This is the simplest way I think I can explain Bitcoin, using as little technical jargon as possible (since I don’t understand most of the technical jargon myself). Bitcoin is a digital currency that can be sent from anyone, to anyone in the world who has a bitcoin address. It’s built on the Bitcoin network which is like a giant public, spreadsheet, or ledger, that records the balance of Bitcoin that everyone has.
You can picture the ledger as looking something like this:
If Alice sends Bob 1 Bitcoin, the spreadsheet gets updated to this:
That’s it? Billions of dollars being invested into a giant Excel sheet? So what’s there to get excited about?
- It’s secure and transparent. When Alice sends money to Bob, bitcoin uses something like a digital signature on the transaction, so that people know that it really is Alice, and not her evil twin, Malice. (For some reason, every bitcoin example in the world uses someone named Alice to send money to Bob. Really.) Using something called public/private key encryption, this signature is absolutely unforgeable. A computer doing a billion guesses a second would have to run for longer than the age of the universe to guess your password. Also, because it’s a public, open ledger (like a giant, shared Google spreadsheet), you can’t pretend to have more Bitcoin than you do. This ensures that when Alice sends 5 BTC to Bob, she really has 5 BTC in her account.
- It’s “anonymous”. Well, technically it’s not completely anonymous. If your identify was ever linked to your Bitcoin address, then you would be revealed. Bitcoin is “pseudo-anonymous”. But the idea is that you don’t have to produce your driver’s license, social security number and sign away your first-born to transfer money. This is why Bitcoin was initially considered the currency for criminals. But in today’s information age, everyone is or should be hesitant about giving away more private information than necessary.
- It’s decentralized. This third point is really what makes Bitcoin revolutionary. There are certainly ways to send money securely and semi-anonymously without Bitcoin. Being decentralized means that there is no one institution or computer server that holds this ledger. There are thousands of Bitcoin computers, or nodes, around the world which track and update the ledger. These computers are called miners. This means that we don’t have to rely on a single bank or institution to send money to someone else. At first, this might not sound like a big deal because we can use Venmo or Paypal to send money to friends all the time. But this involves trusting that the middleman is going to accurately and successfully do this for you. What if Paypal starts charging you extra fees? What if Paypal decides to make you wait 2-3 days for your transaction to go through? What if Venmo thinks your account has been hacked and freezes your funds? What if someone hacks Paypal and steals your money? What if you wanted to send money to someone in a different country? Or what if you’re a small business and want to accept orders from international customers. Last summer I traveled to China. Most people just use cell phones to pay for everything instead of cash. However, I was stuck using cash because I didn’t have a Chinese bank account to connect my cell phone to. I’ve also gotten charged over 5% in fees from my bank and had to wait 3 weeks to cash a foreign check. Bitcoin would’ve solved these problems.
So even for first-world users, there are plenty of reasons to not want to rely on a middleman.
This huge ledger is actually called the blockchain. And just like any database, it doesn’t have to only store account balances. It can store any data, like medical information, driving history, criminal records. It’s especially useful for data that, like bank accounts, you want to keep private and/or protect against fraudulent use. I can see credit scores being a good use case. There are three large credit bureaus that keep tons of sensitive data and have their proprietary magic formula to calculate a number which can determine whether or not I can buy a house. And heaven forbid if one of these large credit bureaus got hacked into and lost the personal data of millions of people. The possible applications for blockchain are endless.
I might do more posts to go into more details of how Bitcoin and blockchain work, but there are likely other sites which better explain the technical aspects.
Let me know if my explanation made sense! Thanks for reading.