So when my wife told me about Bitcoins, it kind of echoed in my brain ‘What’s this? A new ‘fortune cookie’ gimmick?’ She appeared nonplussed for a second but soon dismissed my arguments that Bitcoins will have a short expectancy as juvenile!!

But the idea of ‘cryptographic currency’ stuck on – me being a sucker for anything to do with technology and I kind of clandestinely researched on it and found the concept quite interesting. Being an eternal optimist, I found it to be viable for an alternate currency for the future.

So what follows below is not a sermon, but you can take it as a guide – ‘Bitcoins for dummies’. I have carefully crafted the elucidation considering the fact that it has to be simple enough for even my grand-mother to comprehend. So here it goes folks but first a disclaimer – I am no ‘Bitcoin’ expert (WIP), though my wife is.Also all keywords worth keeping in mind are italicized.

Cash – Well that’s the second thing that makes the world go round (the first being love and third being technology).In our worldly transactions wherein we exchange physical notes of value out of our ‘wallet’ there are 2 parties at play – the central issuing authority (for India, it is RBI) and the intermediary private and government banks who act as safe keepers for our cash. But with advent of tech, physical cash is paving the way for ‘electronic’ payments and I am certain all of us have done an online electronic payment or transfer sometime and this money is stored as a number and not as physical cash on some IT server/ system of the intermediary bank.

So, pointedly, our banks act as safe-keepers and score-keepers of our money and in it we trust with utmost sincerity. I know I am kind of beating about the bush, but guess the emphasis is the key of getting some complex ideas appear simple. Ok, so coming back to the point, what if you were, even hypothetically, given an option to store this electronic form of money on your desktop/ laptop/ computer. What would this be – A text file with a number? But then what happens if I play the devil and copy this text file ‘n’ number of times to increase the worth – that would be cheating or as they say ‘double spending’. It would be akin to counterfeiting.

So how do banks control this ‘double spending?’ The simple answer is time stamping.  They keep a watch on your score – like a clerk saying “this payment came first, and then this one, but only the first one is valid, because the account does not have a high enough score to complete the second payment”. But can we now break away from this intermediary labyrinth and start treating electronic payments like actual hand-to-hand cash delivery wherein there is no middlemen?

So while it’s true that I can send cash in an envelope to someone in Kolkata, how could I do the same with electronic currency without having banks acting as central intermediaries in the process – Lo and behold – Enter ‘Bitcoins’. Its human nature to ‘trust’ and this sometimes leads to pain, and ‘Bitcoins’ attempt to break this monopoly of trust.

Let’s cut chase and jump into the math.

So I tell my bank – I want to pay INR 100 from my (ICICI) Bank account to Mr. X who has an AXIS bank account, and please transfer the money” and the two banks involved would record it on their ledger, first checking to see if you actually had enough to pay that, leaving you with a residual amount in your account.

Now let’s imagine you have 2 bitcoins. But in the Bitcoin system, there are no people’s names; there are only numbered addresses which are called Public Keys – an identification number, and any bitcoins in the system are attached to (or belong to) particular public keys, which in turn belong to actual people. If I want to spend bitcoins, I must first broadcast an electronic message to the ‘Bitcoin network’ saying something roughly like:

“I am Public Key 1sdafpksf03fkkf3kfqfdkdkasdk

I wish to transfer 1 Bitcoin to Public Key 1KDKokokvoejvcev0cceoje

Please check this and record it on the ledger”.

And this ledger in the Bitcoin world is called the ‘Blockchain’. It is disctinctively different from ledgers in our banks on account of the fact that everyone’s ledger (of different accounts / public keys) are fused into one giant interconnected ledger showing all transactions that had ever occurred between users of a particular electronic currency – aka bitcoin. The network collects all the transactions as ‘blocks’ and who checks if the attempts to transact is legitimate or not – well, enter the ‘miners’ – a group of workers – decentralized of course who work tirelessly to make sure sanctity prevails. And as a kickback they get rewarded with bitcoins – The system is built such that you mine new bitcoins by checking that old bitcoin transactions are legitimate, and it’s thus a currency that grows in the process of people trying to maintain its integrity.

But at this step it’s important to actually do a speed check and have a look at the actual algorithm / process here by Satoshi Nakomoto – the ‘baap or father’ of bitcoins. And, if you are a tech sycophant like me, check the concepts of public key cryptography, digital signatures and cryptographic hashing.

So, just to explain it more lucidly I have a diagram here:

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Payment is thus an act of public recording, not an act of private giving. Using this system, I am able to pay someone in Kolkata using a simple internet connection to give an electronic shout-out to a public network. After 5-10 minutes or so the recipient will see the changes reflected in the blockchain, and voila they have received their bitcoins from me

As per me Bitcoin indeed is pretty amazing, but it has also attracted a lot of hype and engrossed lot of ideologies. I am watching the same in close quarters and so can you by understanding it more before taking the plunge – check out: https://en.bitcoin.it/wiki/FAQ#What_is_Bitcoin.3F

As I already mentioned, I am still a novice but twitching at the idea of BITing the COIN!! And as a postscript, I am keen to see some co-innovation projects in SAP wherein a solution to using Bitcoin as a virtual currency payment system is tried out.

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4 Comments

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  1. Shweta Kesarwani

    Good work.

    It would be interesting to monitor the ascent if this “New Money”. Discussions have begun on the regulation and taxation of this virtual money.

    Excerpt from a Forbes blog,

    In December the Congressional Research Service issued a report which came to the following conclusion:

    “Bitcoin raises a number of legal and regulatory concerns including its potential for facilitating money laundering, its treatment under federal securities law, and its status in the regulation of foreign exchange trading.”

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    1. Abhik Shome Post author

      Yes Shweta, that is correct. RBI had also issued a warning on the same in India more towards chances of money laundering. But then again, with all new things comes equal about of scepticsim. So lets see of what ‘color’ this money is.. 🙂

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    1. Abhik Shome Post author

      Thanks MGR.

      Yes. The rates have catapulted of late. Hence nowadays people are investing in terms of

      5K INR or 10 K INR which roughly simmers down to 0.14 BTC or 0.30 BTC.

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