What Is Bitcoin & How Does It Work? The Best Explanation Ever

What is Bitcoin and how does it work? 

The first thing you need to know is that I am the furthest thing from an expert imaginable.  I am not invested in Bitcoin and have never seriously considered investing.  However, I am interested in all things related to money and since I have been asked about Bitcoin several times I figured it was time to learn about it, so I did a little studying.  I learned that Bitcoin is:

  • Digital money
  • Not controlled by any central authority such as a country or even a bank
  • The technology that makes Bitcoin possible is the “blockchain”
  • A blockchain is a “distributive ledger” meaning that everyone in the chain has a record of every transaction made

After my study I felt I had a basic understanding of what Bitcoin is and how it worked, but I struggled to explain it intelligently to anyone else, which meant I probably didn’t understand it very well myself.  Then I came across a brilliant post by Martin Jee in which he claims that understanding blockchain, the technology that makes Bitcoin and other virtual currencies possible, is as easy as understanding playground football.

This got my attention because while I am definitely not an expert on blockchain I do consider myself somewhat of an expert on playground sports.  I spent most of my childhood playing unorganized, unsupervised neighborhood sports. 

We went from one sport to another playing basketball, football, and baseball.  We would make our own teams, agree on ground rules, keep score, and solve our own disputes through debate, argument, and eventually enough compromise to allow the game to continue.  We didn’t have a governing body, league, coaches, or referees, but the games were successfully played season after season and year after year.    

Our football field was three front lawns in our neighborhood with relatively few obstacles.  We played tackle, except for on the driveways, which were two hand touch.  No one who lived in any of the three houses had a child our age who played, and we never asked for permission to play, but that was “our” field and the homeowners tolerated us. 

Years later I introduced my wife to one of the homeowners.  When I told her we used to play football in his front yard, she said to him, “That must have been tough.  Didn’t they damage your flowers?”  This great man looked at her, smiled patiently, and replied, “We were raising boys, not flowers.”

So what does any of this have to do with blockchain or Bitcoins?  Jee, who is referring to international “football” or soccer, explains it like this:

“You know how in a playground football game each player knows what the score is at any one time and you can’t change the score without convincing everyone playing that there’s a very good reason for doing so? Well in a very similar way, each node in a blockchain-based peer to peer network has an identical copy of the network’s ledger of events, and that ledger is immutable.

So both playground football and blockchain achieve a situation where you have multiple participants who have an agreed upon historical record of events and that record cannot be tampered with.

In a playground football game there is no referee (that would be a centralised authority) and yet the game is played successfully because it’s a group of kids playing a game where everyone knows the rules, and they play by those rules because otherwise they’re not “playing football”. When a kid fouls in some way a decision is quickly made amongst the kids as to whether to act upon the foul, or simply let the game continue by passive consent (consensus is constantly achieved). The “ledger part” is the current score that all the kids are keeping in their heads, and every kid doesn’t actually need to see each goal being scored as long as they all agree what the current score is.

The ledger is immutable because a single kid cannot change the score without convincing a majority that his view of events is the right one…

And it’s in that way, that all those games of footie in the playground were actually examples of a peer to peer network achieving immutable, synchronized and decentralized consensus via a distributed ledger!!

And that’s a good way of understanding how blockchain does what it does at a high level.”

So Bitcoin works as a currency without any governing authority the same way neighborhood sports thrive without any adult supervision; by making sure that everyone playing knows the score.

It’s interesting that blockchain technology is now being used to accomplish many things having nothing to do with digital currencies including tracking products being shipped internationally and executing contracts.  Other uses are constantly being developed, so even if you don’t invest in or use Bitcoin you will undoubtedly benefit from the technology behind it.         

I love sharing brilliant stories, analogies, and ideas, and this is one of my favorites.  It takes a concept that can seem obscure, complicated, and difficult to understand and puts it in terms anyone can comprehend.  It almost instantly gave me a more complete understanding of how Bitcoin works, and I hope it has done the same for you.

Leave a Reply