What is bitcoin explained

Still Don’t Get Bitcoin? Here’s an Explanation Even a 5-Year-Old Will Understand

Nik Custodio

Still Don’t Get Bitcoin? Here’s an Explanation Even a 5-Year-Old Will Understand

If you still can’t figure out what the heck a bitcoin is, this simple explanation for a five-year-old may help you …

How does bitcoin work?

We’re sitting on a park bench. It’s 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?

Let’s 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 didn’t need a third person there to help us make the transfer. We didn’t need to pull in Uncle Tommy (who’s a famous judge) to sit with us on the bench and confirm that the apple went from me to you.

The apple’s yours! I can’t give you another apple because I don’t have any left. I can’t 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 that’s what an in-person exchange looks like. I guess it’s really the same, whether I’m giving you a banana, a book, a quarter, or a dollar bill …

But I’m getting ahead of myself.

Back to apples!

Now, let’s say I have one digital apple. Here, I’ll give you my digital apple. Ah! Now it gets interesting.

How do you know that digital apple which used to be mine, is now yours, and only yours? Think about it for a second. It’s more complicated, right? How do you know that I didn’t 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 doesn’t look like sending physical apples.

Some brainy computer scientists actually have a name for this problem: it’s called the double-spending problem. But don’t worry about it. All you need to know is that it’s confused them for quite some time and they’ve never solved it. Until now.

But let’s try to think of a solution on our own.

Ledgers

Maybe these digital apples need to be tracked in a ledger. It’s basically a book where you track all transactions – an accounting book.

This ledger, since it’s digital, needs to live in its own world and have someone in charge of it.

Just like World of Warcraft, say. Blizzard, the guys who created the online game, have a “digital ledger” 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 – we solved it!

Problems

There’s a bit of a problem though:

1) What if some guy over at Blizzard created more? He could just add a couple of digital apples to his balance whenever he wants!

2) It’s not the same as when we were on the bench that 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 he’s a famous judge?) for all our park bench transactions. How can I just hand over my digital apple to you in the usual way?

Is there any way to closely replicate our park bench transaction digitally? Seems kinda tough …

The Solution

What if we gave this ledger to everybody? Instead of the ledger living on a Blizzard computer, it’ll live in everybody’s computers. All the transactions that have ever happened, from all time, in digital apples, will be recorded in it.

You can’t cheat it. I can’t send you digital apples I don’t have, because then it wouldn’t sync up with everybody else in the system. It’d be a tough system to beat. Especially if it got really big.

Plus, it’s not controlled by one person, so I know there’s 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 – kinda like the software used in your mom’s Android phone. Or kinda like Wikipedia. It’s there for smart people to maintain, secure, improve, and check.

You could participate in this network too – updating the ledger and making sure it all checks out. For the trouble, you could get like 25 digital apples as a reward. In fact, that’s the only way to create more digital apples in the system.

I simplified quite a bit … But that system I explained exists. It’s called the Bitcoin protocol. And those digital apples are the bitcoins within the system. Fancy! So, did you see what happened?

What does the public ledger enable?

1) It’s 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).

2) 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.

3) Because it’s a public ledger, I didn’t need Uncle Tommy (third-party) to make sure I didn’t cheat, or make extra copies for myself, or send apples twice, or thrice…

Within the system, the exchange of a digital apple is now just like the exchange of a physical one. It’s now as good as seeing a physical apple leave my hand and drop into your pocket. Just like on the park bench, the exchange involved two people only. You and me , we didn’t need Uncle Tommy there to make it valid.

In other words, it behaves like a physical object.

But you know what’s cool? It’s 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! It’s digital after all. Maybe I can attach some text on it – a digital note. Or maybe I can attach more important things; like say a contract, or a stock certificate, or an ID card …

So this is great! How should we treat or value these “digital apples”? They’re quite useful aren’t they?

Well, a lot of people are arguing over it now. There’s debate between this and that economic school, between politicians, between programmers. Don’t listen to all of them though. Some people are smart; some are misinformed. Some say the system is worth a lot; some say it’s actually worth zero. Some guy actually put a hard number on it: $1,300 per apple. Some say it’s digital gold; some say it’s a currency. Others say they’re just like tulips. Some people say it’ll change the world; some say it’s just a fad.

I have my own opinion about it, but that’s a story for another time.

Hey kid, you now know more about Bitcoin than most.

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Bitcoin

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Bitcoin is a decentralized digital currency created by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009. It does not rely on a central server to process transactions or store funds.
There are a maximum of 2,099,999,997,690,000 Bitcoin elements (called Satoshis, the unit has been named in collective homage to the original creator), which are currently most commonly measured in units of 100,000,000 known as BTC. There will only ever be 21 million Bitcoin (BTC) to ever be created.

As of January 2018, it is the most widely used alternative currency, now with the total market cap around 250 billion US dollars.

Bitcoin has no central issuer; instead, the peer-to-peer network regulates Bitcoins, transactions and issuance according to consensus in network software. These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain.

Bitcoins are issued to various nodes that verify transactions through computing power. It is established that there will be a limited and scheduled release of no more than 21 million BTC worth of coins, which will be fully issued by the year 2140.

Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services. As of February 2015, CoinJolt provided over 100,000 merchants and vendors accepted Bitcoin as payment. Research produced by the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using Bitcoin.

Internationally, Bitcoins can be exchanged and managed through various websites and software along with physical banknotes and coins.

Contents

Basic Concepts [ edit ]

Currency [ edit ]

Alice wants to buy alpaca socks which Bob has for sale. In return, she must provide something of equal value to Bob. The most efficient way to do this is by using a medium of exchange that Bob accepts which would be classified as currency. Currency makes trade easier by eliminating the need for coincidence of wants required in other systems of trade such as barter. Currency adoption and acceptance can be global, national, or in some cases local or community-based.

Banks [ edit ]

Alice doesn’t necessarily need to be in direct contact with bob in order for the funds to be transferred. She may instead transfer this value by first entrusting her currency to a bank who promises to store and protect Alice’s currency notes. The bank gives Alice a written promise (called a «bank statement») that entitles her to withdraw the same number of currency bills that she deposited. Since the money is still Alice’s, she is entitled to do with it whatever she pleases, and the bank (like most banks), for a small fee, will do Alice the service of passing on the currency bills to Bob on her behalf. This is done by Alice’s bank by giving the dollar bills to Bob’s bank and informing them that the money is for Bob, who will then see the amount the next time he checks his balance or receives his bank statement.

Since banks have many customers, and bank employees require money for doing the job of talking to people and signing documents, banks in recent times have been using machines such as ATMs and web servers that do the job of interacting with customers instead of paid bank employees. The task of these machines is to learn what each customer wants to do with their money and, to the extent that it is possible, act on what the customer wants (for example, ATMs can hand out cash). Customers can always know how much money they have in their accounts, and they are confident that the numbers they see in their bank statements and on their computer screens accurately reflect the number of dollars that they can get from the bank on demand. They can be so sure of this that they can accept those numbers in the same way they accept paper banknotes (this is similar to the way people started accepting paper dollars when they had been accepting gold or silver).

Such a system has several disadvantages:

• It is costly. EFTs in Europe it can cost up to 25 euros. Credit transactions may cost a significant proportion of the transaction in place.
• It is slow. Checking and low-cost wire services take days to complete.
• In most cases, it cannot be anonymous.
• Accounts can be frozen, or their balance partially or wholly confiscated.
• Banks and other payment processors like PayPal, Visa, and Mastercard may refuse to process payments for certain legal entities.

Bitcoin is a system of owning and voluntarily transferring amounts of so-called bitcoins, in a manner similar to online banking, but pseudonymously and without reliance on a central authority to maintain account balances. If bitcoins are valuable, it is because they are useful and limited in supply.

Bitcoin Basics [ edit ]

Buying Bitcoin [ edit ]

How to buy Bitcoin? There are many ways to buy Bitcoin cryptocurrency, with debit or credit card, PayPal, online on cryptocurrency exchange, with bank transfers and etc. It’s difficult to say what is the best way to buy Bitcoin. After the opening Bitcoin address-account you can start buying coins.

Buying and selling coins to individuals is carried on specialized sites, such as LocalBitcoins. User should select the country and the city in the special window, fill in the information on the number of coins and select the purchase payment method.

Seller should be chosen according to the grade level on the site. Purchasing Bitcoins at the unaccredited sites or from individuals is not recommended due to the high fraud risk.

Creation of coins [ edit ]

The creation of coins must be limited for the currency to have any value.

New coins are slowly mined into existence by following a mutually agreed-upon set of rules. A user mining bitcoins is running a software program that searches tirelessly for a solution to a very difficult math problem whose difficulty is precisely known. The difficulty is automatically adjusted regularly so that the number of solutions found globally, by everyone, for a given unit of time is constant: an average of 6 per hour. When a solution is found, the user may tell everyone of the existence of this newly found solution, along with other information, packaged together in what is called a «block».

Blocks create 12.5 new bitcoins at present. This amount, known as the block reward, is an incentive for people to perform the computation work required for generating blocks. Every 210,000 new blocks generated (roughly every 4 years), the number of bitcoins that can be «mined» in a block reduces by 50%. Originally the block reward was 50 bitcoins; it halved in November 2012 and then once more in July 2016. Any block that is created by a malicious user that does not follow this rule (or any other rules) will be rejected by everyone else. In the end, no more than 21 million bitcoins will ever exist.

Because the block reward will decrease over the long term, miners will some day instead pay for their hardware and electricity costs by collecting transaction fees. The sender of money may voluntarily pay a small transaction fee which will be kept by whoever finds the next block. Paying this fee will encourage miners to include the transaction in a block more quickly.

Bitcoin Mining [ edit ]

Bitcoin Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions (and a mining rig is a colloquial metaphor for a single computer system that performs the necessary computations for mining). This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.

Bitcoin mining’ is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.

The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Bitcoin Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a subsidy of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.

Sending payments [ edit ]

To guarantee that a third-party, let’s call her Eve, cannot spend other people’s bitcoins by creating transactions in their names, Bitcoin uses public key cryptography to make and verify digital signatures. In this system, each person, such as Alice or Bob, has one or more addresses each with an associated pair of public and private keys that they may hold in a wallet. Only the user with the private key can sign a transaction to give some of their bitcoins to somebody else, but anyone can validate the signature using that user’s public key.

Suppose Alice wants to send a bitcoin to Bob.

• Bob sends his address to Alice.
• Alice adds Bob’s address and the amount of bitcoins to transfer to a message: a ‘transaction’ message.
• Alice signs the transaction with her private key, and announces her public key for signature verification.
• Alice broadcasts the transaction on the Bitcoin network for all to see.

(Only the first two steps require human action. The rest is done by the Bitcoin client software.)

Looking at this transaction from the outside, anyone who knows that these addresses belong to Alice and Bobcan see that Alice has agreed to transfer the amount to Bob, because nobody else has Alice’s private key. Alice would be foolish to give her private key to other people, as this would allow them to sign transactions in her name, removing funds from her control.

Later on, when Bob wishes to transfer the same bitcoins to Charlie, he will do the same thing:

• Charlie sends Bob his address.
• Bob adds Charlie’s address and the amount of bitcoins to transfer to a message: a ‘transaction’ message.
• Bob signs the transaction with his private key, and announces his public key for signature verification.
• Bob broadcasts the transaction on the Bitcoin network for all to see.

Only Bob can do this because only he has the private key that can create a valid signature for the transaction.

Eve cannot change whose coins these are by replacing Bob’s address with her address, because Alice signed the transfer to Bob using her own private key, which is kept secret from Eve, and instructing that the coins which were hers now belong to Bob. So if Charlie accepts that the original coin was in the hands of Alice, he will also accept the fact that this coin was later passed to Bob, and now Bob is passing this same coin to him.

Preventing double-spending [ edit ]

The process described above does not prevent Alice from using the same bitcoins in more than one transaction. The following process does; this is the primary innovation behind Bitcoin.

• Details about the transaction are sent and forwarded to all or as many other computers as possible.
• A constantly growing chain of blocks that contains a record of all transactions is collectively maintained by all computers (each has a full copy).
• To be accepted in the chain, transaction blocks must be valid and must include proof-of-work (one block generated by the network every 10 minutes).
• Blocks are chained in a way so that, if any one is modified, all following blocks will have to be recomputed.
• When multiple valid continuations to this chain appear, only the longest such branch is accepted and it is then extended further.

When Bob sees that his transaction has been included in a block, which has been made part of the single longest and fastest-growing blockchain (extended with significant computational effort), he can be confident that the transaction by Alice has been accepted by the computers in the network and is permanently recorded, preventing Alice from creating a second transaction with the same coin. In order for Alice to thwart this system and double-spend her coins, she would need to muster more computing power than all other Bitcoin users combined.

Anonymity [ edit ]

When it comes to the Bitcoin network itself, there are no «accounts» to set up, and no e-mail addresses, user-names or passwords are required to hold or spend bitcoins. Each balance is simply associated with an address and its public-private key pair. The money «belongs» to anyone who has the private key and can sign transactions with it. Moreover, those keys do not have to be registered anywhere in advance, as they are only used when required for a transaction. Transacting parties do not need to know each other’s identity in the same way that a store owner does not know a cash-paying customer’s name.

A Bitcoin address mathematically corresponds to a public key and looks like this:

Each person can have many such addresses, each with its own balance, which makes it very difficult to know which person owns what amount. In order to protect his privacy, Bob can generate a new public-private key pair for each individual receiving transaction and the Bitcoin software encourages this behavior by default. Continuing the example from above, when Charlie receives the bitcoins from Bob, Charlie will not be able to identify who owned the bitcoins before Bob.

Capitalization / Nomenclature [ edit ]

Since Bitcoin is both a currency and a protocol, capitalization can be confusing. Accepted practice is to use Bitcoin (singular with an upper case letter B) to label the protocol, software, and community, and bitcoins (with a lower case b) to label units of the currency.

Bitcoin Halving [ edit ]

Bitcoin halving — is a process when every 210 000 blocks (approximately every four years) Bitcoin’s extraction complexity is increased (new coins begin to appear two times slower), and the reward for miners is reduced [1] .

Bitcoin price [ edit ]

The price of BTC token or Bitcoin is always chaining, however, BitcoinWiki gives you a chance to see the prices online on Coin360 widget.

Where to see and explore [ edit ]

You can directly explore the system in action by visiting Biteasy.com, Blockchain.info, Blokr.io Bitcoin Block Explorer or Bitcoin Block Explorer. This last site will show the latest blocks in the blockchain. The blockchain contains the agreed history of all transactions that took place in the system. Note how many blocks were generated in the last hour, which on average will be 6. Also notice the number of transactions; in just one hour there are between 6000 to 7000 transactions. This indicates how active the system currently is.

Next, navigate to one of these blocks. The block’s hash begins with a run of zeros. This is what made creating the block so difficult; a hash that begins with many zeros is much more difficult to find than a hash with few or no zeros. The computer that generated this block had to try many Nonce values (also listed on the block’s page) until it found one that generated this run of zeros. Next, see the line titled Previous block. Each block contains the hash of the block that came before it. This is what forms the chain of blocks. Now take a look at all the transactions the block contains. The first transaction is the income earned by the computer that generated this block. It includes a fixed amount of coins created out of «thin air» and possibly a fee collected from other transactions in the same block.

Drill down into any of the transactions and you will see how it is made up of one or more amounts coming in and out. Having more than one incoming and outgoing amount in a transaction enables the system to join and break amounts in any possible way, allowing for any fractional amount needed. Each incoming amount is a past transaction (which you can also view) from someone’s address, and each outgoing amount is addressed to someone and will be part of a future transaction (which you can also navigate down into if it has already taken place.)

Finally you can follow any of the addresses links and see what public information is available for them.

To get an impression of the amount of activity on the Bitcoin network, you might like to visit the monitoring websites Bitcoin Monitor and Bitcoin Watch. The first shows a real-time visualization of events on the Bitcoin network, and the second lists general statistics on the amount and size of recent transactions.

How many people use Bitcoin? [ edit ]

This is quite a difficult question to answer accurately. One approach is to count how many bitcoin clients connected to the network in the last 24 hours. We can do this because some clients transmit their addresses to the other members of the network periodically. In September 2011 this method suggested that there were about 60,000 users.

White Paper [ edit ]

Bitcoin WhitePaper (WP) is a document that helps your prospective customer make an informed decision in favor of your company or a specific product. If the document does not facilitate a decision, it may be anything but not WP. Speaking in the most understandable language, white paper is something between an article and an advertising brochure. The document contains quite useful information and at the same time leads to the fact that the best solution is to purchase a certain product or service.

You can read English (Original) Bitcoin White Paper here.

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