A plain English explanation of a Bitcoin-like “digital crypto-currency”. Older version is here.
The perfect currency
Imagine a perfect currency — a type of coin that is impossible to copy or forge, has a very well controlled supply and can be neatly split into as many denominations as you want. It comes with a special wallet that automatically verifies the authenticity of any coin you put in it and spits it out immediately if it is fake.
It is also very democratic — rather than a government putting newly printed money into circulation by spending it, everyone periodically gets a chance at winning new coins through a lottery method. The amount of new coins produced each year depends on how many people participate in the lottery. So no government or central bank arbitrarily print money and cause inflation.
Each coin has a unique fingerprint — a number. This fingerprint can be used to pay these coins remotely. All the world’s wallets are interconnected through a secure network. The wallets too, have unique fingerprint numbers. Using your wallet, you can dial someone else’s wallet number, followed by one of your coin numbers and send the coin to that person.
This currency is democratic in another way. There is no central organization, person or committee that conducts the lottery. Instead, the wallets continually play the lottery on behalf of their owners. When a wallet wins a certain amount of coin, it is imprinted right inside the wallet. When you send a coin’s fingerprint to someone, your wallet erases the fingerprint from your coin (making it worthless) and the receiver’s wallet imprints the fingerprint on a new coin blank. You cannot circumvent this system to imprint your own coins. Everyone is happy.
Zen and the Art of Software Development 