This is how I explained Bitcoins to a 7-year-old kid — Part 1
This was a long discussion that went on for many days. The kid was interested to know about Bitcoins because he watched a smart guy on Youtube talking about it with the help of some attractive animation. As is the case with most kids, he had no clue about money. One day he asked, I don’t see you insert your paper money inside the computer, how do you buy toys for me? This prompted me to show him some videos on how this money thing works. Incidentally, we landed on that Bitcoin video I talked about earlier. The following is what I tried to explain to him in most basic terms possible.
Day 1: The advent of paper money
Thousands of years ago people used to exchange goods to procure what they needed. If they wanted cattle they will give away some grains in their possession to the person who was willing to exchange cattle with food grains. Fast forward few thousand years, food grains, and cattle became money. People could buy anything that was available then by exchanging good grains or cattle. This was man to man transaction, person to person — direct. Just like kids exchange toys e.g. cars with lego etc.
As time passed, this started to result in a lot of problems. Suppose your friend promised to give your his lego blocks after borrowing toy cars from you, but he never did. To resolve this issue, a wise man was often consulted. The wise man would instruct the other kid who could not keep up his promise either to return what he borrowed from you or give the toy he promised within a fixed amount of time. This wise man (and other wise men like him over generations) later on , over a period of hundreds of years, transformed into what we know today as a bank.
The banks introduced the concept of paper “money”. People didn’t have to own goods to exchange to procure or “buy” other goods or services. Using the paper money, they were able to buy anything they wanted — they earned money by working for somebody, making and selling goods like toys, and sometimes by borrowing. So you can see paper replaced real goods — and if you look closely at a currency note (I showed him INR 100) its just a “promise” that some wise man makes.
The entire money system works on trust. Just like you trust your father when he promises to bring you a new cricket gear. Without trust the note is just a piece of paper. The wise man? He is actually a bank (Reserve Bank of India) who makes a promise and ensures that it’s fulfilled.
Day 2: Virtualization of the paper money
The paper note itself was the first step towards virtualization. You don’t know but the videos you see today on YouTube, computer, streams to your TV were actually stored on a cassette. That was a physical device with tapes rolled inside it. Those tapes contained the video. It’s virtualized now — which means that you see it without touching the source. The same thing happened to currency notes. Your father has it in his bank account, safe and secure. He doesn’t need to carry it in his pocket to buy stuff.
Banks virtualized the paper note and provided a way to manage it over an Internet portal. Just like the way you watch cartoons over the Internet. Because there is no physical possession of the money it’s easier to move it from one computer to another. That’s how your father buys stuff on Amazon.in without the need to insert paper notes inside the computer.
But, let me tell you another story about things that can happen if a bank fails. Way back in the year 2008, something really bad happened and many banks failed. They could not fulfill the promise of keeping the money safe they made to their customers. Although they are large organizations where thousands of smart people work but things go terribly wrong sometimes. A lot of people lost their hard earned money as a result of that.
Day 3: Is there a problem with the Banks and currencies in use today?
Let me put it this way — everything needs to improve all the time. The concept of money should too. Don’t you always tell me that you want to score more runs, bat like your favorite batsman? That’s improvement you want to achieve over your current state. The evolution of money is going to be a combination of the old and the new.
There were a lot of learnings from the 2008 failure I talked about. If there is no central authority that manages money for everybody, there is no chance for the system to fail. Also, do you remember the last game you played with your friends? The bowler thought you were out, but everybody else was in your favor because you were not out. The new system is proposed to work like that. There will be no central authority. There will be validators, just like your friends, who will validate an exchange of money.
Remember barter system of the old times? You will possess virtual currency in your wallet — something that belongs only to you. It’s not a promise by some bank that you have to trust. You can use them to buy goods or services from anybody who accepts those. You can send money to your friend in England. It can potentially replace the existing currency model.
Do you know what is the currency of England? Pound! What is the currency of India? Rupee! Come on, everybody knows that. Good boy — I encouraged him. When the new system arrives, there will be one currency of the world. Isn’t it exciting? Do you know the name of that currency? It’s called a Bitcoin.
Disclaimer: All the content and views of this blog post belongs to me. This in no way reflects the opinion or views of my employer.
