The simplest introduction to Bitcoin, ever.
…And money, and cryptography, and the peer-to-peer concept
I’ve been asked the same question quite a lot recently: “what the fôk is Bitcoin”. I finally had my mother asking me this question (not quite in these words, though), which forced me to find a good analogy so that she could easily understand it. She’s a PhD candidate in Theology and can wreck my brain in less than 2 minutes but still, she could not grasp the logic behind it. She does understands that Bitcoin is a currency. It stops here. What she doesn’t get is the “peer-to-peer” epithet attached to it, how can this “internet money” be created from scratch, and most importantly, be worth something (about 89$ for 1฿, right now) in the “real world”.
The situation
Let’s say you’re part of a community garden. You and your peers are attributed an equal piece of soil and each of you, according to your tastes and abilities, will grow different kinds of vegetables. You will grow tomatoes and lettuce while King Henry The 2nd, your awesome but delusional neighbor, will grow cucumber, leeks and Adorable Minions.
Since you’re single (I can tell, you’re reading about Bitcoins), you are growing too many tomatoes for yourself. Most of them will rot unless you oblige yourself to a very strict diet. A solution would be to trade your tomatoes with Henry, in exchange for leeks, with which you could make this awesome recipe.
The problem
King Henry’s leeks are not available at the same time your tomatoes are and vice-versa. There is really nothing much you can do about it, even though Henry believes he could with his God-given powers. It’s not only a problem between him and you, it’s everyone’s problem in the community garden for they are willing and able to exchange their products.
Anastasia proposes that, instead of doing barter, anyone should just sell their products in dollars, and use the money to buy other products. The catch is that, from now on, everyone will have to charge taxes and include this little income in their tax report. Also, everyone in the garden is already making a living with their regular job but not at the same hour rate. This means that a doctor can buy far more products with one hour of work than his cashier counterpart.
This is already too complicated, and quite unfair for the spirit of a garden community. The idea was to exchange products, not to sell them.
The brainstorm
Then you come up with an idea. For every tomato you are going to give to King Henry The 2nd, he will have to write you a note saying how many leeks he owes you in exchange. But just as you’re giving yourself a pat in the back for such a stroke of genius, King Henry ponders about unforeseen events that might affect the leeks’ quality, such as bad weather.
“Yeah. This can’t work” says Anastasia. “We need to be able to exchange these notes between ourselves in case someone is not able to honor his part of the trade”.
“We might as well print dollars bills” says George, who was very quiet until then.
“It could be our own money bills. So it’s not money like dollar money, it would be Garden Money. This money will be accepted amongst garden users. Since it has no value outside, the government can’t tax it, and the doctor can’t benefit from his higher pay.”
A short silence fell on the crowd as everyone processed this interesting idea. “But who would print the bills?” asked Garry. “And how can we trust that he won’t print a few more for his own benefit?”
Garry was human. And like most humans, he was capable of being a, sneaky, greedy bitch from time to time. And he thought that surely, if he had the authority to print the bills, he would make a few extras for himself. After all, there is no such thing as free money until there is.
“Maybe we can use a special ink, or some kind of fancy paper? My sister can make paper out of mud and hemp fibers” said Helen.
“Apart from being kinda disgusting and not so fancy, this is not a definitive solution, if your sister knows the recipe, anyone can replicate it” said Garry. “Also, it’s getting more complicated and expensive. Who’s gonna pay for these printing expenses? We don’t grow printers, paper and special ink here”. Fancy papers and inks cannot solely prove a bill validity.
“We could give each bills a unique number, so we can validate their authenticity” proposed King Henri in a momentary glimpse of sanity.
As good as this idea was, it didn’t solve the fact that the person responsible for printing these bills could print a few extra bills, with valid numbers. It didn’t solve the cost and complexity issue either.
“Then, maybe, everyone should be responsible for printing his own Garden Money. This way, everyone is paying for the money being made!” said Sarah. She continued: “A community billboard could be provided, on which everyone could see what bills numbers are in circulation and therefore, check if the Garden Money being given to them in exchange for their vegetables are valid tender.”
“Whenever someone prints a bill, he will have to first write its unique validation number on the community billboard to give it a real garden value. This way, she said, everyone is paying for what they print and responsible for validating its “legality”. This process would be transparent, fair trade and totally in line with the spirit of a community garden”.
“But everyone is going to print bills and stop gardening” said Garry, who definitely, you thought, had been a crook in another life.
The resolve
“Not if it gets harder to print them” said Rami.
0.o” ?
It’s fairly simple, actually, said Rami. You could have the first bill to be numbered #1, and the third, #3, and the fourteenth, #14, and so on. Or you could say that the first bill is number #1, and the second is #11 and the third is #111 and so on. Then, we decide that each number “1" must be exactly 1 cm (Rami was european) of width and height. So, to fit the required amount of “1" on a bill. Each new bill has to be 1 cm larger than the previous. This means that the first bill printed will be 10 cm wide, the second will be 11 cm wide and so on.
“But the hundredth bill is gonna be more than a meter wide, that’s about 3 feet!” said Jordan, who was good at math.
“But it solves the whole problem” answered Rami, humbly.
And it did. Decentralizing the bill printing was actually going to decentralize its production cost. No one would have to pay someone else but itself for the bill printing. Having a public validation number meant that no one could ever be able to fake a bill, actually, everyone would be allowed to do so and giving it a “real” value only asks for its producer to write down the number. Making every new bill wider than the previous would insure that the cost of printing a bill would eventually exceed what it could buy, making it worthless to print any new tender, thus, creating some kind of intrinsic value for the bill and a natural equilibrium between the amount of bills in circulation and the amount of goods available. This way, there would never be too many bills (which would make them worthless) and there would never be not enough.
Basically, every new bill coming to market virtually lowers the worth of all the existing bills. The dollar works the same way. If there was only 10 bills for the whole garden, that would means that 1 bill could theoretically buy 1/10th of the garden’s produce. If there was 100 bills, it means that 1 bill could theoretically buy 1/100th of the garden’s produce.
Of course, you could create a bill that has the same number as another one, thus, faking it. But the community billboard doesn’t only track the existing numbers, it also tracks who is the actual holder of the specific bill. If someone buys your tomatoes with the bill #111111111111, you will check on the billboard that the holder of this specific bill is him and, if so, accept the bill then replace your buyer’s name with yours as the new holder.
From the garden to bitcoin
The internet is the garden and Bitcoin has been used widely for many internet-related actitivies, from black markets to very legal markets. We do use numbers, but instead of longer and longer sheets of papers, we use longer and longer “keys” or “series of numbers with logic meaning”.
Each time someone wants to “print” a Bitcoin, they use a software which basically asks the bitcoin server (garden billboard): “What is the next number I should use to print a valid bitcoin”. To which question, the server will reply something like “AB = CD”.
If you have ever taken an IQ test or wasted your time on the internet wondering how intelligent you could be, you already stumbled on such a logic trivia. Basically, moving two letters forward solves the problem.
So if you were to send a love letter to your crush, and test how smart she is in the process, you could send her the following message: “K NQXG AQW (AB=CD)”. Using the AB = CB key, she would translate it into “I LOVE YOU”. (And then laugh at you, but that’s another story.)
Your printing software will work in the same way, asking the community server for two strings of numbers, and then proceed in finding the key that convert one of them into two identical pairs.
In the machine world, though, the question is far more complex, and gets harder for every new bill printed, making them longer (harder) to print, just as extending the width of a sheet of paper would. The process is pretty much the same as the one used in hacking encrypted messages and this is why Bitcoin is called a crypto-currency.
Internet Money is Real Money
And how does this money can be worth something in the real world (93$ = 1฿, 30 minutes later) you ask?
Well, you see, Garry has a best friend, Pedro, who owns a bakery near the garden. Garry doesn’t eat much vegetables, and since Pedro’s wife loves the idea of being able to buy the freshest vegetables in town, he is accepting Garry’s money, knowing that it can be used to buy all the needed vegetables.
With 1 Garden Bill, in the garden, you can buy about a kilo of vegetables, worth about 6 dollars in the “real world”.
When Garry buys a cake worth 10 dollars, at the bakery, he pays with 2 Garden Bills which cost him 2 dollars each in printing costs.
So, at a cost of 4 dollars (2$ +2$) for printing, he’s buying 10 dollars worth of goods. And Pedro, out of the 10 dollars made out of the sell of a cake, can, in return, buy 12 dollars worth of vegetables.
This is how the “real world” value of the money is created.
Conclusion
Basically, the Bitcoin production cost is the computing power required as well as your energy supplier killowatt/hour rate. As time goes by, it’ll take more time (more energy), or more efficient computers (more expensive) to print a Bitcoin just as it would require meters of papers and gallons of ink to print Garden Money.
Last thing you should know is that printing Bitcoins is called “mining” and should only be done by people who are aware of the risks involved. Since the Bitcoin value is only loosely attached to tangible, “real world” assets, its value is very volatile and its mining should, therefore, only be done for fun.
There are lots of advantages to use Bitcoins.
It’s an interesting way of paying or getting paid especially since it cannot really be counterfeited as anyone can print it.
There are no transaction fees when paying or buying, because there are no bank or third party authorities you have to pay for handling the transaction process. Every Bitcoin user has an electronic wallet on his computer, from which he can pay any other user. This is the same as peer-to-peer music downloading, where a person shares and downloads music over the web, instead of getting it from iTunes.
It has no boundaries, nor is it attached to any country’s economic performance.
As a seller, you don’t need to pay for a payment infrastructure. You’re using the same software the buyer’s using. You will never pay a percentage of your sales to a third-party. This means that this currency has no practical interest for banks and credit institutions.
I wonder why governments are slowly trying to make it illegal, or, at least, very hard to convert into real money ;)
Maybe it’s because the organizations who benefits the most of today’s economy are the ones who make a profit on every transactions made in this world. Not the ones who actually bring value into it.
Or maybe you have another explanation? The comment section awaits a few down scrolls from here.
Desambiguation: Bitcoin is a currency, but it’s also the software through which we buy and sell goods.
Note: this is my first blog post in 6 years. And my first, ever, in English. I will gladly accept any criticism you might have, even the smallest vocabulary or grammar adjustment you may find worthwhile. Please share your thoughts on the content as well as the writing style. Thank you.
More information:
A federal judge ruled that Bitcoin was real money.
New York’s financial regulator announced an interest in regulating it.
“We believe that – for a number of reasons – putting in place appropriate regulatory safeguards for virtual currencies will be beneficial to the long-term strength of the virtual currency industry,” said NYSDFS superintendent Benjamin Lawsky in a statement, after sending subpeoneas 22 compagnies related to Bitcoin.
