Complete Idiot's Guide to Bitcoin

| categories: tech, bitcoin | View Comments

Bitcoin is trickling into the mainstream, and the mainstream response is that they don't understand a lick of it.

The tech crowd perennially runs in to this trouble of explaining what the hell they just invented and why people want it. In industry settings there's usually a marketing department to help along. With more grass roots, open-sourcey movements there's often no such luck.

I think the problem, at least in Bitcoin's case, comes from three places:

  1. We can't seem to explain Bitcoin without explaining distributed computing, cryptography, or some other such complicated thing that the listener doesn't need to hear about.
  2. If we manage to get past the technical stuff, we somehow end up in some mind-bending philosophical macro-economics discussion. Turns out "what is currency?" has a very strange answer for a lot of people.
  3. When we do manage to clear out the theoretical cruft, we feel like the result is insulting to the listener's intelligence.

I've been thinking a lot on how I'd explain Bitcoin to the uninitiated, and I think I've figured out where to gloss over to take care of 1 and 2, and what calculated risks I'm willing to take on 3.

Disclaimer: Like I said, I'm glossing over. Hard. Really hard. For the technically inclined folks reading this, I'm going to come forth right now and say that there are some little things below that are just flat out incorrect. I know it feels strange; you're feeling point 3 right now, but to all of your corrections, I say: SHHHH! We're keeping this simple. Some facts are going to go missing.

So without further ado, here's my explanation of Bitcoin:

Let's start by talking about your debit card. Most of you probably have one, and have used it for some sort of over-the-counter purchase. As an example, we'll say your local coffee shop.

When you walk up to the counter and order your latte, the barista is standing in front of a computer connected to the internet. It may look like a little console with a keypad on it, it may be a normal desktop like you have at home with a big drawer underneath, or if you're at a newer, trendier coffee shop, it may well be an iPad with a small white square doohickey sticking out the side. All of these things are computers, and all of them need to be connected to the internet to do what they're about to do.

Now you hand over your card. The card gives the computer some information:

  1. Your name and bank account number.
  2. Where on the internet to contact your bank.
  3. Some security stuff to prove that this really is your card.

The little computer then connects to a big computer at your bank and says "Please transfer $4 from Pat Clemson's account to The Feisty Bean's account. Here's that security stuff to prove we have his debit card, and some other security stuff to prove that we really are The Feisty Bean."

That big computer at the bank has a list of all of the bank accounts, and how much money is in each, so it finds your bank account on the list, subtracts $4 from your balance, then finds The Feisty Bean and adds $4 to its balance.

And that's it. The numbers on the list changed, money has moved. There's nothing else to it. If that feels insubstantial just try not to think about it too hard.

So Bitcoin, like so many amusing things, begins with crazy libertarians.

One day a crazy libertarian says: "I don't like banks. They're big and central and everyone depends on them and the government is involved and it's scary and I hate it. I want to keep my own bank account."

So he puts a little file on his computer that says "Rand Atlas Taggart has $300." Then he calls his bank and, after an awkward conversation, convinces them to simply obliterate his account record. Now his $300 is only recorded in one place: on his computer, in a file he calls his "wallet file."

After a bunch of calls to all his crazy libertarian friends, wherein he convinces them to do the same thing, Rand goes out for coffee.

Like all great coffee shops, The Feisty Bean is owned by an ex-hippie, who totally digs Rand's style on the whole challenging the bank establishment thing. With some computer help from Rand, he puts all of The Feisty Bean's assets into a little file on the cash register computer's hard drive. Now, when Rand buys a cup of coffee, he tells the cashier some information about his computer and a password, and the cash register logs into his computer at home, reduces the amount of money in his wallet file by $4, and increases the amount of money in the wallet file on the cash register by $4. All of Rand's libertarian friends buy their coffee the same way.

And by now you've noticed the big problem:

"What if Rand just changes his file to make himself a millionaire? Can't he just open it and change how much money is in his account?"

Yep. He could, couldn't he? All he has to do is open that file again and change it to say "Rand Atlas Taggart has $300,000,000" and he's supposedly a millionaire. Basically, The Feisty Bean only knows Rand has enough money for his coffee because Rand's computer says so. With the old debit card system, they knew he had the money because the bank said so, and the bank has all sorts of regulation and monitoring from the government to keep them honest (don't get Rand started about whether or not that's actually working. Whoo boy).

Enter Bitcoin.

Are you ready for this? Bitcoin is a magic trick that keeps the crazy libertarians from editing their own bank files. You can pretty much stop there. You understand the core of Bitcoin now.

The way it works is each of the crazy libertarians, and The Feisty Bean, all run a little program on their computer that makes it talk to all the other computers and make sure they aren't modifying their wallet files. It's sort of a neighborhood watch program. This is the biggest gloss-over of them all so far, and if it feels shaky, you'll just have to take the leap of faith. It works, and it works really, really well. If Rand modifies his wallet file, not only will The Feisty Bean's cash register know it, but it will know exactly how much fake money he added. The more suspicious my explanation seems, the more impressed you should be with Bitcoin; it really was quite a feat to make it work and make it as reliable as it is.

That's basically the technical portion of it, now for the economics. In our example, Rand stored dollars in his wallet file. If he'd been Japanese, you might imagine he'd use Yen, or if he were Italian his wallet file might reference Euros. In reality, Bitcoin wallet files always store Bitcoins, which are a new currency that is separate from any country. This comes to a niggle in our original problem: so you can't modify your wallet file to give yourself money, but what about when it's created. How do we know you had that conversation with your bank? The reality is that was a bit of a lie; Rand would never be able to talk to his bank into destroying the money in his account. And his wallet? Our Bitcoin magic trick makes a new wallet start at zero.

So how do you get Bitcoins? Two ways. One is to simply buy some. This is the obvious way. You give someone your American Dollars or whatever have you and they put Bitcoins in your wallet in return.

The second way is called mining. Mining is a way you can create new Bitcoins from scratch. If all wallets started at zero, there had to be a process to make some initial Bitcoins, and mining is it. Mining is very hard; it involves solving a very complicated math problem, which requires specialized computers and takes a long time. This is on purpose; obviously you don't want anybody to be able to create a bunch of money out of thin air. Making it very hard, but still possible, means there's a place for new Bitcoins to come from, but since it takes work, you won't do it unless you think it's worth the work. Since mining actually gets harder and harder over time, less and less people should find it worth it. At present it usually requires special custom computing devices, and some experts calculate that the electricity to power the computer costs more than the money you can make doing it. Note that since mining gets harder over time, we can assume that it used to be much easier. The founders of Bitcoin mined the first coins, and were able to do it much more quickly. While some of them are now very hard to find (paranoid libertarians) we do know that many of them became very rich once people started being willing to pay real money to get Bitcoins.

Now let's talk about the controversies. First there's the economic issue. As mentioned, Bitcoins are created by mining. Mining seems to happen at a pretty steady rate, and as it gets harder, it's expected to slow down and eventually stop. Even if it doesn't there's a limit on how many Bitcoins can exist ever. By contrast, the U.S. Dollar is created and destroyed when the Federal Reserve decides it should be, which they do based on all sorts of factors, usually to try to keep the economy working well. Economists are arguing a lot right now over whether Bitcoins will work right given the way mining works. So far there's a little evidence to prove them right: there's been two incidents where the price of a Bitcoin was cut in half over night.

Then there's the legal issues. Governments like being in charge of currencies; so much so that they usually make it illegal for anyone else to do it. The U.S. Constitution forbids people from using other currencies. So far Bitcoin hasn't been tested in court in this country, but there's some worry that the whole enterprise could be outlawed.

And that's it. Maybe I've clarified something, or maybe I've just thrown another entry onto the "explain Bitcoin to me" pile. Here's hoping.

blog comments powered by Disqus