The Basics of Bitcoins and Blockchains

An Introduction into Cryptocurrency and the Technology that Powers Them

Antony Lewis

• Publisher: Mango
• Year: 2018
• ISBN:
  9781633538016
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Understand Bitcoin, Blockchains, and Cryptocurrency

"Antony helps us all clearly understand the mechanics of bitcoin and blockchain." ? Rob Findlay, Founder, Next Money

#1 Best Seller in Investing Derivatives and Natural Resource Extraction Industry, Futures Trading, Banks & Banking, Energy & Mining, Monetary Policy, and Computers & Technology

There's a lot written on cryptocurrency and blockchains. But, for the uninitiated, most of this information can be indecipherable. The Basics of Bitcoins and Blockchains provides a clear guide to this new currency and the revolutionary technology that powers it.

Bitcoin, Ethereum, and other cryptocurrencies. Gain an understanding of a broad spectrum of Bitcoin topics including the history of Bitcoin, the Bitcoin blockchain, and Bitcoin buying, selling, and mining. Learn how payments are made, and how to put a value on cryptocurrencies and digital tokens.

Blockchain technology. What exactly is a blockchain, how does it work, and why is it important? The Basics of Bitcoins and Blockchains answers these questions and more. Learn about notable blockchain platforms, smart contracts, and other important facets of blockchains and their function in the changing cyber-economy.

Things to know before buying cryptocurrencies. Find trustworthy and balanced insights into Bitcoin investing and investing in other cryptocurrency. Discover the risks and mitigations, learn how to identify scams, and understand cryptocurrency exchanges, digital wallets, and regulations.

Learn about:

• Blockchain technology and how it works
• Workings of the cryptocurrency market
• Evolution and potential impacts of Bitcoin and blockchains on global businesses

You've read books such as Blockchain Bubble or Revolution, Cryptoassets, Blockchain Technology Explained, Blockchain Revolution, The Bitcoin Standard, Mastering Bitcoin, or Bitcoin For Dummies, but to really understand the technology read The Basics of Bitcoins and Blockchains.

Part 1 

MONEY 

Physical and Digital Money

Cash—physical money—is wonderful. You can transfer (or spend or give away) as much of what you have as you want, when you want, without any third parties approving or censoring the transaction or taking a commission for the privilege. Cash doesn’t betray valuable identity information that can be stolen or misused. When you receive cash in your hand, you know that the payment can’t be ‘undone’ (or charged back, in industry jargon) at a later date, unlike digital transactions such as credit card payments and some bank transfers, which is a pain point for merchants. Under normal circumstances, once you have cash, it is yours, it is under your control, and you can transfer it again immediately to somebody else. The transfer of physical money immediately extinguishes a financial obligation and leaves nobody waiting for anything else.

But there is a big problem with traditional physical cash: it doesn’t work at a distance. Unless you carry it in person, you can’t transfer physical cash to someone on the other side of the room, let alone on the other side of the planet. This is where digital money becomes highly useful.

Digital money differs from physical money in that it relies on bookkeepers who are trusted by their customers to keep accurate accounts of balances they hold. To put it another way, you can’t own and directly control digital money yourself (well, you couldn’t until Bitcoin came along, but more on that later). To own digital money, you must open an account somewhere with someone else—a bank, PayPal, an e-wallet. The ‘someone else’ is a third party whom you trust to keep books and records of how much money you have with them—or, more specifically, how much they must pay you on demand or transfer to someone else at your request. Your account with a third party is a record of an agreement of trust between you: simultaneously how much you have with them, and how much they owe you.

Without the third party, you would need to keep bilateral records of debts with everyone, even people who you may not trust or who may not trust you, and this is not feasible. For example, if you bought something online, you could attempt to send the merchant an email saying ‘I owe you $50, so let’s both record this debt’. But the merchant probably wouldn’t accept this; firstly, because they probably have no reason to trust you, and secondly, because your email is not very useful to the merchant—they can’t use your email to pay their staff or suppliers.

Instead, you instruct your bank to pay the merchant, and your bank does this by reducing how much your bank owes you, and, at the other end, increasing how much the merchant’s bank owes them. From the merchant’s point of view, this extinguishes your debt to the merchant, and replaces it with a debt from their bank. The merchant is happy, as they trust their bank (well, more than they trust you), and they can use the balance in their bank account to do other useful things.

Unlike cash, which settles using the transfer of physical tokens, digital money settles by increasing and decreasing balances in accounts held by trusted intermediaries. This probably seems obvious, though you may not have thought of it this way. We’ll come back to this later, as bitcoins are a form of digital money which share some properties of physical cash.

There is a big difference between online card payments, where you type the numbers, and physical card payments, where you tap or swipe the physical card. In the industry, an online credit card payment is known as a ‘card not present’ transaction, and swiping your card at the cashier’s till in a shop counts as a ‘card present’ transaction. Online (card not present) transactions have higher rates of fraud, so in an effort to make fraud harder, you need to provide more details—such as your address and the three digits on the back of the card. Merchants are charged higher fees for these types of payments to offset the cost of fraud prevention and the losses from fraud.

Cash is an anonymous bearer asset which does not record or contain identity information, unlike many forms of digital money that by law require personal identification. To open an account with a bank, wallet, or other trusted third party, regulations require that the third party can identify you. This is why you often need to supply information about yourself, with independent evidence to back that up. Usually that means a photo ID to match name and face, and a utility bill or other ‘official’ registered communication (for example from a government department) to validate your address. Identity information is not just collected when opening accounts. It is also collected and used for validation purposes when some electronic payments are made: when you pay online using a credit or debit card you need to supply your name and address as a first gateway against fraud.

There are exceptions to this identity rule. There are some stored value cards that don’t require identity, for example public transport cards in many countries, or low-limit cash cards used in some countries.

Do payments need to be linked to identity? Of course not. Cash proves this. But should they? This is a big question that raises legal, philosophical and ethical issues that remain subject to ongoing debate. Credit card information is frequently stolen, along with personally identifying information (name, addresses, etc) which creates a cost to society.

Is it a fundamental rig...