I found myself trying to explain cryptocurrency to somebody at a party this weekend and in the process came up with the following bitcoin analogy. It’s admittedly a very simplified version of events, and the timeline is not exact, but it serves as a useful starting point for those who are entirely clueless about the technology.
In this bitcoin analogy, the cryptocurrency is like those drinks tickets that are occasionally sold at parties which don’t have an alcohol license or don’t want cash behind the bar.
2009 – 2017 bitcoin analogy
Before the party has begun, a few early people show up. The organizer explains to them his plan to sell drink tickets (bitcoins) and offers anybody with a pen and paper the opportunity to make tickets. These people are the early bitcoin ‘miners’. Any tickets that they make are theirs to keep or sell. By the time more guests arrive, they have made thousands of tickets to sell. The tickets are still very cheap because nobody has actually bought a drink with them yet and people aren’t convinced the bar will accept them. However, they are cheap enough that people buy some anyway, just in case.
A few guests are convinced that these tickets will be the only way to buy drinks at the party and they tell everyone else this. As people begin to worry that tickets will run out, they buy more. This makes tickets more valuable, and the price goes up. The bar begins accepting tickets for drinks and the price rises even further. Some wealthy guests buy lots of tickets and keep them rather than spend them. These people become very rich as the price of tickets rise, causing other people to want to do the same. This is called holding, or ‘HODLing’, and further increases the value of the tickets.
Every ticket has a unique number and each ticket sold is recorded in a central book at the ticket office. As more people arrive, more ticket offices open and they each keep an identical record of the central book. This is the ‘blockchain’. Every time a ticket is used to buy a drink it is also recorded in the book so that nobody can try to copy a ticket and use it twice. Some people start buying more pens and paper (miners) and make more tickets of their own, but it gets increasingly difficult to make tickets as the unique numbers get bigger and bigger. In bitcoin mining, this increasing difficulty is called the hash-rate.
Suddenly, one of the biggest ticket offices is robbed, and millions of tickets are stolen. People panic, worrying that their tickets will decrease in value. Some people decide to sell their remaining tickets at a loss and leave the party. The value of the tickets drops significantly. However, the remaining guests have faith that the tickets will gain value again and they stay to enjoy the party.
Over time, the increasing difficulty to make new tickets causes some enterprising guests to develop new ticketing systems. Some of the new tickets are based on the old tickets but have more space to record unique numbers so millions more of them can be made. In the real world, these are known as ‘altcoins’, for alternative coins. The new tickets begin to gain popularity, and the bar begins to accept them too. More and more people start to make their own unique types of alternative tickets and more bars pop up accepting them.
The bitcoin analogy as it is today
Suddenly there are thousands of alternative ticket makers and hundreds of different books (blockchains) recording all the different ticket transactions. Bars and shops all over the place are accepting many different types of tickets. Some tickets are well designed and built by engineers, while other tickets are simply scams designed to rob people. There are many varying types of tickets with many different uses, including anonymous tickets that can’t be tracked and secure tickets that can be used like contracts.
Entrepreneurial guests start selling tickets to fund the building of different types of bars and shops which can help serve the party. These are called ICOs. Lots of people are getting rich, and millions of new people are arriving at the party every day. Everybody is drunk now, and things begin to get out of control. More ticket stalls are robbed, and criminals find new ways to steal and duplicate tickets. There is talk of tickets being used to buy drugs and weapons.
All this commotion has drawn the attention of the clubs and bars in the surrounding towns (traditional banks). They are worried about losing out on profit and want to get involved in the big ticket party. Law enforcement is also unhappy about the level of crime at the party. They try to regulate the party by making new laws about how the tickets can be used. Some guests and ticket offices worry this will reduce the value of tickets, while others welcome the regulation because crime is getting out of control.
Over time the new laws help to reduce crime and tickets are more widely accepted. Ticket prices start to stabilize, and trust grows in the community. Many people who previously had no access to parties can join in. Tickets are used to fund projects that improve conditions for thousands of guests. Greedy conglomerates that once controlled and manipulated the world’s money now have no power at the big ticket party.
The DJ drops a beat, and everyone starts dancing. The future looks bright whichever way you look at the bitcoin analogy.
Mark Hartley is an IT specialist, freelance writer, keen traveler, and blockchain enthusiast. He has worked on the trading floors of the world’s biggest interdealer broker in London and helped integrate crypto-services into IT trading systems. When he’s not searching for the world’s most beautiful beach, he’s nose deep in any crypto and blockchain related news.