When someone tries to explain Bitcoin or any other cryptocurrency, they’ll often go on about Internet coins that are really expensive because of maths problems, and in the end, the victim of the explanation learns nothing except that there are only 21 million Bitcoin and you’ve gotta catch ‘em all.
A much easier to understand explanation, which can help anyone understand Bitcoin, blockchain and literally any cryptocurrency in existence, all starts with the simple fact that Bitcoin means two different things.
A tale of two bitties
Bitcoin is two things:
- A “decentralised, immutable, distributed” blah blah blah whatever
- A coin
Let’s call the coin BTC
It’s pretty simple. It’s just a coin, not so different from any other except that it’s purely digital and it solely lives in people’s computers. People invite BTC to live in their computers by downloading a BTC computer program from the Internet.
There are currently about 18.5 million BTC in existence, and there will never be more than 21 million.
The reason there can be a finite number of BTC, even though it’s purely digital, is because that’s just what the rules of the computer program says. Everyone’s using the same program, so everyone’s following the same rules.
In addition to keeping track of how many BTC there are, the computer program also keeps track of who currently owns how many BTC (or small fragments of BTC) at any given time, and allows people to send BTC to other users.
Once again, the reason everyone can agree on who owns how many BTC and who sent BTC to who is because everyone’s using the same computer program with the same rules.
When someone talks about Bitcoin in the “decentralised, immutable, distributed” sense of the term, what they’re talking about is just a bunch of people running the same computer program.
And that’s all “blockchain” is. It’s just a bunch of people running the same computer program with the same rules.
So the real questions to ask if we want to make any sense of this are:
- Why and how did everyone suddenly agree to download and keep running the same computer program?
- Why does everyone follow the same rules?
- Who makes the rules?
1. Why? Just… why?
The reason everyone is running the same computer program is because they get paid to. Specifically, they get paid in BTC.
These people are called “Bitcoin miners”. You might’ve heard that they spend all their time doing maths problems or something, but it’s really nothing as complicated as that. They download the program from the Internet and run it on their computers, because they get BTC if they do.
BTC wasn’t valuable when they first started running this program back in 2009. There was just a handful of people doing it for fun initially. But over time, more people joined in, and people started buying and selling BTC.
The first time someone ever put a price tag on BTC, it was based on the cost of the electricity used to run the computer program. Eventually, people started creating online marketplaces for BTC trading and the coin got its own market price.
As the whole thing grew, BTC became more valuable. And as BTC became valuable, more people started running the computer program to try to get some for themselves, and it just grew even more.
As a market for BTC emerged, people realised that it was really quite useful as Internet money. Most notably, it was very useful for anyone who wanted to buy drugs online, as well as being an extremely fast and cheap way of sending money anywhere in the world.
So now BTC is useful because it’s valuable and it’s valuable because it’s useful. People keep running the computer program because it’s valuable, and it’s valuable because people keep running the computer program.
2. Why does everyone follow the rules?
The only thing that keeps it all working is the fact that everyone follows the same rules.
Sure, someone could modify the program with new rules. For example, you could run the Bitcoin program with a new rule that says that you have a million BTC.
But if you do, everyone else will say “no, my computer program says that you do not have a million BTC,” and they will know that you’re not following the rules and that your BTC is fake and worthless.
This is why blockchains are often described as “unhackable”. It’s because the only way to hack them is to simultaneously persuade thousands of people around the world to trade real money for fake money, and no amount of technical wizardry or hardcore hacking skills will let you do that.
3. Who makes the rules?
As a result of all this, blockchain is a system where the rules are whatever the majority of the participants say they are.
If you can successfully convince enough people to download and run a new program where the rules say you have a million coins, then you suddenly have a million actual coins. Your “fake” coins became real because enough people have agreed that they are real, and if they’re sufficiently real, then people will probably be willing to pay good money for them because of that “useful because it’s valuable, valuable because it’s useful” dynamic.
Is that it?
Countries including China and Australia have announced a national blockchain strategy, the USA is racing to keep up and “blockchain” and “Bitcoin” have been widely hailed as the hottest thing since sliced bread.
But why is everyone making such a big screaming deal about a bunch of people downloading the same computer program if that’s all it is?
After all, billions of people downloaded Candy Crush, but China never got around to developing a national Candy Crush strategy. Or if they did, it’s apparently top secret.
The reason for all the hype is that Bitcoin has brought the missing ingredient to the table by proving that this kind of distributed computing network can generate and sustain its own market value. It comes back to that “useful because it’s valuable, valuable because it’s useful” dynamic.
Computer scientists have been trying to create “unhackable” computer networks – owned by everyone and no one – since at least the 90s. But they always ran into the problem that someone had to pay for it all, and whoever was footing the bill for all the hardware, software and Internet bandwidth inevitably ended up in charge of the whole thing and became a weak point in the system.
Bitcoin solved the problem. And in hindsight, we can see that the reason it was so tough to solve was because it wasn’t entirely technical in nature. It was a question of successfully unifying people around an abstract concept until it became real, and that’s frankly not the kind of thing they hand out research grants for.
In other words, the breakthrough was successfully convincing people to keep following the rules and running the same computer program until it eventually got big enough and the coin eventually became worth something.
The instant Bitcoin became worth something, it was like flicking on a switch. Suddenly you could use Bitcoin for things such as payments and money transfers, which made it even more valuable. At the same time, people could suddenly be motivated to run this program by the promise of payment rather than out of faith alone, which let the system expand dramatically and snowball some more.
That moment arguably came just over 10 years ago, on 22 May 2010, when a chap named Laszlo Hanyecz paid 10,000 BTC for two large pizzas. BTC wasn’t worth anything at the time, so he was getting a pretty good deal. 9 months later, those 10,000 BTC were worth $10,000. The snowball had started rolling and the genie was out of the bottle.
The first “unhackable” computer network had been created and suddenly everyone was realising the immense possibilities of these kinds of systems.
At its most basic, it’s just a bunch of people running the same computer program and following the same rules, but the end result is much greater than the sum of its parts.
Author: Andrew Munro
Andrew Munro is the cryptocurrency editor at Finder. After previously writing about insurance, he now covers the latest developments in digital assets and blockchain, and loves every moment of it. www.finder.com
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