Cryptolingo
There are thousands of cryptocurrencies in the market, and tons of information everywhere. That is why we have prepared this introduction. We will get you there as soon as possible, with hands on experiences. We will write in capital letters the key concepts in the field so you can learn the crypto-lingo on the way.
Cryptocurrency Vs Digital Money. Similarities and differences.
Before we start let’s make clear that most of the money used nowadays is digital money. Only few percent of the total supply of money exists in physical form.
The normal money used by countries is called FIAT, this is the latin for: “let it be done”. And it is called this way because this money is backed up by laws and regulations only.
Fiat can be created at will by central banks, and this is the cause of INFLATION. Bitcoin on the other hand has a limited supply of 21 Million BTC, and it requires energy and computing power to create it.
Fiat is the money we “have” in banks and gets transferred from one account to another using credit or debit cards, or via bank transfers.
We mention there are thousands of cryptos, but they fall in two basic types: Bitcoin-like and Ethereum-like.
Therefore, to simplify more when we say cryptocurrency, think Bitcoin as the fundamental example.
Bitcoin was designed to be like money. It is a digital asset that has a real cost of production. It behaves like a commodity and it takes energy and computing power to create it.
Ethereum was designed as a decentralized virtual computer. (We will talk about Ethereum on section XY)
There are other cryptocurrencies that can be created out of thin air like fiat, but we are not going to talk about those in these series of talks. And strongly advise you to stay away from them.
Digital Cash:
CRYPTOCURRENCY is more like cash than the digital money used in banks.
With cash you give it directly to another person, no need of verifications or approval from a central authority. The bills and coins have all the necessary proofs that they are legitimate.
Off course still can be counterfeit, but let’s leave this aside for now. On the other hand, cryptocurrency can’t be counterfeited.
Cryptocurrency behaves like digital cash. You transfer from one person to another privately and anonimously, and there is no need of a trusted third party to approve or verify the transaction.
The main feature of the Cryptocurrency technology is to eliminate the need of trusting a third party to make the transaction.
This is an unprecedented technical achievement, this is what makes cryptocurrency one of the most important technological advancements in history.
One important consequence of this is that you are the only one responsible for your cryptos, if you lose them, there is no way to recover them. Nobody knows that you had them in the first place so you can’t complain or ask for help. This is the most important thing to keep in mind, we will get back to this later on.
Crypto-Currency:
Cryptocurrency is a DIGITAL ASSET that can be used like money. The fundamental element of this technology is CRYPTOGRAPHY, and hence the name Crypto-Currency. Being a digital asset means it is something you can own.
Transactions:
From the practical point of view, a cryptocurrency, and digital money transaction look very similar. In order to see the similarities and differences, let’s imagine that Alice will send money to Bob, using digital money and using cryptocurrency.
If you don’t know Alice and Bob, means you are really new into crypto! We will talk more about them when we have a look at CRYPTOGRAPHY. Don’t be scared, you use that everyday even if you don’t know it.
Digital Money Transaction
In this transaction Alice has to log into her bank account and transfer the money to Bob’s account. Bob has provided her in advance of his bank account number.
The banking system is in charge of verifying that Alice has the required funds, and that Bob’s account exists, and updating the account balances after the transaction takes place.
This type of transaction is CENTRALIZED because the bank system has to process the transactions. Validate, approve and execute them.
The Bank acts like a TRUSTED THIRD PARTY in the transaction.
Cryptocurrency Transaction
To make this transaction Alice logs into her wallet and send the crypto to Bob. Bob has provided in advance his PUBLIC ADDRESS. This is similar to his bank account number.
So far the two transactions look very similar. However, in the digital money case the transaction was handled by the banking system. In cryptocurrency, transactions are handled by a DECENTRALIZED computer network.
A decentralized computer network is the essence of cryptocurrency, so let’s take a minute to understand the basic differences with the banking system.
PEER TO PEER NETWORK
The cryptocurrency decentralized network is a group of computers (called nodes) that talk to each other trough a special communication protocol.This is like a technical language computers use to communicate.
All nodes in the network stand on equal footing that is why it is called PEER TO PEER. Nodes can join or leave at will and this does not affect the performance of the network.
It is DECENTRALIZED because there are no nodes with special priviledges, all nodes are equivalent.
Anybody around the world with the necessary equipment can be part of the network. There is no need of permissions to do that either.
The network keeps the record of all transactions in a special database called THE BLOCKCHAIN because of the way it stores the transactions in groups called blocks.
Because any node can join or leave the network, the blockchain is a public database, any node can see all the network transactions.
Privacy is mantained because everybody can see the PUBLIC ADDRESSES but nobody knows who owns them.
If you have somebody´s public address you can use a blockchain explorer and view all transactions made by that address.
Security in a decentralized network.
In a cryptocurrency decentralized network, all nodes keep a copy of the block chain, they are updating the blockchain all the time with new transactions.
If some malicious actor wants to cheat the system introducing a different blockchain, it could do it only in some of the network nodes. As long as the majority of the nodes have the valid blockchain, any efforts to introduce a false blockchain will be discarded by the network.
You may hear at some point the term 51% ATTACK. This refers to the situation where some malicious actors have more than 50% of the nodes of the network and they can, in principle introduce another version of the blockchain.
This is very different from the banking system, where the security of the database relies on the physical security of the computers operating the system. And privacy is kept only to some extent because the bank employees know everything about your transactions.
No 51% attack has never being recorded in 15 years of Bitcoin history, and nowadays the ammount of energy and resources needed to do so make it virtually imposible to do due to the way that Bitcoin has implemented the Block Chain and the Peer to Peer network.
On top of that, it is also economically unfeasible, because the only thing that a malicious node can do is to DOUBLE SPEND, meaning that you could send the same bitcoin to two different recipients.
Therefore, if somebody had enough computing power to control more than 50% of the nodes, this person would get more money by being honest than by trying to cheat the system. We will see this more closely on the Bitcoin section XYZ.
In particular, a malicious actor can´t “hack” into another person account. The Bitcoin blockchain is one of the most secure databases in the world. To understand why requires some knowledge of mathematics, but let us outline the reason why:
How secure is Bitcoin?
The security of the cryptocurrency is based on a mathematical imposibility, it is not possible to find the solution to the equations that relate the public addresses to the “master password” called PRIVATE KEY.
Some things are hard because there is not enough time, money or intelligence to do them, but in mathematics there are things that can be proven to be impossible. That is the kind of impossible we are talking about in cryptocurrency.
The weak point in any cryptocurrency technology is the human factor. The two most dangerous things in crypto are:
1) Losing your Private Keys. If this happens you loose everything. 2) Somebody steals your Private Key, if this happens this person is in control of your cryptos.
Decentralization and cryptocurrency mining:
For the system to be decentralized, it has to be autonomous and self sustainable, otherwise whoever pays for the system would have control over it.
The nodes join the decentralized network because it is profitable to do so.
The Bitcoin system rewards the network nodes with Bitcoin. The nodes keep updating the blockchain, and processsing new transactions. But once every ten minutes on average one of the nodes receives a MINT TRANSACTION, a special type of transaction where new Bitcoins are added to the system.
This happens at random, and the network nodes keep working on adding transactions and updating the database to increase the chances of receiving a mint transaction and be rewarded with Bitcoin.
The process of updating the blockchain is called MINING, and the network nodes that work verifying transactions and adding new blocks to the database are reffered to as MINERS. The constant process of verification is also reffered to as PROOF OF WORK as it requires energy and computing power to do it.
Proof of work uses a lot of energy and computing power, and it gives a real cost of production to Bitcoin. In this way Bitcoin is a digital asset that behaves like a commodity.
Cryptocurrency Mining solves three important problems:
1) It is a fair way to distribute the cryptocurrency among market participants. In this way there is no need of a trusted mint, or central bank issuing the currency.
2) It rewards the nodes contributing to the functioning of the network.
3) By using energy in the process it creates a physical barrier for attackers who might want to orchestrate a 51% attack on the network.
Proof of work effectively converts energy into currency. If the system relies on human laws, good will, altruism, or any other form of agreement, it would be less secure.
Bitcoin Halving
We mentioned that there will only be 21 Million Bitcoin. This is hard coded into the source code of the Bitcoin software, and it is the main reason for Bitcoin price to rise. The absolute scarcity of Bitcoin makes is the ideal store of value.
At the same time Bitcoin comes to existence every time a miner gets a Mint Transaction.
To have a finite number of Bitcoin the mining reward of Bitcoin is halved every four years on average.
So it is becoming more scarce over time, and this pushed the price further up.
The network nodes also receive tips to give priority to include transactions on a block chain.
Eventually the mining rewards will be very small and the network will live out of tips or transaction fees.
Summary of Differences between Fiat and Crypto:
• A fiat transaction is processed by the banking system.
• A cryptocurrency transaction is handled by a decentralized peer to peer network.
• Cryptocurrency is like digital cash. A Fiat digital transaction requires verification and authentication by the banking system.
• Cryptocurrency is private. Fiat is handled by the bank.
• Fiat can be created at will by the central banks causing inflation.
• Cryptocurrency like bitcoin has a limited supply.
• Cryptocurrency is international.
• Fiat transactions are tied to the banks.
How does crypto works on daily life?
Let us finish this introduction with a mental exercise, let’s imagine a day in the life of a crypto investor, so you have a clear picture of what you can do.
A normal crypto user (not somebody operating a network node) interacts with the cryptocurrency network with a piece of software called WALLET, it may be a phone APP, a web browser extension or a stand alone desktop program.
All you ever have is your private keys, these are typically a set of 12 words that are used to generate all the crypto addresses to handle the cryptocurrency.
With your 12 words you can recover all your cryptos in any place or device. Just install a wallet software, input the 12 words and the wallet recovers from the network all the associated cryptocurrencies.
In other words, you don´t “have” the cryptos in your wallet, only the private keys used to transfer them from one address to another.
You can send cryptos to anybody in the world. You only need their public address to do so. Likewise you can receive cryptos from anybody in the world without permission of any authority.
To buy cryptocurrencies, like Bitcoin or Ethereum you have to sign in to a cryptocurrency exchange, called CENTRALIZED EXCHANGE (CEX). Typically you have to complete a KYC (know your costumer) verification and then you can have an account with the CEX where you can buy and sell cryptocurrency.
A CEX is a big market and you can buy and sell there hundreds of cyptocurrency assets.
It is worth noticing that cryptocurrency trading is not an easy thing to do, most people lose money. A good understanding of the mechanisms behind price movements is necessary to adopt a strategy that give you good results.
If you buy Ethereum, you enter a whole ecosystem with thousands of cryptocurrencies, you can buy and sell these on DECENTRALIZED EXCHANGES (DEX). The ethereum network allows the construction of many web applications that use blockchain technology. This is called the WEB III
General Background:
There are two crucial ingredients in Cryptocurrency that we use everyday in computer networks: Cryptography, and Proof of Work. Let’s take our time to review these very important ingredients of cryptocurrency technology.
Cryptography
Crypto currency is a technology based on cryptography. It will be very useful to know a few basic concepts to understand the language used in crypto.
The oldest use of cryptography is to send messages from one person to another but written in such a way that only the sender and the receiver can understand the message.
For this system to work, the sender and the receiver have to agree on a “key” to substitute the letters of the message for other set of symbols that only they know.
The sender takes the original message and applies the rules given by the “key” to convert the original message into an uninteligible message. The sender “encrypts” the message with the key.
This message can be delivered to the other person and it does not matter if others can read it, because without the “key” they can’t decipher the message.
When the receiver gets the message, he can convert it back to the original form using the same “key” that is known only for the sender and the receiver.
This is widely used in telecomunications to make sure that the information remains private even if it is being broadcaster trough a public network.
This type of cryptography requires that the sender and receiver have to agree and share the key before sending messages.
Cryptocurrency uses a different kind of cryptography that does not require the sender and the recierver to agree before sending messages.
Public and Private Key Cryptography.
Public Key cryptography involves a pair of keys:
A) A Private Key, which is supposed to be secret. B) a Public Key, which can be shared openly.
Information encrypted with the Public Key can only be decrypted with the corresponding Private Key.
Information encrypted with the Private Key can only be decrypted with the corresponding Public Key.
This is very useful for creating digital signatures.
For example:
Alice signs a document with Alice’s Private Key. Anybody with Alice’s Public Key can be sure that the document was signed by Alice. (Assuming she is the only person who can use Alice’s Private Key)
And secure communications:
For example:
Bob wants to receive a secret message from Alice,
Bob send’s Alice his Bob’s Public Key. Alice will use Bob’s Public Key to encrypt the message. The message can be sent trough a public channel and be visible to all, but only Bob can decrypt it using Bob’s Private Key. Bob can reply to Alice as well, If Alice can decrypt the message with Bob’s Public Key, then she knows the message was created by somebody who has Bob’s Private key. That is why it has to be really private: To make sure the message is from Bob if it was decrypted with Bob's Public key. This method has the advantage that two unknown persons can send encrypted messages to each other by sharing their Public Keys. Public and Private Pairs of keys are the heart of cryptocurrency technology, they match each other like lock and key. Let’s illustrate how it works in Bitcoin. Relation to Bitcoin: Roughly speaking, in Bitcoin, your Private Key will be associated with your "wallet", The Private Key can create many associated Public Keys that will be associated with your "Bitcoin Addresses". When a new address is created it is empty, and then anybody with the address can send Bitcoin to it.
Every Bitcoin address contains either zero or some Bitcoin. Only the person who owns the private key that created the address can transfer the bitcoin in the address.
Bitcoin Transaction:
Let's suppose that Alice transfers 1 BTC to Bob. Alice is the owner of 1 BTC in Alice’s Address 1. Alice’s Address 1 was created with Alice’s Private Key. And only Alice can transfer the 1 BTC at that address. Bob owns Bob’s Address 1 that was created with Bob’s Private key. In a (oversimplified) way, a bitcoin transaction is like a document or receipt where: 1) Alice transfers the ownership of 1 BTC at Alice’s Address 1 to Bob’s Address 1. 2) Alice signs the transaction with Alice’s Private Key, authorizing the transfer from Alice’s Address 1 to Bob’s Address 1. The fact that the transaction is signed with Alice’s Private Key proves that Alice’s agrees to transfer the property of 1 BTC to Bob.
Double Spending:
The problem with this oversimplified analogy is that Alice can transfer the property of 1 BTC at Alice’s Address 1 to more than one person.
After sending the transference to Bob, she could send another transaction to Carl (for example).
This is the problem known as DOUBLE SPENDING.
Both Bob and Carl have the proof that Alice owns 1 BTC at Alice’s Adress 1. And has agreed to transfer the property, because the transaction is signed with Alice’s Private Key.
One way to prevent this situation to happen, where the same Bitcoin can be used more than once, is to have the transactions time stamped, and the first transaction that arrives is final, when a second transaction arrives spending the same Bitcoin, the transaction fails making sure that the first transaction to arrive is the valid one. Proof of Work:
Proof of work is widely used in computer networks to avoid spam.
For example with E-Mail, every email sent requires the sender to solve a computing task that consumes energy and time. This is the Proof of Work.
For a simple message this is not a burden to the sender. But if you want to send thousands of messages, the ammount of energy and time required to send them would be an obstacle. In this way Proof of Work reduces spam by making it very expensive and time consuming.
In Bitcoin:
All nodes in the Bitcoin network are validating the block-chain. Each validation consumes energy and computing time.
If, at some stage more than one version of the block-chain appear, the network allways takes the block chain with more validations as the true block chain.
In other words: The block chain that represents more energy and time is taken as the valid chain.
If a malicious actor wants to double spend some BTC, he has to create another version of the block chain, and get more validations than the “honest” block chain.
When more than one block chain appears, the network keeps track of all versions until one of them becomes the one with more validations.
Most of the network is working on the honest chain, a malicious actor has to employ more energy and computing power than the rest of the network in order for his block chain to have more validations than the honest chain.
Spending all that energy and computing resources is economically unviable.
If somebody has that much energy and computing power, he can make more money supporting the honest chain than trying to double spend and destroy the system that is creating so much profits.
Ethereum Virtual Machine
Ethereum expands beyond Bitcoin primary function as a digital currency, offering a platform for developing decentralized applications.
The Ethereum Virtual Machine runs “smart contracts”, which are programs which interact with the blockchain and execute automatically when certain conditions are met. Without third party interference, downtime, fraud, or control. Which has led to its widespread use in areas like finance, real estate, non profit organizations, and gaming.
One necessary condition for a smart contract to run is that somebody has to pay for the “gas” to run it.
The gas is a fee that the user has to pay to run a smart contract. The gas fees are related to the number of computations involved in the execution of the smart contract.
These gas fees are an economic incentive for network nodes, and also prevent a smart contract to get stucked on an infinite loop.
Ether (ETH) is the native cryptocurrency of the Ethereum platform, to reward the network nodes, who perform computations and validate transactions.
Hash Functions
Another piece of language so we can understand all the technical jargon in crypto.
https://xorbin.com/tools/sha256-hash-calculator
Using the Seasonal Tokens Web3 Ecosystem as a playground to learn about cryptocurrency technology, token economics, smart contracts, and cyclical trading.
OLD VERSIONS OF THE CRYPTOLINGO AND BEGINNERS GUIDE PAGE
Objective: to find investors among the population who are new to cryptocurrency technology.
The reasons to target this population are:
- Bitcoin halving brings a wave of new adoption and increased media coverage. (And FOMO)
- The number of potential new crypto adopters is greater than the actual number of users.
- The subject is not easy and there is too much information.
- Approaching people to sell tokens is counterproductive. But offering help needs no excuse or apology.
- Old crypto users are heavily biased towards Bitcoin and Ethereum.
- More open investors look for utility and other fancy use cases.
Advantages of S.T over other online information
- You learn with a hands-on, real trading experience.
- Full documentation in various formats.
- It has technical community support, mostly used for entertainment.
- S.T is a low-risk, hedged trading environment.
- There is a whole ecosystem, independent from external markets.
- It is a low entry point for new users. The tokens are cheap.
Implementation
- Using a dedicated Zealy platform for a series of linked quests organized in modules.To monitor and keep track of user's progress.(And lower legal liability on S.T)
- Using Reddit and YouTube to host the reading material and explainer videos that go with each module. (making it public and discoverable)
- Using the S.T Zealy platform to reward our community members for enrolling people in the Cryptolingo platform.
- Establish a reward system for a "chain-reaction" effect, where old users invite new users and receive a reward.
In this way, we can advertise openly without legal liabilities since we are not selling tokens or giving financial advice. Instead, we are offering education for free. But the "courses" will make users to understand the advantages of Seasonal Tokens as an investment.
Background
This introductory section is to make sure that the users understand the advantages offered by Seasonal Tokens, and provides the background for people to understand the difference between this and other crypto projects.
The Beginners Guide to Crypto (Old version)
In this section we will learn some of the most important concepts to understand the cryptocurrency technology.
Introduction
Cryptocurrency is a totally new type of technology. It is so useful that it is growing at an amazing speed. You won't be able to ignore this for long. Not knowing how does it work may put you in disadvantage, or expose you to new dangers and scams.
At the time of this writing there are thousands of cryptocurrencies, and the literature, videos, webinars, etc. About it is enough to discourage most people from even trying to learn how does it work.
That is why we have prepared this introduction, as a step by step guide that provides you a hands on experience to discover by yourself the wonders of this new technology.
First some encouraging ideas:
1) Even though there are thousands of cryptocurrencies, if you have a basic understanding of Bitcoin and Ethereum you will have the tools to understand any other crypto project.
2) The same way you don't need to be an engineer to operate a computer or a car, you don't need to understand everything about cryptocurrencies. Using them will be as easy as using your phone.
Second, an encouraging warning:
With every great power comes a great responsibility.
Nowhere else is this more true than in crypto.
A great Power:
Crypto puts in your hands the power to access markets where billions of dollars fly around. Imagine somebody gave you a free entrance ticket to the stock-market, or a pool full of sharks!
Great Responsibilities
Most people trading in these markets loose money. It is easy to be lured by the dream of making lots of money in one lucky trade, which you may, but making consistent profits in the crypto or stock market is an art of its own. But you can adopt low risk strategies that will create value over time. Knowing more about the factors affecting a cryptocurrency's price will surely help a lot.
You are the Only one responsible for your crypto
Cryptocurrency technology is designed to eliminate the need to trust in third parties to make transactions. But this also means that you are the only person responsible for your cryptos.
You can think of all cryptos to be associated with an special "password" called the Private Key. Only the person who has the Private Key can transfer the crypto. If you loose your crypto, or send them to the wrong place, nobody in the world can help you recovering them.
And the Ultimate and most important Warning in Crypto:
If you lose the Private Key you lose everything. There is no way to recover the crypto associated to that Private Key.
To conclude:
There are two basic types of cryptocurrency represented by Bitcoin and Ethereum. A basic understanding of the way they work is very important because:
1) Safety reasons, 2) To maximize the benefits you can get from this technology.
We will talk about Ethereum on section X. Before we get there we will be talking about Bitcoin-Type cryptocurrencies. So when we say "cryptocurrency" you can think of Bitcoin as the most important example.
Basic Fundamental Principles
We mention that cryptocurrency is a totally new technology. But money is nothing new, and most of the money we use everyday with credit and debit cards is digital, so what is new about crypto?
The groundbreaking innovation of Bitcoin is that it behaves like digital cash.
With electronic money like debit or credit cards, you have a balance with the bank and any transaction you make is processed by the bank, this system is "centralized" because the bank has to process all transactions and approve or deny them.
The bank act as a "trusted third party"
With cash, If you give a coin or a bill to somebody, you don't need any third party or approval. The money is physically transferred from one person to the other immediately.
Therefore what is totally new about cryptocurrency is that it behaves like digital cash, you can transfer it from one person to another and don't need the approval of a central authority that functions as a trusted third party. When you transfer cryptocurrency to other person it is similar to giving a coin or physical bill, the transaction is complete, you can't take it back, or cancel it.
Two Classes of Cryptocurrency
Most cryptocurrencies fall on one of two fundamental types represented by Bitcoin and Ethereum.
Bitcoin was designed to be digital cash.
Ethereum was designed to be a decentralized virtual computer.
Here in these words is summarized all we need to know about cryptocurrency! But we will spend some time understanding in depth the meaning of these sentences. First let us talk about money.
Two classes of Money
Bitcoin was designed to be like money, but there are fundamentally two types of money represented by Gold and Fiat.
Gold
Gold is a commodity, a physical object and it's price is determined by the balance of supply and demand, it's value is influenced by the cost of production, the handling of the asset, transportation, storage, checking its purity, etc.
Fiat
Fiat is a form of money created by banks and adopted by a government to run a country. Its value is decided by the banks and governments, and one of the most important features is that they can create it at will. This creation of money out of nowhere is the cause of inflation, which decreases the value of the fiat currency. Another interesting fact about fiat money is that only 5% exists in the form of coins and bills, most of it is purely electronic money.
Gold 2.0
Bitcoin is a digital asset that behaves similar to a commodity like gold, for example. That is why you will hear it called Gold 2.0
Like gold, bitcoin has a cost of production, the process of producing bitcoin is called "proof of work mining" or simply mining, and requires energy and special equipment. The process of proof of work effectively converts energy into currency. bitcoin's price is determined by the supply and demand of the digital asset.
Following Bitcoin's example there are other cryptocurrencies produced by proof of work, and so they have an intrinsic value given by the cost of production.
And there are cryptocurrencies that can be created out of thin air as well, without spending time or energy in creating them. We are not going to talk about those in this introduction to cryptocurrency. And we advise you to stay away from them.
In the following sections we will be talking about digital assets that have a connection with the real economy given by their cost of production.
Summary
Bitcoin was designed to be Digital Cash. The ground breaking Bitcoin innovation is that you don't need to trust third parties to make transactions. (Bitcoin transactions are made trough a decentralized computer network that we will be discussing in section XYZ)
Bitcoin is very different from digital money like credit or debit cards that need a centralized database to process all transactions. Bitcoin is closer to a physical coin than to a credit card.
Crypto-Currency
The name comes from the fact that it is a form of digital money based on cryptography.
Traditionally Cryptography is used for two main things:
1) To send messages trough a public channel, but only the person who has the key to open it can read it. Imagine you send a message but you need a password to read it. Only the person with the password can read it.
2) To sign a document with a special signature that only you can produce, but anybody with the key can confirm that it was signed by you.
There have been many attempts in the past to create a form of digital money using cryptography but Bitcoin was the first to achieve this without the need of trusted third parties.
The oldest forms of cryptography involve two persons that agree on a rule or "key" to substitute the symbols of a message. Once they agree, person 1 can use the rule (key) to take a message and "encrypt" it, converting it into a different message, that only person 2 can recover or "decrypt" using the same rule (Key) used to encrypt it.
This form of cryptography has the disadvantage that person 1 and person 2 have to share in advance the key to encrypt and decrypt messages. The only 100% safe way to do it is in person. Because using other means may reveal the key to other people.
For example if person 1 sends the key by mail, there is a chance that somebody can read the mail. etc.
Bitcoin uses another type of cryptography called Public and Private key cryptography. Otherwise you would have to know in person all people you want to send bitcoin to.
So let's have a closer look to Public and Private key cryptography.
Public and Private Keys
Public key cryptography involves a pair of keys: a public key, which can be shared openly, and a private key, which is kept secret. Information encrypted with the public key can only be decrypted with the corresponding private key, and vice versa. This method is widely used for secure communication and digital signatures.
So for example if person 1 wants to receive a secret message from person 2, then person 1 can send person 2 his public key. Person 2 will use Person's 1 public key to encrypt the message. The message can be sent trough a public channel and be visible to all, but only Person 1 will be able to decrypt it using his Private Key.
Person 1 can send a message to Person 2, and if Person 2 can decrypt the message with Person's 1 public key, then he knows the message was created by somebody who has Person's 1 Private key.
That is why it has to be really private!! to make sure the message is from Person 1 if it was decrypted with Person's 1 Public key.
As you can see this method has the advantage that two unknown persons can send encrypted messages to each other by sharing their Public keys.
Public and Private Pairs of keys are the heart of cryptocurrency technology, they match each other like lock and key.
Relation to Bitcoin:
Roughly speaking, in Bitcoin, your Private Key will be associated with your "wallet", The Private Key can create many associated Public Keys that will be associated with your "Bitcoin Addresses".
When a new address is created it is empty, and then anybody with the address can send Bitcoin to it.
Every Bitcoin address contains either zero or some Bitcoin. Only the person who owns the private key that created the address can transfer the bitcoin in the address.
Bitcoin Transaction
Let's suppose that Person 1 transfers X BTC to Person 2.
Person 1 is the owner of X BTC in address 1. Address 1 was created with Person's 1 Private Key. And only Person 1 can transfer the BTC at that address. Person 2 owns an address 2 that was created with Person's 2 Private key.
In a (oversimplified) way, a bitcoin transaction is like a document or receipt where:
1) Person 1 transfers the ownership of X BTC at address 01 to Address 2.
2) Person 1 signs the transaction with it's Private key, authorizing the transfer from address 1 to address 2
Double Spending
The problem with this oversimplified analogy is that Person 1 can transfer the property of X BTC at address 01 document to more than one person.
This is the problem known as "double spending".
Let's picture an example to illustrate the problem:
Imagine Person 1 owns a house, and has a legal document that proves it. In Crypto your Private Key is what proves you own something.
Imagine Person 1 signs a contract saying I transfer the property of my house to Person 2, and sign it with Person's 1 Private key.
And then Person 1 signs another contract saying I transfer the property of my house to Person 3. And also signs with Person's 1 Private key.
Both Person 2 and Person 3 have the proof that Person 1 owns the house and has agreed to transfer the property (because the transaction was signed with Person's 1 Private Key).
In practice, after Person 1 gave the house to Person 2, he is no longer the owner and it is illegal to give the house to Person 3.
One way to prevent this situation to happen, where the same Bitcoin can be used more than once, is to have the transactions time stamped,
and the first transaction that arrives is final, when a second transaction arrives spending the same Bitcoin, the transaction fails making sure that the first transaction to arrive is the valid one.
To Summarize
Bitcoin solution to the problem of double spending is to have the transactions time-stamped.
However this requires to have the record of all transactions and their time stamps. So that if two transactions arrive and both claim to transfer the same Bitcoin to different addresses, the earliest transaction will be valid and the latest will fail.
How to keep this record without the need of trust in third parties is the great achievement of Bitcoin technology. The decentralized database that accomplishes this task is called the block chain, because it processes and time stamps transactions in blocks. A complete understanding of block chain technology is not necessary to operate Bitcoin, but we need to talk more about this to learn more concepts that you will hear all the time in this business.
Bitcoin
Think of Bitcoin as a form of digital cash.
In the sense that it behaves similarly to coins and bills.
Cash is different than digital money such as we use with credit or debit cards.
A cash transaction is direct and final, between two persons. A digital transference has to be processed and verified by the bank system.
You can transfer Bitcoin to another person without need of a third party for review or approval of the transaction. And your transaction is totally private. Only you and the person you sent the Bitcoin are aware of it.