Explain Bitcoin Like I’m Five
Explain Bitcoin: Bitcoin 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…
Double Spend Problem
ELI5 Bitcoin: 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.
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 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.
Now let’s explain Bitcoin and its key functions.
Bitcoin’s Key Functions Explained
Explain Bitcoin: An Open Ledger
Explain Bitcoin: 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 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
ELI5 Bitcoin: Every single transaction on the Bitcoin network is recorded on the open ledger, and the ledger is downloaded on every computer 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 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
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 miners and nodes (computers running the protocol) must 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 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 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.
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.
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 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 400,000 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.
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 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 minted 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.
It’s all in the code, and as we know it will take over 400,000 petaFLOPs to change it.
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.
Author: Tommy Limpitlaw
Can you buy less than 1 Bitcoin?
Yes. Every Bitcoin can broken down into 100 million bits. They are known as satoshis, after the pseudonymous creator Satoshi Nakamoto. And some companies will let you buy as little as $1 worth of Bitcoin, which at time of writing is worth about 11,000 satoshis. There are many companies that have a system for dollar cost averaging (DCA). This is a great way to buy Bitcoin, and is known in the space as ‘Stacking Sats’. Basically, what you do is set up small automatic, recurring payments to buy Bitcoin (or sats), and you DCA over time.
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.
How can I buy Bitcoin in the UK?
There are many reputable Bitcoin exchanges operating in the UK. However, the most recommended exchanges are Kraken or BlockFi. Or you can buy Bitcoin from Bitcoin marketplaces, such as LocalBitcoins or Paxful. All of these exchanges and marketplaces are global with high liquidity and excellent customer service. Check out our reviews on each platform.