Part one: What are cryptocurrencies and what to do with them?
There it was again. In December 2020 the bitcoin unexpectedly passed the USD 20,000 mark (and at the time of this writing, even the USD 50,000) and I asked myself for the 50th time in the last few years: “Why have I not yet spent time investigating this undoubtedly fascinating technology?”
For various reasons I never believed in cryptocurrencies as currencies of the future (and I still don’t). But a rally such as the current one, can simply not be ignored.
And also, my gambling instincts had been woken up. I wanted to learn how to play with this interesting toy. I decided to start a little project of my own and “do some cryptocurrency” at home.
But let’s talk about the basics first. I will use the bitcoin, as it is the most famous of all cryptocurrencies, to demonstrate the idea and the mechanics behind cryptocurrencies. Still it is important to mention that there are dozens of cryptocurrencies out there all working in similar ways.
What are bitcoins?
Can I see them? No.
Can I touch them? No.
Can I do anything with them? Well…yes…not so much though. Something to elaborate on later in this series.
So what are they?
It all started with a guy called Satoshi Nakamoto in 2009. And very much like the bitcoin, that guy never existed. So that non-existing guy had an idea. He came up with a piece of paper describing a system for a decentralized payment system using what we know as the bitcoin as currency.
He said: ”Whoever is able to solve this specific riddle that I will give out, will be rewarded with a specific amount of my invisible currency. You cannot touch, see or smell it, but we will run a distributed ledger among all of us to remember that you own them.”
That distributed ledger is the bitcoin blockchain, a virtual piece of paper where all bitcoin ownership is tracked.
Then he said: “Once the riddle is solved we will create another riddle, based on the previous one, so more and more people get the chance to be rewarded with some bitcoin.”
And so he himself solved the first riddle and created the first 50 bitcoin out of thin air. He wrote the solution to the riddle into the genesis block (on the virtual piece of paper) and passed the riddle on to others.
Many people try to solve the ever new riddles since, one following the next and they have become known as miners, as they mine for bitcoin like Dagobert Duck (Scrooge McDuck) did mine for gold at the river Klondike.
Many people have solved such riddles and have been rewarded with a total of more than 20 million bitcoins by now.
The solutions to all the chain of riddles, i.e. who solved them and were granted rewards, are tracked in the blockchain in a way that nobody can alter its history.
Usually, in fantasy books, there would be a mighty guardian who watches over all this. In real world, however, the integrity of the bitcoin blockchain is protected by many people participating and keeping copies, as well as some clever mathematical algorithms that make manipulation nearly impossible.
And he continued: “But you cannot just earn the bitcoins by solving the riddles. Once you own them, you can pass them around from one person to another as you wish. After all they are yours. Whenever you pass your bitcoin to another person we will keep track of that in the same book in which we remember who solved the riddles and all the spending and sending will be part of the riddle that needs to be solved.”
To be continued in my next article on how I tried mining!
