Bitcoin is a monetary system. The best way to understand it is in comparison to two other monetary technologies: the gold standard and the U.S. Federal Reserve. In both of these systems, you need a way to control how much money exists (supply), and how people give it to each other (exchange). Bitcoin is simply one more way to implement supply and exchange of currency.
Bitcoin is also a thing that random d-bags talk about to each other, and to their bored dates. We will not discuss that aspect of bitcoin here but it’s actually the predominant societal aspect of bitcoin.
This article was originally posted on December 14, 2015 and updated on December 1, 2021.
Controlling Supply for Gold and the Fed
Under the gold standard, the supply is controlled by physically mining chunks of gold. Mining is difficult and costly. The supply of gold will grow at a rate determined by how difficult it is to get gold out of the ground. Under the U.S. reserve bank system, the supply is controlled by an independent group of smart people who use economics to decide how much money should be supplied to the system. Paul Krugman has a classic summary of why you might want a system like this here.
Exchange for Gold and the Fed
Implementing a system of exchange is even easier. You simply hand each other bags of gold coins or stacks of paper money. In the U.S. reserve banking system, people can also exchange electronic dollars. In that case, you also then need an accounting system to keep track of who owns which electronic dollars. Fedwire and other centralized ledgers handle this in America. There is simply a centralized, trusted, government-run ledger keeping track of everyone’s transactions.
These systems of exchange are directly analogous to the two ways everyone keeps track of the money in Monopoly. Most people use the paper money and hand it back and forth. But, some people have noticed that if you are missing some money from the Monopoly box, or if you just don’t feel like taking the money out, you can just ask a trustworthy person with a pen and paper to keep track of everything.
How Bitcoin Implements Supply and Exchange
Bitcoin is not all that different, except the supply and exchange parts are connected in a way that isn’t true for gold or dollars. The bitcoin mining operation, and the upkeep of the ledger are the same process.
To mine a bitcoin, you have to perform the public service of updating and verifying the shared ledger (called the blockchain) for the network. When you “mine” bitcoins, you are actually listening to the network for any announced transactions, writing all of those transactions down, and then publishing a log consolidating all of those transactions. Just like a page in the Monopoly bookkeeper’s notes.
However, usually there are many Bitcoin bookkeepers publishing incompatible logs all the time. So Bitcoin uses clever elements of cryptography to make it rare for any one published log to be deemed acceptable to the network, using publicly auditable rules. On average, a log gets deemed acceptable every 15 minutes or so, and that log gets added to the running record of all past logs (the blockchain).
You can read more of the details here.
Why the Heck Didn’t I Buy a Few Bitcoins When I Wrote this in 2015
Yeah I know shaddap.
2 Replies to “What is Bitcoin?”