What is Bitcoin? A primer for five year olds

frankenmint (42)in #bitcoin • 7 years ago

title

I wrote this (or took it from someone - sorry I can't totally recall and I don't see it from doing a google search) a while a go and never placed it anywhere or possible forgot to place it on honeybadgerofmoney.com. So I present it to you. Now I know you may know everything there is to Bitcoin or Ethereum, you may have been an early adopter from 2011 and saw the great crash from $30.... this is definitely NOT for you.... if by chance you just found out about cryptocurrency or maybe you learned of steemit first and wish to be able to wrap your head around Bitcoin... welcome, we've been waiting for you. Please take a seat and have a snack closeby and we dive into: Bitcoin, A primer for Five Year Olds.

What is money?

Money is a token that society uses to express and trade value...anything could act as money - traditionally it was gold or salt or food or silk or livestock etc. depending on how well that money lasted (gold lasts a long time and is fairly hard to acquire - salt is the same in places where it is hard to collect).

So now what is bitcoin?

Bitcoin is a form of money that is made from a special math calculation called proof of work.

When bitcoin was first invented, NO ONE was doing any of the fancy math so it was very easy to solve these proof of work problems and to generate new bitcoin... however if you can simply create bitcoin forever and ever then it really isn't all that valuable. Therefore, by design, the group that made bitcoin decided to put an artificial limit on how much bitcoin could ever exist - they decided to make that number 21 million.

This group was really smart though - see they knew that you need to be able to spend more than 21 million possible times so they allowed bitcoin to be able to be calculated down to 8 decimal places...the money that we use and see in the USA traditionally is reduced down to only 1/100ths i.e. one penny. With bitcoin the lowest unit currently 1/100,000,000th - that penny for bitcoin is called a satoshi - named after the group who invented bitcoin (Satoshi Nakamoto - There is no proof that Satoshi Nakamoto is one person or is a group so I think it's a group and choose to refer to the creator of bitcoin that way).

So now that we know what it is and how it's made, how do people send it back and forth if it's not physical? how come I can't just copy it?

Remember all bitcoin is uniquely created by that fancy proof of work math - it is always accounted for... over time as more people used their computers to do this fancy math, and because the amount of bitcoin is limited in supply, the software makes a 'correction' in the math - this correction is called 'difficulty'. When more participants solve the math problems, more bitcoin is mined at a faster rate, that correction is calculated once per every two thousand math problems solved (exactly 2016 math problems solved to be specific). Therefore, copying and pasting the values is really only copying and pasting the reference to the created bitcoin and not actually creating NEW bitcoin...

So then what is that reference? what does that mean?

Great questions! That reference is the way you can send it. In order to actually have controlling ownershipof that bitcoin is to have a copy of that reference. It is a number and it is called a private key - this private key is used with bitcoin software to sign and send the coin to different private keys.

Well if anyone can spend if they have that private key then how can I send bitcoin without endangering my own private key?

That private key uses OTHER advanced math together (SECP256k1 and ripemd-160 ) together in a special type of math called hashing. Hashing just means combining numbers a certain way to get a new number (but in a way that it always generates the same result) with a special letter number format (called base-58) to make a public address.

Public addresses are safe...think of them like an id for bitcoin - use those addresses to send bitcoin to the reference (private key) that you are trying to keep hidden. See we call it digital cash because if someone steals that private key, they can send the bitcoin on that private key to a new private key that only they know, effectively stealing that bitcoin.

It is very easy to generate new addresses and private keys... imagine a drop of water...that drop of water has billions of atoms...now imagine all the atoms in the entire ocean - it's an uncountable number...that is the number of possible bitcoin private keys that could be created...for all intents and purposes it is a gigantic number, bitcoin wallet software creates new private keys using random numbers...because it is very easy to do it, bitcoin wallets are designed these days to create a fresh address each time you send bitcoin...

You still never explained how its sent and received!

I'm getting there! Bitcoin is a network software - you don't have one server someplace that runs all bitcoin because anyone can download the software and act as a backup for the network - in fact, that is what happens, the network copies itself each time the software is downloaded and allowed to run...That software is called a 'full' node because it has all the transaction data for bitcoin -every sent and received transaction is in that 'full' node. When people say blockchain they are referring to the entire collection of transactions.

Remember how we said bitcoin was created using fancy math problems? I never explained what those math problems do:

They are used to find a mathematical (proof of work) answer that takes the last solved answer with current transactions and creates a new latest answer to include some of those current transactions - people call this activity of taking the latest answer and transactions to solve: mining. So you see, the incentive to do this math is that new bitcoin is also created and is awarded to that computer (person in control of that computer) solving that math problem.
The solutions to the math problems also show the transactions. Each time the math problems is solved it includes a 'block' of transactions. that's why they're normally called blocks and together, since the last answer is the 1st input to the next problem, they always go sequentially, like a chain...that is how you get the phrase blockchain.

Remember anyone can participate in solving this math with their computers...However since bitcoin has been around since 2009...many MANY more people now use their computers to solve the math - so many do this that we can no longer solve the math with regular computers. In fact it got so fierce, that just one year after, in 2010, people got smart and started to combine or pool together their computer processing power to act as a bigger computer and hopefully solve more math problems than those who were doing it on their own in a solo fashion. Now fast forward to 2016 - it isn't possible to mine bitcoin with regular computing hardware anymore - purpose built computer chips named ASICS are used to do the math work these days. This amount of computer processing power allows the bitcoin network to have a reliable network for solving the math problems which is also what records the transactions. The only way for a bad guy to break bitcoin would be to create or control enough hardware to be more than 50% of the entire network of processing power - a conservative estimate is perhaps 300 million dollars - that is how much money a bad guy would need so that they could build new hardware and have processing power greater than half of the rest of the network...that type of threat is commonly called a 51% attack There were only periods in the beginning when few people used bitcoin to where such an attack could happen and thankfully it didn't happen because then most of us would have never trusted to use or even try out bitcoin.

Why and who cares about all this?

Bitcoin is a type of money that requires no government to issue it...because it is created and maintained through mathematics and economic incentive, Bitcoin is viewed as a superior money in the eyes of some. Others like it because they can spend it in an uncensored capacity - they could send it off to another party for drugs or for other illicit purposes - that was the first major proliferation of bitcoin in usage - was through dark net markets in 2011. Bitcoin also works well for small transactions because you can pay in fractions of cents due to its smallest unit being 1/100000000th of a whole number...this means that if bitcoin were to ever greatly spike in value, that you still have a means for small priced purchases or trades.

Finally, it has a very low barrier to entry for setting up- you download a wallet or can even use a web wallet such as circle or blockchain.info and can use them to store bitcoin on your behalf in exchange for ease of use and for trusting that they don't lose your private keys to a hacker. As you can see, it is free to setup a bitcoin address so merchants should desire them because they can enable effortless global payments.

Is it really free?

The simple answer is no, the long answer is not really eli5. In order to reliably send bitcoin to another address, a small fee should be tacked onto the transaction - that fee is given to the solver of the math problem in addition to the newly generated coin as per the specification limit of 21 million.

See, every four years roughly the amount of bitcoin generated will split in half...in 2009 50 bitcoin was generated each time a math problem was solved...then in 2012 that number reduced to 25 coins...in July 2016 the amount reduced again to only 12.5 coins.

Bitcoin also allows anyone to take donations in an automated manner - The public addresses can be placed anywhere, even in a barcode! This barcode is called a QR-code and is used by mobile phone wallets to send bitcoin.

I just saw you said wallets, is that the same thing as a full node?

It isn't. A full node can include wallet software and often does, but the answer is no. Mobile phones do not have the battery life nor the storage capacity to store all transactions from the bitcoin network - those and other wallet software are often (not always but almost always) a lightweight wallet - called an SPV wallet. These wallets are special because they function much faster than a full node wallet and they much more portable in terms of the amount of required power and storage space to use them.

That summed it up!

I figure if you are still reading from here that I should thank you and ask you to upvote and share! Perhaps when you get asked about bitcoin, you can link them to this to save you time. As a reward for sticking in ther this far out, I bequeath to you an image of a dog chewing a bubble (taken without permission from /r/interestingasfuck):

dogebubbl