What is a Wallet and How Does A Crypto Payment Work (Explain Like I’m 5)
…continuing from: How Bullet-Proof Is The Blockchain? (ELI5)
Cryptocurrency really is money, isn’t it, Cryptoman?
Yes, it is RookieBoy, just as much as paper money is.
So why can I never see it, like I can see those dollar notes with their portrait of Washington and weird pyramid on the back?
Because cryptocurrency has no physical existence. It is entirely digital, like all those cell phone photos you take, or the Youtube videos you watch or the websites you visit. They are digital records, but they are real. So is the crypto stored in your digital wallet.
But what exactly is a digital wallet, Cryptoman?
It is just a small software program that runs on your PC or cell phone. It records the amount of crypto it holds, and it has a password, so only you can open it. It also has a public key and a private key. These keys are critical to making the wallet work.
I don’t like the word “wallet.” Who chose that word?
No-one knows who invented it, RookieBoy. It’s from the Old French “walet.” It originally meant “knapsack or roll,” the kind of thing that carried one’s valuables. It’s a word Satoshi Nakamoto chose, so nobody questions it. It must be right.
Maybe he wasn’t so clever, Cryptoman. That wallet software is really like a bank account, not a wallet. It doesn’t just show what’s in there, it records every transaction, in or out. At least mine does. And another thing, what’s all this “key” stuff. Real wallets don’t have keys.
So, the public key is actually the address of your wallet. When a transaction is added to the blockchain that’s the “address” that is attached to it to indicate you were involved.
In which case, Cryptoman, why don’t we call it the account number?
As for the private key, that was weird it gave me this list of words: bark, green, sour, etc. And it told me to write it the whole list down and then hide it somewhere safe. So I did. And I can no longer remember where I hid it. Does that matter?
It will if you ever delete your wallet or your cell phone is destroyed. You will need that list to reincarnate your wallet. That happens you know. People lose their wallets. A company called Chainalysis, researched this in some detail. They estimated that somewhere between 2.78 and 3.79 million bitcoins have already died and gone to cryptoheaven. That’s averages out at $27 billion, all of which could be rescued if anyone knew the private keys.
Maybe we could hire a clairvoyant. She would go into a trance and recall the pivate-key-words perfectly. Then we’d be rich.
Go ahead. Sounds like a plan. Let me know how you get on.
Tell me how a crypto payment actually works. Is it like a bank account: I write a check and send it to someone, who pays it into their account?
Do you know how a bank check works, Rookieboy?
To be honest, no.
That’s good. Now I won’t have to confuse you with comparisons.
Crypto doesn’t work like a check.
Here’s what happens. You send some crypto, say one bitcoin, to your BFF, RookieGirl, for Valentine’s day. You send it to her bitcoin wallet address.
The transaction doesn’t go to the other wallet directly, it goes to one of the mining nodes, and they share it with all the other mining nodes. It lines up with other transactions waiting for inclusion in a block. At some point, usually after 10 minutes or less, the transaction is included in a block. One of the mining nodes solves the “mining problem” and adds the new block to the chain.
The new block is then distributed to all the mining nodes, which confirm it as valid. A new block is considered valid when five or more blocks confirming the recorded transactions are “hooked” to it across the network.
At that point the bitcoin is added to RookieGirl’s wallet — or should we call it a purse — and she runs off with your bitcoin and some other guy.
How does the Bitcoin network communicate?
You really want to know?
OK. So, the whole network, consisting of various types of nodes and wallets (I’ll not bore you with a list of what is possible) is a peer-to-peer network, which means that all the nodes have equal importance and priority.
This is not the same arrangement as the Internet which is a type of hierarchical network — although the bitcoin network uses the Internet for sending messages, it is a network within the Internet. All the nodes in the Bitcoin network are routing nodes.
Wait a minute; you don’t really want to understand all this networking stuff do you? Just think like this: the network is resilient, any node can disappear, thousands of nodes could disappear, and yet the network would still mine blocks and payments would still be possible.
I’m sorry you lost me at “OK.”
The next blog post in this series is: Down in the Weeds. Mining and the Bitcoin Network: (Explain Like I’m 5)