How does Bitcoin work? Explains Bitcoin Like I & # 39; m Five
Bitcoin is not easy to understand. The largest cryptocurrency in the world works in a similar way to traditional money, but obeys to totally different rules. Bitcoin can also be seen as software, but works differently from traditional centralized software.
Do you have trouble understanding how bitcoin works? Nik Custodio tried to answer this question in December 2013 in a blog post titled " Explain Bitcoin Like I & # 39; m Five ." Today, we highlight some of Custodio's information from that piece, also explaining new bitcoin information from the last five years.
First, Custodio uses the example of an apple transfer to explain how bitcoin works:
We are sitting on a bench. It's a great day.
I have an apple with me.
Now you have an apple and I have zero apples.
My apple has been physically placed in your hand. You know the transfer happened because you were there. You saw the apple in hand. You touched the apple. It was not necessary to have a third person to verify that the apple transfer took place.
The apple is now yours. I can not give you another apple because I have no more apples. I can not control your apple anymore. The apple is completely out of my possession. Now it's your apple: you can give it to your friend, and then a friend can give it to his friend, and so on. Here's how a person exchange works.
Person exchanges work great for personal transfers. They are not so great, however, for digital transfers.
The Problem of Digital Transfers
For millennia, humans exchanged goods in a simple way. If someone wanted to buy a sack of potatoes, he would give you a coin. The coin had a gold or silver content sufficient to give the same price as the potato sack.
Then, the Internet was invented and things changed forever. As Custodio explains:
"Now, I have a digital apple, so I'll give you my digital apple … How do you know that the digital apple that was mine is now yours and yours alone? Think about it for a second. "
With digital files, things get complicated. Suppose you have an Apple file on your computer. It's a picture of an apple in .jpg format. You can send that apple to your friend. Once you've submitted that file, however, you still have the original file until you decide to delete it. Now you have two apple files. You can send that Apple file to thousands of people, if you want.
"The sending of digital apples does not seem to send physical apples."
As the Internet grew, this problem became legendary. It has become a name: the double problem of spending.
An ordinary ledger does not solve the problem of double spending
For millennia, companies have used records to track expenses and payments. A ledger is basically a book in which it traces all transactions.
In the digital world, we also have master books. A ledger is a digital file. A company like Blizzard, for example, has a digital ledger for their game. The register keeps track of the gold coins in World of Warcraft. It keeps track of rare objects.
Great! Blizzard has solved the problem, right?
The problem with a digital ledger
There is a big problem with digital registers: they are not very secure.
Let's say that someone at Blizzard is a friend who plays on the server. He decided that his friend deserves a little extra gold and a new legendary item. Blizzard's boy makes a quick change to the digital ledger. Changing a centralized digital ledger is as easy as typing new numbers into an Excel spreadsheet. If you are an employee and have access to the ledger, nobody will know.
We need a better solution. Bitcoin is that solution.
Bitcoin is the solution to that problem
We have a problem: we can monitor transfers of digital files with a digital ledger. However, if that ledger is in the hands of a single entity – like a person or a company – then there is the risk of fraud.
Bitcoin proposed a unique solution: and if we had given the ledger to everyone?
Instead of the ledger that exists only on Blizzard computers, for example, we could place it on everyone's computers. The ledger on everyone's computer will monitor all transactions that have ever taken place. The advantage of this system is that you can not fool it.
Let's say I try to send you a digital apple that I do not have. Before accepting my Apple digital file, you decide to check the balance of my wallet on the ledger. If I try to cheat the system and claim to have an apple that I do not own, my ledger will not be synchronized with the ledger of everyone else. My ledger will be different.
The ledger is not controlled by one person. This means that no one can choose to give himself more apples. If someone tried to do it, and they tried to make a change in their own ledger, then the mistake would be obvious.
"The rules of the system were already defined at the beginning", explains Custodio. "And the code and the rules are open-source, that's where smart people can contribute, maintain, protect, improve and control."
In the meantime, those who participate in the network will receive a reward. If you check your general ledger and check your ledger information, for example, you could get 25 digital apples as a reward. In fact, this is the only way new apples are created.
In this situation, "digital apples" are bitcoins.
If you want to send fractions of an apple, then bitcoin lets you do it. You do not have to send 1 apple. You can send 0.01 of an apple. You can also send 0,0000001 apples.
How Bitcoin Upgrades Work
Suppose someone wants to change digital accounting. They have a way to speed up transfers of digital apples. By changing some lines of code in the digital ledger, they can speed up the entire network. People can transfer digital apple files faster than ever before.
Here's how bitcoin updates work.
Bitcoin is an open source protocol. This means that anyone, anywhere in the world, can edit bitcoins – similar to Wikipedia. There is nothing to stop you from proposing a bitcoin update.
So what is preventing people from constantly changing bitcoins?
Miners and consensus rules come into play here.
Miners protect the bitcoin network by verifying transactions . Miners verify transactions based on the bitcoin rules they have previously agreed to follow – the consent rules .
When someone proposes a change to the bitcoin protocol, that proposal goes through a series of checks and balances. It is added to the Github bitcoin page, for example, where it is discussed and reviewed. If most developers agree that the change is good, then the proposal is added to bitcoins.
At this point, miners may choose to follow the change or not. Miners may choose to upgrade to new software without problems, for example. Or, if the update is controversial, the miners might refuse to update.
Ultimately, bitcoin and its blockchain technology are complicated. It is difficult to understand the bitcoin if you are five or 25 years old. Today, computer elites all over the world are continually updating bitcoins to improve the system. As we move forward, the bitcoin continues to grow, but the same basic concept of the secure transfer of digital files remains constant.