ELI5 Bitcoin: Bitcoin is pretty 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 with a decentralized, trustless and secure network.
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 ELI5 Bitcoin for you.
ELI5 Bitcoin – Explain Bitcoin Like I’m Five
Let’s just say there’s you and me in a room, and I hand you a dollar. I gave the dollar to you, and now you have it and I don’t.
We didn’t need anybody else to verify the transaction, and I can’t take it back unless you give me it back. That dollar is yours now to do whatever you like with it.
But let’s say we have a digital dollar and we want to do the same transaction.
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?
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.
ELI5 Bitcoin: Bitcoin’s Key Functions
Bitcoin is 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 (in this case Bitcoin) that are sent are recorded on this open ledger.
And every single transaction in Bitcoin’s history is on Bitcoin’s open ledger.
But don’t we need a trusted third party, like a bank to verify all the transactions? I hear you say. Well, Satoshi got around this problem too.
Instead of a central authority like a central bank keeping track of the transactions, Satoshi introduced a ‘decentralized’ open ledger. One which hundreds of thousands of computers have a complete record of.
And because its an ‘open’ ledger, anybody can check any transaction.
With Bitcoin Code is Law
Every single transaction on the Bitcoin network is recorded on the open ledger, and the ledger is downloaded on every computer that runs the Bitcoin 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 computer 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
Because no central authority owns or runs Bitcoin, changing something has to go through a democratic vote among the Bitcoin community.
If any new code is introduced, an upgrade, the majority of the miners and nodes (computers running the protocol) have to be in consensus to implement the upgrade.
For example, if 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 Bitcoin 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 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.
The Most Secure Network Ever Created
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.
Between them, they process 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 this is supposed to be ELI5 Bitcoin, 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 400,000 times more powerful than the world’s most powerful supercomputer.
ELI5 Bitcoin: Proof of Work (PoW)
Nodes are not paid for their work. They’re kind of like the guardians who validate the blocks of transactions that the miners sent.
Miners are the ones who pick up the transaction, hash them into blocks and send blocks to the nodes.
Once the nodes are in agreement that each block of transactions are all 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 mining machine 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 minted bitcoins go 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 minted bitcoin – 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 bitcoins 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.
It’s all in the Bitcoin code, and as we know it will take over 400,000 petaFLOPs to change it.
Send Bitcoin to Anybody from Anywhere, at Any Time
Bitcoins 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 Bitcoin, and any bitcoins you do send will always arrive at the address you send it to.
The Bitcoin protocol is programmable, too. Of course, it’s a computer program itself. Think of Bitcoin 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 of Bitcoin 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.
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 Bitcoin, 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.
We’re already seeing things built on Bitcoin. Things like Lightning Network, which 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 on the Bitcoin 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 Bitcoin network.
ELI5 Bitcoin – 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.
Bitcoin is not a scam. It is hard money – every single Bitcoin has been worked for. Unlike government money.
Bitcoin is network of trust. It 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, the only asset that has absolute scarcity, and an asset that can’t be stopped or controlled, might just turn out to be the money of of the future.
Author: Tommy Limpitlaw
How do you make money with Bitcoin?
There are many ways to make money with Bitcoin. The most obvious way is to mine Bitcoin. Bitcoin mining is the process of verifying transactions, and helping to secure the Bitcoin network. Bitcoin miners are rewarded with bitcoins for their work.
What is the point of Bitcoin?
Bitcoin is a decentralized money. A money that nobody can control or manipulate, and a money that nobody can print and devalue. It’s also not necessary for any third party to verify transactions, so it makes it much faster and cheaper to send value. It’s also money built on the Internet: a society of almost 5 billion people.
How many bitcoins are left?
There can only ever be 21 million bitcoins. At the time of writing, there are 18,422,856 bitcoins in circulation. There are 6.25 bitcoins minted roughly every 10 minutes, so that’s 900 every day. The amount of newly minted bitcoins is cut in half roughly every 4 years, in what is known as the halvening. The halvening will continue to take place until the last fraction of Bitcoin is minted in around the year 2140.
Is Bitcoin legal?
As of July 2020, Bitcoin is legal in most countries. The US, UK, Canada, Japan, and all other developed nations it is very much legal. However, the legal status of Bitcoin varies in other jurisdictions.