The Basic Basic Guide To Blockchain, Bitcoin (....and Cryptocurrency)
Ok so your friend is banging on about Bitcoin, you have no idea what they're on about so you're just smiling and nodding and sipping that flat white until they pipe down...
I've been there. Now, I am that friend, and I have some good and bad news.
The bad news is that your friend probably won't pipe down any time soon, and a lot more of your friends will also be on the case in a matter of time, if they're not already.
The good news is it's actually very exciting, and not that complicated when you break it down.
Disclaimer: I'm not super "tech-y", I certainly don't know everything there is to know on the subject (tech police, I hear you...), I'm pretty basic. But I like to think I have a better understanding than your average and a decent enough way with words that I can explain it.
If you CBA to read this, skip to the bottom.
First up, things Bitcoin (and cryptocurrency and the blockchain) is not:
- A scam
- A ponzi/pyramid scheme (unless you're an idiot)
Okay, so now that's cleared up (we'll get into why later), let's get into what this whole thing's about.
What Blockchain Is
To understand what Bitcoin, cryptocurrencies and all that jazz is and what the point is, you first need to understand why blockchain is such an awesome tech revolution.
In words of one syllable (ok, three) the blockchain is...
A. MASSIVE. DATABASE. (A freaking huge one, really. Bigger than my collection of yoga pants)
Otherwise known as the "ledger".
The ledger is made up of "blocks", each of which is a record. It could be a transaction record of currency (like Bitcoin), medical records, property ownership or anything really which has a value. Each block has a unique timestamp, and is linked to the previous block (hence, "blockchain").
The database isn't kept by one central body (like a government or bank), but instead is distributed between everyone who has access to the blockchain, so everyone has a copy that continually, automatically updates itself
Errr, hold up. So everyone has access to all my private information??
Only you can access what's inside your "address" (aka, account which gives you access to the ledger).
So, if you had 2 Bitcoins in your account, only you, with a private encrypted key, are able to get access, for example if you wanted to spend or send your Bitcoin to someone else. Other people can see those 2 Bitcoin are there, but not who they belong, and they cannot get access.
Because everyone in the network has a copy, if someone tries to edit or "hack" a piece of the blockchain, it'll be rejected because it won't match all the other copies of the ledger on everyone else.
This makes it super secure, because to hack the blockchain someone would have to edit the same bit of the network, on every computer that has access, at exactly the same time.
Good, right? Just make sure you don't lose your private key, because now there's no bank to reset it for you!
Got it. So why does everyone keep banging on about a big, shared, secure database? Who cares?
This is SO exciting. Trust me. In a nutshell it's because it means the middleman can be cut out of a lot of transactions.
Think about when you buy something...the transaction has to go through payment service providers and multiple banks, all who charge processing fees, take time (you know that feeling when all those "pending charges" come out your account at once? Yeah, that.) , and who have authority to freeze your account and access your cash (including PayPal!)
And what about when you donate money to charity, how do you know where that money ACTUALLY goes?
The blockchain means we no longer have to trust in intermediaries because there is a shared record of every single transaction. No corruption. No third party control.
What this actually means
Now, instead of booking your holiday to Ibiza using a travel agent or even AirBnB, you could book direct with a host or local business in the country you're visiting and cut out all the commission and fees (yay, lower costs! Fairer prices! Quicker service!)
Countless startups are now busy building decentralised platforms that allow you to do just that with everything from travel, to banking, charities, buying property, medical and even social media, with a whole new "internet of value" being created.
As you can imagine, this has a pretty big implication for a lot of the large systems, organisations and businesses we're used to using as "trusted" third parties at the moment so yeah, you could say it's kind of a big deal.
Now, onto cryptocurrencies...
These new blockchain platforms and startups almost always incentivise you to use them with a small amount of their own cryptocurrency (or "tokens")
Bitcoin is actually just one of over 1400 cryptocurrencies, a number that's growing every week.
Most of these cryptocurrencies, very basically, are like loyalty points.
Let's go back to the Ibiza scenario...
Remember you booked a lovely stay with a local hotel for a great price, paying them directly through a new blockchain platform?
You will have made the payment in cryptocurrency and, just like a Boots points card or your local cafe's stamp card, you will have earned a small amount of the currency or "utility token" back in your account, which you can save up to redeem of your next trip or even related stuff like bikinis, fake tan, or maybe a hire car when your there.
(NB, of course this relies on brands and retailers starting to accept cryptocurrencies, which a few are starting to do. There are even companies developing cards which instantly switch your crypto cash into normal money when you use it.)
But what about cancellations? How I can trust I get refund if there's no booking operator?
The platform has it's own built in rules "smart contracts" on the blockchain that automatically settle disputes like late cancellations so both you and your host know you're protected against cancellations and other disputes.
Bitcoin is a bit of an oddity. It's a cryptocurrency which doesn't have it's own platform and doesn't have a specific "use" (other than being able to be used without a bank). Time will tell what happens to it, it's price and how its used, so watch this space....
Blockchain is a big, un-hackable, shared database that replaces the need for third parties like banks
Cryptocurrency is digital money that works a bit like nectar card, and its transactions are recorded on the blockchain.
Should I cash in my ISA and put it into Bitcoin?
Don't be a muppet. Don't invest more than you can afford to lose. Don't take this as investment advice. Make your own decisions. #YouDoYou.