Matt Gibson explains how bitcoin works and the role blockchain technology plays in in its existence

Matt Gibson explains how bitcoin works and the role blockchain technology plays in in its existence

By Matt Gibson*

At the start of 2017 ‘Bitcoin’ entered the zeitgeist and has since never left. It’s mentioned everywhere online. It’s mentioned by everyone at work. It’s even mentioned as pick-up lines in online dating apps albeit to unknown success.

So what’s all the fuss about? What is Bitcoin and the blockchain?

Quite simply Bitcoin is decentralized digital money and the one word in that definition that makes it so revolutionary is the first one. It’s decentralised.

Digital money is nothing new, we use it everyday in our lives and have done so for years. We use digital money through online banking when paying bills and moving money between accounts, or when paying for things online. However with all these scenarios there is one thing in common. You have to go through a central authority - a bank or a credit card company, and that gives them a lot of power and control.

They decide where your money can or can’t go, they decide the fees they charge you, they decide the data they keep on you. Have you ever thought why it costs so much to send money overseas? Shouldn’t it be fast and seamless with today’s technology? Also why do I need to be charged 3.5% on every credit card transaction? Is the value that these credit card companies provide really worth the amount of money they are earning from online transactions?

The fundamental question this brings us to is, do we really need centralisation in our monetary system?

Well, a central authority does an extremely important job, they validate transactions. They check their ledger to make sure I have enough money in my account to send to someone else and that the transaction has been confirmed via both parties.

So if we are to get rid of a central authority how would a decentralised payment system work?

We would still need a ledger and someone to check each transaction, without this people would be able to spend money they don’t have or spend the same money twice as there is no one to check their balance, their incomings and their outgoings.

But who would we give this ledger too?

Rather then trust one random stranger online with this vitally important job, Bitcoin trusts thousands of strangers scattered all over the glove where the majority have to agree upon the validity of a transaction before it is confirmed. This distributed trust network is another technology you may have first heard about in the last 18 months, ‘The blockchain.’

If you were to look up the definition of a blockchain you may read something along the lines of, “A continuously growing list of records, called blocks, which are linked and secured using cryptography.” This definition is very opaque, a more understable definition of a blockchain is, ‘A ledger that is duplicated thousands of times across a network of computers that regularly update.’ On the face of it, it is that simple - where instead of only the bank having a ledger of account numbers and the cash balance associated with each account, thousands of people have it.

It is important to note that the blockchain was invented along with Bitcoin but they are not inherently tied together, Bitcoin is just one application built using a blockchain. A blockchain can be used for a multitude of technologies and applications like logistics, property ownership and healthcare to name a few.

But back to Bitcoin, it has now been around for almost 10 years, it has undergone thousands of attacks from hackers and governments yet not once has the network been taken offline or taken down. It has so much computer power behind it that that a successful attack on it is practically impossible. It is a financial technology that is not going anywhere.

Matt Gibson is part of the team at

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Bitcoin is a Monetary System. Think about that, Bitcoin is a Monetary System. The best attribute of Bitcoin is its immunity to 'bank holidays'.

If the housing market in NZ collapses, banks could simply take customer deposits to stay capitalized. Rogue governments might take your stocks, even your vaulted gold might be seized.

As for Bitcoin, it's yours, there is no Bitcoin HQ where rouge banks and governments can demand your Bitcoin be handed over.

Venezuelans love Bitcoin.

I presume you mean rogue instead of rouge.

Common commenters mistakes aided by spellcheckers
loose instead of lose - I truly fear that this will become common usage
boarder instead of border

No, it's rouge cause they got "blood on their hands" ;-)

Bitcoin is based on the greater fool theory.
If I want safety I buy gold. I want something tangible and that I can barter with if the world goes “tits up”.

Blockchain technology is going to be huge though.

That's sloppy thinking because you're more or less saying people only buy Bitcoin to speculate on the price AND that it's a Ponzi Scheme.

1. People use Bitcoin for remittances, donations, e-commerce, store of value in failing countries, banking the unbanked etc. The greater fool could be the merchant paying huge Visa fees OR citizens of failing countries holding onto their failing currencies.

2. If the world goes "tits up" Bitcoin will still exist, it's not a bank that can fail.

3. Bitcoin's price has 'crashed' many times and the price fluctuates. This is very much the opposite of greater fool theory and Ponzi schemes .

4. Lastly when people say "Blockchain technology is going to be huge though" it shows people don't actually understand that Blockchain technology is only really useful for money, almost everything else is better off in a standard (centralized) data-base.

Not all people buy bitcoin to speculate on price but it’s an unregulated ponzi scheme. People don’t buy bitcoin to pay for donations or e-commerce. Some have happened to have bought into the fad and they happened to have the need to donate etc and the place happened to accept bitcoin as payment.

Spoofing, wash trading, painting the tape you name it, all stock market manipulation tactics are allowed and being carried out by the exchanges without any regulation. If it wasn’t for that the ponzi would’ve died long time ago. Let’s not even talk about tether named USDT the fake money printing press and the exchanges acting like the federal reserve injecting fake capital.

Also are you saying the internet and bitcoin nodes will still exist when the world goes tits up? I guess it depends on your definition of "tits up".

I own crypto and no, I’m not complaining the fake trade volumes are keeping the market and my portfolio up. I’m just saying it like it is.

If the world loses the internet, Bitcoin will be the least of our worries - though their are privately rented satellites that host nodes that cover most of the world.

How is Bitcoin a Ponzi Scheme? Name ONE decentralized Ponzi Scheme? Name ONE Ponzi Scheme that can decrease in value 80% and not collapse? You are talking absolute rubbish.

People take donations in Bitcoin all the time, heaps of YouTubers flick their QR code online. There are charities that only accept Bitcoin. Then there are those Visa won't touch like WikiLeaks, who have been accepting Bitcoin for agers.

Not the world, just the local area around your city. Happened last couple of months, power and internet cuts happen often in NZ. We certainly do not have the luxury to exert the power use of Ireland into just getting a small number of users able to transact. We tend to rely on systems that can provide good access and transaction scaling for the whole country. If it makes you feel better they looked at decentralisation over a decade ago... not much technically changed when they added the brand names so it is still as useful as it was a decade ago. Good for those seeking venture capital though, it has sparked whole new investment fashions, which tech was needing. It was getting stale and a bit whiffy over there. The VR lot was a bit slim on the ground & IoT was as contagious as the herpes simplex virus with the same value proposition in much of it.

If power cuts happen, bank-cards don't work. The difference is if your phone is charged (which can be done using your car), you can still transact in Bitcoin, as you'll still have access to the internet via cellphone towers with battery backups. Also satellites are being used to stream (run nodes) the Bitcoin ledger globally .. so with some cheap sat-gear you can have yet another backup.

As for power usage, everybody is free to mine (validate transactions) for Bitcoin. People still have to pay for the power usage of their machines, and if Bitcoin's prices fall, many may not be mining enough Bitcoin to cover costs, so they'll turn off their mining hardware. Mining companies move to where the cheapest power is. There are many places in the world that generate excess power - even Australia (solar)! What better use than to turn excess power into cryptographic secure Bitcoin - you are short-sighted to how this could drive clean energy forward.

To be clear, the amount of energy used to mine Bitcoin has NOTHING to do with the number or speed of transactions. Everyone's Bitcoin Ledger (copy of the blockchain) is updated approximately every 10mins, regardless of power usage (mining hash-rate).

As for transaction throughput, Blockstream's lightning network is currently in testing and making live lightning transactions. MIT is working on LIT Box, another implementation. These second layer solutions will leave the SWIFT system an Visa in the dust. At the moment, after SegWit's mass adoption (Bitcoin update), there is no backlog of transactions on the Bitcoin network and hasn't been for some time.

To be clear again, New Zealand could have ZERO full nodes and ZERO people mining bitcoin - yet if you have a smartphone you can still download a Wallet and transact in Bitcoin. Also, Bitcoin is a decade old.

It is estimated that over 50% of the money in bitcoin is dirty money. It needs to become regulated and traceable.

I don't think that's true (50%), also money is fungible so the idea of 'dirty money' is moot.

When you make up stuff don't use round number, 98.7% of the time people will see though it.

On a side note if you didn't make that stat up, congratulations your the 1.3% well done.

We mined our own bitcoin back in 2012/2013. Not for money, but because we are geeky and enjoyed experimenting with the tech and the idea/philosophy of a new method of exchange that circumnavigated banks.

We've watched the market in cryptos go up, down several times since those early days. Last December there was definitely something of a "tulip" moment, but the subsequent crash hasn't wiped out use or interest in cryptos, which have crashed many times before almost on an annual cycle.

There is a whole generation of us that want cryptos to work. Not to make a quick speculative bet, but because we don't trust banks to have societies best interests at heart. There are a very large group of millennial's where cryptos are part of their political and ideological beliefs and it's a global phenomenon. An area where a kid in South Korea shares the same ideology as a kid in Venezuela or France. Whenever I see older people commenting on cryptos it's clear that they have zero awareness of this. They are not on any of the crypto forums, they are not part of those conversations and they don't understand how important cryptos are on that level.

Crypto has behaved like a ponzi on several occasions, but so have many other markets. It just happens because people are involved and that's just human behaviour. We create ponzi-like schemes over and over with our FOMO mentality.

I personally hold a whole swag of different cryptos and will support them for as long as I believe in the hope that they offer an alternative to the banks.

Damn wrong Matt Gibson, bring back the mathematics genius of high dimensions. I got my hopes up but the title was a billboard. Matt would not write anything as trite. Bit of a downer. No mention of this Matt being as high as the COO at MyCryptoSaver, essentially paid to sell the stuff. But why not, a crash of 11% in a week is a perfect time to buy in & take a punt right... yeah not really. Not unless you had an itchy trigger finger & plan to dump it all very shortly.
On the topic:
and power hungry bosh

Frankly making all personal transactions non private without warrant is particularly a sticking point for any grown man. But hey I won't publish your use of porn & medical services if you don't.

6 years of this, 6 fricken long years. How many more paid intro advertisements are there going to be. Re-detailing the basic intro provides no investment news. Even smart phones needed less intro lead time than this, online trading got adapted to pretty quickly, so did virtual servers. We can skip the intro.