If you are like most people you have heard about Bitcoin. But what is bitcoin and why should you care?
Note: the following is a simplification to explain the high level concept. There is plenty of material available that explains the how in more technical detail.
Why do you use banks? Everyone reading this, I’m sure, has a bank account. You almost certainly have a debit or credit card.
I’m sure none of us reached adulthood with the thought “the first thing I need is a bank account”. So why do we have one?
Today I’m going to answer that question. Because it’s only when you understand the “Why” that the “How” becomes important.
And today I’ll explain why Bitcoin might be a better way of solving the problems that lead us to use bank accounts.
So, why do you use banks?
There’s more than one answer:
- You need to send money to someone far away
- you need to buy something in a shop
- you want to borrow money, maybe to buy a car, or a house.
But let’s examine these answers. There are other ways you could do these things. You could send cash in an envelope. You could tell the shopkeeper that in exchange for taking the milk now, you’ll give them something they want later. You could ask to borrow money from a friend, or even a stranger.
I see you thinking “that’s not realistic.” And you’re right. But what is not realistic about me not asking you for money?
The answer is actually quite simple:
You don’t trust that your cash won’t be stolen if you send it in an envelope. You don’t even trust that the recipient will tell you they got it.
The shopkeeper doesn’t trust that you will give something in return for the milk at a later date.
And, unbelievably, if you lend me money, you don’t trust that I will pay you back (the cheque’s in the mail, honestly!)
Trust is the reason that banks were created. Trust is the reason that you use banks to send someone else money. Trust is the reason that you use a debit card in a shop. Trust is the reason that you lend your money to the bank and not to me.
Because it is impossible to maintain trust relationships with all the people we have to do business with.
But when it comes to money – a store of value we don’t want to lose – we have to trust something. So we trust the bank.
Again, you may be thinking, I don’t trust banks at all. But your actions tell me otherwise.
You are happy for your employer to put your pay into the bank, and quite happy to leave it there until you need to pay the shopkeeper.
And you are quite happy for the bank to lend that money to me, so I can buy a car or a house or holiday. Because that is what the bank is doing with your money.
And what does the bank do in return? What does the bank give you when you give it your trust? How does the bank reward you?
Well, the bank charges you fees. It charges you interest. And it imposes rules on when you can take your money out. That’s what the bank does.
Doesn’t seem like a very fair trade does it?
And that’s what the person or people who invented Bitcoin thought.
They said, what if we could build a system that doesn’t need trust. What would that look like, and how would it work?
So, because the “why” is more important than the “how”, I would like you to imagine a world in which you could send money without trusting anyone, pay for things without trusting anyone, and lend or borrow money without trusting anyone.
A world in which you could deal directly with anyone without trusting them, but knowing that you can’t be scammed.
That’s a world of trustless transactions.
That’s what Bitcoin does.
I hope I’ve got you interested enough to be thinking, so how would that work? So here goes. I promise I’ll keep it as simple as possible.
Let’s think about how transactions work now.
When you put money into the bank, the bank records it in a ledger. It looks like this. “Hamish put $10 into the bank today”. The same thing happens when I pay for something. “Sarah paid Salta cafe $4.50 for a coffee on Thursday.”
That’s all a ledger is. A record of everyone’s transactions. It’s a big bank statement
The bank controls the ledger, and verifies every transaction. In practical terms, when I say you trust the bank, I mean you trust that bank will look after the ledger and not fake the transactions.
So how does Bitcoin do it?
[Disclaimer, I’m deliberately over-simplifying things here to make the concept clear. In fact, how bitcoin works is much more complicated than this]
With Bitcoin, there is one ledger. Only one. And everyone can see it. So everyone can check that it is correct.
No person verifies the transactions. Transactions are verified by code. For each transaction a complex calculation is carried out to check the transaction is valid.
And copies of the ledger are stored on thousands of computers. They are all in sync. So that complex calculation is carried out on thousands of computers. And the owners of those computers are incentivised to verify transactions correctly.
And the final stroke of genius is that when each transaction is recorded it refers to the previous transaction. So if you tried to change or delete a transaction, people would notice the anomaly.
So it is impossible to change the records, because it creates an obvious anomaly, and because you would have to make the change on thousands of computers.
So that’s it. The ledger (or bank statement) is open and anyone can check it. It’s stored on thousands of computers. Complex calculations verify every transaction, the members of the network are incentivised to make the right decisions, and the ledger or statement is built in such a way that if you tried to change or delete a transaction, people would notice.
So you don’t need trust.
And, maybe, you don’t need banks.
And that is Bitcoin, and that is why you should care.
Now that you understand why Bitcoin was invented, I want to leave you with a question. If we use banks because we don’t trust other people with our money, how could this technology be used to disrupt other institutions that work on trust?
If you have more questions or want to chat about the universe of Bitcoin more, please email us on email@example.com