How does Bitcoin Work.

When the internet was invented we learned how to transmit data from one person to another person.

To share a row of my favorite dancing hamsters, I would create a website and publish it through a 3rd party host to "serve" my page to the public. This is what is known as centralized sharing because in order for me to share to you I have to go through a centralized server.

Enter the web 2.0 age. We now communicate directly with one another. In the early days, it revolved around chat rooms and Message boards. The hosts of these sites being the 3rd "centralized" parties.

Anybody remember Napster?

Napster was the first peer to peer sharing service mainly used to quickly download and upload music. That's right with high-speed dial-up you could have an entire song in just half an hour.

Technically it was a decentralized platform, the first to use peer to peer sharing, I could directly share a file from my computer to yours, but it was all done under the umbrella of Napster. This made it also centralized.

Napster was great but it was problematic. The major issue was people were just stealing copyright material. Getting the music they used to pay for, free.

Why is that?

We could not remove data from one place and deliver to another place as you would with a physical object in the real world. The only way to move data from one place to another place on the internet was to make copies.

Until now.

This is what Bitcoin does. Using the technology of the blockchain when you share data electronically via the internet it leaves one location and is delivered directly, peer to peer (not through a third party) to another location. This is why it can be monetized and used as currency.

To give it value, difficult algorithms were created to mine the currency. The value is in the time and electricity it takes to mine. The more Bitcoin gets mined the harder the algorithms become and the more time and electricity it takes to mine them, making it more and more valuable and harder to attain. By creating scarcity, we now have the fundamental basis of a marketable currency.

Now to take it one step further, the trade-off is not limited to a set currency value. It can be a digital contract. For example, if Bob creates a song and publishes digitally to the blockchain the contract could be that every time someone else plays Bob's song, Bob gets paid. This is what is known as a smart contract.

Do you see how this kind of technology could be revolutionary?