The best way to understand Bitcoin is with an analogy right out of the Quran: Are you not aware that Allah knows all that is in heaven and the earth? Surely it is all preserved in a Book. Indeed, that is easy with Allah [22:70].
From stone inscriptions found in ancient civilizations, to modern accounting, record keeping is indispensable to civilization. Even Allah (SW) rewarding or punishing us on the day of judgement will rely on the angels recording our record of good and bad deeds!
Money, when looked at from a higher perspective, is also a kind of record keeping mechanism. If I sell a chocolate cake for 1000 rupees, the note in my hand is my claim to society, saying “Today I provided society with a 1000-rupee cake; Tomorrow I am entitled to get something back from society, of my choosing, which is also worth 1000 rupees”. My rupee note is a physical record of what society owes me back in terms of goods or services.
But my 1000-rupee note can get torn. Or stolen. And it takes a lot of effort to physically protect and transfer it. To pay someone in Karachi, somebody must take it all the way from Islamabad. So much hassle merely for a paper with no intrinsic value, just with a number written on it, indicating what I can buy with it. (We all know that the paper currency of today is not actually backed by gold in the State Bank. Only a tiny fraction of real gold exists, hence the term “fractional” reserve banking).
So, one clever person, (Satoshi Nakamoto), thought of a superior way to represent society’s record of debts, dealings, and transactions with each other: A distributed electronic ledger.
Bitcoin is a combination of two things: A unit of account, the Bitcoin currency itself, as well as an accompanying software that maintains a huge, immutable database of all transactions ever conducted in Bitcoin. This database uses modern computer science and mathematical principles of cryptography to make sure it cannot be tampered with. And the network effect of bitcoin, its global adoption, makes sure that this database exists on thousands of computers all around the world, hence highly unlikely to be lost. This makes Bitcoin the most superior form of money in four important respects:
a) Indestructible: A rupee note can be lost, but records on the Bitcoin ledger are permanent.
b) Convenient: A rupee must be physically transported in its paper form. Bitcoin exchange across the globe is way cheaper.
c) Permission-less: It is free to use, with no government able to confiscate your money, or no dictator able to prevent you from using it.
d) Deflationary: While the rupee keeps losing value over time, Bitcoin keeps gaining it because of its limited supply.
Many people have called Bitcoin, Gold 2.0. And indeed, as a form of currency, it rivals the stability and permanence of gold, but in a modern and scientific way.
Courtesy: Asif Shiraz