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You've probably heard a lot about bitcoin over the last few years. But do you truly understand how it works? This article explains the concepts in straightforward language (like you were 5) so you'll never be out of the loop again.

Written by Nik Custodio: https://twitter.com/nik5ter

Read by Abbey Rennemeyer:\xa0https://twitter.com/abbeyrenn

Original article:\xa0https://fcc.im/2tzvh1E

Learn to code for free at:\xa0https://www.freecodecamp.org

Intro music by Vangough:\xa0https://fcc.im/2APOG02

Transcript:

We\u2019re sitting on a park bench. It\u2019s a great day.

I have one apple with me. I give it to you.

You now have one apple and I have zero.

That was simple, right?

Let\u2019s look closely at what happened:

My apple was physically put into your hand.

You know it happened. I was there. You were there. You touched it.

We didn\u2019t need a third person there to help us make the transfer. We didn\u2019t need to pull in Uncle Tommy (who\u2019s a famous judge) to sit with us on the bench and confirm that the apple went from me to you.

The apple\u2019s yours! I can\u2019t give you another apple because I don\u2019t have any left. I can\u2019t control it anymore. The apple left my possession completely. You have full control over that apple now. You can give it to your friend if you want, and then that friend can give it to his friend. And so on.

So that\u2019s what an in-person exchange looks like. I guess it\u2019s really the same, whether I\u2019m giving you a banana, a book, or say a quarter, or a dollar bill\u2026.

But I\u2019m getting ahead of myself.

Back to apples!

Now say, I have one digital apple. Here, I\u2019ll give you my digital apple.

Ah! Now it gets interesting.

How do you know that that digital apple that used to be mine, is now yours, and only yours? Think about it for a second.

It\u2019s more complicated, right? How do you know that I didn\u2019t send that apple to Uncle Tommy as an email attachment first? Or your friend Joe? Or my friend Lisa too?

Maybe I made a couple of copies of that digital apple on my computer. Maybe I put it up on the internet and one million people downloaded it.

As you see, this digital exchange is a bit of a problem. Sending digital apples doesn\u2019t look like sending physical apples.

Some brainy computer scientists actually have a name for this problem: it\u2019s called the double-spending problem. But don\u2019t worry about it. All you need to know is that, it\u2019s confused them for quite some time and they\u2019ve never solved it.

Until now.

But let\u2019s try to think of a solution on our own.

Ledgers

Maybe these digital apples need to be tracked in a ledger. It\u2019s basically a book where you track all transactions\u200a\u2014\u200aan accounting book.

This ledger, since it\u2019s digital, needs to live in its own world and have someone in charge of it.

Say, just like World of Warcraft. Blizzard, the guys who created the online game, have a \u201cdigital ledger\u201d of all the rare flaming fire swords that exist in their system. So, cool, someone like them could keep track of our digital apples. Awesome\u200a\u2014\u200awe solved it!

Problems

There\u2019s a bit of a problem though:

1) What if some guy over at Blizzard created more? He could just add a couple of digital apples to his balance whenever he wants!

2) It\u2019s not exactly like when we were on the bench that one day. It was just you and me then. Going through Blizzard is like pulling in Uncle Tommy(a third-party) out of court(did I mention he\u2019s a famous judge?) for all our park bench transactions. How can I just hand over my digital apple to you, like, you know\u2014 the usual way?

Is there any way to closely replicate our park bench, just you-and-me, transaction digitally? Seems kinda tough\u2026
The Solution

What if we gave this ledger\u200a\u2014\u200ato everybody? Instead of the ledger living on a Blizzard computer, it\u2019ll live in everybody\u2019s computers. All the transactions that have ever happened, from all time, in digital apples will be recorded in it.

You can\u2019t cheat it. I can\u2019t send you digital apples I don\u2019t have, because then it wouldn\u2019t sync up with everybody in the system. It\u2019d be a tough system to beat. Especially if it got really big.

Plus it\u2019s not controlled by one person, so I know there\u2019s no one that can just decide to give himself more digital apples. The rules of the system were already defined at the beginning. And the code and rules are open-source. It\u2019s there for the smart people to contribute to, maintain, secure, improve on, and check on.

You could participate in this network too and update the ledger and make sure it all checks out. For the trouble, you could get like 25 digital apples as a reward. In fact, that\u2019s the only way to create more digital apples in the system.

I simplified quite a bit

\u2026but that system I explained exists. It\u2019s called the Bitcoin protocol. And those digital apples are the \u201cbitcoins\u201d within the system. Fancy!

So, did you see what happened? What does the public ledger enable?

1) It\u2019s open source remember? The total number of apples was defined in the public ledger at the beginning. I know the exact amount that exists. Within the system, I know they are limited(scarce).

2) When I make an exchange I now know that digital apple certifiably left my possession and is now completely yours. I used to not be able to say that about digital things. It will be updated and verified by the public ledger.

3) Because it\u2019s a public ledger, I didn\u2019t need Uncle Tommy(third-party) to make sure I didn\u2019t cheat, or make extra copies for myself, or send apples twice, or thrice\u2026

Within the system, the exchange of a digital apple is now just like the exchange of a physical one. It\u2019s now as good as seeing a physical apple leave my hand and drop into your pocket. And just like on the park bench, the exchange involved two people only. You and me\u200a\u2014\u200awe didn\u2019t need Uncle Tommy there to make it valid.

In other words, it behaves like a physical object.

But you know what\u2019s cool? It\u2019s still digital. We can now deal with 1,000 apples, or 1 million apples, or even .0000001 apples. I can send it with a click of a button, and I can still drop it in your digital pocket if I was in Nicaragua and you were all the way in New York.

I can even make other digital things ride on top of these digital apples! It\u2019s digital after-all. Maybe I can attach some text on it\u200a\u2014\u200aa digital note. Or maybe I can attach more important things; like say a contract, or a stock certificate, or an ID card\u2026

So this is great! How should we treat or value these \u201cdigital apples\u201d? They\u2019re quite useful aren\u2019t they?

Well, a lot of people are arguing over it now. There\u2019s debate between this and that economic school. Between politicians. Between programmers. Don\u2019t listen to all of them though. Some people are smart. Some are misinformed. Some say the system is worth a lot, some say it\u2019s actually worth zero. Some guy actually put a hard number: $1,300 per apple. Some say it\u2019s digital gold, some a currency. Other say they\u2019re just like tulips. Some people say it\u2019ll change the world, some say it\u2019s just a fad.

I have my own opinion about it (and you can check out the link in the original article).

That\u2019s a story for another time though. But kid, you now know more about Bitcoin than most.