Setting the scene: decentralising financial control

Let’s start with an analogy to set up some of the problems that Bitcoin solves:

Imagine an island occupied by a tribe - consisting of a chief (denoted by *) and its tribespeople. We’ll call them Grads

👩🏽‍🎓 👩🏻‍🎓 👨🏿‍🎓 👨🏼‍🎓 *👩🏾‍🎓

Grads use a rare stone, 🔵 as their currency. Instead of carrying the heavy stones around, they use a bookkeeping system where every transaction is reported to a bookkeeper, 👩🏽‍🎓 📖.

When tribesmen want to transfer ownership of 🔵 to one another, they make a transaction request to the bookkeeper who then has to:

🆔 Verify that they are who they say they are (to prevent people from spending someone else's money)

💵 Check that the sender has sufficient funds to send

📖 Record the transaction on a list - a ledger

As a result, the bookkeeper has a record of all the transactions that have ever been made.

👩🏻‍🎓 → 👨🏿‍🎓 500g 🔵

👩🏽‍🎓 → 👨🏼‍🎓 3kg 🔵

👨🏿‍🎓 → 👩🏽‍🎓 450g 🔵 … and so on

The ledger is kept in a special building 🏦, which the bookkeeper alone has access to. The bookkeeper only works 📆 Mondays-Fridays, and charges a fee for her work on each transaction. Sometimes, the sender and recipient has to wait days for their transactions to go through. She also charges higher fees with larger transaction amounts 📈.

The bookkeeper assures the tribespeople that the ledger is accurate and secure, and they simply has to trust that it is so.

This is banking as we know it today, sending sensitive transaction information through an intermediary, a trusted third party. We're relinquishing our privacy and control over our own money to banks and payment processing companies, similar to how the tribespeople are doing so by relying on the bookkeeper.

👩🏻‍🎓 → 🏦 →👨🏿‍🎓

...

The island population grows and is now occupied by 3 tribes, each with its own chief, currency, and bookkeeper/ledger:

👩🏽‍🎓 👩🏻‍🎓 👨🏿‍🎓👨🏼‍🎓 🏦 *👩🏾‍🎓 Grads use 🔵 as its currency.

👩🏼‍🌾 👩🏻‍🌾 👨🏿‍🌾 👨🏾‍🌾 🏦 *👨🏽‍🌾 Farmers use 🔴 as its currency.

👨🏼‍🍳 👨🏽‍🍳 👨🏿‍🍳👩🏻‍🍳 🏦 *👩🏾‍🍳 Chefs use ⚫️ as its currency.

💼 The individuals can move to live and work in different tribes, but must adopt the currency of whatever tribe they are in during their stay.

💰 They must pay a significant fee if they wanted to send money across tribes, as well as deal with the exchange rates.

💥 If two chiefs dispute, they may block a transaction between their respective tribes completely.

Frustrated with long wait times, hefty fees, and lack of control over his own funds, a computer-savvy Farmer 👩🏻‍🌾 devises a set of rules (a protocol) for a new kind of money that does not have centralized control - he gives it the name Bitcoin.

The fundamental difference between Bitcoin and 🔵, 🔴 and ⚫️ is that Bitcoin transactions do not rely on a bookkeeper. The farmer designed a system such that everybody has a copy of the ledger - where transactions can be made at anytime and completed almost instantaneously for a very low flat fee.

📖 🌐 📖

The Farmer proposes this to a group of friends, some of whom find it lucrative enough to recognise Bitcoin as money and are willing to accept some Bitcoin instead of their usual tribal stones as a payment. These enthusiasts agree to become participants, a node 👩🏻‍💻, in the Bitcoin network - they do so by installing the Bitcoin software 📀 and downloading a copy of the ledger.

When they want to transfer Bitcoins to each other, they announce it to everybody on the network (in reality, this is done through devices with Internet connection). 📣 After each transaction is announced, the Bitcoin software on each node works to verify the transaction by looking at the entire ledger to see if the sender has sufficient funds.

Beginning of ledger

Sarah 👩🏽‍🎓 → 👩🏻‍🌾 Jane 10 Bitcoins

Raj👨🏼‍🍳 → 👩🏻‍🎓 Amy 2.5 Bitcoins

Vic 👩🏼‍🌾 → 👨🏽‍🍳 Ali 5 Bitcoins

Amy 👩🏻‍🎓 → 👩🏼‍🌾 Vic 2 Bitcoins

…

If Amy 👩🏻‍🎓 announces she wants to send some Bitcoins, each node checks if she has enough money by looking through the ledger - they calculate her available balance by adding up the Bitcoins that she has received and subtracting the amount she has sent.

Potential to be added

Amy 👩🏻‍🎓 → 👩🏽‍🎓 Sarah 1 Bitcoin ❌ Not Valid

Amy 👩🏻‍🎓 → 👩🏽‍🎓 Sarah 0.5 Bitcoin ✅ Valid

After the transaction is verified, it can be added to the ledger (more on how later). This shared, public ledger is the called the blockchain.

In incorporating the use of this distributed ledger, we now have a de-centralised transaction system. A network-centric system that:

Does not involve an intermediary between sender and receiver

👩🏻‍💼 → 👩🏼‍💼 instead of 👩🏻‍💼 → 🏦 → 👩🏼‍💼

Does not care where the money is coming from, where it’s going, or the amount being transferred. The transactions are peer-to-peer - every node is equal.

[👩🏽‍🎓 → 👩🏻‍🌾 20 Bitcoins] is treated the same as [👨🏼‍🍳 → 👨🏽‍🍳 0.25 Bitcoins]

In summary, Bitcoin is essentially an abstract token of value of which transactions are recorded in an open, distributed ledger (the "blockchain").

So…

Why are people excited about it?

Bitcoin is increasingly being recognised as a store of value 🔸. The network grows as more tribespeople accept Bitcoin as if it was their traditional tribal stone - they are attracted to the fact that they don't have to rely on the bookkeeper to store, send and receive money.

Dismissing Bitcoin as "just another currency" would be like saying the tribespeople simply decided to adopt a new type of stone, 🔘 as money - while still relying on the bookkeeper to transfer ownership of it. The key difference here is that the ledger is now open, public, distributed - giving its users the flexibility, transparency, and privacy like they've never seen before.

Yours, and yours alone

🏪 If you go to buy a product in a store and pay by cash 💵 - physically handing the storeowner the banknotes - that's the end of that transaction. No one else is involved besides the two of you. You don't have to wait for anything to be checked out or "cleared".

💻 However, if you online shop and use PayPal or card 💳, that money is in an account that is owned by a third party. If your bank or payment processing company decides your account is being misused, they may freeze your funds, 🚫 blocking access to your own money.

🆔 With Bitcoin, you don't need to identify yourself to anybody or sign up for an account, just like when you pay directly by cash. You don't need an account to carry around a wad of bills 💵, and if you lose those bills, there is no way to get it back. Similarly, the Bitcoins you own are completely yours unless you spend it (or lose it). A Bitcoin transaction is more like the physically-paying-by-cash example above than the online shopping example in this regard, with the added advantage that you can be half a world away from the storeowner.

Indiscriminate of source, destination, and transaction amount

✈️ Those of us who travel frequently have experienced the pain of having to exchange money abroad, pay fees when withdrawing cash abroad and walking around with multiple currencies in our wallets at once. In contrast, 10 Bitcoins in Japan is 10 Bitcoins in Norway and the US and Zimbabwe. 🌎 It doesn't care where you reside in the world.

💰 Banks charge fees for wire transfers, which increases with the amount you are sending. With Bitcoin there is a relatively very low (maybe <$2!) flat fee no matter how much you are sending. This is a great feature for remittances, as it would allow immigrants to send money home in minutes at a much lower cost.

🖥 Micro-transactions - the ability to send fractions of a Bitcoin - will allow content creators to monetise their content. For example, if you were a YouTube vlogger you could directly receive donations and payments from viewers to watch your content. Conversely, companies can pay you a few cents worth of Bitcoin for watching their adverts. To the viewer, it will be like sending fractions of a dollar to watch their favourite content. Content creators can generate great revenue from these micro-payments in accumulation.

🛂 There is also a use-case for those with limited to no access to banking. With Bitcoin you don't need to have a bank account or verify that you are even eligible for one. So those living in rural areas can send and receive payments from anywhere through a procedure as simple as sending an email.

Andreas Antonopoulos (@aantonop) refers to Bitcoin as "The Internet of Money". In his book of the same name, he emphasizes that currency is just the first application of this decentralized technology, much like 📧 email is an application of the Internet. The fact that there is no central control allows anyone to create software-based payment systems without asking anyone for permission, much like building websites on the Internet.

How does a de-centralised ledger work?

The core innovation of Bitcoin is de-centralisation of the ledger itself (i.e. making the ledger public and distributed to everyone). At any given point in time, the participants of the network has established an agreement - a consensus - about the transactions that have happened so far. Therefore removing the need for a trusted third party.

So without a central party in charge of checking and adding transactions, how is the ledger updated?

To avoid erroneous, unchecked transactions being added to the ledger, it is locked with a password - which means no one can easily add information or manipulate previous transactions. There is some work to be done in order to add to the ledger.

… This is where miners ⛏ come in.

Miners ⛏ are nodes who volunteer to take on two tasks:

✅ Verify that a transaction is valid (relatively straight forward, just need to check previous transactions to calculate the sender’s available balance)

🔗 Add the verified transaction to the ledger (difficult)

Continuing with Amy’s transaction - she has 0.5 available Bitcoins to send. She broadcasts to the network that she’d like to send this to Sarah.

📣 Broadcasted, not yet verified

Amy 👩🏻‍🎓 → 👩🏽‍🎓 Sarah 0.5 Bitcoin

Suppose Ali 👨🏽‍🍳 and Jane 👩🏻‍🌾 are miners. They verify the transaction, but still need to "unlock" the ledger in order to add the transaction to it.

Finding the password to unlock the ledger is difficult and energy-intensive because the search for the password is completely random. Essentially, Ali and Jane have to try potentially hundreds or thousands of passwords before they stumble upon the right one.

Suppose Jane wins this case:

👨🏽‍🍳 Ali 🔑 🔑🔑🔑🔑🔑🔑🔑🔑🔑🔑

👩🏻‍🌾 Jane 🔑🔑🔑🔑🔑🔑🔑🔑 ✅

She "unlocks" the ledger and adds Amy’s 0.5 transaction to the blockchain. Everybody's ledgers gets updated and Jane gets a small reward in Bitcoins for her work. The search for a new password begins again to add the next transaction.

*Note that the "lock" does not prevent the network from seeing what's inside the ledger - the information is still public. The lock just prevents people from freely modifying what's inside - like an unbreakable, transparent vault. The public ledger is called the blockchain because it is a series of blocks of transactions.