I originally wrote this for Twitter. Since that may implode at any moment, here is my clear, simple, no-BS explanation of Bitcoin and blockchain for civilians.
I promise not to explain any math. You do not need it.
The basic thing
Think about the Visa card people. When you use your card to take some of your money and give it to that Etsy account to buy a cool Whatever, Visa records the change in a database in a secret cave somewhere:
- –$25 you
- +$25 them
You have to trust the honesty of Visa. In theory they could give money to their friends in the database, which is bad for obvious (and not-so-obvious) reasons. Ultimately, the government checks to make sure.
OK, let’s say you are a libertarian goldbug. You want government entirely out of the money business. But how? Someone has to make sure the ledger of Who Has How Much Money is honest, right?
Bitcoin solves this using a new technology called a “blockchain”. It means that no, we do not need to trust the people who maintain the database with the list of who has how many Bitcoins, the way we have to trust the Visa people. The blockchain uses multiple synchronized databases checked against each other. They prevent cheating using the same basic cryptographic math which already makes it possible to safely send data like your credit card number over the internet.
Blockchain technology can maintain a trustworthy ledger of any shared information, not just Bitcoin, without needing a trusted agent to maintain the database. It seems like this must be useful for something, right?
A lot of nerds who understand the math are working on potential applications. Many are goofy. Many are scams. Many, like Bitcoin, try to create a scarce commodity (ideally, but not necessarily, a useful commodity) so that early players win at a gold rush. And a few are … intriguing. It may be that none of these pan out. If one does, it could be huge.
That’s it.
Must a blockchain wreck the Earth?
Bitcoin uses an approach to the necessary math called “proof-of-work”. This makes computers sweat hard, which uses a lot of energy. A lot of our legacy electrical generators put carbon in the air, contributing to climate change. The energy cost of Bitcoin is not just high; it increases with every transaction, making it unsustainable as a widely-used currency. (This is one reason why I am not a millionaire now. I knew early on about Bitcoin and expected that it would get big — though I had no idea how big — and concluded that investing in it was not ethical.)
In theory, blockchain tech does not necessarily have to use such compute-intensive (and thus energy-intensive) methods. There are alternatives to proof-of-work, like proof-of-stake, which should use far less energy. But proof-of-work has a big head start, alternatives have not yet proved themselves, and many existing blockchain applications — notably including Bitcoin — cannot migrate away from it.
NFTs: non-fungible tokens
Bitcoin is designed as an artificial commodity which shares many of the characteristics of gold. It is fungible: one Bitcoin is the same as another, just as any ounce of gold is equivalent to another. But one could create a ledger listing unique things: non-fungible tokens with unique IDs.
In theory, one could use an NFT blockchain to assign a unique ID to any set of unique things: say, a database which knows who owns each Vermeer painting. For now, most NFT ledgers have no enforcement mechanism at all, so “owning” an NFT has as no more significance than the hokey certificate I have from a registry saying that there is a star named after me. Many scammy NFT systems do not even attempt to point to physical things, just invented commodities like ugly digital images.
Blockchain enthusiasts imagine that someday we will use NFTs to keep track of every thing in the world. No more arguments about whose soda that is in the fridge, who holds the title to that abandoned lot on the edge of town, et cetera; a database everyone can see will know all.
A word about geeky politics
One can recognize in blockchain technology an idea familiar from decades of idealistic and naïve tech geek politics. Consider John Perry Barlow’s breathless 1996 Declaration Of The Independence Of Cyberspace:
We have no elected government, nor are we likely to have one, so I address you with no greater authority than that with which liberty itself always speaks. [⋯] Cyberspace consists of transactions, relationships, and thought itself, arrayed like a standing wave in the web of our communications. Ours is a world that is both everywhere and nowhere, but it is not where bodies live. We are creating a world that all may enter without privilege or prejudice accorded by race, economic power, military force, or station of birth. We are creating a world where anyone, anywhere may express his or her beliefs, no matter how singular, without fear of being coerced into silence or conformity.
I do not think I need to explain how that is not quite working out the way that Barlow and countless other tech nerds imagined.
Tech nerds have a longstanding tendency to assume that de-centralized technology structures inherently produce democratic, egalitarian, liberatory social consequences, protecting individual rights and freedom. An instructive 1995 essay, The Californian Ideology, explores and criticizes that assumption and others from the culture and cultural politics and politics politics of “tech”.
On superficial reading, the writings of the Californian ideologists are an amusing cocktail of Bay Area cultural wackiness and in-depth analysis of the latest developments in the hi-tech arts, entertainment and media industries. Their politics appear to be impeccably libertarian - they want information technologies to be used to create a new ‘Jeffersonian democracy’ in cyberspace in its certainties, the Californian ideology offers a fatalistic vision of the natural and inevitable triumph of the hi-tech free market.
But history teaches otherwise. Aside from the example of Barlow’s failed dream of an internet without prejudice, or the way that Bitcoin created — by design! — its own inequality, concentrating wealth in the hands of early enthusiasts, decentralized designs tend to not work even on the technical level.
More
Over on Bluesky, I offered this explanation to Jeff Sharlet and he asked reasonably:
I’m stuck pretty early. What is a bitcoin? Like, I “know,” but no, I don’t really know, and one thing I’ve learned as a journalist is if I don’t know something, lots of other people don’t, either.
If a five year old asks me what a dollar is, I’d say it’s a green rectangle of paper you can trade for other things. If they asked “why,” I’d say, because we all agreed it is, and even though that’d be wrong, the 5-year-old would be satisfied. That’s my level.
The five year old understands that $1 “is” a green rectangle of paper, but coloring a rectangle green doesn’t make it $1. I understand that opening a Word doc and writing “1 bitcoin” doesn't make it so. But I don’t understand why not.
This is of course as tricky as thinking about what a dollar “is”. Either a number recorded in your bank account or a bill in your pocket can be “a” dollar, right? Why does this work?
- Security measures ensure that all of those dollars are real. With bank account records, that means more people & processes. With bills, this is mechanical / infrastructural; mints use special paper and ink and printing plates et cetera to make it hard to create fake bills.
- Rules control what banks can and cannot do in their account records, and control how bills are minted and distributed. There are an array of people & processes which run around enforce those rules.
A bitcoin is just a record on the bitcoin blockhain ledger, pretty much how a dollar in a bank account is just a record on the bank’s computer. But instead of using people & processes enforcing the security measures and rules, bitcoin uses software architecture.
Security measures — why they call it crypto
Bitcoin, blockchain, and related technologies are called “crypto” because they rely on the math & computer science of cryptography. To go a step deeper on how that works, it does help to glance at three related facts about math:
-
If one has two big prime numbers, it is easy to multiply them together.
100,927 × 223,339 = 22,540,935,253 -
If one has big number created by multiplying two prime numbers together and one also knows one of those prime factors, it is easy to find the other prime factor.
22,540,935,253 ÷ 223,339 = 100,927 -
If one just has a big number created by multiplying two prime numbers together, figuring out the prime numbers is very hard.
22,540,935,253 = ??? × ???
This asymmetry makes it possible to:
- Easily scramble information — “encrypting” it
- Easily unscramble that information — “decrypting” it — if one has the right number as a key
- Have confidence that no one can unscramble encrypted information without the key
Another math trick makes it possible to break the keys into pieces in a useful way:
- Alice & Bob both create for themselves a pair of keys: a private key which they keep secret, and a public key they let anyone see
- When Alice wants to send a secret message to Bob, she combines her private key with his public key to encrypt the message
- When Bob receives the encrypted message, he can combine his private key with her public key to decrypt and read it
- If someone else tries to read the encrypted message, knowing Alice’s public key & Bob’s public key won’t work
One can use public key cryptography in a lot of clever ways. F’rinstance, Alice can “sign” a message so that anyone can confirm both that it definitely came from her, and that it is exactly the message she intended without alterations.
Blockchain is a very clever extension of public key cryptography tech; the novel wrinkle is using it to ensure that when one database sends a change in the ledger to another database, the blockchain can confirm that this is a legitimate change so that the databases remain synchronized. This makes it possible to treat the blockchain as a single database without having to trust any of the people who run the computers where the databases live.
One can think of the bitcoin blockchain ledger as looking like:
| account | bitcoin | |
|---|---|---|
| ⋯ | ⋯ | |
| 34189970 | ₿23.4 | |
| 34189971 | ₿19.773 | |
| 34189972 | ₿0.224 | |
| ⋯ | ⋯ |
When a person tells the bitcoin blockchain “I control Account 34189971 and want to transfer ₿2.5 to Account 987435”, that person uses their private key to confirm that they legitimately control Account 4382791.
The way the bitcoin blockchain handles the synchronization of multiple databases also allows people to keep have cryptographically-validated numbers on their computers which they can use to transfer bitcoin between each other without having to contact the big synchronized databases on the blockchain immediately. Think of this as similar to how one can buy something with the imprint of a Visa card on a paper transaction receipt, getting the information to the Big Visa Database later.
The software technology of the bitcoin blockchain ledger does not just ensure reliable & secure transactions, it imposes rules which gives bitcoin certain characteristics:
Rules governing bitcoin
Again, bitcoin is an invented, artificial “commodity” tracked in a peculiar database managed using blockchain ledger technology. Bitcoin only exists in the database, and obeys rules defined by the system’s creator, known only by the pseudonym Satoichi Nakamoto. Those rules draw on glibertarian goldbug thinking about money, so those rules give bitcoin characteristics paralleling gold:
- Bitcoin is fungible: there is no difference between ₿1 in one account and ₿1 in another. There is not even an equivalent to the serial numbers on dollar bills.
- Bitcoin can be sliced as finely as you want. One can have ₿1.7382416001, give ₿0.0000000014 to someone else, and have ₿1.7382425987 afterward. This makes it better to think not in terms of a number of bitcoins but rather in terms of an amount of bitcoin.
- Bitcoin transfers are anonymous & untraceable. One can send bitcoin from Account A to Account B with just the password for Account A and the ID of Account B. The blockchain ledger retains every transaction, but does not know who controls the accounts.
- There is a limited finite maximum amount of bitcoin: ₿21,000,000. Most of that is already assigned to particular accounts.
- The amount of bitcoin assigned to people grows very slowly. New bitcoin gets assigned to accounts through “mining”: if one uses a computer to do computations which support the confirmation of transactions and the maintainance of the databases, the system rewards one’s account with a little bit of new bitcoin.
It turns out that goldbugs don’t understand how money works and why legacy financial systems work the way they do, leading to wags referring to bitcoin as “Dunning-Krugerands” and observing that bitcoin and other cryptocurrencies it has inspired as “speedrunning financial fraud”. In particular, bitcoin’s gold-like qualities make it volatile, deflationary, and generally unsuited to serve as the currency it was intented to become.
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