10 JAN - 22 JAN 2018

By Derek Naminda

MONEY in the future will be virtual. Actually, before we get to money becoming completely virtual, there is going to be a fight. A big fight by big banking corporations to keep money and banking in its current state. The price of Bitcoin at its inception in 2009 was US$0.0076 which four years later escalated to US$1,242. Bitcoins were created on 3 January 2009, just a couple of weeks prior to the financial meltdown on 29 September 2008. To understand what follows, an appreciation of the GFC is desirable.

The creation of Bitcoins is one of the most fascinating enigmatic stories of data science. Bear with me for now I will get back to why that is fascinating. Firstly, let us talk about what Bitcoin is; Bitcoin is simply virtual money. It is money that is held in a virtual system. It is difficult to explain what Bitcoin is without reminding you how the standard bill that you can hold with your hands works. The Bitcoins system works differently from your standard bill. This is because of one major factor which is that, it avoids a third-party player. To show the difference, I will start by explaining how the current money system works.

Money is basically an accounting system. As a system, it is a ledger of who owns this or that value and who owes this or that to this one or that one! So, for that accounting system to work, we need somebody who is a central issuer. When you and I agree to pay for something am offering, we are simply using a modernized barter system. The old barter system used ‘unbalanced scales’ in that one could exchange a cow for a bag of salt, which would be unbalanced even if the transacting parties felt that they were getting a fair deal. In order for the ‘barter system’ to work fairly there had to be a central issuer who in the Zambian context, is the Bank of Zambia, hence the name the central bank. Both you and I have to agree that this issuer is trusted and that the money is real. We both have to believe in the promise of the issuer. Without that understanding or belief, money is nothing but a piece of paper. So, for years now we have governments issuing money that has to be based on value, of gold reserves. That is basically similar to what a Bitcoin is. It is an accounting system that knows what a participant is owing or how many Bitcoins one has in its digital environment. I know, you are still asking what is a Bitcoin and how does it work?

Right now, third-party issuers and the banks, create these fees and inefficiencies that ultimately created the corruption and eventual eruption of the financial meltdown in 2008. With the Bitcoin system, the third-party function is adopted and automated. It is a closed system that does not require a central issuer.

Think of it this way, someone created a virtual system that cannot be hacked, completely closed off, and put 21 million coins in that system. Every one of those 21 million coins is known by encryption. Every single coins’ history is known. So, where it has been and who has owned and used it to pay for goods and services are all known. By that very nature it cannot be stolen. One cannot steal a bitcoin because where it was stolen can easily be traced. Every transaction is authenticated by numerous competing computers that are rewarded, mathematically, for the correct quickest authentication. Notably, one cannot take those notes out of the system because It is a closed system. To get into this system one has to open an account. How that works is explained later in this article. Worthy of note is the fact that one can sell their bitcoins to another registered user, if they chose to do so. So, who created this system? Satoshi Nakamoto.

Satoshi Nakamoto, in many ways is a very interesting figure in the creation of Bitcoins. He is simply the founder of Bitcoins and wrote the code and plan for how the Bitcoin system works. He wrote in his first email to creative collaborators that “…I have been working on a new electronic cash system that is fully peer to peer, with no trusted third party.” The system that holds the 21 million Bitcoins is a number of computers or savers spread around the world. These are not real coins but essentially digitally coded coins using encryption. PAGE 21

Every single Bitcoin is known by encryption. Every individual (Bitcoin owner) in that system is identified by encryption not by name or social security number.One logs in the same way one would log into their online bank account. Once one is in the system, they are no longer a ‘name’ but an encryption and can only transact as an encryption.

The difference with your bank is that it keeps your name and your social security number somewhere. The problem is that that system can be hacked and information stolen. That system is also susceptible to corruption, such as charges on banking or the financial meltdown which creates a great prospect for Bitcoins. Here is why this will take off; where one sends money using for instance, Western Union, in order to send US$500, they would need to pay US$16 and that transaction would have to be verified and only be accessible to the recipient, a couple of hours later or at least as WU promises 15 minutes. Conversely, with Bitcoins, where one sends Bitcoins, the recipient only needs an account to receive Bitcoins and they would have the money in milliseconds.

Remarkably, one would not have to pay anything for transferring the Bitcoins and it is this zero payment that the big banks are against. That is where the big fight with banks will be. In fact, it has already started. It is safe to suppose that Western Union and its ilk equally wouldn’t be too happy with the zero-payment dynamic presented by the Bitcoin system!

Bitcoin has a million computers around the world that keep the encrypted information. To get in, one needs to install a wallet on their computer or phone, and buy bitcoins by auction or render a service to someone who has Bitcoins and be paid using Bitcoins. However, the founders wanted to avoid the use of cash in creating Bitcoins. The purest way to gain Bitcoins is for example, as a data scientist I sell my services to a company which, say, pays 10 Bitcoins, those bit coins will be sent to my account and I will in turn use Bitcoins at any participating retailer.

As a new user, one can get started with Bitcoin without understanding the technical details. Once one has installed a Bitcoin wallet on their computer or mobile phone, it will generate their first Bitcoin address and they can create more whenever they need one. One can disclose their addresses to their friends so that their friends can pay them or vice versa. In fact, this is pretty similar to how emails work, except that Bitcoin addresses should only be used once. A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.

Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individual can control what is included in the block chain or replace parts of the block chain to roll back their own spends.