[blockchain] Let me try to explain Bitcoin to my Mum, Daniela
Hi Mum,
I have a system that is perfect for sending you money from the UK to Italy without waiting three days. Plus, if I send you 100€, you will get 100€* and not 97€! There is a 3€ bank fee for the currency exchange.
Before trying to explain it to you, let me ask you a question.
What do you expect from a bank, Mum?
Should it protect your money, so that only you can access it? Good.
Should it keep records? Fair.
Should it allow you to spend your money? Fair.
Should it allow you to receive payments? Fair again.
Bitcoin allows you to do all of this without using a bank or any intermediary; that’s why it is fast and cheap, although not completely free.
Let’s start with the first requirement: identity.
Bitcoin has a unique way of protecting your account. You can generate as many accounts as you want, and they will be protected by a super-safe password (private key) that only you will know. This private key is quite complex, and it is almost impossible** to crack.
They will maintain your records using a technology called blockchain. The name comes from its structure. Imagine all your transactions, like paying a bill or buying grocery, stored in small notebooks with a unique code on it that identifies you.
On top of every notebook, there is the net sum of the transactions.
You get €1000 from your pension, and you then spend €50 for a bill, and buy a bike for your niece for €300. On the cover of the notebook, it reads: + €650.
To keep the books in order, you don’t need the details, just the balance.
Let’s call this notebook a block. Imagine you have a notebook (block) for every day of the year, and you want to put them together. Every notebook will need to start from the previous one’s balance so that if your balance were €2000 in January, the February one would start from there, and not from zero.
If you put them one after another to form the history of your account, you then create a chain of blocks, a blockchain!
Now imagine that the blockchain contains not only your notebooks but everyone else’s and that you can also see other people’s balance.
Everyone in the blockchain network has a copy of everyone’s notebooks’ chain, making the system copied and replicated thousands of times.
Here is how you can send me money, given that I have told you I am notebook #1704 and you are #1234.
You send a note, a message, to everyone in the network saying: #1704 +100€ and #1234 -100€.
Next time the whole magic notebooks system is updated, your notebook will lose 100€ and mine will gain them. The power of the blockchain is that everyone in the network can see everything, and only when half of the people using our magical system, plus one, confirm that you sent me the money will I have them.
If you try to send the same 100€ to my sister and me at the same time (sneaky Mum!), someone on the network will see the discrepancy and invalidate the transaction! This is the way the blockchain control itself.
It is also impossible to change the past notebooks because the actual balance would not make sense, resulting again in an inconsistency that the network will invalidate.
You can eventually try to change all notebooks of the last three months to add some money, but in this scenario you also need to update all the copies of your previous three months notebooks in all the computers on the network: an almost impossible task.
Ah, you have a question. Hit me.
I see your point; you want to know how Bitcoin prevents you from calling all of our relatives and agreeing with them that you have 1M€; good question.
No, you cannot do that, and no, you won’t be rich.
In the Bitcoin network, there is a concept called proof-of-work. You can read everyone’s else’s notebook, but you can write to them (vote) only if you invested in big and expensive computers to solve a mathematical puzzle.
This secures the network because you can write on the chain only if you have spent time and effort. This makes it almost impossible for someone to buy a consensus that reaches 51% of the network***.
You can call Aunt Paola, but unless she owns tens of thousands of euros worth of computers, she won’t be able to certify that you have 1M euros!
In the real world, when you pay with euros, the notes are backed by a counter value in gold, so you have to spend (or own) something valuable to produce a record. In Bitcoin, the proof-of-work is the effort you have to invest to create a Bitcoin, and this gives Bitcoin its scarcity and value.
Is Bitcoin a perfect system? Far from it, but it is a system that can use technology to challenge what banks have been doing for the last 400 years.
Banks were created in Venice because people needed a system to secure money and efficiently conduct transactions.
Bitcoin was created for the very same reasons, out of human ingenuity.
*Untrue but still relevant to the example at hand
** Highly, highly, highly unlikely to be cracked
** Again, this is not entirely true, but it is true enough for now
