The Crypto-Currency by The New Yorker

bgeron‘s answer to “ELI5  : How do bitcoins work?

Here’s the story behind Bitcoin: sending money is complicated. PayPal can do it easily but has substantial fees and is risky for sellers, wires are expensive, and so on. Cash is ideal, but you can’t use it over the internet. So people wanted a kind of e-cash: no chargebacks, low fees, no censorship. Also not run by a government or corporation, because then they have too much power and power corrupts.

But how can a money be created without a govt/company oversight? They invented a really hard puzzle, it’s called a SHA256 hash. You can roll some dice and see what their hash is, and if it’s really special you earn some coins.Example. It’s a strange and very hard puzzle. They designed the puzzle to be really hard, because if too many people can solve it, there are suddenly too much coins and the coins are worth nothing. It is so hard, on average it is solved every ten minutes by anyone in the world. So for a lot of people, it can take a year or even more to solve the puzzle. But when they solve it, it’s like winning the lottery, except they get Bitcoins instead of dollars.

Until today, this lottery yielded 7 million coins in total. People give them to other people to buy things, or if they owe a friend some money. And it’s really easy to give the money to others. You have this program, called a wallet, and it says how many coins you have. You can click send, type your friend’s ‘address’, the amount, and a few seconds later it shows up in your friend’s wallet. You can also save his address, so you don’t have to type in his address twice.

Because people find Bitcoin convenient to use, and you can buy a lot of stuff with it, people want to have some Bitcoins. So they give $ to a lottery winner, and they get BTC back. And then they can buy stuff with it, or give it to a friend, or sell it to someone else.

To get a chance at winning the lottery, you need an expensive graphics card. Or if you want even more chance, you can buy 2 cards or 3 or even 100. It is like having 2 or 3 lottery tickets, instead of only one. But each graphics card also use a lot of power and make your room really hot.

By the way, if a lot of people buy expensive graphics cards and participate in the lottery, it gets harder for a single person to win. Also, the lottery decreases. Currently you get 50 coins if you win the lottery. After four years, the winner gets only 25. Four years later, only 12½, then 6¼, and so on. In total there will ever be only 21 million coins. This is makes a Bitcoin ‘better’ than a dollar: in 100 years, a dollar will be worth very little because the government keeps printing more and more money, and your dollar will be less and less special. In 100 years, there will still be only 21 million bitcoins.