Let's imagine that Peter wants to send Julia $50. Both live in the same house. Peter would only have to ring Julia's bell and give her a $50 bill. Julia only has to check whether the note is genuine. If so, the transaction is complete. Julia is now in possession of 50$, Peter has 50$ less.
Now let's imagine Julia lives in Thailand and Peter somewhere in Africa. Peter wants to send Julia $50 again. Of course Peter could book a trip to Thailand and give Julia the 50$ personally. This is expensive and would only make sense if Peter is traveling to Thailand for professional reasons anyway or is on holiday there. Then he could give Julia the $50 personally, then we have the same case as above. So let's say that Peter stays in Africa. What options does he now have to send Julia the $50? Peter could put the $50 in an envelope and send it to Julia. He only has to pay the postage. If everything goes well, Julia will have her $50 a few days later. Peter would call Julia and ask if she got the money. If she confirms, then everything is fine. The transaction was successful.
But stop! Let's take a look at what could go wrong:
- Julia could claim not to have received the money when in fact she did. She could ask Peter to send another $50.
- Julia really did not receive the money (Peter sent it, but the letter was lost or someone stole the contents)
- Peter didn't send the money, but claims to have sent it and assumes that Julia herself would claim not to have received the money.
As we can see, things can go pretty badly. How to solve this problem? Well, we could hire a third, trustworthy person (e.g. notary in your locality) to receive the money and pay Julia personally if she is nearby. This presupposes that Julia and Peter trust the notary blindly. So if the notary says the money hasn't arrived, then it's true. So we assume that the notary is 100% honest.
Now Peter can send the $50 to the notary by post. When the notary confirms the receipt of the money, he informs Julia about the receipt of the money. Julia can now collect her money for a fee of e.g. $1. Since the notary is honest, neither Julia nor Peter can claim not to have sent or received any money. If Peter's money doesn't reach the notary, it's only because he didn't send it or it was stolen. In our monetary system, the notary takes on the function of the bank. We pay a fee for their services.
So why is bitcoin different? With Bitcoin, Peter can digitally send Julia Bitcoin worth $50 peer-to-peer like cash! We do not need a bank or a “notary” for this. We don't have to trust anyone, not even ask for permission. And that, along with many other things in Bitcoin, is simply revolutionary!