Layman Explanation of Bitcoin, Even Your Granny Can Understand

In a prison, there are no currencies. No one has access to money of any kind. But a prison, although small, is still a society. And a society needs to trade goods and services. Maybe someone is a barber. This person will cut people’s hair but wants something in return. Something that he can use to later go to his cellmate and give him in return for the book that he wants from him. The cellmate also needs something in return for the book to use for getting himself another book.

How do you do this without money?

Well, they use cigarettes as a currency. A hair cut is worth 20 packs. A chance to play basketball is worth 10 packs. A book is worth 5 packs and so on. There is a problem. There are not enough cigarettes inside the prison in each person’s hands to be able to do all the transactions. But everyone knows that once a week a new supply comes in. So instead of getting the packs from each other, they start “owing” each other some packs of cigarettes. Joey gets a haircut and he owes the barber 20 packs. The barber gets a book and owes John 5 packs. Once the new shipment comes in, everyone will settle their debts.

But how do we keep track of all this?

Well, everyone will have to carry a notebook with them. Whenever two people make a transaction, they both write it down in their books. Luke writes “I owe Johnny two packs” and Johnny writes “Luke owes me two packs”. This way we know who owes what to whom. But we all write everything in the same format. One transaction after another. So it becomes a long chain of transactions. If I know how many cigarettes I had at any point and go through the transactions after it, I can figure out how many cigarettes I will have.

Last problem: how do we know what people wrote in their books are correct and no one is faking transactions? I can go steal someones book and write a fake transaction in it.

Well, to overcome this we assign the wisest most trustworthy person in the prison as a witness. Whenever two people are making a transaction, he has to witness it and sign both books with his own signature. This way, we know that each transaction is witnessed by our trusted person and actually happened.

Cigarettes are bitcoin. Notebooks are ledgers. The agreed upon text format in the notebooks is blockchain. The wise persons are bitcoin miners.