I'm writing a Bitcoin article that I hope to be published. The problem is, the intended audience is composed of non-programmers (financial/investment people mostly, and a lot of monetary freedom-oriented people), but they absolutely want to understand how it works -- otherwise they will not trust it. So I've had to simplify, simplify to get something that a smart non-programmer could understand (even if it's not 100% accurate -- the point is to "get the idea", and then I'll provide a link to the technical paper).

And please, if your feedback is "please make the explaination more complex in the following way" then that's not helpful, because I need to SIMPLIFY the explaination furthur, not make it more complex. I would like to condense and simplify the "how does bitcoin work" section to be about half its current length, so please help.

Thanks,

Bitcoin Cryptocurrency: The Future of Money

What is Bitcoin?
The first completely decentralized, anonymous, electronic currency has just been created, and its name is Bitcoin. Its creator is Satoshi Nakamoto, a libertarian computer programmer and cryptography expert. Bitcoins are digital tokens of value that can be exchanged anonymously between users across the internet or stored on disk. Bitcoin serves the purpose of not just a currency, but also of an online virtual banking system.

Although Bitcoin is not a “hard” currency in the sense that it is not directly backed by a commodity, it differs greatly from traditional government issued fiat currency and regulated banking in several important aspects:

•   Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank. There will never be more than 21 million Bitcoins in circulation, unlike fiat currency which has no limit.
•   Bitcoin transactions are anonymous whereas a wire transaction in a government run banking system requires a federally licensed financial institution to act as a middleman. This third party must report on transactions to the regulators, and so in effect all financial transactions are monitored by the government. With Bitcoin, no third party can spy on, prevent, control, or tax transactions.
•   Bitcoin accounts are private and not subject to outside inspection and therefore account monitoring or confiscation for any reason is not possible.

It is also worth pointing out that gold-backed digital currency – such as what GoldMoney offers – also differs from Bitcoin in important ways. Gold has the obvious advantage of thousands of years of historical precedent as money, as well as having a physical form that can be used in trade. However, the major disadvantage of a gold-backed currency is that it requires a central repository, which implies (1) storage fees (2) vulnerability to raids and inspections and ultimately (3) complete monitoring and control by regulators. The unfortunate fate of E-Gold is tantamount to the fact that any centralization of a currency system is vulnerable to outside monitoring, tampering or outright confiscation. Bitcoin does not have any of these risks.

How do I use Bitcoin?
My own experience using Bitcoin has been a blast, especially when compared to the slow and cumbersome nature of traditional financial institutions. To use Bitcoin, the place to start is bitcoin.org. There’s no paperwork, no identification, and no payment required to start – just download the software. After installation, you’re ready to exchange Bitcoins with your friends across the world.

The quantity of services that use Bitcoin is small but steadily growing. Notable websites thus far are bitcoinmarket.com, which allows exchange between various fiat currencies and Bitcoins, and biddingpond.com, which is an implementation of e-bay with Bitcoins. If you want a few coins to start with, go to freebitcoins.appspot.com for some initial bit-capital.

How does Bitcoin work?
Part 1: Digital Signatures
The foundation of Bitcoin lies with digital signatures, which are related to cryptography. Consider two people, Dick and Roberto. Dick wants to send Roberto messages over the internet, and Dick wants to be certain that nobody impersonates him. To accomplish this, Dick uses a pair of what are called asymmetric cryptographic keys. Asymmetric keys have the special property that a message encrypted using one key can only be decrypted using the other matching key.

Dick can publish one of his keys for everyone to see (his “public” key), and keep the other secret (his “private” key). Before sending a message to Roberto, he first encrypts the message using his private key. Although anyone can decrypt and read the message (because everyone can access his public key), everyone knows that Dick truly wrote the message because only he could have encrypted it using his private key. This is the basis for a digital signature.

Finally, it should be noted that real world digital signatures can also verify that the signed document has not been tampered with or modified since it was signed.

Part 2: Neighborly Agreement
In the world of Bitcoin, every user has a wallet which contains (1) their personal public/private key pair and (2) all transactions between all Bitcoin users. A transaction is just a record of money changing hands from one Bitcoin wallet to another: it contains the public key to identify the spender, the public key of the receiver, and the amount. Additionally, the transaction is digitally signed by the spender, proving that they agreed to the transaction.

To check your current balance, you take a look at all the transactions, and add up all the ones that have been signed over to you. You can verify this balance with all of your neighbors, since everyone knows about all transactions.

To give someone money, you simply sign a new transaction and broadcast it publicly to everyone. Everyone else will audit your transaction before they accept it to be sure you have a sufficient balance. The receiver will get confirmations from auditors as they accept the transaction. In this manner, you cannot spend money that you don’t have.

Part 3: Dealing with Dishonesty
When someone publishes a transaction to be audited by everyone else, not everyone can send confirmations to the receiver. If this were true, then it would be too easy to fool receivers if a large number of auditors were dishonest. To solve this problem, everyone who agrees with a transaction must also work together to perform a very difficult computational operation on that transaction, that when complete seals the transaction as valid.

The computational operation that must be performed on each new transaction also relates to previous old transactions, much like a stack of blocks. The tallest stack of valid, sealed transactions is regarded as “the truth”, and receivers will therefore only trust auditors with the tallest valid stack. Since it takes enormous computing power to build a valid stack, any group of dishonest users would need more computational power than all of the honest users to continue to grow and propagate a false stack of transactions.

Finally, even if a group of dishonest users managed to accumulate more processing power than all of the honest users, they would have to decide between using that power to defraud the system (thus invalidating their claim to wealth) or using it to collect legitimate transaction fees (which are earned by helping to seal transactions onto the stack). Someone who worked hard to accumulate such immense computational resources would find it more profitable to use it to earn legitimate wealth rather than destroy the currency.

Part 4: Anonymity
Previously it was mentioned that each wallet has a pair of cryptographic keys. Actually, however, each wallet can contain an indefinite amount of key pairs. Ideally one could use a new key pair for every single transaction. In this way, even though everyone has a record of all transactions, there is no way for them to (1) discover or track individual account balances and (2) discover the common source or destination of multiple transactions. To audit, the wallet owner merely needs to prove that they own enough Bitcoins for a particular new transaction, which they can do without revealing their total balance.

Conclusion
Despite the fact that Bitcoins do not exist in the physical sense, even a cursory glance can show that they do serve the primary functions that make money useful. Bitcoins provide medium of exchange (anonymous and across great distance), unit of account (completely private), divisibility (up to eight decimal places), scarcity (21 million limit), portability (can be transferred as a file), and store of value (current exchange rates put 1 Bitcoin, or BTC, equal to 0.065 USD).

Of course, it’s impossible to know if Bitcoin will continue to meet the store of value requirement. Bitcoin could lose favor new and better digital currencies are invented, it could be hacked, exchange rates could change dramatically, and so on. I believe that Bitcoin has enormous potential, but it will have to stand the test of time and the marketplace.

Even if Bitcoins turn out as a failed experiment, it still provides a glimpse into a decentralized monetary future. As distrust in central banks continue to increase as the financial crisis drags on, my expectation is that private currencies will continue to grow in popularity.

Finally, for those who claim that Bitcoin is “too virtual” – well, what about the US dollar?