“Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency — the system works without a central bank or single administrator.”
I’m sorry Wikipedia but you lost me.
Instead, picture this…
Imagine a giant wall of letter boxes, each with a glass door. A crowd of people stand watching the letter boxes. Inside some of the boxes are coins. The crowd can see how many coins are in each box.
The crowd watches as a person steps forward with a key, opens a box, takes a coin, and deposits into the slot of another box. A clerk in the corner of the room writes this transaction into a ledger book. “Coin moved from box 4 to box 10.”
Time passes and more people step forward with keys, open individual boxes, and move coins to another. All the while the clerk in the corner is busy keeping track.
When approximately 10 minutes pass, the clerk closes his book and invites anyone in the room to solve a puzzle. A few people with huge calculators step forward. The first to solve the puzzle gets the honour to place the completed book on the shelf of official records. Good job buddy! The clerk rewards the winner with some newly minted coins.
This 10 minute cycle of record keeping continues so long as there are people in the room watching the boxes.
*The glass boxes are wallet addresses. Visible to all.
*The key is your wallet password. Keep it safe.
*The crowd is anyone running the bitcoin client software.
*The smart guys with big calculators are the miners.
*With a big enough calculator, anyone can try to mine.
*A book for every 10 minutes is a “block”.
*The shelf of books is the “blockchain”. All transactions ever, safely stored for anyone to read.
Why is a crowd of people watching a bunch of glass boxes important?
Before Bitcoin, a security guard would watch the boxes. Think of your bank, VISA or PayPal.
What if the guard caught a virus and got ill? What if the guard took a nap during some downtime? These mistakes happen when there is a single point of failure, like bank account details on a database.
Before Bitcoin, the keys were held on the guards belt. We trust the guard, of course, but must answer a number of personal security questions to gain access to our key.
Are we comfortable with the guard knowing so much? What if the guard lost the key? What if someone figured out the secret answer to our key? What if the guard sold our personal information? Not all guards are good.
With Bitcoin the whole world is watching the boxes all of the time. No one can lie, cheat or spend a coin in two recipient boxes at once. You hold the key to your box.
Remember always, with Bitcoin there’s no guard. If someone pickpockets your key, there is no one to turn to for help.