Idiot's Guide to Cryptocurrency (Using Bitcoin for Illustration)

What is It?

Let's talk about Bitcoin (BTC). BTC is a digital currency that can be used like actual money to buy goods and services. Unlike real money however, the "accounting" is all kept on an online record called a blockchain. This online record is also decentralised, meaning that there are identical copies of it stored on computers all over the world.

What's a Blockchain?

A blockchain is literally, a chain of blocks. It contains the entire record of every single BTC transaction in history. Each transaction is verified and when one block (equivalent to 1MB worth) of transactions is verified, it gets added to the blockchain.

The blockchain is the mastercopy of the entire record of BTC. There are multiple copies of the blockchain, stored on multiple computers around the world known as nodes. When one copy of the blockchain is held up to scrutiny, it is compared to the rest of the copies around the world. (Remember this for later!)

Why the Need for This Blockchain?

If you were to buy an ice-cream for a dollar today, the dollar would disappear from your wallet into the ice-cream uncle's pocket. This physical transfer prevents you from using that same dollar to buy anything else. Maybe you could make a counterfeit dollar, but someone could scrutinise the two dollar coins and maybe tell the fake one from the real one.

If this transaction were an online transaction however, you could make a copy of your dollar, so you can give one copy to the uncle and keep one copy for yourself to buy something else later.

To prevent this from happening with BTC, every transaction has to be verified and added to the blockchain.

What is Verification?

Simply put, miners use computer programmes to run through scores of BTC transactions to ensure that they are not fraudulent. This is known as verification. Basically making sure that nobody made a copy of BTC and then paid for two different purchases with that same BTC.

Remember we talked about comparing copies of the blockchain earlier? This is what a miner basically does - looks at the blockchain attached to a transaction and verifies that this blockchain is indeed the same as what's recorded everywhere else. After transactions are verified, and miners can produce "proof of work", the transactions are added to the blockchain and practically "immortalised" on record. (Yes, everyone knows that you used BTC to buy bubble tea last week)

What Are Miners?

As a reward for this arduous work of verifying transactions, miners are given free BTC for the work of verifying transactions. This work of verifying transactions is thus known as "mining". Verify transactions, get free BTC. It's kinda like, do some digging, and get some gold (aka mining for gold).

So Good, Get Free BTC. Why Doesn't Everyone Do It?

If only it were so easy! There are plenty of miners and everyone wants a piece of the cake. Unfortunately, there is only one winner. Only one miner takes home the BTC reward for each block added to the blockchain.

Proof of Work!

How do we decide who wins? It's a concept called "proof of work". Here's where it gets messy.

After completing a block, miners need to prove that they did the work of verification (aka proof of work). This proof involves guessing a number (aka a "hash"). This number must fulfil specific requirements. First, the number must be a 64-digit hexadecimal (0123456789abcdef) number (btw your handphone number only 8-digits ok). Second, there is a target hash, and your number must be less than the target hash.

This is pretty much down to guess work, but basically it's "fastest fingers first". Whoever can get the hash the fastest wins. It's also down to your computer's processing power.

So if Ah Beng and Ah Seng both verified 1MB of transactions, but Ah Beng guessed the hash first, Ah Beng gets the BTC and Ah Seng gets a sour taste in his mouth.

Summary

BTC is a digital currency that can be used to buy stuff. The record of where BTC has moved around and how it's been transacted is stored on an online record called the blockchain. The blockchain is formed when miners verify individual BTC transactions, and then guess a number in order to prove that they completed the work first. The blockchain keeps BTC secure and safe from hackers/frauds. In exchange for this arduous business, miners get BTC in return for their efforts.

That's it! Idiots guide to BTC and crypto in general. I hope I haven't confused you more than when you started.

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This article is not meant to be comprehensive. It's a simplified explanation of BTC pitched at the level that I would have wanted it to be explained to me. I wrote this after fumbling around on the internet trying to explain the concept of cryptocurrency to my gf. It is certainly not financial advice.

The best article I've read explaining this concept is here: https://www.investopedia.com/tech/how-does-bitcoin-mining-work/