No matter what they tell you, Bitcoin is not like normal currency.
Most of us have a good understanding of how government currency works. Money is a physical quantity printed by the government in mints and stored in banks. I can withdraw money at ATMs or branches, and physically give it to other people. When you hold money in your hand you own it.
In order to make good decisions about bitcoin, we have to understand as much about how it operates as we do government currency. So then, what is a bitcoin? Where are they stored? What does it practically mean to say “I own a bitcoin”? When I send bitcoins to someone else, what happens? We’re about to answer all of these questions in a way that’s easy to understand, but doesn’t brush off complex concepts or use analogies that hide deeper truth.
What is Bitcoin?
Bitcoin is a software system that operates over the internet. A close relative is Bittorrent, which is software that allows people to download files from their neighbors, or the Hypertext Transfer Protocol, otherwise known as HTTP, which is the software that lets us view web pages hosted on other people’s servers.
Bitcoin, instead of letting you download files or webpages, is designed to be used as a currency, the same as government-issued money. The fundamentals of any currency system - ownership, transactions, monetary policy - are all built into the Bitcoin system.
The Bitcoin Network
When you download a file off of bittorrent, you are downloading it from other people just like you who have the same file on their computers. There isn’t a central computer that everyone is connected to -- you’re downloading the file directly from your neighbors. This is why bittorrent is called a peer-to-peer network.
Similarly, the infrastructure of bitcoin is a peer-to-peer network of tens of thousands of people. All these people are running the same program on their computer, called the “Bitcoin Client”, and all of these programs are talking to each other.
What do these programs talk to each other about? Well it turns out they say only a few very basic things:
“Alice sends 2 bitcoins to Bob” “I confirm that Alice sends 2 bitcoins to Bob”
“Hey do you know anything about this transaction between Alice and Bob yesterday?” “Yeah, here’s my record of it”
The work of the bitcoin network is to enable and track transactions of bitcoins. When I send one bitcoin to Ross, my computer says to it’s neighbors “Gareth sends 1 bitcoin to Ross”, these neighbors check that everything about the transaction is valid, and then repeat the same message to their neighbors.
In this way, a single transaction is relayed to every node in the network, and all machines agree on a single global transaction log, called the “Blockchain”.
The Blockchain
The Blockchain is a public record of all bitcoin transactions. It is maintained by each computer in the bitcoin network, in the sense that each computer maintains a copy of the blockchain, and is constantly listening for and adding transactions to it. The blockchain looks like a long list of transactions just like
“Ross sends 3 bitcoins to Gareth” “John sends 1 bitcoin to Gareth” “Gareth sends 2 bitcoins to Ross”
Of course, it isn’t written in exactly that language. It’s written in a format that’s easy for computers to read and a bit harder for humans. You can directly read the blockchain on many public websites. Here’s an example section of the real blockchain for the curious.
The Blockchain is a public record of all bitcoin transactions, but this explanation ignores a very important subtlety: the record of a transaction in the blockchain *is* the transaction. The act of recording a transaction in the blockchain is the act of transferring money between people. They’re the same thing.
Understanding the centrality of the blockchain allows us to answer two fundamental questions very easily:
What does it mean to say “I own bitcoins”?
Let’s say we looked at the blockchain and found three transactions with my name in them:
“Ross sends 3 bitcoins to Gareth” “John sends 1 bitcoin to Gareth” “Gareth sends 2 bitcoins to Ross”
Then I own 2 bitcoins. The number of bitcoins I own is simply the number of bitcoins that have been sent to me, minus the number of bitcoins I have sent to other people.
Furthermore, this is the definition of owning bitcoins. There is no more substance or reality to my ownership of them other than the fact that these transactions are recorded in the blockchain, and are there for anyone to see and verify.
What is “a bitcoin”?
A bitcoin is just a quantity of one unit in a transaction recorded in the blockchain. Bitcoins do not have unique identities, it never makes sense to talk about “this bitcoin” or “that bitcoin”. Sending a bitcoin from me to you simply means my balance goes down and yours goes up. That’s it.
Outro
That is the core of bitcoin: many computers in a peer-to-peer network with a shared transaction log called the blockchain, and balances recorded in the blockchain are called bitcoins. Now, the next time someone tells you bitcoins are “digital coins sent through the internet”, you can nod your head and say “yeah”, but also understand how the statement is a gargantuan understatement.
There are more questions which follow immediately from these answers. If there’s anything you’d like answered specifically, feel free to tweet at me, @garethmacleod or send me an email at [email protected].
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