I tried to break it down to someone yesterday. It went like this: BitCoin is a digital Internet currency. Think of it as an counterfeit-proof electronic dollar which is not manipulated by a central authority such as the Federal Reserve. It’s a basis of trade for goods, just as any other currency. Value is based on scarcity, and new BitCoins are only minted at a predictable rate once a Block is solved…
The BitCoin currency is a peer-to-peer solution for the problems which are seen in any system of currency. Every BitCoin transaction is recorded in a public ledger, which is found at Block Explorer. Each transaction is hashed into a block, the specifics of which I don’t want to get into, but are explained in the original paper Bitcoin: A Peer-to-Peer Electronic Cash System by BitCoin creator Satoshi Nakamoto. After the solution to the block is found, it is replicated throughout the peer-to-peer network, and all transactions are then verified by the BitCoin client software, which I might add is open-source. Any attempts at forging a block are rejected by the network as invalid. It is by solving a block which rewards the solver with 50 BitCoins which further propagates the BitCoin economy.
Which brings me to mining. To solve the block, a value must be solved through mathematic computation of the block. I’m not a math guy, so I couldn’t functionally explain this part, except that there are more intelligent folks which set this up. So, we use our processor power to search for the solution. As the complexity of the solution has risen to adjust the fixed rate of BitCoin dispersal, a CPU is no longer sufficient to solve a block in a reasonable amount of time. At the time of this writing, the current difficulty factor is 567385. So, if your CPU could perform at a rate of 4,000,000 hashes per second, it would take you over 19 years to solve a block, not factoring in the eventual rise of the difficulty. This, we use accelerated parallel processing, which involves harnessing the computational power of a graphics processing unit, or GPU (Why?). It’s optimal to hash on AMD cards, which is explained here. So, if I use my computer to generate BitCoins (by further supporting the BitCoin economy by verifying transactions), I am Mining BitCoins.
Take a quick look a BitCoin Part 1, a brief look and its volatile history. I ran through a couple questions that typically come up in BitCoin for the Masses, cause everyone will ask how anonymous BitCoin actually is, or how exactly do bitcoins have any value.