The goal of this video is to explain the essence
of how Bitcoin works without any jargon or scary math. It is not, however, an introduction
to what Bitcoin is or why it matters, for that, check out the great intro video at bitcoin.org. With that said, on to how it works! Bitcoin lets people exchange money electronically
as easily as sending an email or text. To send money, you use what’s called a “Wallet”
app to type in an amount, enter or scan a recipient’s account number, and hit ”Send”.
The recipient will then see the money pop up in their account. So how does it work? At a basic level Bitcoin
is just a ledger with account numbers and balances. When Bob sends Carol 5 Bitcoins,
his balance goes down by 5, and Carol’s goes up by 5. There’s no gold or government-issued
money backing these numbers, just people’s belief that the numbers are worth something,
and a system that prevents unfair changes. Part of this system makes sure that no one
can spend money from someone else’s account. Every time you hit “Send”, your Wallet
app sends a message to the Bitcoin network describing how the ledger should change, including
the sender’s and recipient’s account numbers and the amount to transfer. So what’s to
prevent a thief from creating a message transferring money from someone else’s account? Bitcoin requires a kind of signature on each
message to prove that it was created by the true account owner. The signature serves the
same purpose as a handwritten signature on a paper check, but it’s based on math rather
than handwriting. The math comes from the world of cryptography,
which is normally used to hide secret messages, but in Bitcoin, has been re-purposed to prove
ownership. Each Bitcoin account number has an associated key that only the true account
owner knows, and is used to create signatures by encrypting transaction messages. Others
test the signature by trying to decrypt it. If successful, they know the signature was
created by the true account owner. In addition to not relying on handwriting
analysis, these math-based signatures also can’t be copied and reused on other transactions,
since the signatures are unique to each transaction. So these signatures keep unauthorized transactions
from changing the ledger, but who exactly is checking the signatures, and overall, maintaining
the ledger? Surprisingly, anyone who wants to! One of the main goals of Bitcoin is to provide
a decentralized system, meaning no single company or government can control it. Every
time someone sends money, a transaction message is passed around to all the people who want
to help maintain the ledger, who I’ll call “maintainers.” Each maintainer keeps a
personal copy of the ledger and updates it whenever they receive a new transaction with
a valid signature. With ledgers spread all over the world, traffic
delays--and occasionally fraud--can lead to differences in those ledgers. So how does
the world decide which version to use? Like in other democratic systems, there’s
a vote, but it’s a bit different than a typical ballot system. Maintainers “vote”
by trying to solve a special puzzle based on their version of the ledger. The first
person to solve a puzzle announces their solution and everyone updates to that version.
So the vote turns out to be a kind of mathematical race, but it’s designed to favor the majority’s
version. This is because the more people there are working on a particular version, the faster
it will be solved. Because new transactions are constantly being
generated, this voting process repeats over and over again so maintainers can continually
agree about new transactions. So why math problems instead of, say, emailing
in votes to decide on a ledger? Without a central authority to register voters, it would
be hard to enforce one vote per person--a single person could create multiple accounts
to vote more than once, or even millions of times. The math problems prevent this by making
each vote have a cost in computers and electricity. This means out-voting, or out-solving the
majority to take over the ledger would effectively require out-spending the majority--an unlikely
event. So the math enables a fair vote in a decentralized
system. Two more important details about how it does this: To prevent someone from pre-solving a puzzle
to win the race, each puzzle builds on previous answers, and the winner is not just the most
recent solution, but the ledger version with the most total solutions. The puzzles are also extraordinarily special
in that there are no tricks to solving them faster, other than by buying more computers
and electricity. It’s this property that underlies the entire system, and gives people
assurance that solutions are truly from the majority, and not a clever attacker. A final note about how money is created. Every
time a puzzle is solved, a small award is added to the solver’s balance, effectively
creating money “out of thin air.” This award acts as an incentive for people to help
maintain the ledger, and is in addition to small fees senders attach to transactions. Because maintainers acquire newly created
money through computation, they are typically called “miners,” but their main purpose
is really to manage the ledger, not to create money. The voting system simply provides a
convenient way to randomly distribute money into the world, and in fact, after 2140 no
more money will be created. In summary, Bitcoin is an electronic currency
that’s based on a collaboratively maintained ledger. People transfer money by sending messages
to maintainers describing where and how much money should move. Maintainers make sure that
the messages are from the true account owners by checking digital signatures. And finally,
the maintainers reach consensus with each other through a math-based voting process. I hope this gives you a quick sense for how
Bitcoin works. If you’d like to dive deeper into the rabbit hole, check out my 22-minute
video: How Bitcoin Works under the Hood. Also, feel free to subscribe for more concise
tech explanations.
