The Innovation of Bitcoin: How Does It Really Work?

Exchange of goods and services happens every day around the world. Here are two scenarios in which it may occur.

1. The Middleman

I have an orange, and you want my orange. We agree that you can have my orange if you wash my car. You wash my car, and I give my orange to a stranger along with a dollar bill. That stranger hands the orange to you and keeps the dollar. You have been paid your one orange and the stranger has been paid a dollar for being the middleman in our transaction. This is how most of our monetary transactions cur rently happen.

2. Peer Exchange

I have an orange, and you want my orange. We agree that you can have my orange if you wash my car. You wash my car, and I give you the orange. No one has witnessed the transaction but the two of us, but we know I had an orange and gave it to you. No third party was involved, and we both got what we wanted: a sweet juicy orange and a clean car.

Crypto-Currency

This is the theory behind Bitcoin and other "crypto-currency," or electronic money exchange systems. You and I can make exchanges without the need of assistance (and fees) from third parties. The inventor of the Bitcoin system, an unknown person going under the alias of Satoshi Nakamoto, created a peer-to-peer open source software system in 2009 in which regular people could exchange money without the need of [...]