Above: The bitcoin logo (Davidstankiewicz, Wikimedia Commons)

Suppose you’re trying to buy a new album online. You can’t find it on your usual music streaming service, so you decide to get it from an online store instead. And they primarily take credit cards.

Not everyone has a credit card. And even if you do, is it safe to use online? Is it a good idea to reveal your identity to this merchant? Does most of the money go to your favourite artist, or does a lot of it go to a middleman?

You might be able to avoid some of these issues by paying with bitcoins. Bitcoin transactions rely on something called a blockchain system, which acts as a trust engine. In other words, the blockchain gives buyers and sellers a lot of confidence in their bitcoin transactions.

And as the technology develops, blockchain systems will be used for a whole lot more than just buying things online. Someday, blockchains could completely transform things like banking and government services as well.

What is bitcoin?

Bitcoin is not managed by a bank or any other financial organization you might see around town. It’s a digital currency, so it only exists electronically. Bitcoin is also a cryptocurrency. That means bitcoins are created and transferred in secret code by computers running special software.

Nowadays, many merchants accept bitcoins. You can buy bitcoins using Canadian dollars or many other currencies. To get started, you need to set up a bitcoin “wallet”. The website bitcoin.org provides links to various commercial websites offering this service.

Did you know? Bitcoin was born in 2009.

Blockchain: The basis of bitcoin

I already mentioned that bitcoin is based on something called a blockchain. This is a digital ledger that can keep track of many things. The bitcoin blockchain contains the history of every bitcoin in circulation, and every transaction it has ever made. This blockchain is distributed across many computers around the world. Anytime a new bitcoin transaction happens, it gets recorded on the bitcoin blockchain.

How do bitcoin payments work?

When you go to buy music with your bitcoins, your wallet software will make sure you have enough. Your request is then encrypted (coded) into a series of numbers and letters called a hash. Each hash is connected to a difficult mathematical puzzle that must be solved in order to complete the bitcoin transaction.

Next, a group of people called miners get involved. Miners use software to resolve the puzzle through trial and error, and by testing trillions of possible solutions. Imagine if you went to buy music at a record store. And rather than asking for money to complete your purchase, the cashier asked others to answer a difficult quiz on your behalf. Once someone got the quiz right, you’d get to take your music home. That’s kind of how miners work!

When a miner finds a solution, other bitcoin computers across the network will check that miner’s work. And once the work is validated, the new block is copied onto the end of the blockchain. Your transaction is complete: your bitcoins are spent and you can enjoy your music!

But why would a miner spend their time trying to help you buy music? Mining is actually a way to earn bitcoins: the first miner to solve a puzzle gets more bitcoins in their wallet.

Did you know? There is a limit of 21 million bitcoins that can ever be mined.

In blockchain we trust

People trust bitcoin transactions because of the bitcoin blockchain. It lives on an open and secure network of computers, which can verify that the bitcoins people spend are real.

But blockchains can be useful in other areas, too. For example, some governments are considering using blockchains for services that require you to prove your personal identity, like opening a bank account or applying for a driver’s licence. Your school could use a blockchain to create tamper-proof academic achievement records, and online music services could use one to keep track of the music you buy.

In all cases, the reason for using a blockchain is simple: it provides a historical record that no one can change. Remember the hash? If anyone tried to tamper with records, the new blockchain hashes wouldn’t match the old ones, and all transaction processing would stop. This makes it very hard to cheat. Also, the blockchain ledger is distributed across thousands of computers, which aren’t controlled by any single person or organization.

Did you know? The value of bitcoin fluctuates. In early 2017, one bitcoin was worth over 1000 Canadian dollars.

So what about my music?

So let’s get back to that music you wanted to buy. Have you ever thought about the challenges musicians face when trying to sell their music? They often have to negotiate with record labels and broadcasters, who take a cut of revenue in order to handle advertising, licensing, and payments. Blockchains could change this by helping to cut out the middlemen who handle sales transactions. More of your money would go directly to the artists you love.

Blockchains are powerful trust engines. The confidence they provide may eventually replace the work of some of the organizations people trust today, like record companies, banks and even governments. Important institutions that have lasted decades or even centuries could fade away. Imagine how that might change the world!

Learn more!

About bitcoin:

The great chain of being sure about things (2015)
The Economist

The trust machine (2015)
The Economist

What Is Bitcoin and Its Current Crisis? (2014)
L. Greenemeier, Scientific American

12 questions about Bitcoin you were too embarrassed to ask (2013)
T. Lee, The Washington Post

About the impact of bitcoin:

Lawrence Ostroff

I have been with SAP for several years, working in consulting, solution management, operations, and other areas. I'm currently in a go-to-market role covering strategy, planning, and execution. Before joining SAP, I worked in information technology management positions at various companies, and I hold a BA in Applied Mathematics from UC Berkeley and an MBA from Wharton. I've had the good fortune to travel around the world for business, and I've developed an interest in learning foreign languages, including Chinese and Japanese.

Je travaille pour SAP depuis plusieurs années, dans des domaines tels que la consultation, la gestion des solutions et les opérations. Actuellement, je me concentre sur la commercialisation, y compris la stratégie, la planification et l’exécution. Avant d’être embauché chez SAP, j’ai travaillé pour diverses entreprises dans le domaine de la gestion des technologies de l’information. Je suis titulaire d’un baccalauréat en mathématiques appliquées de l’Université de Californie à Berkeley et d’une maîtrise en administration des affaires de la Wharton School. Dans le cadre de ma carrière, j’ai eu la chance de voyager partout dans le monde. J’ai également développé un intérêt pour les langues étrangères, dont le chinois et le japonais.

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