Lesson 7: How Does Bitcoin Work?
Students will be able to explain the technology that Bitcoin runs on and explore the advantages and disadvantages of Bitcoin.
Jump$tart Standard: This lesson does not align with any Jump$tart standards.
SEL Competency: Social awareness
Hook (5 min)
Slides: Review: What Is Bitcoin?
Review what Bitcoin is by sharing out the definition and then the short video.
Say: Today we are going to explore how Bitcoin works in general, along with exploring the advantages and disadvantages of the technology it runs on.
Presentation (35 min)
Slide: Blockchain Is….
Say: Blockchain is a digitally distributed, decentralized, public ledger that exists across a network. Basically, it’s a fairly new technology that allows people to make and record transactions. It is maintained by every user on the blockchain.
Being decentralized means that every user has a complete copy, so it cannot be forged or changed. Also, the blockchain can track the entire transaction history of any given item or currency, so someone can’t go into it later and say they didn’t “get” the payment. By comparison, think about a checkbook. If you send a check to someone and they say they didn’t get it, you don’t know and can’t track where it is. But if you send money via the blockchain, the transaction is recorded and sent out to everyone on the blockchain—and it cannot be changed, forged, or lost.
Slide: Blockchain Is the Technology that Bitcoin Runs On.
Say: Blockchain is the technology that Bitcoin runs on.
Slide: The Bitcoin Blockchain
Say: The Bitcoin blockchain network is simply a public ledger, or recording of who sent Bitcoin to whom. The network has to validate each transaction before it is recorded permanently in the ledger.
Slide: The Bitcoin Blockchain Process
Say: Let’s take a look at this image. Let’s say I want to send 1 bitcoin to another person. I want to send it to my friend, so I start by going to my computer. The information is recorded on a block, and the fact that I want to send 1 bitcoin to my friend is broadcast to all of the computers that also use bitcoin. One of these servers, also called a miner, goes in and verifies the transaction using cryptography—hence the name cryptocurrencies. Then the miner validates the transaction—meaning they go in and say, yes, you do have a bitcoin, and yes, you can send it to your friend. Then that information is stored on the block and can be seen by everyone.
Slide: Review of Blockchain
Say: Let’s watch this quick video to recap what we just talked about.
Slide: Review: How Does Blockchain Work? (Video is embedded in slide.)
Say: So blockchain is the technology, and Bitcoin is just the first application of the technology as a currency. Think about it this way: all money is just a ledger—or a way to transact and keep track of transactions between one person and another—and the Bitcoin blockchain is just a new way to transact, without having all of the issues of our current money system. Essentially, Bitcoin eliminates human error in a money system.
Slide: It’s Like the Internet
Say: For many people, the “how” of blockchain is very complicated, so I like to compare blockchain to the internet. No one knows exactly how the internet works; we all just know what it is and that it does work for sending really funny cat videos. I don’t know how it stores and shows me the cat video; I just know that it does.
Slide: Bitcoin Advantages/Disadvantages
Say: There are a lot of advantages to Bitcoin.
- Speed: It is a lot faster to send money via Bitcoin than it is to send money via a bank that could take 3-5 business days—and sometimes charge you a wire fee or a bounced check fee.
- There is no central authority controlling it, so there is no way to manipulate or corrupt it.
- It is uncensorable, meaning anyone can use it. A bank might not allow you to have an account without proper documentation, but with Bitcoin, anyone can access and send it.
- Unlike fiat currency and credit cards, which allow for fraud, Bitcoin and all Bitcoin transactions are stored on a public ledger or tracking system—so it cannot be counterfeited, and transactions cannot be reversed.
- Banks have complete control over blocking or freezing your account and setting limits on how much you spend or send. With Bitcoin, you have complete control. The coins are yours, and no one is loaning them out to others, like the bank does with fractional reserve lending.
- And best of all, there is a limited supply of bitcoin, which makes them more valuable than fiat currency, where the government can print as much as they want—thereby creating inflation and devaluing the money we work so hard to make.
- The government isn’t a big fan of it, because they have a harder time keeping track and controlling its flow.
- It’s not insured by the FDIC—so if you lose your bitcoin, there is no calling a credit card company and getting it back. Bitcoin holders need to be very careful to keep track of their login information and their “keys” to their bitcoins; otherwise, they can be lost forever. Yes, you can see the transactions online—but your private keys, a.k.a. the passwords you need to send and receive your bitcoins, can be lost—and once lost, they’re lost forever.
- It is fairly volatile because it is a newer technology. It is trying to find it’s real value in the market, but this makes day to day commerce difficult. For example, if I buy a coffee with bitcoin in the morning and then the value of bitcoin goes up 5% by the afternoon, that coffee becomes a heck of a lot more expensive.
- A lot of governments don’t recognize it, and many businesses don’t accept it…yet. This is changing, and these are some of the growing pains we can expect with a new technology.
Exit Ticket (5 min)
Distribute exit ticket graphic organizer/3-2-1 Reflection.