money

Who is in charge of Bitcoin?

| roger nunn

Please note that I’m writing this as a way of making sense of the world of cryptography and blockchains. I may write something that is incorrect, and when I do, please feel free to tell me that I have misunderstood the way it works.

I am using Bitcoin here as an example as it was the first successful attempt to create virtual money without a central authority. Before I started buying Bitcoin, I wanted to know who was in charge and who would I complain to if there was a problem.

It’s a question that many people ask.

The answer is, of course, not as simple as giving the name of an organisation. The code that is used to run Bitcoin is published and available to all. The way Bitcoin works is not important to understanding why there is no one organisation “in charge” of it.

Bitcoin relies on the feedback between multiple (thousands) of computers to verify the correctness of transactions that are put onto the blockchain. Once there is sufficient verification (called mining) measured by computing power, a block of transactions is added to the blockchain. The need for verification is the reason why transfers of Bitcoin are not immediate. Any transactions added to the chain that are not verified are subsequently ignored by the blockchain.

The use of computing power (proof of work) to verify transactions and to create new Bitcoin is why no one person is in charge of Bitcoin. It is possible to change the code and modify the way Bitcoin works but it would only be effective if accepted by more that 50% of the available computing power. There have been a number of cases where a group of miners wanted to change the way the code worked and started using the new code. This actually creates a second blockchain that duplicates the first one up to the point of the split.

It is called a hard fork, and it means that there are two blockchains. The reality of course is that the value of any coin depends on its acceptance and its use, something that is measured by the number of people who get involved in it. Anyone can take the code and create a clone of Bitcoin but if there are no users it is just code that runs on the maker’s computer.

So the person in charge of Bitcoin is both the persons who use it and the persons who mine it. The more people who use it, the more who believe in it and will pay for it. The higher the price the higher the rewards for the miners, meaning that’s it’s value is based on your belief in it (like fiat currencies).

Is there more than one Bitcoin?

| roger nunn

Most people have heard of Bitcoin and maybe that it was created in the wake of the financial crisis that started around 2007.

Bitcoin is now 12 years old, but it didn’t get much visibility (perhaps notoriety) until after 2013. The name Bitcoin is unfortunate as it gives the idea that there is a physical manifestation of the technology. However, as no better name was found everyone uses coins.

In the meantime the idea of basing value on the security of the blockchain spawned a multitude of other coins, like Etherium and Ripple. Bitcoin was seen to be insufficiently flexible to be used for contracts, so Etherium includes a form of programming that allows for “smart contracts”.

The existence of smart contracts has in turn spawned a large number of Tokens, which are payment transfers built on the Etherium blockchain using smart contract possibilites.

The number of new tokens expanded dramatically since the first bitcoin frenzy in 2017 and there are now over 5,000 of them. As the transfer of value on the blockchain requires keeping track of large numbers, there are now a multitude of software wallets make it easy to store and transfer crypto currencies. At the same time, there are a number of exchanges that are used as market-places to trade crypto.

Each of the paragraphs above gives just an idea of the subject matter, something that needs to be studied in depth just to get a feel of what crypto really is.

I often get asked how it can be real if it is just a string of numbers stored on a computer. Answering the question means studying the history of non-crypto currencies first and realising that even the “normal” currency that you have in your account is also only a string of numbers. The hardest point to understand is often that there is no central authority for Bitcoin, it is controlled by many thousands of computers around the world, all competing to maintain the system.

The real strength of Bitcoin is that there is no central authority and therefore no one to create inflation or to simply take money from your account.