My answer to the mandate "Please give a layman's description of how Bitcoin (and blockchain technology) work."
Suppose "Bob" wants to buy a computer from "Alice" for $1000.
Suppose Bob has ten $100 bills. Why couldn't he just scan the bills, and send the scans to Alice as payment?
It's because there's nothing to stop Bob from making ten more scans (or an infinite number of scans), and sending scans of the same bills to other vendors as payment.
This is called the "double spend" problem for electronic money.
Banks and credit card companies solve the "double spend" problem by maintaining internal ledgers that keep track of transfers of money from one account to another, and prevent the same money from being spent more than once from a single account.
This prevents the double spend problem, but it creates other problems.
For example, as a bank customer, you must now wholly trust the bank with complete control over your money. The bank can do all of the following:
* deny you access anytime they wish
* restrict the amount you can withdraw
* seize your funds
* spy on your transactions and report them to the government
* go bankrupt
* inflate the currency
* reverse transactions, and claw back money you've already received
* take its sweet time to settle payments
For example, when Wikileaks broke the Snowden revelations about US government spy programs, the US government leaned on financial service firms to cut off all access to banking and payment services to Wikileaks.
As a result, Wikileak's bank, Visa/Mastercard, Paypal, etc all terminated service to Wikileaks.
In contrast to the centralized ledgers controlled by financial companies, blockchain technology solves the "double spend" problem by creating a single, decentralized, global, immutable ledger.
This ledger is maintained by a network of specialized computers (called "miners") running "mining" software.
Anyone can join this network of miners by running the mining software on their own computer. The miners are incentivized to run the network because they receive the new bitcoin that is periodically "mined", as well as trading fees.
In order to make a new entry to this global ledger recording the transfer of bitcoin from one wallet to another, the miners in this network have to agree that it's a legitimate entry.
The software is written in such a way that in order to make a false entry to this ledger, someone would have to spend a lot of money to take control over at least 50% of the processing power of this network.
And the cost of such a "51% attack" rises as the value of bitcoin increases (currently, it would probably cost hundreds of billions of dollars to mount such an attack.)
As a result:
* People don't have to trust banks or other centralized authorities to trade with each other.
* Unless you give them the key to your wallet, no one can seize your bitcoin, not even the original developers of the software.
* No one can inflate your bitcoin (the software is designed to only create 21 million bitcoin and no more).
* No one can reverse a payment once you've received it.
There is a fee to trade bitcoin, but it's automatically set by the software based on the trading volume and price, not by a centralized authority.
For example, when the government shut off all other financial services to Wikileaks, Wikileaks was still able to accept bitcoin donations.
Blockchain technology is also useful for other problems that require a decentralized, immutable, censorship-resistant record. For example, recording title transfer to property on a blockchain allows anyone to see that the transfer happened in a way that is difficult for either party to deny later on.
#blockchain
#bitcoin
Suppose "Bob" wants to buy a computer from "Alice" for $1000.
Suppose Bob has ten $100 bills. Why couldn't he just scan the bills, and send the scans to Alice as payment?
It's because there's nothing to stop Bob from making ten more scans (or an infinite number of scans), and sending scans of the same bills to other vendors as payment.
This is called the "double spend" problem for electronic money.
Banks and credit card companies solve the "double spend" problem by maintaining internal ledgers that keep track of transfers of money from one account to another, and prevent the same money from being spent more than once from a single account.
This prevents the double spend problem, but it creates other problems.
For example, as a bank customer, you must now wholly trust the bank with complete control over your money. The bank can do all of the following:
* deny you access anytime they wish
* restrict the amount you can withdraw
* seize your funds
* spy on your transactions and report them to the government
* go bankrupt
* inflate the currency
* reverse transactions, and claw back money you've already received
* take its sweet time to settle payments
For example, when Wikileaks broke the Snowden revelations about US government spy programs, the US government leaned on financial service firms to cut off all access to banking and payment services to Wikileaks.
As a result, Wikileak's bank, Visa/Mastercard, Paypal, etc all terminated service to Wikileaks.
In contrast to the centralized ledgers controlled by financial companies, blockchain technology solves the "double spend" problem by creating a single, decentralized, global, immutable ledger.
This ledger is maintained by a network of specialized computers (called "miners") running "mining" software.
Anyone can join this network of miners by running the mining software on their own computer. The miners are incentivized to run the network because they receive the new bitcoin that is periodically "mined", as well as trading fees.
In order to make a new entry to this global ledger recording the transfer of bitcoin from one wallet to another, the miners in this network have to agree that it's a legitimate entry.
The software is written in such a way that in order to make a false entry to this ledger, someone would have to spend a lot of money to take control over at least 50% of the processing power of this network.
And the cost of such a "51% attack" rises as the value of bitcoin increases (currently, it would probably cost hundreds of billions of dollars to mount such an attack.)
As a result:
* People don't have to trust banks or other centralized authorities to trade with each other.
* Unless you give them the key to your wallet, no one can seize your bitcoin, not even the original developers of the software.
* No one can inflate your bitcoin (the software is designed to only create 21 million bitcoin and no more).
* No one can reverse a payment once you've received it.
There is a fee to trade bitcoin, but it's automatically set by the software based on the trading volume and price, not by a centralized authority.
For example, when the government shut off all other financial services to Wikileaks, Wikileaks was still able to accept bitcoin donations.
Blockchain technology is also useful for other problems that require a decentralized, immutable, censorship-resistant record. For example, recording title transfer to property on a blockchain allows anyone to see that the transfer happened in a way that is difficult for either party to deny later on.
#blockchain
#bitcoin