Explain Bitcoin Like Iโm Five
by Nik Custodio 2013/12/12open in new window
If you still canโt figure out what the heck a bitcoin isโฆ
Weโre sitting on a park bench. Itโs a great day.
I have one apple with me. I give it to you.
You now have one apple and I have zero.
That was simple, right?
Letโs look closely at what happened:
My apple was physically put into your hand.
You know it happened. I was there. You were there. You touched it.
We didnโt need a third person there to help us make the transfer. We didnโt need to pull in Uncle Tommy (whoโs a famous judge) to sit with us on the bench and confirm that the apple went from me to you.
The appleโs yours! I canโt give you another apple because I donโt have any left. I canโt control it anymore. The apple left my possession completely. You have full control over that apple now. You can give it to your friend if you want, and then that friend can give it to his friend. And so on.
So thatโs what an in-person exchange looks like. I guess itโs really the same, whether Iโm giving you a banana, a book, or say a quarter, or a dollar billโฆ.
But Iโm getting ahead of myself.
Back to apples!
Now say, I have one digital apple. Here, Iโll give you my digital apple.
Ah! Now it gets interesting.
How do you know that that digital apple that used to be mine, is now yours, and only yours? Think about it for a second.
Itโs more complicated, right? How do you know that I didnโt send that apple to Uncle Tommy as an email attachment first? Or your friend Joe? Or my friend Lisa too?
Maybe I made a couple of copies of that digital apple on my computer. Maybe I put it up on the internet and one million people downloaded it.
As you see, this digital exchange is a bit of a problem. Sending digital apples doesnโt look like sending physical apples.
Some brainy computer scientists actually have a name for this problem: itโs called the double-spending problem. But donโt worry about it. All you need to know is that, itโs confused them for quite some time and theyโve never solved it.
Until now.
But letโs try to think of a solution on our own.
Ledgers
Maybe these digital apples need to be tracked in a ledger. Itโs basically a book where you track all transactions โ an accounting book.
This ledger, since itโs digital, needs to live in its own world and have someone in charge of it.
Say, just like World of Warcraft. Blizzard, the guys who created the online game, have a โdigital ledgerโ of all the rare flaming fire swords that exist in their system. So, cool, someone like them could keep track of our digital apples. Awesome โ we solved it!
Problems
Thereโs a bit of a problem though:
What if some guy over at Blizzard created more? He could just add a couple of digital apples to his balance whenever he wants!
Itโs not exactly like when we were on the bench that one day. It was just you and me then. Going through Blizzard is like pulling in Uncle Tommy(a third-party) out of court(did I mention heโs a famous judge?) for all our park bench transactions. How can I just hand over my digital apple to you, like, you knowโ the usual way?
Is there any way to closely replicate our park bench, just you-and-me, transaction digitally? Seems kinda toughโฆ
The Solution
What if we gave this ledger โ to everybody? Instead of the ledger living on a Blizzard computer, itโll live in everybodyโs computers. All the transactions that have ever happened, from all time, in digital apples will be recorded in it.
You canโt cheat it. I canโt send you digital apples I donโt have, because then it wouldnโt sync up with everybody in the system. Itโd be a tough system to beat. Especially if it got really big.
Plus itโs not controlled by one person, so I know thereโs no one that can just decide to give himself more digital apples. The rules of the system were already defined at the beginning. And the code and rules are open-source. Itโs there for the smart people to contribute to, maintain, secure, improve on, and check on.
You could participate in this network too and update the ledger and make sure it all checks out. For the trouble, you could get like 25 digital apples as a reward. In fact, thatโs the only way to create more digital apples in the system.
I simplified quite a bit
โฆ but that system I explained exists. Itโs called the Bitcoin protocol. And those digital apples are the โbitcoinsโ within the system. Fancy!
So, did you see what happened? What does the public ledger enable?
Itโs open source remember? The total number of apples was defined in the public ledger at the beginning. I know the exact amount that exists. Within the system, I know they are limited(scarce).
When I make an exchange I now know that digital apple certifiably left my possession and is now completely yours. I used to not be able to say that about digital things. It will be updated and verified by the public ledger.
Because itโs a public ledger, I didnโt need Uncle Tommy(third-party) to make sure I didnโt cheat, or make extra copies for myself, or send apples twice, or thriceโฆ
Within the system, the exchange of a digital apple is now just like the exchange of a physical one. Itโs now as good as seeing a physical apple leave my hand and drop into your pocket. And just like on the park bench, the exchange involved two people only. You and me โ we didnโt need Uncle Tommy there to make it valid.
In other words, it behaves like a physical object.
But you know whatโs cool? Itโs still digital. We can now deal with 1,000 apples, or 1 million apples, or even .0000001 apples. I can send it with a click of a button, and I can still drop it in your digital pocket if I was in Nicaragua and you were all the way in New York.
I can even make other digital things ride on top of these digital apples! Itโs digital after-all. Maybe I can attach some text on it โ a digital note. Or maybe I can attach more important things; like say a contract, or a stock certificate, or an ID cardโฆ
So this is great! How should we treat or value these โdigital applesโ? Theyโre quite useful arenโt they?
Well, a lot of people are arguing over it now. Thereโs debate between this and that economic school. Between politicians. Between programmers. Donโt listen to all of them though. Some people are smart. Some are misinformed. Some say the system is worth a lot, some say itโs actually worth zero. Some guy actually put a hard number: $1,300 per apple. Some say itโs digital gold, some a currency. Other say theyโre just like tulips. Some people say itโll change the world, some say itโs just a fad.
I have my own opinion about it.
Thatโs a story for another time though. But kid, you now know more about Bitcoin than most.
Recommend Reading (Updated 2017)
โYou Donโt Understand Bitcoin Because You Think Money is Realโopen in new window by Maria Bustillosopen in new window is a good follow-up read.
You can also read more about Ethereum and Smart Contracts hereopen in new window. Enjoy!