If digital currency is truly a globally transformative concept and technology, there needs to be a simple way to explain the basics to someone including your co-workers, brother or grandmother.
So here goes nothing..
What is A Blockchain?
People make transactions. Bob sends money to Alice, Alice sends money to Karen, maybe Karen buys flowers and sends money to Gregory to pay him.
In order to have a stable system of money you need to keep track of where the money has gone and who has the money now.
So what Satoshi Nakamoto (creator of Bitcoin) did to solve this problem of consensus on where the money has gone and who has it now, was create a way to organize this data (also known as a “data structure”) called the Blockchain.
A Blockchain works by collecting up a list of transactions and shoving them into a block with other junk.
You then take this block and you make it point to blocks previous to it, which contain other transactions occurring in the past.
When you append this block to another block, you create a chain of blocks (ie the block chain), which is fascinating because it allows you to basically trace the transactions backwards.
So you could say,
“Okay well in this block contains a payment where Alice sent money to Gregory. And that money that Alice got was from Karen in this previous block”
At it’s heart a blockchain is just a “data structure” (i.e. a unique way to organize data) that tells us who sent money where, and who has money now but it doesn’t have any one person managing it.
Congrats we’re 50% the way there 👍🏼😀 That’s the simple part!
Mining for Bitcoins
The more complicated part that confuses people is when they hear about the “computing” and “the mining” of Bitcoins with this magical internet money hocus pocus.
I like to explain it like this:
Remember that there is no sort of central entity which is going to manage this ledger of accounts, like a bank, a treasury, a company or a government. So instead we need to have some other way to manage it.
We need to do this because we have to make sure our accounts and transactions are up to date! Also, because this money, we need to make sure that no one is messing around trying to add money to different accounts or spend other people’s money.
So what Nakamoto did was use this idea of a “miner”, which is essentially a computer that runs the Bitcoin software.
All this software is trying to do is solve really hard mathematical problems.
These problems are so hard that there is basically nothing you can do beyond guess the answer.
So you have this group of computers all running this Bitcoin software, and all they’re doing is just guessing and guessing these math puzzles.
But what happens is eventually one of these computers guess the answer correctly! And they basically say,
“Hey everyone!! I know the answer!!”
and they broadcast to every other computer miner in the Bitcoin network.
The thing about these puzzles are that they can be very hard to come up with a solution to, but, once you find a solution everyone can easily verify whether it’s correct or not!
So when the computer who guessed the puzzle correctly finds the answer, they tell everyone in the network so that everyone in the network can double check their work.
A miner here says, “Yep that’s good”. And another miner says, “I understand that!”, then another miner claims, “Looks good to me” until the whole group of mining computers comes to consensus that the answer is in fact correct.
Once we’ve confirmed that the answer is right, the miner who solved the puzzle can take a list of transactions, shove it in a block and add that block to the chain of blocks.
And here comes the key idea:
In doing so they are rewarded by being able to add a bit of Bitcoin to an address of their choice.
That’s why people run the bitcoin software, and miners do what they do.
They have to work very hard to solve a puzzle, and in doing so burn electricity by guessing and guessing the solution.
Then when someone gets the right answer, the whole game starts over with a new math puzzle.
Phew! Made it through that in one piece👌
Here’s the last part of the system.
As the chain of blocks grows with more transactions, the difficulty of solving these problems increases.
As the difficulty increases, Bitcoins naturally become more scarce because miners must use more electricity and effort to solve puzzles, creating an programmed inflation in Bitcoin rarity.
To keep Bitcoin rare, after a certain amount of blocks, you undergo what’s called a “halving” of the block reward.
Where originally, a miner who came up with a solution would be awarded 50 bitcoins, after several hundred thousand puzzles that reward is halved to 25 bitcoins, and then 12.5 and so on, and so forth.
This halving keeps occurring every few hundred thousand blocks, until the hard cap written in the software of 21 million Bitcoin is reached.
So there you have it. A simple explanation of the funny internet money that your party guests can’t stop talking about. There are a large number of details left out for the sake of reader sanity, but the core idea is there!
If you’re interested in buying some Bitcoin or other forms of digital currency checkout Coinbase the easiest and more secure way to buy and sell digital currency!
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