Why Was Bitcoin Created?

 What exactly is Bitcoin?

Depending on who you ask, the word “Bitcoin” can have many different definitions.

And as some start explaining what Bitcoin is, that’s when you’ll typically start hearing tech jargon spewed out.

Words like “blockchain” and “protocol”.And phrases like “peer-to-peer networks” and “distributed ledgers”.

Bitcoin Jargon

OMG! Jargon overload! ????

It’s easy to feel like you’re drowning in a sea of terms. Trying to accurately describe “Bitcoin” can get technical and complicated really fast! ????

So rather than go that route, I think a better approach is to start with the PROBLEMS that Bitcoin was trying to solve.

Once you understand that, everything will become much clearer for you and you’ll be able to grasp the technical concepts faster and follow along much more easily.

Why was Bitcoin created?

According to the Bitcoin white paper, Satoshi Nakamoto wanted to create:

“…electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.”

Translation:

“Physical cash allows me to transact directly in the REAL WORLD with another person without the need of a bank. I like this freedom. I want this same freedom ONLINE. So I need a digital version of cash or digital cash. ”

Satoshi’s answer: Bitcoin.

The concept of creating a digital version of cash that can be sent around online without a “trusted intermediary” sounds simple but before Satoshi Nakamoto created Bitcoin, all previous attempts were unsuccessful.

This had never been done before.

Let me explain why using an example.

Let’s say that Ursula the Unicorn bakes and sells cupcakes.

Ursula the Baker

These cupcakes are special. They sing. They’re waterproof.

They are singing waterproof cupcakes!

Singing Waterproof Cupcake

And each cupcake only cost $1. With air delivery, via unicorn, included for free.

Molly the Mermaid wants to buy one cupcake from Ursula.

So they meet up and transact with cold hard cash.

Cash Transaction

Here’s what happens:

Molly gives the $1 bill to Ursula.

The $1 bill is now physically owned by Ursula.

Ursula trusts that the $1 bill is unique and real.

The $1 bill is unique and real because it can be verified since it’s issued by a central bank.

Due to these properties, the $1 bill is used as a medium of exchange…meaning other people are willing to exchange the $1 bill for stuff (“goods and services”) they want.

Ursula gives the cupcake to Molly.

Now let’s say that Molly is soooo far away that the distance would be even way too far for even Ursula to fly and deliver the cupcake herself. She’ll have to ship it via an air courier service like FedEx or UPS.

Ursula wants Molly to send payment first….online.

But how will Molly handle payment?

How can Molly send cash over the internet?

Digitize cash

There lies the problem with cash.

Cash is money in the PHYSICAL form of currency, such as paper banknotes (dollah dollah billz yo!) and metal coins.

But we have a problem….

You can’t send physical cash over the internet!

Buyers and sellers have to be physically present at the same location in order to transact in cash, which isn’t always possible.

Face-to-Face Cash Transaction

Since cash is physical, how do you transfer it online?

By digitizing it…by making it digital.

But if it’s digital, that means it can be easily reproduced (digital counterfeit).

So how do you prevent people from spending their digital money twice (or more)?

So that’s one problem.

There’s another problem.

Molly wants to use cash because she already has some in her wallet. But if she wants to send cash electronically (in digital form), now she has to rely on a financial institution like a bank.

But what if Molly didn’t have an account with a bank? Sorry Molly, no cupcakes for you then.

Fortunately, in this story, Molly does have a bank account.

But when we’re dependent on such financial institutions, this poses a threat or risk.

For example, let’s say the greedy sharks who run the bank love cookies and hate cupcakes.

Shark Banker

So the bank, not being a fan of cupcakes, may abuse its power and decide to block Molly’s transaction. The bank will not allow any transactions related to cupcakes!

Say what?! Heartless I tell you!

Or the bank may charge extra fees for non-local transactions.

Or even worse, the bank sees unicorns as evil, along with anybody who does business with unicorns as automatically evil also.

So even though Molly is a mermaid, she’s seen as “evil” because she’s trying to buy cupcakes from a unicorn!

As a result, the bank may freeze Molly’s account and now Molly can’t even access her money. Molly the Mermaid is locked out!

The bank is holding Molly’s money hostage. The bank is the single entity in control of all of her money. Since there is a single entity in charge, this is considered centralized.

“Centralized” means one point or source of control.

Bank Censorship

Molly just wants her cupcake and is frustrated.

“If I were able to use cash, I wouldn’t have to go through my bank! Gosh, darn it! This sucks!”

“I wish a digital form of cash existed.”

“That I’m in total control of.”

“I want to be able to use this digital form of cash just like the cold hard cash in my tail where I can spend it however I want with whoever I want without needing the approval of any person, company, or institution.”

So Molly basically wants two big things:

Digital money that can be used online like cash….

That is decentralized.

Decentralization is the exact opposite of centralization. With decentralization, there is not one single entity in charge.

Decentralized is where control and decision-making is shared among participants.

In terms of money, “decentralization” means that you don’t have to go through an intermediary like a bank or other financial institution.

This would give you the freedom to spend digital money any way you please without the risk of your transactions being blocked or your money being frozen or taken away from you.

Molly wants decentralized digital cash.

But this is actually extremely difficult to accomplish!

Let’s learn why…