I was sent an email from a listener of my podcast, but the detailed answer is better in a blog post with video. The email was a quick one that was placed on the contact form on my website. The contact form on this blog and my podcast go to my personal email. He was sending mainstream news on a bitcoin exchange service going offline. I think the point of his link was to explain the risks of bitcoin. Here is the email:
Subject: bitcoin news
I am going to answer this article in my podcast, but I want to give details on how bitcoin works. I never said it was perfect, but it sure is better than the U.S. Dollar (USD) as far as the thought that went into the infrastructure of the system.
First, I would ask that you watch this video on bitcoin first. It is a little easier to understand than the next videos, but isn’t in quite as much detail.
Don’t let this scare you away though. It starts off like you don’t know anything about bitcoin, therefor will start off a little easier and get more advanced as the videos go on.
First a general overview of what bitcoin is. Bitcoin is a digital crypto-currency using modern cryptographic methods to make a private and secure transaction. This method is not unlike going to a secure website. It was meant to be used in a decentralized network, where peers (or the global populas) pitch in a little work to maintain the production, transaction history, and use of the money. It is a software based currency, which is why it has some security risk, but these risks are addressed in the programming.:
Bitcoin is generated by Bitcoin Miners. The software allows the miners to generate more bitcoin as an added reward for providing the peer-based computing power. So now you have an entire network of computers working together as well as checking each other’s work.
As each bitcoin is transferred between people, a small fee (set by the payer) is sent to many of the computers working on the transaction.
No one computer can keep up with the transaction history fast enough in order to falsify transactions because of how the programming requires a computer to work too long for the balance update.
Wallets usually come in online and offline (or paper) versions. Online are currently on the network while offline wallets are held in a “vault” with the network knowing that the money exists, but doesn’t know exactly where it is, until it is used again.:
Think encryption here. Another way to look at it is converting a WAV, uncompressed audio file into an MP3 version that is compressed. Some quality could be lost. We take lots of data and make it into an encrypted type of “zipped” file. This is used in many different places in the transaction and history.:
Electronic version of a signature. I have a private signature and a public signature. I show people the public signature when doing transactions and it can be used to prove that I signed the transaction. Although I personally have a copy-able signature, the digital signature changes based on each and every transaction.:
I have to prove that I own the bitcoins that I use before I can use them. Once I use them, I have to pay someone their portion, then pay a small fee to the computers on the network, and give myself back the change. It may not make sense to some, but you can only pay with historic values, and then we pay ourselves the change.:
They have to spend lots of time to solve a digital math problem that takes about 10 minutes to complete.:
How everything is hashed, signed, and placed in the blockchain:
This explains what the miners are doing and how the “mine” runs out of “coin” over time. It proves that in the future, transaction payment, will need to be the main reason for miners to be online.:
The bitcoin and blockchain is more secure than dollars and goldbars. The problem is the people that you are using to hold your bitcoin and to transact through, that is why you need a reputable company.:
I hope that this clears it all up for you guys, and I NEED a bitcoin expert to be a guest on my show. So if you really know your stuff and can teach it is a very understandable way.
Enter the challenge for: