Cryptocurrency explained in 60 seconds – The Basics of Bitcoin

This entry is part 1 of 8 in the series Cryptocurrency Basics

 

CryptoCurrency Explained – Cryptocurrencies like Bitcoin are often described as complicated and technical. They’re not: the core concept is simple.

If you have 60 seconds to spare read the explanation below and ‘own’ that concept forever.

CryptoCurrency Explained in 60 seconds

First of all we start with an analogy. Until just over 100 years ago the people of Yap, a Pacific island, used large stone disks as coins. The picture on this page shows some.
Cryptocurrency Explained - Yap Island BitcoinYappians used these stones for large expenses such as dowries. Because the stones were large the islanders didn’t bother moving them about. They just transferred ownership. People knew who the current owner was because it was public knowledge.

This made it difficult to commit fraud.

  • You couldn’t spend someone else’s stone, because everyone knew who owned the stone.
  • You couldn’t spend the same stone twice because everyone would know.
  • You couldn’t fake the currency, because to do that you’d need to carve a new stone – which anyone could do anyway.

It was a great system. It just didn’t scale up well.
Cryptocurrency Explained - bitcoin logoBut cryptocurrency works in exactly the same way, and does scale up.

Here’s why they’re the same.

Bitcoins don’t move around. They stay fixed on a public ledger, the “block chain”. Anyone can check ownership by checking this ledger.

This makes it difficult to commit fraud:

  • You can’t spend someone elses bitcoin, because everyone knows who owns them (from the ledger.)
  • You can’t spend the same coin twice, because the network keeps the ledger up to date and there’s only one ledger. If you did try to spend it twice, everyone would know.
  • You can’t fake the currency, because to create a bitcoin you need to break a difficult maths problem. A new problem is set every 10 minutes, and the winner gets a brand new bitcoin as a ‘prize’. There’s no way to fake the answer – you’re either right or you’re not, so there’s no way to fake a bitcoin.

Openness is at the heart of both the Yap stones and cryptocurrencies. Everything is there for anyone to scrutinise, and so anyone can check if a payment comes from the rightful owner. There’s no need for trust between two people in a transaction, because the system removes the possibility of fraud.

That’s it, that’s the core of cryptocurrency explained in 60 seconds.  Of course there’s a great deal more to it.  If you’d like to follow the technology as it develops, drop by my google+ page or linkedin page and say hi.

Now, if you’ve got another 60 seconds, here are the answers to some burning questions you may have.

 

 

1 Response

Leave a Reply

seventeen − 3 =

CommentLuv badge