Bitcoin and the Blockchain, explained to an 8 year old

If you’ve turned on the TV in the past few months, you’ve certainly heard the terms “Bitcoin” and “Blockchain”. Although these concepts can seem confusing at first, they work very simply and do a great job in combining the field of economics with the field of technology. So let’s dive into what a bitcoin is, how it works in a blockchain system, and why it matters.

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What’s a bitcoin?

Now if you’re anything like me, that google definition made ZERO sense. Quite simply, Bitcoin is a currency that works on a peer to peer network, which means there is no middleman.Regular currencies, such as that of the Dollar or Euro, are controlled by the government and banks, which serve as the “middleman”. bank.png

This middleman controls the production of the currency and has full control over its circulation. With Bitcoin, there is no “middleman”, which means transactions can be made directly from person to person. Bitcoins are a digital currency, meaning they are not actual physical coins or bills.

“But Ruchir, if this currency is online, then what’s stopping me from hacking it and sending one bitcoin to multiple people at the same time?”

The Blockchain ensures authenticity

The blockchain is what keeps the world of Bitcoin spinning. Basically, the blockchain is a continually growing list of transactions. Every time a bitcoin is exchanged, it is added to the blockchain. Once that transaction, or block, is added to the blockchain, the bitcoin has been officially transferred. Quite simply, the Blockchain is just a list of all transactions made through bitcoin, in order by timestamp. But how does this ensure authenticity? By being public.

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The Blockchain is public

The reason people can’t hack Bitcoin is that the Blockchain is decentralized and public, which means that everyone can monitor it, and no one owns it.

The math test analogy:

You’re taking a math test in a room with 50 other students, but there is no teacher watching over you. You could cheat on the math test by sneaking a calculator into the room, but if the other kids saw you cheating they would report you for having an unfair advantage on the test. So even though there is no teacher watching, everyone taking the test ends up making sure that no one cheats.

classroom.pngThat’s how the public blockchain works: the people that invest in bitcoin also makes sure that no one is cheating the system. They do this by monitoring the blockchain, or record of transactions. This ensures that no transactions are made more than once. To make this system even more secure, every block in the blockchain is encrypted, and only the next transaction has the key to decrypt and attach to the first block.

Mining

Ok, so we understand that bitcoin is a currency that can be traded like money. We also know that it is decentralized and secure, which raises the question.

If no one owns Bitcoin, where do the bitcoins come from?

By mining.

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People don’t actually go out and dig for physical bitcoins, it’s all virtual. However, the process of “creating” bitcoin is called mining. ANYONE with a computer and access to the internet can mine bitcoins virtually. Miners solve difficult math problems, using special software on their computers, and in return, they get bitcoin. This means, the more GPU/CPU power (basically how strong your computer is) your computer has, the faster it can compute a mathematical problem, and the better chance it has to actually mine bitcoin. The first computer to solve the problem gets a little bit of bitcoin.

Inflation

Less and less bitcoin are produced each year. Also, the difficulty of the math problems gets harder as more and more people integrate with the bitcoin system.

The math teacher analogy:

Your teacher wants to distribute 200 apples by the end of the year. So she comes up with a game, where she writes a math problem on the board, and whoever solves it first gets an apple. As more and more people start playing her game, she starts distributing a smaller fraction of an apple for each correct answer, making the game more competitive while increasing the value of each apple.

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How does this relate to bitcoin? Well for every “math problem” computed, the user doesn’t get one whole bitcoin. In fact, the reward is halved for every 210,000 blocks added to the blockchain (roughly every 4 years). This maintains the value of bitcoin. It also means that around 2140, almost all 21,000,000 bitcoins will have been mined.

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Also, in order to keep things consistent, the math problems get easier/harder every two weeks based on how much computational power people are putting into the system.

 

If you want to see the current stats of bitcoin, including the block reward, difficulty, and bitcoins left to mine you can check here http://www.bitcoinblockhalf.com/

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The value of bitcoin is volatile, and investing in it can be risky. If you are thinking about mining bitcoin, rather than just trading it, you need to invest in heavy computational gear and get strong graphics cards (ASIC is preferable). I suggest against this, since the return on investment for mining bitcoin is very low unless you have a lot of computational power (like an entire computer farm dedicated to mining).  Also, understand that this tutorial was just a glimpse into the world of bitcoin, and I recommend reading the official bitcoin paper to get an in-depth understanding of the system. https://bitcoin.org/bitcoin.pdfstats.png

To answer the question: I don’t know. This is a tech blog, where I go over the technology of things. Bitcoin uses some new, innovative features such as decentralization and the blockchain, which are definitely going to be implemented heavily in the future. Here on The Millibit, I do my best to give you easy explanations of how these essential concepts work, but investing in them is all up to you.