Sunday, January 25, 2015

Bitcoin: What's the big deal?

TechTalk Summary: The intention is to understand a topic by raising and answering questions by participants, all of whom are interested in exploring the topic further. Most of the discussion is performed by novices in the field, so most progress is based on first principles. And there could be technical faults in the discussion captured below.

{ This is Part 2 of the Bitcoin TechTalk series. The previous TechTalk about Bitcoin is available here: Bitcoin: A Bubble? }

A: So new currency you say, why do you need a new currency?
B: It is a decentralised network, there is no central authority. So a central authority cannot ask you for a high percentage of commission. A network of miners maintain the network and they are rewarded by new bitcoins for their work.
A: Well, that is for now. Once the transaction volume increases,who is to stop them for charging high commission?
B: Well since anyone is free to participate in the miner network, hopefully economic/competitive equilibrium is reached.
A: Hmm... but if anyone can participate in the miner network, how do you avoid malicious activity?
B: That is the crux of the bitcoin algorithm. It maintains a distributed ledger of all transactions since Bitcoin's birth. Adding transactions to this ledger requires high computing power. And every miner in the miner network is in a race to add transactions to this ledge. On the other hand, validating transactions from the ledger requires very few computational resources. So it is easy for the miner network to identify and discard malicious transactions.
A: While the distributed ledger in itself is useful in a lot of situations beyond currencies, the very low transaction charges implies that you could perform very small transactions without incurring much cost. A slew of new and interesting ideas could be implemented with this. (Ref: Why Bitcoin matters)
B: But the cost of bitcoins is too high, I don't think micropayments is an option at all.
A: Actually, the bitcoin protocol has a nifty feature where you could divide a bitcoin down to as small a fraction as you wish. Currently the smallest unit of bitcoin, also called a satoshi, is 1/100,000,000 BTC

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