17 CommentsIt seems almost impossible to explain ״What is Bitcoin” to someone who is new to it. After going through every possible tutorial I decided that the main reason people don’t understand what Bitcoin is, is due to the fact that the explanation is usually too technical. So I decided to create my own “What is Bitcoin for Dummies” video. 2:40 minutes of a completely non technical, simple explanation.
And here’s the text version:
Imagine for a second that you are in charge of the task of inventing money. But you get this task today, not in the 12th century when money was initially invented. You’re basically asked to find a way for people to exchange an agreed value between one another.
I know it’s hard, but try to think, if this was done today, would we really be using metal coins and paper for this ? Perhaps we can find a better way ?
What if we wrote down somewhere, maybe in an electronic ledger what value each person has. This way we can keep track of how much value every person can spend. So if I for example do some work for you, you would probably give me some of your value in exchange. Let’s name this value “Bitcoin”.
But how will people be defined in this ledger ? I mean, how will someone send me value or Bitcoins….I guess we will have to give each person a unique identifier or address. We will keep track of which address (or person) holds which value. These addresses are known as “wallets”.
So we’ve decided to write down in our ledger which address, or wallet, holds which amount of value. This ledger is called “The block chain” – and it keeps all of the transactions from the beginning of time.
Now it’s time to make sure that everyone follows the rules. How can we do this ? How can we insure that no one cheats and says that their address has more value then what they actually own ?
I know! We’ll spread this ledger around to tens of thousands of people, so whenever someone wants to transfer some of his value in order to get something we can check to see if his story adds up to what everyone else thinks. If he’s good for his value, we will let him spend it.
But why would these people want to carry this ledger on their computer, and who has time to verify all of this each time a transaction is made ?
Well, what if we rewarded people who did this with value, that could be a good idea. Hence the “miners” were born. Tens of thousands of people who get paid in Bitcoins for going through the ledger, making sure that everything is in order and that no one is cheating (including themselves).
You’ve just invented a modern solution for money! And that’s exactly what Bitcoin is…A digital decentralised currency…
Hi, I understand you created very simplified explanation in order to give basic idea what is it all about.
Still, there is one important aspect not explained at all.
From the day the money was invented (and BTW it was not in 12th century, you can read in Bible that Patriarch Abraham bought the lot to bury his wife with silver coins), the kings and later governments had the authority to issue currency and legislate its use.
It was never “maintenance free”
Now, in your example, there is a conglomerate of “many many” computers, who have the job of “Proof of work”
Somebody will have to keep an eye on maintenance of those computers, decide how many are needed, decide who is a miner and who is not, etc.
In short, this system, as any system, needs maintenance and regulation.
The Q is, who performs these functions?
Hi Mike,
There is no central authority who performs the task of authorising miners nor maintaining them. There’s nothing and no one to stop you from downloading the free Bitcoin Core software and starting to mine on your own machine. No one can keep you mining or refuse to accept the solutions you mine either. The system is open and permissionless and decentralised.
(In practice, your personal computer would be too slow to mine at a profit but if you bought certain specialised mining equipment from the company of your choice, you could indeed mine Bitcoin).
Compensation for the necessary burden of verifying blockchain legitimacy seems a rational meaning for “mining”. Yet I keep reading that “mining” is performed by solving very difficult, resource-hogging math problems for bitcoin prizes. I like your definition better, but how do you reconcile your description to the math problem one?
Hi Sharon,
Well, both definitions are true. The mathematical puzzle in question is known as hashing. Hash functions convert data of arbitrary length to a set length, in a deterministic and non-reversible way. The higher Bitcoin difficulty goes, the more leading zeroes the hash solution must contain. 1
OK, so to get a practical eg. of how this works, copy the above text, starting from “Hi” and ending at “1.” Paste this text into the following site and hit the Calculate SHA-256 Hash button:
http://www.xorbin.com/tools/sha256-hash-calculator
You should get the following result:
395cc2ce6724de1da673ce79d60e875f7c12c5ccf095a333f0edb00e641b81bf
It has no starting zeros, so it wouldn’t be a valid solution to a Bitcoin block (assuming the data you pasted was valid transaction and other data). If you increment the number at the end (by changing the 1 to 2) you’ll get a completely different result. If you can imagine doing this in an automated way until the random hash result starts with say 000000…. then you’ll have a pretty good idea of what miners are doing.
Obviously, doing this quickly takes a lot of computing power, which uses a lot of electricity. This is why miners are rewarded for performing this task, which is known as “Proof of Work.” It’s proves that blocks weren’t generated randomly but were a product of dedicated resources.
Is there any danger of Governments shutting down bitcoin and loss to everyone?
Hi Mike,
A total, network-wide shutdown is not feasible without a massive coordinated effort between all governments of the world, to both restrict internet usage, take out the Blockstream satellites and shut down all businesses associated with Bitcoin. Even then, people could still trade Bitcoin, they’d just have to do so in a covert manner and at risk of prosecution. A full-scale effort at shutdown is possible but highly unlikely in the foreseeable future, at least in my opinion.
Of course, nothing stops governments from regulating Bitcoin within their borders. Indeed, some governments have – I think the most recent to ban Bitcoin was Morocco. Probably the most significant nation to severely restrict Bitcoin thus far has been China, which has imposed all sorts of restrictions at the exchange level. The majority of Bitcoin mining still occurs in China, however.
You must remember that Bitcoin was designed to make typical bans and attacks as ineffective as possible. This is why it’s very important that Bitcoin remain decentralized, so that there’s no central point of control to be attacked. Decentralization is “expensive” but necessary.
Hello Alexander ! Thank you so much for your simple explanation of bitcoin. I have looked at various sites to see how it works but always declined getting involved as I was never sure of what I had read. Now it seems a lot clearer. I knew that eventually i’d find someone who could relate to simple old me. I hope to get more insight as I watch the running commentary. Thanks again
Can you please explain how does someone who has no bitcoin get value? Where does it begin….how are bitcoin earned? Where does it start?
Hi Shayon, you can either buy Bitcoin or work for Bitcoin, I suggest you sign up to our Crash Course, it should have a lot of relevant information for you about Bitcoin. You can sign up here: https://99bitcoins.com/subscribe-to-newsletter/
Let me get this straight. Somebody wrote the code for the block chain and then locked himself out of it so he could never alter it or influence it again . . . ever. And now Bitcoin is wholly autonomous and utterly hack proof forever. Yet every other piece of software or app needs routine updates to function properly. And nobody, not even the guy who wrote the original code, can simply give himself a bunch of Bitcoins. Sound about right?
Interesting idea, althought I suggest to read a bit further about Bitcoin on our site to understand the technology behind it.