Explain Bitcoin Like I’m Five
Explain Bitcoin: Bitcoin (BTC) is technical, and understanding it isn’t easy. Understanding how the Internet works isn’t easy either. None of us think about how the protocol level of the Internet works, but we can all surf from page to page seamlessly.
Bitcoin is no different. The protocol level that we all think of Bitcoin is the base layer for the decentralized financial industry, and is laying the foundations for so much innovation it’s hard to quantify what is possible.
Like the Internet, you don’t really need to know all the intricacies of how Bitcoin works, but if you’re interested in a basic understanding, allow me to explain Bitcoin for you…
Bitcoin Is A Necessary Innovation
Bitcoin throws up divided debate, seemingly like nothing else before it. It has been labelled rat poison, a fraud, magic Internet money among many other disparaging terms.
But why? What is it that makes highly intelligent people dismiss it so quickly? I can’t speak for anyone, but they simply can’t understand it. They might be too old, simply not understand technology and not have taken the time to get some advisor really explain Bitcoin to them.
While this is true for some, I believe others are simply trying to disrupt adoption for their institutional buddies. But the fact is Bitcoin is one of the most important innovations in out lifetime, and adoption is inevitable.
The doubters either understand and are fearful of the disruption it will bring, it or need Bitcoin explained in simple terms. Maybe they should start by reading this article. So, without further ado, allow me to ELI5 Bitcoin for you.
Satoshi Nakamoto Overcame The Double Spend Problem
The best way to explain Bitcoin and how it stands out from all other digital currencies that came before it is to discuss the double spend problem. Something Satoshi overcame.
The double spend problem is how it says on the tin. Duplication of digital files is easy, think about the last time you bought an album, hardly anyone does because they can just duplicate the file.
This is the problem that plagued every digital currency innovator before Satoshi, because a digital money that can be copied is useless. Think about it:
Let’s just say there’s you and me in a room, and I give you a dollar. I gave the dollar to you, and now you have it. That’s normal, and we didn’t need anybody else to verify the transaction.
And I can’t take the dollar back unless you give me it back. That dollar is yours now to do whatever you like with it.
Now let’s try that with a digital dollar, which is basically an Internet file.
I send you the digital dollar and you receive it. Now, you have it, as it’s in your inbox, and you’re a dollar richer, just like the physical way.
But how do you know that digital dollar is one of a kind? Can’t all digital files be duplicated?
The physical one, as long as it looks like a dollar it will pass for a dollar, but how do you know the digital dollar isn’t copied?
I could have paid all my dollar debts with the same digital dollar for all you know, and yours would be worthless.
This is what’s known as the double spending problem, and it was the main stumbling block for every attempt at a digital money before Bitcoin.
Many people tried and failed to get around it, but now with the creation of Bitcoin, Satoshi Nakamoto became the first person/people to figure it out. And that’s what has got every person who understands digital money excited in the early days of Bitcoin.
Now let’s explain Bitcoin and its key functions.
Bitcoin’s Key Functions Explained
Explain Bitcoin: An Open Ledger
Bitcoin’s main function is really quite a simple concept. It’s called an open ledger – a bit like a bank book. All the digital dollars that are sent are recorded on this open ledger, and every single transaction in Bitcoin’s history is on the open ledger.
But don’t we need a trusted third party, like Western Union or a bank to verify all the transactions? I hear you say. Well, Satoshi got around this problem too.
Instead of a central authority keeping track of the transactions, Satoshi introduced a ‘decentralized’ open ledger. An open ledger that tens of thousands of computer devices have a complete record of, and they all work together to make sure everything is in check. They’re called nodes, and I’ll get back to them later.
And because its an ‘open’ ledger, anybody can check any transaction.
With Bitcoin Code is Law
ELI5 Bitcoin: Every single transaction on the Bitcoin network is recorded on the open ledger, and the ledger is downloaded on every node that runs the protocol.
It can’t be cheated because if anyone tries to cheat it, their version of the ledger won’t match all the others, and they’ll be ostracized from the network.
The rules of the ledger are hard coded into the protocol, and every node running it has to abide by the coded law.
As well as the ledger being open, the protocol is also open source, so anybody can audit it.
Consensus Must Be Achieved
Explain Bitcoin: Because no central authority owns or runs the network, changing something has to go through a democratic vote among the Bitcoin community.
If any new code is introduced, such as an an upgrade, the majority of the nodes must be in consensus to implement the upgrade, and the miners will point their hashpower to the version they want to see as the Bitcoin protocol.
It sounds strange, but it’s similar of moving a website to another server. All the files will be duplicated and sent to the new server, and the webmaster will point his domain at the server of his choice, and whichever one it points to is the one that gets the traffic and updates thereafter.
But of course it is different with Bitcoin and no one person can choose to change everything or anything. As I said, it’s a democratic vote.
Let’s say somebody wanted to change the protocol to have a limit of 21 billion bitcoins, rather than 21 million. They would introduce the idea to the network, who would either agree to change their version of the network protocol or not.
Once the majority are in agreement (more than 50% of the network) the new code will be implemented, and the new Bitcoin protocol will start to take shape from then on.
If the majority cannot agree to it, the change proposal will not be implemented, and so the Bitcoin protocol will remain the same.
This is decentralized, direct democracy, and it ensures that no central authority can print more bitcoins at will, and pretty much guarantees Bitcoin’s limit of 21 million will never be changed.
But of course there are updates that improve the network and when these are introduced, they go through the process. It all takes a long time, and many don’t like that.
But we’re not dealing with a website changing server, we’re dealing with an Internet protocol that’s worth a few hundred billion dollars, and any change to the code could introduce bugs, that could end up harming Bitcoin if it’s not taken with extreme care and due dilligence.
Bitcoin Is The Most Secure Network Ever Created
ELI5 Bitcoin: Anybody can be part of the Bitcoin Network by running a node or mining machine. And it’s these two elements that carry out all the work and make Bitcoin the most secure network ever.
The whole Bitcoin network processes the equivalent more than 80,704,290 petaFLOPS. That’s eighty-million, seven-hundred-and-four-thousand-two-hundred-and-ninety petaFLOPS. Every second!
I won’t go into what a petaFLOP is because that might go over the head of a five year old, but to give you some idea of the security of the Bitcoin network: the most powerful supercomputer, Summit, can process 200 petaFLOPS.
Bitcoin is over 4,000 times more powerful than the world’s most powerful supercomputer.
Proof of Work (PoW)
Explain Bitcoin: Nodes are not paid for their work. They’re kind of like the guardians who validate the blocks of transactions that the miners sent.
Every feature of Bitcoin is important but Bitcoin nodes are extremely critical. At last count there was 9,831 Bitcoin nodes worldwide, and this is the most important aspect of Bitcoin’s decentralisation.
There are full nodes and light nodes, and full nodes are the ones that we depend on mostly as they have the full Bitcoin protocol downloaded.
Every node constantly monitors the Bitcoin blockchain to distinguish legitimate Bitcoin transactions from non-legitimate ones, and their main job is to prevent attempts to double-spend bitcoins.
Full nodes also support the network by accepting transactions and blocks from other full nodes, validating those transactions and blocks, and then relaying them to other full nodes. They work together and have to be in agreement with each other or the Bitcoin blockchain couldn’t function as we know it.
What if there’s a rogue transaction? I hear you ask. If there’s a rogue transaction, the nodes will pick it up and deny it access onto the blockchain. If a rogue node or several nodes try to manipulate it and they say it’s a legitimate transaction, they will be out of consensus and their version of the Bitcoin blockchain will be dismissed by the other nodes.
But couldn’t a state or a rogue billionaire buy more nodes and take over the network? Nodes aren’t expensive, and it wouldn’t take a rich state or billionaire to have more nodes than what is there now. And let’s say someone did buy 10,000 nodes and they intend to take over the network.
In this case, the existing 9,738 nodes would have to be convinced that their version of the blockchain is the actual version. Those 9,738 nodes are owned by Bitcoiners, shops and businesses with interest in Bitcoin etcetera so they’re not going to be convinced of something that’s not good for the network.
Basically, what would happen is the rogue nodes would just force a fork in the chain and there would be two versions of Bitcoin, because the legitimate nodes wouldn’t update to the other version.
If the nodes had some rogue miners on side, the best they could achieve would be to mine their version of the blockchain and be paid out in their version of Bitcoin, which would have no value, so the miners would lose money.
Bitcoin Miners Work With Nodes To Power And Secure The Bitcoin Network
A Brief Look AT How Bitcoin Mining Works: Bitcoin Miners are the ones who pick up the transaction, hash them into blocks and send blocks to the nodes, and they’re paid for their processing power – work.
Bitcoin miners all work together to put transactions into the latest block, then every 10 minutes or so they send the block (usually full of transactions) to the nodes. Once the nodes are in agreement that each block of transactions is legitimate, they will send the block back to the miners.
The miners then try and discover the cryptographic puzzle that the network asked, and every Bitcoin mining device frantically hashes away trying to be the one to find the answer.
A lot of processing power goes into finding the block, and only one miner will do so, but all this processing power doesn’t only secure the network, it guarantees the proof of work that is behind every minted bitcoin.
The newly mined currency goes to the first miner to discover the answer to the cryptographic puzzle. They get to add the latest block to the blockchain and are rewarded for their proof of work with the mined coins – known as the block reward.
The block reward is currently 12.5 BTC, but that will be halved next month, and then halved again every four years or so until the last fraction of a bitcoin is minted in around the year 2140.
This ensures that the limit of 21 million will never be exceeded, and it also ensures that we know exactly how many there are now, and will be at any time in the future.
For a in-depth explanation of Bitcoin Mining, check out ELI5 Bitcoin Mining
Send Value to Anybody from Anywhere, at Any Time
ELI5 Bitcoin: To explain Bitcoin it’s necessary to understand that every piece of data on the network are exchangeable anywhere in the world. They’re also divisible by 100 million, and you can send as many or as little as you want.
Nobody can stop you sending them, and any you do send will always arrive at the address you send them to.
The Bitcoin protocol is programmable, too. Of course, it’s a computer program itself. Think of it like the Internet of Money.
What do I mean by that? Well, think of the Internet as the Internet of Information. It allows us to send information freely, and everything is sent with the touch of a button.
Bitcoin is similar, but it allows value to be sent and not just information. Of course we can send value on the Internet, but for that we rely on a central authority.
And as we know they charge us a lot of money for that.
Any amount can be sent anywhere in the world for a fraction of the cost banks charge us for the same service. And instead of waiting five days for bank clearance, it takes about 20 minutes on average.
Explain Bitcoin: Bitcoin is a computer program. A protocol, just like Internet protocols HTTP, or TCP/IP. And just like those the Bitcoin protocol can be programmed.
Programs can be built on top of the protocol, such as contracts, certificates, or even check-out services. All this can be done on the Internet, but because the Internet is centralized we have to trust them and pay for the privilege.
Bitcoin is trustless – you don’t need to trust because code is law.
Things like Lightning Network are being built on top of the Bitcoin network. The Lightning Network is a payment network that facilitates Bitcoin transactions for a fraction of a penny and be carried out in milliseconds.
There’s also the Liquid Network, built using the Bitcoin codebase. It’s a sidechain that allows for faster transactions at a fraction of the cost compared with the main blockchain.
The Liquid Network works alongside Bitcoin, and its main use case is for exchanges and financial institutions, and this opens up so many possibilities for the way value is transacted.
Bitcoin Explained – A Network of Trust and Absolute Scarcity
There’s a lot of noise, good and bad, about Bitcoin. Some very intelligent people will tell you it’s a scam. But they either have an agenda or they haven’t taken the time to understand it. Maybe they just need someone to explain Bitcoin to them in simple terms.
Bitcoin is not a scam. It is hard money – every single coin has been worked for. Unlike government money.
It’s is network of trust, and Bitcoin doesn’t need a trusted third party to verify transactions, because transactions can’t not arrive at the address they were sent to.
It’s all in the code, and the code is secured by a distributed supercomputer.
In times of governments saying there is no limit to the printing press, an asset that can’t be manipulated, one of absolute scarcity, and one that can’t be stopped or controlled, might just turn out to be the money of of the future.
A Bitcoiner since 2017 and a Bitcoin Maximalist since 2018, Tommy is our main writer and editor at Bitcoin Maximalist. Other than researching and writing about Bitcoin, Tommy loves spending time with his family and supporting his beloved Leeds United.