How would you explain Bitcoin to children?
1) The invention of paper money
Thousands of years ago, people had to exchange goods to get what they needed. If they wanted meat, they had to trade some of their possessions with a person who wanted to exchange the meat for something else. During this era livestock and grains were exchanged for other things − in turn these goods began to be used like money.
Eventually, people were able to buy anything available by exchanging grain or livestock. This system, called barter, was a direct transaction between individuals. Just like children exchanging toys.
As time passed, some problems began to arise in exchange transactions. For example, a friend of yours promised you some Lego in exchange for your toy car, but he didn’t give you the car. In ancient times, a knowledgeable person, a mediator, was usually consulted to solve such issues. Over thousands of years, these mediators that ancient societies consulted, evolved into what we now know as banks.
Banks developed the concept of “paper money”. People no longer needed anything other than paper money to acquire other goods or services. They could buy anything they wanted using paper money. They gained money by working, producing or selling goods such as toys and by borrowing. Paper replaced real goods, acting as unit of exchange for them. If you take a closer look at the paper money in tour pocket, you’ll see the signatures of the people we just talked about on it.
In the same way you trust your dad to get you the newest toy, our entire monetary system is built on ‘trust’. Without people’s trust in each other, money is nothing more than a piece of paper. What about the people in-between who make the compromise? They are now banks that fulfill people’s promises of payment to each other.
2) The digitization of paper money
Paper money, which replaced live animals and grains as a token of exchange, was actually the first step towards digitalization. The videos you watch on YouTube today were previously stored on tape. This tape was a physical device with magnetic strips inside. Now the whole process has been digitized − videos can be watched without there being any physical tape recordings are. The same goes for money. Your family’s money is safely in a bank account without your parents even seeing it. The family doesn’t need to carry all their money in their pockets to buy goods.
Banks have digitized paper money and provided a way to manage it online. Just like you watch cartoons online, you can control your money online. Money is not physically present and transferring money from one computer to another is far easier than using paper money or goods.
3) Bitcoin
Do you remember what your mom and dad did before they went on vacation? They locked all the doors of the house to keep it safe while you were away. We offer computer security in a similar way − we use passwords that work like locks. We can generate complex encryption keys that look like very strong locks using computers. If a criminal gets hold of these encryption keys, which are similar to our house keys, they will also have our money.
Encryption is central to Bitcoin’s underlying technology and with strong encryption, we can be sure that only we have the keys to our Bitcoin.
Bitcoin technology associates each unit of currency you hold the keys to and makes it yours. All transactions are added to a chain of transactions, verified by hundreds of different people, and added to the Bitcoin registry. We call this distributed and decentralized technology a “blockchain”. Bitcoin is also an application of this amazing technology.
Bitcoin is a technology that does not require interpersonal trust. You don’t need a “wise person” to solve the problems you have with untrustworthy people when using it. The library of Bitcoin transactions is scattered around the world, on the computers of people called “miners”. Each miner has exactly the same ledger as the others. So, if criminals attempt to change the records in the ledger, they can only do so on one computer. Records can always be used with confidence for this reason.
To make transactions with Bitcoin, you need:
- A Bitcoin wallet: There are many wallet types where you can keep your Bitcoin safe. You can store your Bitcoin keys on paper, your mobile phone or your computer.
- Bitcoin: You must have Bitcoin to exchange with others.
- A buyer who pays you: No matter what you use, this part never changes. You need someone willing to buy something from you in exchange for something else.
- A seller who will trade something in exchange for Bitcoin: If you want to buy something with your Bitcoin you will need a seller who accepts Bitcoin.
- Internet connection: You need a way to deliver your transactions to the miners located around the world.
If you want to trade with another friend using Bitcoin, you can send money directly from your wallet to theirs without an intermediary such as a bank.
Bitcoin Mining:
Mining processors, devices that don’t have a central location and scattered at different points, are made to users. Anyone with sufficient computing power can become a public Bitcoin miner. Mining is open to everyone and there are now many miners worldwide.
The fact that the network is open to everyone ensures transparency and the reliability of transactions. The Bitcoin network and its technology is not owned by any single institution. Miners compete to solve a complex mathematical problem. The data from each transfer made by a user is transmitted to the miners throughout the Bitcoin network. Miners combine these sets of transactions together to form a block. Then the miners work to verify this newly generated block. The first miner to solve the problem adds a new block to the blockchain and receives newly created Bitcoin as a reward.
4) How can I obtain Bitcoin?
There are multiple ways to own Bitcoin. The two methods that come to mind are:
- Become a Bitcoin miner and start producing Bitcoin. This method requires you to have sufficient processing power which would cost you money.
- Buy Bitcoin from a Bitcoin trading platform like BtcTurk.
