Decrypting Bitcoin - The Blockchain Technology Explained
What are cryptocurrencies? How do they work? How do you get them? Where can you use them? And what makes them safer, faster, and often cheaper to use than cash or credit?
Your host for this video 5th Quill Studios co-founder Randy Clemens answers these questions and more, walking you through an in-depth overview of this paradigm shift in money. You will see how Bitcoin is already benefitting millions of users across the globe and you will learn how you can be one of them.
TRANSCRIPT
[NEWS SNIPPETS BEGIN]
What is Bitcoin? It seems to be gaining momentum day-by-day. New online currency for the world. Now it's gone all the way down to $91. A lot of volatilities. Bitcoin and other cryptocurrencies have earned quite a bit of attention over the past few years. Bitcoin at Mt. Gox broke into four digits. Many call them the future of money but a majority of people don't really know much about them. As the Bitcoin traded as low as a $109 before its (inaudible 00:00:55) came to a climax. What are cryptocurrencies? How did they work? We will be being paid in Bitcoin like we can be paid in Euro. How do you get them? Where can you use them? And what makes them safer, faster, and often cheaper to use than cash or credit? Architecture that Bitcoin represents is of enormous computer science interest.
[NEWS SNIPPETS END]
My name is Randy Clemens and I'll be your host, answering these questions and many more walking you through an in-depth overview of this paradigm shift in money. You'll see how it's already benefiting millions of users across the globe and you'll learn how you can be one of them. Join me as I decrypt Bitcoin from its enigmatic beginnings in late 2008 to a look at its promising future. I'll also explore the breakthrough technology underneath it, the blockchain and how it can change more than just our relationship with money. It can transform our societies, our governments, our businesses and possibly our every interaction. But first, some chocolate.
What you just witnessed was a Bitcoin transaction here at my favorite chocolate shop. Just a few taps on our phone screens and the funds were transferred nearly instantly without any bank or credit card company taking a cut. A little over a year ago, I didn’t know a single thing about Bitcoin. I'd heard of it but that was where my familiarity with it ended. Then in April, 2015, I moved across the country from Southern California to New Hampshire to be part of the Free State Project. A group of over 20,000 pro-liberty activists moving to New Hampshire to create a truly free society with minimal government. It was here that I first saw Bitcoin being used. And I quickly got a deep interest in understanding how it worked.
I had tons of questions. But as I learned more I began to see that Bitcoin was more than just a convenient way to send money to anyone anywhere. It also reduces the cost and friction of international commerce and presents a viable alternative to the world's troubled currency markets.
The idea for Bitcoin and its underlying blockchain technology were published in October, 2008 by an anonymous user or group of users under the pseudonym Satoshi Nakamoto.
Just a few short months after Nakamoto proposed the Bitcoin network, he officially launched it, releasing an open source Bitcoin software client and mining the first block of Bitcoins called the Genesis Block on January 3rd, 2009. By the very next year, Bitcoin grew to be the world's top performing currency, a feat it would repeat in 2011, '12, '13 and '15. Today, there is more than $10 billion worth of Bitcoin in circulation and millions of Bitcoin transactions occur each day. Digital electronic money transfers have been around for decades, but what sets Bitcoin apart is that it is completely decentralized. No single person or institution controls the Bitcoin network. And its structure, money supply and transaction record cannot be manipulated by any bank, government, organization, or rouge bad actor. We're going to get into the technical side of how it all works in just a minute. But first, I think it’s important to cover a few more of the reasons why people are using Bitcoin and what excites me most about it.
Bitcoin's benefits are being realized on a macro-global scale. The estimated 4 billion people on earth who currently don't have reliable access to banks can now plug into the global financial network with nothing more than a cellphone that can send text messages. With Bitcoin, you are your own bank. There is no third party holding your funds. No monthly account charges, no over drafts, no convenience fees tag on simply for spending or transferring your funds. Fees for Bitcoin transactions typically range from free to just a few cents and any amount can be sent to anyone, anywhere in just a matter of seconds. And the best part is that your bank is always open.
These low to no fee transactions are already disrupting several markets. Some of the largest relief will be for remittance payments. That's money sent home by people working in other countries. This is a huge economy with an estimated $580 billion flowing to families in developing countries. That's more than three times the size of any official government development assistance, by the way. Banks and companies like Western Union take an average of 9% of that. Though it can reach as high as a whopping 16% for something Bitcoin does essentially for free.
And Bitcoin is becoming more widely accepted on the local micro level as well. There are numerous large online retailers and a growing number of savvy brick-and-mortar businesses across the world that are jumping on the bandwagon. Tools like Bitcoin debit cards now let people spend their cryptocoins anywhere that credit cards are accepted and several third-party tools have popped up that help Bitcoin users actually save money on their Amazon orders or on gift cards for places like Starbucks and Target.
Bitcoin mixes the digital ease of credit card payments with the privacy of a cash sale. With credit cards, you hand over your sensitive private data and account number every single time you buy something. Credit card and bank data centers are constantly warding off cyber attackers at great cost. Though they've been less than successful.
In 2015, hackers made off with 80 million names, Social Security numbers and other sensitive data from medical insurance giant Anthem Blue Cross. In 2014, a breach at JP Morgan Chase compromised the data of seven million small businesses and 76 million households. 70 million records from Target in 2013. 56 million from Home Depot in 2014. 77 million records from Sony's PlayStation network in 2011. The list goes on and on and on.
With a decentralized network like Bitcoin, there is no single point to attack. No stored private data to steal and you don't have to trust any third party to store your funds or information. You are your own bank.
There are plenty more reasons why people are using Bitcoin and we'll cover a few more in this video. But now, I'd like to shift focus and take a look at how Bitcoin works. Now we're about to get somewhat technical for a minute because it's very important to talk about how this all functions. But rest assured, just as you don't need to understand the Federal Reserve or economics to spend a dollar, please know that you don't have to understand any of this to use Bitcoin. We're explaining it if only because it's fascinating and it all happens systematically behind the scenes. Let's take a look under the hood.
Using my Bitcoin wallet, I scan the QR code that Dancing Lion Chocolates presented to me. This began the first stage of the transaction which you can think of like a pre-authorization charge on a credit card. My wallet broadcast a message to the Bitcoin network, thousands of independent computers called nodes that are located across the world. Rather than having one central party control a private ledger each note on the Bitcoin network maintains its own copy of the blockchain, a distributed public ledger, which some have called the biggest thing since the internet.
Transactions in the physical world and the digital world rely on ledgers for accurate record keeping. Think of ledgers as the behind the scenes balance sheets that help keep track of the world's assets. And that doesn't just mean your money, your car registration, your house deed, the terms of your cell phone contracts. These are all stored in ledgers. At its essence, the blockchain keeps track of every Bitcoin transaction that's ever taken place and it enables what is called distributed consensus.
Each node on the network can mathematically verify that the ledger is accurate and has not been altered. And each node can see that the copy of the blockchain they are using matches the blockchain data that other independent nodes are using.
There is no central party controlling the ledger. It only gets updated by the consensus of nodes around the world. This is why Economist magazine dubbed the blockchain, The Trust Machine. To pre-authorize transaction, my wallet sends a message to the Bitcoin network with three things. My wallet address, the amount of Bitcoin to be sent and the recipient's address. The blockchain ledger is then checked to verify that I am the owner of the account and that I have these funds available. Verifying that there are enough funds in any account is easy enough. Again, the blockchain is a public ledger. So anyone can view how much Bitcoin is in any address at any time. So everyone knows exactly how much money everyone else has? Not quite.
Bitcoin addresses are long strings of numbers and letters. No names or personal data are revealed in these transactions which helps ensure relative privacy even with the complete transparency that a blockchain provides. But to verify that I am, in fact, the owner of these funds and to prevent others from using them by simply typing in my addresses as their own, Nakamoto built in a private key function that serves as a digital signature. Think of this like signing a check or a credit card receipt or entering a pin for a debit card transaction. Only exponentially more secure.
Each Bitcoin address has its own private key, which is a very long string of random letters and numbers that only the wallet owner knows. Think of it as a super password.
Bitcoin was created to remove the need for trust between parties. And it did this with an elegant solution called cryptographic proof. Each digital signature is built around something called a cryptographic hash. An algorithm that takes any amount of data from of simple sentence to a full on novel and mathematically encodes it, turning it into an unpredictable fixed length sequence of numbers and letters. Even the smallest changes to the input makes the output hash drastically different. The beauty of cryptographic hashing is that this is a one-way function. Computers are not yet smart enough to predict these hashes or reverse-engineer them, which makes cryptographic hashing a secure way to prove that you know something without revealing what you know.
So when my transaction was sent to the network, my public key along with the transaction details gets hashed in a way that the receiver and network can verify that I am the owner of that private key without actually having to reveal my private key to the recipient or any third-party. The buyer needn’t worry that their account will be hacked or frozen, that their sensitive personal data will be stolen or that their shopping habits will be tracked. And the seller needn't trust the funds won't arrive, that a check won't clear or that there will be a charge back. Again, no trust is needed. It's all mathematically proven. Anyone who tried to create a bogus transaction would quickly be forded. Without knowing my private key, their hash digital signature would not match mine which would cause their attempt to get rejected by the network and fail.
And this pre-authorization stage takes only a few seconds or less. Once the nodes have confirmed that I am the owner of the account and that I have the funds necessary the transaction moves on to a group of users called miners, who ultimately confirm and finalize every exchange. The miners around the world are constantly collecting groups of these new pending transactions, organizing them into new candidate blocks to confirm and add to the blockchain ledger with each block built upon the last.
But how do so many participants agree on what block comes next? Mining solves the crucial task of reaching consensus among numerous parties by using a lottery system called proof of work that has miners competing to be the first to solve very complex mathematical puzzles.
To assemble a new block, a miner gathers a number of pending transactions and puts them through a series of cryptographic hashes. But since outputs from a hash are impossible to predict, miners are essentially engaged in a guessing game. Imagine you had a mining computer running at home and it was trying to include my transaction in the newest block. Your miner would take the digital signature from the last confirmed block on the blockchain and hash it with a collection of pending transactions and several other pieces of information.
Bitcoin is designed so that it takes about 10 minutes for a miner on the network to find a solution and create a new block. And to maintain this rate, the difficulty of finding the right answer automatically adjusts approximately every two weeks. When a block has been mined and confirmed, it also generates a difficulty target for the next block. At that point your miner and every other mining computer on the network is in a race to assemble a block that yields a hash value lower than the target number generated from the previous block. These targets are complex hexadecimal numbers with a long string of leading zeros.
Let's say this was the target number from the previous block after assembling your candidate block your computer begins hashing all the transaction data with another input. A random number called a nonce. To try to find an output that is lower than that target. And again, because the outputs from hashing are impossible to predict it takes a heck of a lot of guesses to find a nonce that yields a winning hash. Currently the entire Bitcoin network collectively makes about 1.5 quintillion guesses per second. That's 1.5 times 10 to the 18th power or 1.5 billion guesses per second and yet it still takes 10 minutes for the network to find one nonce networks. Once a nonce is found that produces a hash lower than the target, the successful miner broadcasts its answer to the network as a new block.
This is the proof of work, essentially showing that there was a significant amount of computing effort behind finding that solution. And while it may have taken significant effort to find it, once the solution has been found it is very fast for other miners to plug in the nonce, check the math, verify the block and begin trying to win the next one. That process repeats, utilizing the hash output from the previous block as part of a hash input for each new block stringing them all together in a chain of blocks that can be easily followed all the way back to Satoshi Nakamoto's Genesis Block. All nodes agree that the math adds up for each and every block. And because of that consensus, users have trust that the system functions as promised which is part of what gives Bitcoin its value.
The beauty of this system is that the record book cannot be altered. Any attempt to alter a transaction already in the blockchain would require not only the rehashing of the block containing that transaction, but all other subsequent blocks as well. Depending on how deep in the chain the transaction is, it could take a single attacker weeks, months, or even years to rehash the rest of the blockchain. And even if this were to happen, the rest of the network would still be adding new blocks onto the main chain faster than the attacker could possibly add incoming blocks to his fraudulent chain. And this attempt would be rejected.
Mining and this proof of work concept are what keep the Bitcoin network secure. And it eats up quite a bit of computing power and electricity as a result. To reward miners for participating and investing in the accuracy of the network, a miner is rewarded with a certain number of Bitcoin, currently twelve and a half though this will change over time as well as any transaction fees included by the senders. That reward is also how new Bitcoin is introduced to the network. Unlike central banks and governments that can print more money anytime they wish for any reason, there will only ever be 21 million Bitcoins released. According to a set formula that should see the last Bitcoin mined sometime around the year 2140. At that point miners will rely solely on transaction fees to incentivize their computing work.
Amazing, isn't it? We made it through the technical part. And I want to point out again that all of this is automatic and behind the scenes. To the buyer and seller, it's just a few clicks or taps on a computer or phone and you're good to go. Now that we've explained how it works, let's take a minute to discuss how people actually get Bitcoin. Yes, mining is one way. It was not really considered cost effective to get started mining at this point without significant investment and very low electricity rates.
There are plenty of easier ways to get Bitcoin, thankfully. Bitcoin ATMs like this one here in Manchester aren't exactly everywhere like traditional ATMs. But they're popping up in more and more places. New stands in several countries like Canada and Australia now offer customers the ability to buy Bitcoin over the counter. For many, the simplest way to get Bitcoin is to just find someone in their area who uses it. There are currently close to 900 local Bitcoin groups around the globe on meetup.com and a website called LocalBitcoins.com connects people around the world allowing them to trade traditional currency or other items like Amazon gift cards for Bitcoin, online or in person.
Several free wallet apps like Coinbase, AirBitz and mycelium allow users to purchase Bitcoin using a debit card or bank transfer. Perhaps you're someone who sells products online or owns a business or maybe you've got a blog or media channel that you'd like to monetize. Accepting Bitcoin as payment is extremely easy to set up. In fact, one of the world's largest e-commerce platforms, Shopify.com, has helped thousands of entrepreneurs, crafters, freelancers and other merchants to take Bitcoin all with just a few simple clicks. There are also online exchanges where people can buy and sell Bitcoin as the price fluctuates. Just as the values of traditional world currencies rise and fall so do the values of digital currencies. And these exchanges allow users to speculate on price changes just like a stock market. Complete with short selling, margin trading, lending and more.
And this brings up an important point. I've talked a lot about Bitcoin being safe and secure. But several Bitcoin exchanges have seen security breaches in the last few years. Namely, Mt. Gox and Bitfenix. These heists are like a digital bank robbery in that when you store your funds with someone else there is a chance you can lose them. You were only your own bank when you hold your own Bitcoin. When you store your coins with a third party like an exchange, they control the private keys. And if you don't control the keys, you don't have the Bitcoin. You essentially just have an IOU. I definitely recommend reading up on additional security measures if you're looking to hold or trade any amount of Bitcoin that you wouldn't feel safe carrying around if it were cash in your pocket.
Once you've got some Bitcoin, there are plenty of places where you can spend it. And there are a few neat services that actually stretch your spending power that I want to tell you about as well.
Over a million items are available at discount retailer overstock.com. Got a travel bug? Expedia is ready to book your dream trip with Bitcoin. Microsoft users can buy apps for Windows phones as well as movies, videos and video games for Xbox one. Steam, the massively popular video game platform with a 125 million users, announced in April, 2016 that they too were accepting Bitcoin. Software and hardware vendors like TigerDirect, Dell and Newegg are a few of the other bigger names. And several third-party services such as gyft.com and purse.io allow people to purchase gift cards for all kinds of stores like Amazon and Target using Bitcoin often at a discount.
Critics of Bitcoin like to argue that Bitcoin isn't real because its digital.
- KRUGMAN: In Bitcoin, which is -- there's nothing in the end. It's supposed to be purely self-fulfilling prophecy. Purely levitating on itself.
- CLEMENRS: A funny fact, since most of the money that you and I use is actually digital.
- KRUGMAN: I mean if you if you're looking for the idea that a currency doesn't really have to be something physical. It could be something that is virtual. That's the system we already have.
- CLEMENTS: Economist estimate that only 8% of the world's money supply exists as physical bills and coins. Despite the fact that some government money exists as tangible paper and metal, it isn't actually backed by gold or any other material. Only trust. We trust that dollars will be valuable tomorrow, so we accept payment in dollars today.
But what is driving that trust? The United States Federal government is more than 19 trillion dollars in debt with no payment plan or solution in sight. Just keep paying interest. And the Federal Reserve has been around for just over a century, tasked with only one job, to preserve and protect the value of that US dollar. Yet in that time its value has fallen more than 95%. 95%? You had one job Federal Reserve. This Federal Reserve, a private organization run by appointees, not elected officials, mind you, can increase the money supply with the push of a button. However, they see fit. Even printing trillions of dollars to bail out their elite banker friends and devaluing every single one of your dollars in the process.
This kind of centralized control over the money supply and the ability to manipulate the market simply cannot exist with Bitcoin. Now while I'd love to go deeper into the tremendous corruption behind the Federal Reserve System and currency markets worldwide, it's a huge topic. It's a little outside the purview of this video. So we've added some links and resources on our website if you'd like to learn more.
One of the other added benefits that I'd like to mention is the ability to send micropayments, small amounts like a few pennies or fractions of a cent as the advertising industry continues to die slowly, clogging your browser with windows with more clutter and spyware to support the free content. Micro payments could allow people to access the content they want without being subjected to invasive ads or needing to sign up for a full and limited subscription to all of the sites content.
As you can undoubtedly see by now, Bitcoin and its underlying blockchain are already transforming how the world thinks about and uses money. But outside of money, there are methods being developed where Bitcoin and its blockchain could be used to execute contracts, transfer ownership of other assets like stocks, a car or even a house.
Blockchain technology is also being utilized by other revolutionary projects like Ethereum, a world computer that will take decentralization even further allowing entrepreneurs to create businesses that essentially run themselves. Imagine a computer performing many of the functions of companies like Airbnb, Amazon, Dropbox, Kickstarter or Uber minus the middlemen and bloated bureaucracies that siphon off a large portion of each sale. Imagine self-driving cars that rent themselves out and earn money for the car's owner when they're not using it. Drones that deliver mail and packages on their own. Proof of origin and the end of counterfeiting. Elections that can't be rigged. Blockchains can allow all of this and more.
Exciting times to be sure. Don't worry if you didn't catch all of this or weren't able to understand it all. It's an extremely complex topic that is still changing minute by minute. But the beauty of Bitcoin is how elegantly all of these complexities are essentially invisible to the user. Sending a Bitcoin to a person standing right in front of me is just as easy as sending it halfway around the world. All it takes is a few simple clicks and voila, you are your own bank.
If you'd like to learn more and access more Bitcoin resources, please check out our website, 5thQuill.com/Bitcoin. And if you'd like to make a donation to support our work and future videos, we of course welcome any and all donations to the Bitcoin address you see on your screen. Thanks so much for watching. My name is Randy Clemens and I love Bitcoin. Change the money, change the world.
(END OF AUDIO)