Bitcoin Explained for a 5 Year Old (With Stick Figures)
Imagine I have one apple.
Then, I give you this apple.
Now you have one apple and i have zero.
Let’s examine this closer
My apple was physically put into your hands, you know it happened – you touched it.
There was no need for a third person to help us in this transaction to confirm the apple went from me to you.
Now, you could give it to your friend, and then that friend can pass it on to his friend and so on. You’re free to do whatever you want with that apple.
It’s the same idea whether I give you a watermelon, a shoe or a dollar bill.
That’s what we call a physical transaction.
Now, what if I were giving you a digital apple?
This changes things.
How can you know that digital apple I sent you, which used to be mine, is now yours and only yours?
How can you know I haven’t already sent that same apple to my Dad via email attachment? Or to my pen pal from the Philippines?
Maybe I’ve made multiple copies of it and posted it on the internet where millions of people downloaded that very same apple.
This digital exchange is not the same as our physical exchange, it carries over more complexity.
Some super smart computer scientists have a name for this, its called the “double spending problem” and for a long time it’s been very hard to solve.
Maybe someone should be keeping track of these digital apples right? Maybe an accounting book?
We do have something for this, and it’s called a “ledger”.
This digital ledger needs someone in charge of recording all the apple transactions that happen on the internet!
Blizzard, the company that made the online game “World of Warcraft” has a digital ledger too. It’s where they keep track of all the cool digital game items like rare armor costumes.
Awesome! All we have to do is find someone like Blizzard to keep track of our digital apples! :-)
Uh oh…
but what if someone at Blizzard becomes greedy and started adding digital apples to his own fruit wallet?
Going through Blizzard has complicated things a bit, it’s no longer as simple as me giving my digital apple over to you.
How can I hand my digital apple to you like the good ol’ times?
Here’s how
Instead of just Blizzard having all that control over the ledger of the digital apples of the world, we gave it to everybody? Every transaction ever made would be recorded and made public.
It would be impossible to cheat, I can’t give you digital apples I don’t have because it just wouldn’t sync up to everybody else’s record.
It’d be a tough network to beat, especially if it got really big.
Plus, it’s not controlled by just one person.
The rules for this network are defined in the beginning, the code and rules for it are all open sourced – free for anybody to improve, change, review and so on.
You could participate in this network and update the ledger to make sure it all checks out.
For your work participating – you’d be rewarded like 15 digital apples!
And by the way, that’s also how the new digital apples are generated!
Real Life
Those digital apples are actually Bitcoins.
And that network we learned about is called the Bitcoin Protocol.
And that public ledger? That’s actually called a “BlockChain” and it:
A) Tells us the exact number of bitcoin in circulation and exactly how many there are in total
B) Acts as a receipt for every bitcoin transaction
C) Solves the double spending problem because it’s public!
So now we have this fancy cool way of proving digital stuff is delivered through the internet! We can use it to track Bitcoin or cute digital kittens.
But what about other stuff? What about sending important contracts, ID certificates or medical information…
This is new blockchain technology is pretty cool and there’s a lot of smart people arguing about it.
People like politicians, economists, programmers and more all think the blockchain could be worth zero or actually worth tons!
Some say bitcoin is digital gold and others say it’s a currency.
Others say they’re just peanuts.
Some people think it’ll change the world and others think it’s just a fad.
But now you know more about bitcoin than 99% of the population, congrats!
