Bitcoin in plain words

An old problem: digital payment with no intermediary

In the first lesson we saw that digital payments depend on a ledger kept by someone, usually a bank. BitcoinBitcoinThe first crypto-asset, launched in 2009: a system of electronic payments between people, with no intermediary, based on a public blockchain.Example: "Bitcoin" with a capital usually means the network and its rules; "bitcoin" in lowercase, the unit. was described in 2008 in the paper “Bitcoin: A Peer-to-Peer Electronic Cash System”, signed with the pseudonym Satoshi Nakamoto: an electronic cash system "from peer to peer". The idea is that people can send value directly to one another, with no bank in the middle.

The hard part of digital money is that a file can be copied. If money were just files, you could send the same money to two people at once. This is called double spendingdouble spendingTrying to spend the same money twice; with digital money it is possible unless a shared record shows what has already been spent.Example: A file can be copied, but a spent bitcoin shows as spent in the shared ledger and cannot be spent again.. A bank solves it by keeping a ledger in which it sees what you have already spent. Bitcoin solves it with a shared public ledger, a blockchain, kept by many participants who check the same rules.

A network with no centre

Bitcoin is both a network and a set of rules. Computers around the world, called nodesnodeA computer that is part of a blockchain network, keeps a copy of the ledger and checks that transactions follow the rules.Example: Thousands of nodes can independently check the same new block., keep copies of the ledger and check every transaction against the same rules: for example, that nothing is spent that was already spent and that the transaction has a valid signature (we talk about signatures in lesson 4). There is no central server and no company that decides alone. Such a network is called decentraliseddecentralisedWithout a single centre of control: the rules are applied by many independent computers, not by one company or institution.Example: A network of nodes that check transactions themselves, with no bank in the middle, is decentralised..

New transactions are sent into the network and end up in a block through miningminingThe process by which computers in the Bitcoin network compete to add the next block of valid transactions and are rewarded for it.Example: Mining makes it very expensive for anyone to rewrite old blocks.. Mining is a competition in which certain computers work to add the next block of valid transactions, and whoever succeeds receives a reward. The Bank of England describes it as solving complicated mathematical problems. Bitcoin.org says it works like a competitive lottery that keeps any single participant from adding blocks one after another alone, so nobody controls by themselves what goes into the ledger or rewrites it easily.

A transactiontransactionA transfer of value between two addresses, recorded in the ledger once it has been checked.Example: You send an amount to a friend's address; the transaction shows up in the blockchain once confirmed. usually gets its first confirmationconfirmationThe fact that a transaction has entered a block of the blockchain; the more blocks are added after it, the harder it is to undo.Example: A merchant may wait for one or more confirmations before treating a payment as received. within 10 to 60 minutes, according to Bitcoin.org, and the more blocks are added after it, the harder it is to undo. That is much slower than a card payment, which feels instant, and the Bank of England notes that paying with crypto-assets is generally slower and more expensive than with ordinary currency.

A rule of the protocol: limited supply

In almost every discussion the number of units comes up. The rules of Bitcoin say there will be at most 21 million bitcoins: new units are created at a rate that falls and can be predicted, and issuance stops. This is called a limited supplylimited supplyA rule in the protocol that fixes the maximum number of units that will ever exist, instead of anyone being able to create as many as they like.Example: Bitcoin has a limit written in its rules: 21 million units. That says nothing about the price. and it is a rule written in the protocol, not the promise of a company. A unit can be divided into very small fractions (the smallest is called a satoshi and is one hundred-millionth of a bitcoin), so the limit does not mean there are too few units for transactions. The rule is enforced by the software participants run; it could only change if most of them voluntarily adopted different rules.

What Bitcoin does not answer

Bitcoin does not answer the question "what is it worth?". The price is formed on markets, from supply and demand, and it changes a lot (we see why in lesson 5). You will not find prices, gain charts or predictions here: a price written in a lesson would be out of date within hours, and a prediction would only be a guess. The Bank of England notes that such assets are generally held as investments by people who expect their value to rise, and that central banks therefore call them crypto-assets, not money.

If you come across a promise of gains, of "easy money" or of an "opportunity that will not come again", remember that Bitcoin is a system of rules, not a guarantee of anything.