What Is Bitcoin and How Does It Work?

What is Bitcoin? What is Crypto? What are we trying to decode at Digipesa? 

If you are here, you have probably read another article about this somewhere. But ours will be different, because we will tell you what we have learnt from experience, in addition to the facts that have never changed since we read this article

In the simplest terms, bitcoin is a digital currency, meaning you cannot touch it, the way you hold coins or notes in your hand. These coins and notes are manifestations of fiat currency, like the Kenyan Shilling. That is what we consider the opposite of digital currencies.

All the same, fiat currency does not have to be something you touch. Think about it. When you send money to and from via M-Pesa, you might end up never touching any note or coin. Or say you’re short on cash and you cash out your Bonga points for airtime or other value, you have interacted with a digital form of currency that gets its value from a certain system. 

Now, bitcoin and other cryptocurrencies go a step further in that they are based on a blockchain with cryptographic proof, thus the “Crypto” reference. 

Who came up with the concept? He/she/they went by the name Satoshi Nakamoto. Whoever it is went to great lengths to hide their identity. They released this paper on October 31 2008, implementing bitcoin in 2009. The community was celebrating this date last week. Nowadays, who created bitcoin is not something we obsess over, but in earlier years, half the trending news in the industry used to be speculating about bitcoin’s creator. Newsweek probably had the biggest “expose” in 2014. But as intended, the system superseded the creator, inspiring a lot of fintech innovation that we see today. 

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Fundamental concepts in Bitcoin

Cryptographic proof

What is bitcoin and cryptographic proof

In the bitcoin world, cryptography works to secure transactions. You know how you are paying for something or using a service to move money and they ask you for so many details through sign ups just to establish trust — you know, just in case you’re planning to not meet your end of the bargain? Well, with bitcoin and blockchain, no third party is necessary, two parties transact and there is proof of the transaction instantly recorded publicly on a blockchain.

What is a blockchain?

blockchain, block, chain

This is that public recording system that is distributed across a network of computers. Information is stored in a block that is created only at the end of this chain chronologically such that you cannot go back and alter the details. Bitcoin’s was the first blockchain, with many coming up after that.

In simple terms, when a transaction happens, it needs to be confirmed on the blockchain by the computers (nodes) in the network. Because you cannot go back and alter the transaction, bitcoin transactions are irreversible

You can now see how fraud becomes difficult.

The transaction fees at the beginning used to be very negligible. This fee incentivizes the nodes to support the network. Today, the fee is slightly higher but is still very low compared to traditional methods. A transaction on the blockchain is also quite fast and takes a few minutes regardless of where in the world you send the funds.

If you want to read a more extensive explanation, we recommend this one at Investopedia.

Look out for the next post about how you can get and use bitcoin in a few.

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