First of all, we start with an analogy. Until just over 100 years ago the people of Yap, a Pacific island, used large stone disks as coins. The picture on this page shows some.
Yappians used these stones for significant expenses such as dowries. Because the rocks were plentiful, the Islanders didn’t bother moving them about. They just transferred ownership. People knew who the current owner was because it was public knowledge.
This made it difficult to commit fraud.
- You couldn’t spend someone else’s stone because everyone knew who owned the rock.
- You couldn’t spend the same stone twice because everyone would know.
- You couldn’t fake the currency because to do that you’d need to carve a new stone – which anyone could do anyway.
It was a great system. It just didn’t scale up well.
But cryptocurrency works in the same way and does scale up.
Here’s why they’re the same.
Bitcoins don’t move around. They stay fixed on a public ledger, the “blockchain.” Anyone can check ownership by checking this accounting.
This makes it difficult to commit fraud:
- You can’t spend someone else bitcoin because everyone knows who owns them (from the ledger.)
- You can’t pay the same coin twice because the network keeps the accounting up to date and there’s only one ledger. If you did try to spend it twice, everyone would know.
- You can’t fake the currency because to create a bitcoin you need to break a complicated maths problem. A new challenge is set every 10 minutes, and the winner gets a brand new bitcoin as a ‘prize.’ There’s no way to fake the answer – you’re either right, or you’re not, so there’s no way to fake a bitcoin.
Openness is at the heart of both the Yap stones and cryptocurrencies. Everything is there for anyone to scrutinize, and so anyone can check if a payment comes from the rightful owner. There’s no need for trust between two people in a transaction because the system removes the possibility of fraud.
That’s it, that’s the core of cryptocurrency explained in 60 seconds. Of course, there’s a great deal more to it.