored in a publicly available ledger called a blockchain. Think of the blockchain as an extremely long receipt of every single bitcoin transaction that has ever taken place. When a transaction occurs using bitcoin, the transaction needs to be verified and recorded which adds the transaction to the blockchain. That complex and forever growing grains of sand problem is how these transactions are verified and recorded. Miners competitively work to verify pending transactions and whoever solves the problem first successfully adds the transaction (which includes the debit of bitcoin from one wallet and the addition of bitcoin to another) to the blockchain and collects the reward; creating new bitcoins in the process. This process inherently prevents the duplication of any bitcoin as each newly generated coin is composed of parts of the transactions that have happened before it.

Bitcoin is used in the same manner as online payment services and more and more vendors are starting to accept bitcoin as a form of payment. One of the benefits bitcoin payments provide is the low to nonexistent overhead charges associated with online, debit and credit card transactions. The fees associated with the common online payment services are bypassed when using bitcoin because of the peer-to-peer nature of the transaction process. This is for the people, by the people at its finest. The minimal transaction fees are much lower than the typical 1%-3% charged with other transaction methods.

Watch for a future post where we dive deeper into the shadowy world of the crypto in cryptocurrency.

https://www.bitcoinmining.com/

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Cryptocurrency 4Thought Studios Medium