Yes, the blockchain is truly revolutionary. Yes, bitcoin is Tulipmania 2.0. Yes, cryptocurrency is a nail in the coffin of the bankster parasites. Yes, digital currency is a tool of the totalitarian tyrants. No, these statements are not contradictory. But don’t worry if you think they are. You’re just a victim of “The Bitcoin Psyop.”
So what’s the bitcoin psyop? Well, look at a headline like this:
If you immediately think “Aha! I knew it! The Fed is behind this bitcoin nonsense, after all!” then you might want to stop and contemplate this headline from two years ago:
Do you think there’s some kind of contradiction here? Or do you think that Bernanke has “flip-flopped” on the issue? Or do you suspect that Bernanke was always secretly behind bitcoin but couldn’t admit it until now?
If so, then you have fallen for an embarrassingly simple trick. That trick is to use the words “bitcoin” and “blockchain” and “cryptocurrency” and “digital currency” interchangeably, as if they are all the same thing. They are not.
Confused? Well, fear not! Our good friends at the Bank for International Settlements (BIS) have written a handy-dandy article that explains everything to you in simple, everyday language. They’ve even illustrated that article with easy-to-understand infographics!
Just kidding. Their unwieldy article on “Central Bank Cryptocurrencies” is a predictably hot mess of monetary jargon and Venn diagrams that somehow make things look even more complicatedthan they sound.
Now, to be fair, their proposed new “taxonomy of money” has real explanatory power, and the diagrams that result are genuinely insightful, but it hardly makes for light bedtime reading. So, let’s see if we can make it a little easier, shall we?
A blockchain is a cryptographically secured ledger that can be permissionless and decentralized.
The geeks in the crowd will appreciate the fact that the blockchain is a stupendously elegant solution to some incredibly complicated problems in the obscure recesses of arcane subjects like distributed computing and payment processing. But for the non-geeks, perhaps this will suffice: Some of the oldest documents ever discovered have been ledgers of one sort or another. Medical records, legal and business contracts, accounting ledgers; as long as there has been civilization, there has been the need for secure and accurate record-keeping of transactions and events. And since the birth of civilization there has only been one way to keep those records: a system where a recognized central administrator stores, secures and updates that ledger.
Until now, that is. With the advent of the blockchain, an accurate ledger can now be maintained without a single, central point where that information is stored, maintained or updated. Registrars? Notaries? You might as well be talking about farriers and chimney sweeps.
So how does it work? And what does it do?
Mike Maloney, the filmmaker behind the popular “Hidden Secrets of Money” documentary series, describes it this way:
The system that bitcoin runs on is called “blockchain.” Think of it as a modern version of an old-fashioned bookkeeping ledger, but instead of a handwritten list of entries and calculations, a blockchain is a digital list of entries and calculations. A “block” is simply a bundle of transactions. Think of a block as a whole page of transaction in the old-fashioned ledger. A blockchain is just a chain of blocks. It’s the same as a whole series of pages in the old-fashioned ledger.
Easy, huh? Here’s how it works: The Bitcoin blockchain actually exists in every one of the millions of computers on the network as exact copies of each other. However, for this example, so that we can zoom in and you can really see just how a blockchain works, I’m going to show it as one giant blockchain in the middle of a small network of computers.
Let’s follow a pizza transaction with bitcoin. When the transaction occurs it first appears on the network in a pool of unconfirmed transactions along with thousands of others from all around the world. Millions of different computers from the network then gather some of these transactions and place them in their own blocks. The computers are all creating blocks constantly in the hope that theirs will be the next one added to the official chain.
A new block is added to the chain every ten minutes or so, when one of the computers wins the right to have its block recognized as the next in the chain and is rewarded with a prize of newly created bitcoins. The way a computer wins the prize is by trying to guess the answer to an extremely difficult math problem. In fact, the problem is so difficult that even with millions of computers making guesses billions or even trillions of times per second it still takes roughly 10 minutes to find the answer. Once one of the computers guesses the correct answer and wins, all of the millions of computers on the network that did not win are instructed to throw away all the work they have done, update their ledgers with the block from the winning computer, and start again with a new math problem.
In doing so, the computers use an immense amount of power and cost a literal fortune to run. So why do they do it? Because it can be very profitable. This is where the term “mining for bitcoins” comes from. Instead of striking gold by mining for precious metals in the wilderness, these computers are hoping to strike bitcoin by mining precious numbers on the blockchain.