At a very basic level, Bitcoin is just a digital file or ledger that contains names and balances, and people exchange money by changing this file. When Bob sells Carol a lawn mower for 5.2 Bitcoins, Bob’s balance goes up by 5.2, and Carol’s down by 5.2. There’s no gold or government issued money backing these numbers. Bob is only willing to trade his real-life lawn mower for a higher number in this digital file because he has faith that other people will also trust the system.
So who maintains this ledger and makes sure no one cheats? One goal of Bitcoin is to avoid any centralized control, so every participant maintains their own copy of the ledger. One surprising consequence of this is that everyone can see everyone else’s balances, although the real system only uses account numbers and not names, so there’s some level of anonymity.
If everyone maintains their own ledger, how are all the ledgers kept in sync as money is transferred? At a basic level, when you want to send money, you simply tell everyone else by broadcasting a message with your account number, the receiver’s, and the amount. Everyone across the entire world then updates their ledger.
As a quick aside, I’m describing how Bitcoin works for power users--people who help maintain the system. You can also just use the system to send a receive money, however, without maintaining a ledger.
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