035a3a1c40

bitcoin

Basic Bitcoin summary 
~1000 words simply explaining how bitcoin works so you don’t have to explain it to your mom

OVERVIEW

Bitcoin has a reputation for being more complicated than it is. What I’m trying to do here is explain the bare minimum so you get the ideas without the technical jargon. Ideally, this is supposed to be golden retriever level simple - blame me if it isn’t. We’ll start with the underlying concepts, then necessary info on bitcoin, and lastly an analogy to put it all together.

LEDGERS, MONEY, AND BANKS

Bitcoin is a blockchain, and a blockchain is a type of ledger. People invented ledgers hundreds of years ago to solve some problems with tangible money, or “cash”. You would give some of your cash to a guy with a big ledger book and feather pen. He’d keep your money safe and write the total beside your name in the ledger, like an account balance. Effectively, this means you traded cash for “numbers-on-a-page”, but it made things more convenient and you trusted feather pen guy.

Feather pen guy’s job was to write down transactions between people while keeping track of everyone’s account balance. Transactions were done by feather pen guy subtracting the cost from your balance, and adding the cost to the balance of whoever you wanted to pay. With your signature beside each transaction to verify it, no one could fake a transaction to pay themselves. You could even have “transactions-by-mail” where you sent feather pen guy the details of the transaction you wanted to make - like a check. So, feather pen guy was like a middleman that held your money, processed transactions, and kept track of your account balance.

If everyone adopted this system, would we even need cash? We could do all our transactions in the ledger book. To start an account, instead of giving feather pen guy cash, we could have someone pay us through the ledger. Like receiving your first paycheck by direct deposit or check instead of cash. “Ledger-money” is no different from “cash-money”. They’re both the same money but in two different forms. This is why there are no “cash bitcoins” - they’re not needed. So, if there is no cash, ledger-money could only come from the previous transactions that transferred you money. In that case, all money would be a transaction record or “numbers-on-a-page.”

In modern times, feather pen guy and his ledger are what we’d call a bank. Consider your bank account; you deposit money and they hold it for you. When you buy something with your card it’s subtracted from your account balance and added to the balance of whoever you paid. Instead of slow transactions-by-mail, we have instant transactions over the internet. So your bank is the middleman aka feather pen guy between you and whomever you pay (or pays you). The money in your bank account comes from previous transactions or the initial cash deposit you made in exchange for “numbers-on-a-screen.” Although we still use cash in society, it’s not hard to see how we could replace all cash with bank accounts. This “numbers-on-a-screen” and absence of cash causes most of the confusion about where and what bitcoin is, but we have used these same concepts since ledgers were created.

SOME INFO ON BITCOIN

Bitcoin is a ledger with some differences from the one we just covered. Instead of trusting feather pen guy (or a bank) to record transactions in his ledger, we all “share” the same ledger. This ledger uses the internet to automatically update each new transaction. Only the ledger that the majority of people use is considered legitimate and that you can make/receive a payment. This is what’s called decentralization and means we don’t have to trust a single person/company to maintain the ledger.

How do you get bitcoins?

You can get bitcoins just like any other currency, you just have to do one of the following: trade your dollars with someone that already has bitcoins, sell your goods or labor for bitcoins (like how you make money), or make new bitcoins (below).

Where is Bitcoin?

Bitcoin exists on a computer program called Bitcoin Core. Bitcoin Core is what manages everything that makes Bitcoin work. It isn’t owned by any single person or company. Instead, it’s managed by a large group of people.

**How are bitcoins made? (**Mining)

Bitcoins are created by solving a difficult math problem that can only be solved by computers. When a computer solves one of these problems, the answer is shared with other computers that check it. The answers to those problems are Bitcoins. The whole process is similar to a complicated version of “2+?=4”. If Alice (the person that owns the solving computer) says the answer is 2, we (the checking computers) would all agree she’s correct and she’d get some bitcoins from the Bitcoin software (not a person). This is all done automatically by computers on the software. This whole process is called mining. *It’s important to note that eventually no more bitcoins will be made. I’m intentionally leaving out a lot of confusing info here to avoid triggering anyone’s High School algebra PTSD so don’t call me a liar.

How are bitcoins used to pay someone?

When Alice pays Bob with bitcoin, it updates the ledger with the transaction and transfers that answer to him. By looking at the transaction history, we can trace the bitcoins from Bob back to that initial math answer. So bitcoin is the answer to a math problem and a transfer record of sorts.

Why are bitcoins valuable?

Bitcoins are valuable only because people believe they are - like gold, beanie babies, or money. Money is just paper or numbers on a screen, it has no real-value like food or gas. Money is valuable because we can trade it for things with real-value. The belief that if we are given money today, we can trade it with someone tomorrow is what makes it valuable. Bitcoin is the same.

Why use bitcoins?

People use bitcoins because they don’t want banks or the government to have any of their private information. Plus, if the government decides to print more money, it can cause inflation (since there are a limited number of bitcoins, inflation isn’t a problem). By using some complex math, bitcoin is made anonymous like cash and secure like bank accounts. This complex math is called, “hash function cryptography” and, “elliptic curve digital signature algorithms” - but we won’t be going over that.

AN ANALOGY OF THE FIRST BITCOINS

Imagine a group message thread between people on a messaging app - let’s call it “Bitcoin Core.” The thread is like a page from the ledger book and has many transactions between people. When a new math problem is solved, the software automatically creates a new thread. The solver is awarded bitcoins in a special message on the new thread. Everyone moves to the new thread, the previous thread is locked and saved for records. Everyone has agreed to use the ledger that the majority of people use. So, if anyone tries to create their own thread, they’re on their own. Lastly, by using similar math that creates bitcoins, we can link the previous threads to the current one. If someone tries to alter an old thread, it will have a ripple effect and create a thread that the majority of people aren’t using. This is how we get the term blockchain. Threads have the following:

The thread itself - Blocks - like pages in the ledger book, organizes and secures transactions mathematically.

Message senders & receivers - Transactors are the people in the message thread being paid or paying each other. The bitcoin software is a special transactor that only gives bitcoin to the solver.

Messages - Transactions are the transactions between people. With each group message thread, many transactions between people are recorded.

Signatures - Signatures are what verify a transaction as legitimate, just like signing a check. These aren’t normally part of text messages, but it may help to think of email signatures or cringey text signatures from middle school.

It might look something like this

SUMMARY

Bitcoins start as the answer to a math problem. These answers are transferred to people as a form of payment. A shared ledger keeps track of who solved the original math problem, and to who it has been transferred to since. Ultimately, bitcoins are only valuable because people believe they are.