Preamble: Online introductions to blockchain technology are as available as sand on a beach, but sometimes we trust our own sources to break things down in a familiar and digestible way.

That said, what’s needed may be an explanation of this technology framed in the context of a common line of questioning. Below are the right answers in the casual format of this recognizable and unintentionally patronizing-at-times dialogue:

I. “Hey, So My Grandpa Wants to Invest in Bitcoin…”

Don’t invest in what you don’t understand — A Warren Buffett Paraphrase

Let’s dig a little bit into two reasons why Grandpa may want to invest to be sure that he truly wants to invest.

A: He’s pretty firm on the commodity-over-cash argument and first mover advantages, and thinks that proof-of-work systems are adequately scalable, at least to the extent that they remain functional despite high transaction fees and poor developer/miner relations — in time, side chains will do the rest.

B: Someone on CNBC said it’s going to $1,000,000! (Yes… ‘A’ was supposed to be scary, that’s the joke)

Now, lets not pigeonhole Grandpa into either extreme here, but the answer doesn’t really matter so long he was informed enough to actually consider both A & B .

Not there just yet? Then we need to turn that uninformed decision into an informed one.

II. “Well I already get the idea. The blockchain is digital money. Or gold? I know a bar that accepts…”

Hold your horses!

Bitcoin isn’t “the blockchain”, it’s “a blockchain” — one of thousands. It used to be “the” blockchain because it was the first one, but a lot has changed in nine years including what Bitcoin users claim that it represents. Let’s back up.

What’s a blockchain? When someone asks me about blockchain I usually give them a simple piece of homework:

Search: “Proof-of-work” and do your best to explain it’s purpose to me.

The caveats are this: Any try is a good try, and I promise to fill in the blanks.

The goal is to separate out those looking to learn from those that simply want a get-rich-quick pointer in the right direction. The latter doesn’t work because that direction changes so frequently that one must be informed enough to either regularly gauge the winds, or to call their “blockchain friend” several times per day for updates without being added to a “do not disturb” list.

In doing this, you’d learn what a blockchain is, about Bitcoin’s origin, its features and drawbacks, the potential solutions to those drawbacks, and which technologies are working on those solutions.

To answer that question and thereby explain what blockchain is, we’ll look at two parties:

(1)The people powering a system, and (2) the people using it.

POWER!

Proof-of-work is a system by which the more computing power people around the world lend to the system, the more they earn in tokens (which on bitcoin are called Bitcoin). We could get into what’s actually happening here — a race to solve small mathematical equations where the winner receives block rewards that are proportionally released at given intervals based on… — Wait, maybe that’s where these articles tend to lose people.

For Lesson 1, all you’ll need to know is this:

People power the network for a proportional payout, and by powering it they’re actually helping to process transactions happening around the world.

These power-people are called miners.

USERS!

John sends Jane a token. What happens behind the scenes?

1. The transaction is put in line to be added to the worldwide list, or ledger. A blockchain is a distributed, or decentralized ledger.

2. At certain intervals, a new group of transactions called a block are automatically ‘confirmed’ to have really happened using cryptographic mathematics (where the word ‘crypto’ in ‘cryptocurrency’ comes from…). They’re added to the chain forever by the the miners mentioned above.

3. John and Jane, both of whom have the blockchain on their computers, are actually helping the network by further distributing it (like backup copies around the world). They’re called nodes.

All in all, a blockchain is a bit like perpetual motion device, not owned by any company or persons, and completely powered by economic incentives. The code creating these proof-of-work blockchains is open source and was released into the wild about a decade ago.

III. “That’s cool. But why is any of this actually worth anything?”

Good question. Now we’re getting to inherent value.

Bitcoin was really just a proof of concept to show that a decentralized system could really run perpetually. Its value is entirely speculative, based only on supply and demand. The only purpose that Bitcoin serves is to be sent from A to B. In this case, they happen to be finite in number (eventually 21 million), so the higher the demand the higher the price, given a nearly consistent supply.

The Bitcoin community is still trying to figure out what it wants to be in time. See, the way that a proof-of-work system works, only a certain number of transactions can be sent at a time. When there weren’t many users around, fees on transactions were low, and Bitcoin was marketed by users as digital cash. They’d pitch acceptance to bars and restaurants and want to see it used even by small nations over time. Now that there are more users around there is often a transaction backlog, people pay higher and higher transaction fees (to miners) to leapfrog to the front of the line.

To improve this, the technologies need to change, or scale. This scaling debate has been at the core of the discussion in this community for years. Now that things are slower and pricier, these same users say that Bitcoin is digital gold and not cash, meant instead to be held over time as a finite commodity that’s even more valuable. Others have soldiered on under the original cash-centric banner as “Bitcoin Cash”, (though a process called a fork) which saw Bitcoin split into a set of fraternal twins. Crazy and a little confusing, right? No worries, we’ll save blockchain politics for Lesson 2.

Friends, if you see this entire system as a speculative bubble and fad without any real or inherent utility, and as a cool technology backed by nothing, then you’d best tell Grandpa that Bitcoin isn’t for him. On the other hand, if you see the niche and potential then so be it. Not sure just yet? Let’s dig deeper.

IV. “Wait wait, none of it has any real use?”

That’s not true either. This technology has come a long way and now features a variety of potential use cases.

Let’s take a look at a few.

If we think of Bitcoin as a single-purpose blockchain (it does one thing and does it really well), then Ethereum, the #2 chain by market capitalization, is a multi-purpose technology.

Ethereum is a system that can host other distributed applications on top of it like an operating system or a world wide computer.

For an overly simplified and likely controversial illustration of this comparison, see below:

Here’s what gives Ethereum’s token, called Ether, real world utility and value:

Every action taken on any one of the thousands of apps being developed on Ethereum (sometimes called distributed apps, or dApps) costs a tiny fraction of its token in payment to the worldwide network (and miners). In short, the more successful and widely used applications that come to be, the higher the demand will be for these tokens. This is a BIG addition to simple price speculation or commoditization of a crypto-token.

For other use cases, we’ll look at a few of the many dApps being developed to better understand the potential of blockchain technology.

Augur and Gnosis are two groups racing to build decentralized prediction markets. Imagine a system on which the odds a given event taking place (e.g. betting on election results or sporting events) aren’t possible to rig. The probability is open source, the results are final and instant, and fees are near-zero. The company behind a market won’t be located offshore, and there’s no one to run with your funds, which are locked in little open sourced if-then scenarios called smart contracts.

Oh, and remember all of those times that you read something about “bitcoin getting hacked?” Well, that didn’t happen. What happened was the implosion of yet another financial exchange. MtGox is the most infamous, but BTC-E, Bitfinex, and more have all suffered breaches in the hundreds of millions of US dollars. When a centralized company holds millions or even billions in user funds, they become targets and single points of failure.

To solve for this, many groups are building decentralized exchanges (DEx). Like the prediction markets, this software is open source, instant, and funds aren’t ever held by third parties. There’s no potential for a company to file for bankruptcy and to take your funds, or for users from certain regions to be banned due to restrictive new laws. They are truly automated financial exchanges. Examples of decentralized exchanges and protocols include:

0x Project, Radar Relay, AirSwap, the Kyber Network and EtherDelta, which is already fully functional, although not as feature-rich or user-friendly as centralized financial exchanges in these early days.

**It’s worth noting that these are simply a few interrelated examples that may have utility behind their token’s value. There are numerous other great examples out there that aren’t based on the Ethereum platform for you to explore.

V. “Great, can I give you some money and you…”

Knowing which scaling solutions will lead to the quickest and cheapest transactions, or which have the best use cases with the most utility takes time and a lot of information. The deeper you and Grandpa dig, the more you’ll learn about blockchains that use entirely different methods to process transactions and run systems (called: consensus mechanisms, e.g. proof-of-work), like proof-of-stake technology, which I’ll assign as your homework for today.

What is the right solution, which features and drawbacks do each offer, and of course what’s the next big thing? What if all of these networks, competing chains, and applications could talk to each other regardless of their platform? What if they could use each other’s features or exchange balances? All of this is being worked on, and by exploring the potential for this technology you’ll continue to find answers as well as new and more interesting questions, and you’ll know exactly how to guide others as this new space continues to evolve.

VI. “Hey again, should I get into Potcoin and Ripple?”

VII. Simplified Glossary

Bitcoin: The token transacted on bitcoin; the first distributed ledger, a single purpose proof-of-work blockchain.

Block: A group of transactions added to a blockchain.

Blockchain: A distributed ledger, or decentralized list of transactions.

Consensus Mechanism: A method by which consensus, or confirmation of validity of transactions on a blockchain, is reached.

dApp: Distributed (decentralized) application on a blockchain.

Decentralized Exchange: A type of dApp, a distributed financial exchange used to trade crypto-tokens.

Ether: The token transacted on Ethereum.

Ethereum: A multi-purpose blockchain-backed world-wide computer on which other distrubuted applications can be built.

Miner: An individual or group that competes to earn rewards and validate blockchain transactions by solving blocks (using computing power to solve complex mathematical equations).

Node: An individual or group running a full copy of the blockchain on a computer.

Proof-of-work: A consensus mechanism which features miners that validate transactions through computing power lent to a network in exchange for payment in digital tokens.

Scaling Debate: Debate over the best methods by which to increase speed and decrease cost of using blockchains.

Smart Contract: An if-then function that allows something on a blockchain to be automated if the correct conditions are met.