Record prices and more and more investors: digital coins are more popular than ever. Due to the explosive rises in value, it seems you can no longer ignore it. An explanation of how bitcoin and other cryptocurrencies work, so that you can participate in the discussion about the financial topic of the moment.
For months, the financial news has been dominated by digital currencies such as bitcoin, ripple and ethereum. Today, ethereum reached the record of more than $1,200 (€1,000). At the beginning of 2017 you bought 1 ethereum for 10 dollars, so the early birds could make a nice profit last year.
The most famous of all cryptocurrencies is bitcoin. The fact that it is a crypto coin (or crypto currency) does not mean more or less than that the money only exists digitally. There are no physical coins or notes of it. This applies to all cryptocurrencies: from bitcoin and ripple to litecoin and ethereum.
The big difference between cryptocurrencies and the ‘normal’ currency is that with the latter the Dutch government sends (or at least tries to send) the value. If your euro suddenly becomes worth less, the government steps in to ensure that the value stabilizes. The same applies if the currency becomes more valuable. This is not the case with bitcoin, and those other cryptocurrencies. At the time of writing, the coin is worth around $15,000. If the value is only 1 dollar tomorrow, then you have been unlucky if you have bitcoins. Conversely, if the bitcoin is worth $25,000 tomorrow, you’ll have earned $10,000.
The fact that the government does not pull the strings behind the scenes is the disadvantage and the advantage of bitcoin. It also means that no one has complete control over the currency.
A term that is almost always used with bitcoin is blockchain. Blockchain technology is to bitcoin what the engine is to a car. Without that technology, it doesn’t work at all. Where with a euro the bank keeps track of how much (or little) you have of it, with bitcoin it is a bit more complicated.
Blockchain technology keeps track of all bitcoin transactions. So if you give one coin to your neighbor, it will be stored in the blockchain. If all that information were in one place, it would be very difficult, if not impossible, to secure. Folm.io has enough information. That is why blockchain technology stores the information spread over all different computers. To make sure that a transaction from one computer to another goes well, a digital signature is added. It just works a little differently than the scribble you normally use.
To ensure secure transmission, each user has two keys: a private key (private key) and a public key (public key). Those keys are actually a bunch of numbers, just “1” and “0,” one after the other. It is very important that the private key actually remains only yours.
Unlike your ‘normal’ signature, a digital signature is different every time you need one. So for every transaction a new signature is created. To this end, a combination is made of your private key and the content of the message. That is why you must also keep the private key secret, otherwise anyone can sign your name. That signature also consists of a lot of ones and zeros.
Of course, a signature is of no use to you if someone else cannot verify it. In normal life, your signature is therefore in your passport. Again, it is slightly more complicated with digital scribbles. To check the signature, the other person needs your public key and the transaction in question. By combining the two with your signature, the other person will be told whether the scribble is real or fake.
The storage and control of bitcoin transactions are also distributed over computers. In doing so, you run into another problem: how do you ensure that people cannot tamper with data from the past? And so can you say that you gave them 200 bitcoins last year?
Before we get into that, it’s important to take a step back. If you were to design a blockchain, you would see exactly why it is called that. The data is stored as blocks and those blocks are chained one after the other.
In a little more detail, this comes down to the following: a block consists of 2,400 transactions. They are lumped together and encrypted. At the end of that process, a similar number comes out as with the signature: a combination of ones and zeros. To create a new block, you have to startwith those numbers. As a result, blocks are linked together like a chain.
Securing those blocks is done by people called miners. These miners receive a reward, a block reward, for each block they protect. That reward consists of a – piece of a – bitcoin.
The linking of those blocks and the amount of different miners form the strength of the security. Because each block builds on an old block, you can’t go back in time and cheat with the transactions. In addition, the code at the end of the block would no longer match the circulating code, and you would be blown away.
The most obvious option to defraud seems to secure a block itself. But that doesn’t work either. This is due to the way in which security works. In short: different miners are looking at how they can secure the same data. The first person to finish gets the reward. That does not alter the fact that the other miners will continue. Moveco.io has enough information. As with the signature, there must be one specific combination of numbers. So everyone should end up with the same thing. If one person comes up with a different combination, it’s because that person cheated. The system is designed in such a way that it looks around at the different blocks. One deviant code immediately stands out.
This security is therefore completely separated from one computer or location. In addition, the code on which bitcoin runs can be viewed by everyone via code sharing platform Github. Programmers have already established that there are no backdoors.
The original code was created by a person or group calling themselves Satoshi Nakamoto. Who or what Satoshi Nakamoto is is unknown. There have been people who have impersonated the creator of bitcoin. They all turned out to be a mess. Because the system is set up so transparently, it has no effect on trust in bitcoin.