It took a while for me to get a complete picture of how bitcoins change hands. It is completely unlike the way we deal our money, cash – digital or otherwise. In our day-to-day life, if somebody pays us, say in currency notes, we carry that with us, in our wallet. The currency note changes hands as well as physical location. If it is in your wallet, then it’s yours.
On the other hand, if somebody transfers money from her bank to your bank, credit entry in the ledger of your bank account is made indicating you have received, and debit entry is made in senders account. Again, notionally, the money has changed its location. Account and debit & credit entries (i.e. a balance ledger) indicate the owner.
This is how we understand when somebody says, ‘I gave x amount of money to him’.
This is not how it works in the world of Bitcoins. Of course, since there is no printed Bitcoin currency, so you cannot carry that in your wallet. There are no accounts, either, to which somebody can transfer some Bitcoins. Then how does it work? Let me attempt to explain the way I understood it.
Let’s say we lived in a medieval tribe called Blockchainians, where there are no Kings and Governments. Blockchainians are a group of people who have axes to cut trees and know a great deal of mathematics. Group together says, anybody can go to the jungle and clear up the jungle. Whoever clears up the jungle, he will own that that area of jungle (clearing of jungle is akin to mining and owning cleared area is like getting Bitcoins). Let’s call that cleared up areas of jungle as Bitland. Whoever owns the Bitland, he can trade full or part of Bitland with others in the group.
Now Bitland is not something a buyer can put in a bag, take it with him. Land will remain there where it is. What changes is only the title or ownership of Bitland or part of Bitland.
Lets Mr. A has cleared a piece of Bitland. He wants to sell/barter it to Mr. B. Mr. B wants to purchase Bitland. Since most people in tribe have same/similar names, Mr. B creates a number, a special number as following –
04ce875702b93398d29b2bf5af7878dd86130cca4f1a53143b82af53c02089e2d56609a16e08a1cd7a68e355a5d893f22f90d30d4ecb25f6d1afeebc0917d3d01
It’s a long hexadecimal number. We will discuss speciality of this number in Part-2.
Mr. B asks Mr. A to change the ownership to the special number above. This is an accepted practice in the tribe Blockchainians. Mr. A having received the price in horses/grains, he etches the number in stone and embeds the stone in the Bitland piece, thus changing the ownership to Mr. B.
After a few years, Mr. E from a nearby tribe wants to purchase Bitland. He is approached by Mr. B and says he’s willing to sell his Bitland. On the same day, Mr. E is approached by another Mr. D claiming to be the owner of the same Bitland, and he offers a better price. Now Mr E is in a real fix.
How does is he know who is the real owner? How can he verify the ownership? There is no central authority which keeps records of ownership. Community collectively verify and agree upon the ownership. How do they verify it? It’s just a number on an embedded stone on the plot.
This is where their special skills in mathematics come to rescue. We will see that in next part.
Takeaway: Bitcoins are not like our currency notes. They are much like land property. In fact, many dislike calling Bitocin a ‘Digital Currency‘, they prefer calling them ‘Digital Asset‘.
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