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, quicker, and often cheaper to use than cash or credit?
Your host for this movie 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.
[NEWS SNIPPETS BEGIN]
What is Bitcoin? It seems to be gaining momentum day-by-day. Fresh 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 fairly 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 indeed know much about them. As the Bitcoin traded as low as a $109 before its (inaudible 00:00:55) came to a orgasm. 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, swifter, 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 two thousand eight to a look at its promising future. I’ll also explore the breakthrough technology underneath it, the blockchain and how it can switch more than just our relationship with money. It can convert our societies, our governments, our businesses and possibly our every interaction. But very first, some chocolate.
What you just witnessed was a Bitcoin transaction here at my dearest chocolate shop. Just a few taps on our phone screens and the funds were transferred almost 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 Fresh Hampshire to be part of the Free State Project. A group of over 20,000 pro-liberty activists moving to Fresh Hampshire to create a truly free society with minimal government. It was here that I very first spotted 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, two thousand eight by an anonymous user or group of users under the pseudonym Satoshi Nakamoto.
Just a few brief months after Nakamoto proposed the Bitcoin network, he officially launched it, releasing an open source Bitcoin software client and mining the very 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 $Ten 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 downright 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 very first, I think it’s significant 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 four billion people on earth who presently don’t have reliable access to banks can now ass-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 ease will be for remittance payments. That’s money sent home by people working in other countries. This is a big 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. However 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 leaping on the bandwagon. Implements like Bitcoin debit cards now let people spend their cryptocoins anywhere that credit cards are accepted and several third-party contraptions have popped up that help Bitcoin users actually save money on their Amazon orders or on bounty 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 mitt over your sensitive private data and account number every single time you buy something. Credit card and bank data centers are permanently warding off cyber attackers at good cost. Tho’ they’ve been less than successful.
In 2015, hackers made off with eighty million names, Social Security numbers and other sensitive data from medical insurance giant Anthem Blue Cross. In 2014, a breach at JP Morgan Pursue compromised the data of seven million puny businesses and seventy six million households. Seventy million records from Target in 2013. Fifty six million from Home Depot in 2014. Seventy seven 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 slew more reasons why people are using Bitcoin and we’ll cover a few more in this movie. But now, I’d like to shift concentrate and take a look at how Bitcoin works. Now we’re about to get somewhat technical for a minute because it’s very significant 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 fetish mask.
Using my Bitcoin wallet, I scan the QR code that Dancing Lion Chocolates introduced to me. This began the very 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 knots 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 fattest 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 knot on the network can mathematically verify that the ledger is accurate and has not been altered. And each knot can see that the copy of the blockchain they are using matches the blockchain data that other independent knots are using.
There is no central party controlling the ledger. It only gets updated by the consensus of knots 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 proprietor of the account and that I have these funds available. Verifying that there are enough funds in any account is effortless 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 fairly.
Bitcoin addresses are long strings of numbers and letters. No names or private data are exposed in these transactions which helps ensure relative privacy even with the accomplish transparency that a blockchain provides. But to verify that I am, in fact, the proprietor 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 coming in 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 proprietor knows. Think of it as a super password.
Bitcoin was created to liquidate the need for trust inbetween 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 elementary sentence to a utter on novel and mathematically encodes it, turning it into an unpredictable motionless length sequence of numbers and letters. Even the smallest switches 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 clever enough to predict these hashes or reverse-engineer them, which makes cryptographic hashing a secure way to prove that you know something without exposing 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 holder of that private key without actually having to expose 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 private 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 attempted 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 knots have confirmed that I am the holder 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 permanently collecting groups of these fresh pending transactions, organizing them into fresh 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 rivaling to be the very first to solve very elaborate mathematical puzzles.
To assemble a fresh 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 unlikely to predict, miners are essentially engaged in a guessing game. Imagine you had a mining computer running at home and it was attempting 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 lumps of information.
Bitcoin is designed so that it takes about ten minutes for a miner on the network to find a solution and create a fresh block. And to maintain this rate, the difficulty of finding the right response 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 elaborate 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 starts hashing all the transaction data with another input. A random number called a nonce. To attempt to find an output that is lower than that target. And again, because the outputs from hashing are unlikely to predict it takes a heck of a lot of guesses to find a nonce that yields a winning hash. Presently the entire Bitcoin network collectively makes about 1.Five quintillion guesses per 2nd. That’s 1.Five times ten to the 18th power or 1.Five billion guesses per 2nd and yet it still takes ten 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 reaction to the network as a fresh block.
This is the proof of work, essentially demonstrating 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 rapid for other miners to cork in the nonce, check the math, verify the block and begin attempting to win the next one. That process repeats, utilizing the hash output from the previous block as part of a hash input for each fresh block stringing them all together in a chain of blocks that can be lightly followed all the way back to Satoshi Nakamoto’s Genesis Block. All knots 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 fresh blocks onto the main chain swifter 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 munches up fairly a bit of computing power and electrical play as a result. To prize miners for participating and investing in the accuracy of the network, a miner is rewarded with a certain number of Bitcoin, presently twelve and a half however this will switch over time as well as any transaction fees included by the senders. That prize is also how fresh 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 twenty one 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 indeed considered cost effective to get embarked mining at this point without significant investment and very low electric current rates.
There are slew of lighter ways to get Bitcoin, gratefully. 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. Fresh stands in several countries like Canada and Australia now suggest customers the capability 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 presently close to nine hundred local Bitcoin groups around the globe on meetup.com and a website called LocalBitcoins.com connects people around the world permitting them to trade traditional currency or other items like Amazon bounty cards for Bitcoin, online or in person.
Several free wallet apps like Coinbase, AirBitz and mycelium permit users to purchase Bitcoin using a debit card or bank transfer. Perhaps you’re someone who sells products online or wields a business or maybe you’ve got a blog or media channel that you’d like to monetize. Accepting Bitcoin as payment is utterly effortless 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 ordinary 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 permit users to speculate on price switches just like a stock market. Accomplish with brief selling, margin trading, lending and more.
And this brings up an significant 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 certainly recommend reading up on extra 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 slew of places where you can spend it. And there are a few neat services that actually spread 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 wish journey with Bitcoin. Microsoft users can buy apps for Windows phones as well as movies, movies and movie games for Xbox one. Steam, the massively popular movie game platform with a one hundred twenty five million users, announced in April, two thousand sixteen that they too were accepting Bitcoin. Software and hardware vendors like TigerDirect, Dell and Newegg are a few of the other fatter names. And several third-party services such as gyft.com and purse.io permit people to purchase bounty 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 truly 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 nineteen trillion dollars in debt with no payment plan or solution in look. 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 thrust 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 capability 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 phat topic. It’s a little outside the purview of this movie. 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 capability to send micropayments, petite amounts like a few pennies or fractions of a cent as the advertising industry resumes to die leisurely, clogging your browser with windows with more clutter and spyware to support the free content. Micro payments could permit people to access the content they want without being subjected to invasive ads or needing to sign up for a total and limited subscription to all of the sites content.
As you can undoubtedly see by now, Bitcoin and its underlying blockchain are already converting 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 permitting 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 possessor when they’re not using it. Drones that supply mail and packages on their own. Proof of origin and the end of counterfeiting. Elections that can’t be rigged. Blockchains can permit all of this and more.
Arousing 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 enormously sophisticated topic that is still switching 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 effortless as sending it halfway around the world. All it takes is a few elementary clicks and voila, you are your own bank.