I found myself this past weekend attempting to explain a Blockchain and Bitcoin Mining to family members who had never heard of any of it. I spent some time attempting to put together a simple explanation that makes sense, and I want to include it in an article to help other people understand. I would like your opinions on where I can improve this explanation, where I can make it more simple, and where I have it wrong.
At the moment, I am not attempting to explain the intricate workings of how a Blockchain fits together securely, or how a 51% hack would be accomplished, or what happens with a Hard fork. I don't want to get that in depth here. I may write a more advanced follow-up if needed.
Thanks in advance for your comments and critique.
To understand what happens behind the scenes with Bitcoin, you have to be familiar with the terms Blockchain and Mining.
Here is an explanation of the Blockchain that makes the most sense to me. To start with, let’s think about the system we are familiar with today… the banks you deal with in the real world. Are you able to see all of your bank’s transactions behind the scenes? Not a chance. Can you imagine a system where anyone can see your paycheck deposited into your account, and then see where you send your money? Of course not. For privacy reasons, no bank would ever make this information public, or let anyone know exactly what it is doing with the money it takes in.
In contrast, what if you could make a new anonymous account with the push of a button, and instantly make an anonymous transaction from that account? It would not matter if everyone could see an amount traveling from your anonymous account to someone else’s anonymous account, especially if this was just one of millions of anonymous transactions bundled together into one file where everyone in the world could see them. This would mean all creative auditing, fraud, data manipulation, currency creation from thin air, and other financial mischief would go out the window. Once a transaction happened, it could not be altered by anyone because all computers worldwide have access to the information and would know immediately if something changed.
This is what happens every 10 minutes on the Blockchain. A new ‘Block’ is added to the end of the chain with all of the anonymous transactions publicly available from the previous 10 minutes. All computers on the network have access to the new block and agree the block is correct. This chain of 10 minute blocks goes all the way back to the beginning of Bitcoin, and continues to grow.
Now that you understand the Blockchain, you might be wondering how the anonymous transactions all get combined into the 10 minute blocks. This is where ‘Mining’ comes is. Mining is a term used for the process of assembling the new Blocks, and rewarding the computers putting them together the quickest with new Bitcoin. Every computer mining on the network is frantically putting together all of the transactions from the last 10 minutes into a correctly formatted file. All of these computers are running at incredible speeds, but only one is going to finish first and add the new block to the end of the Blockchain. The winning computer is currently rewarded with 12.5 Bitcoins (approximately $7,250 at the time I am writing this) for winning the 10 minute race. This is called Mining. Other Altcoins use the same method for processing their transactions.