How Bitcoin works – episode 1: the Bitcoin island

 

As mentioned in the introduction, Bitcoin belongs to the category of abstract token money. In its essence it is a system that records ownership of tokens called “bitcoins”. The banking system operates in a very similar way, but in most people’s minds it still records ownership of a physical token – banknotes. A 100 US dollar balance of a bank account mentally equals to an ownership of a 100 US dollar bank note, the numbers represent something tangible in the real world.

With Bitcoin the situation is different because there is no tangible asset in the real world which people could use to make a mental connection to a “bitcoin”. Since human brain is more comfortable working with concepts it can experience in reality it is useful to introduce a metaphor from the real world that would help people build a mental model. Currently the commonly used metaphor is “coins” or physical money. We would argue however, that there is a better metaphor that describes Bitcoin more accurately – specifically a register of land ownership.

The Bitcoin network functions like a fancy book of records that, instead of keeping records of ownership of real land, records ownership of abstract land with a unit of measure called “bitcoin”. In the real world a register of land ownership records who the owners of specific sizes and locations of land are. Villages, municipalities or other designated administrative units use the register to record every change in ownership as a result of trade, inheritance or appropriation of land. Bitcoin network does the same thing – it records changes of ownership.

To stretch the metaphor further, Bitcoin network is like a magical island that maintains a register of ownership of its land. All land on the island always has an owner and the size of each piece of land is expressed in units called “bitcoins”. This magical island is intelligent and can communicate with and perform certain tasks for the owners of the land.

Let’s say the Bitcoin island looks something like this:

bitcoin-island

Each square of land in the picture above represents an area of size called a “bitcoin”. What the Bitcoin island does is that it keeps a label on each piece of land that determines who its owner is:

bitcoin-square

Each piece of land carries a label with the name of its owner. Its size is measured in “bitcoins”.

The entire island then looks something like this:

island-labels

Each piece of land on the island has a designated owner

As we continue our discussion in the next episodes, we will always use the words:

Bitcoin – with capital B to refer to the magical island which keeps records of ownership of its land (it is a metaphor for the Bitcoin network)

bitcoin – with lower case b to refer to a specific size of land on the Bitcoin island, which is used as a unit of measure to express the size of each piece of land on the island (it is a metaphor for bitcoin the currency)

A lot of confusion has been caused by calling both the network and currency “Bitcoin”, as people often get confused if the discussion is about the network itself or the currency. Hopefully our metaphors started to clear things out.

The last thing we explain in the episode is the size of a “bitcoin”. It is equivalent exactly to one 21 millionth of the surface of the entire island. In other words, 21 million bitcoins would perfectly cover the entire surface of the island. In our picture we only drew 21 squares for practical reasons – it’s not possible to fit 21 million of them with labels and name tags.

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