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A Simple Bitcoin Analogy

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This is a simplified analogy that can be used to introduce someone to Bitcoin and how it works.

Imagine there are a group of lockers in a public place. Each locker has the following:

  • A lock that requires a key
  • A window to see inside
  • A slot that money can be put in
  • An identifying number

A group of these lockers might look like this1:

Lockers with Windows

These lockers are secure. The windows are unbreakable, the locks cannot be picked, the metal cannot be cut, and the entire group is bolted to the ground. Furthermore, there is only one copy of the key, and it is in possession of that locker’s owner; Nobody else is able to get inside without that key.

Each locker is free of charge. A person may claim any unused locker, upon which they get the only copy of the key. A person may have as many lockers as they choose; there is no shortage of lockers. People use “wallets” (which are more like keychains in this case) to keep track of all the lockers they own and their associated keys. If anyone loses their wallet, they lose the ability to open any of their lockers, and that money is inaccessible forever.

Because the group of lockers is in a public place, and each locker has a window, anyone is able to see how much money is in each locker. They can see the identifying numbers on the locker, but they do not know who the owner of the locker is.

This group of lockers represents the Blockchain, and the contents of each locker represent Bitcoins.

Alice is selling a chair that Bob wants to buy. Bob calls up Alice to make a deal:

Bob: I’d like to buy the chair you are selling. How much do you want for it?
Alice: I’ll give it to you for 0.2 Bitcoins
Bob: Sounds great! Which locker number is yours?

Alice goes to the group of lockers, sees that #412 is unclaimed, and claims it. She heads home with the key.

Alice: Put the money in locker 412 please!

Bob goes to the lockers, finds #412 and peeks inside. He can see that it is empty. Bob goes to his locker (#387), pulls out some money, and sticks it in the slot on locker #412. He then goes back home.

Bob: I put the money in your locker!

Alice goes to the lockers and checks the contents of locker #412 through the window. She sees the 0.2 Bitcoins sitting there. Since Bob is the only person she told about #412, the money must have come from him.

Alice: I just checked, and I see the money in my locker. Here is your chair!

The entire transaction was done without Alice and Bob ever needing to meet in person. No banks were involved in the transaction, there were no processing delays, there were no fees. Bob is unable to issue a “chargeback” to void his transaction; the money is already in Alice’s locker, and only she can get it back out. Furthermore, anyone checking the contents of the lockers by peeking through the windows could only tell that a transaction was made; they are unable to discover who was involved.

This is the basic premise of Bitcoin. Learn more about Bitcoin here.

This analogy was not my idea, I am paraphrasing Henry Romp2.