You are on page 1of 33

10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

the goal of this video is to explain how

00:01 Bitcoin works under the hood to give a

00:03 clearer idea of what it really means to

00:05 own send or mined bitcoins first a brief

00:09 high-level overview of what bitcoin is

00:11 at its core bitcoin is just a digital

00:13 file that lists accounts and money like

00:15 a ledger a copy of this file is

00:18 maintained on every computer in the

00:19 Bitcoin network these numbers don't

00:22 represent anything in the physical world

00:23 they only have valued because people are

00:25 willing to trade real goods and services

00:27 for a higher number next to their

00:28 account and believe others will do the

00:30 same the numbers only have value because

00:33 we believe they have value just like any

00:34 other fiat currency to send money you

00:37 broadcast to the network that the amount

00:39 on your account should go down and the

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 1/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

00:41 amount on a receivers account up nodes

00:43 or computers in the Bitcoin network

00:45 apply that transaction to their copy of

00:47 the ledger and then pass on the

00:49 transaction to other nodes this with

00:51 some math based security is really all

00:53 there is a system that lets a group of

00:55 computers maintain a ledger while this

00:58 may sound similar to the way a bank

01:00 maintains a ledger the fact that the

01:01 ledger is maintained by a group rather

01:03 than a single entity introduces a number

01:05 of important differences for one unlike

01:08 a bank where you only know about your

01:10 own transactions in Bitcoin everyone

01:12 knows about everyone else's transactions

01:14 also while you can trust your bank or

01:16 you can at least sue it if something

01:18 goes wrong in Bitcoin you're dealing

01:19 with anonymous strangers so you

01:21 shouldn't trust anyone the Bitcoin

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 2/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

01:23 system is amazingly designed so that no

01:25 trust is needed special mathematical

01:27 functions protect every aspect of the

01:29 system the rest of this video will

01:32 explain in detail how Bitcoin allows

01:33 such a group of strangers to manage each

01:35 other's financial transactions

01:38 at a basic level for Alice to send money

01:40 to Bob she simply broadcast a message

01:43 with the accounts in the amount send

01:45 five bitcoins from Alice to Bob every

01:48 node that receives it will update their

01:50 copy of the ledger and then pass along

01:51 the transaction message but how can

01:53 nodes be sure that the request is

01:55 authentic that only the rightful owner

01:57 has sent the message Bitcoin rules

01:59 require a kind of password to unlock and

02:01 spend funds and this password is what's

02:03 called a digital signature like a real

02:05 handwritten signature it proves the

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 3/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

02:07 authenticity of a message but it does so

02:09 through a mathematical algorithm that

02:10 prevents copying or forgery in the

02:12 digital realm unlike a simple static

02:15 password a completely different digital

02:17 signature is required for every

02:18 transaction keep in mind that in Bitcoin

02:21 you're dealing with complete strangers

02:22 so you never want to reveal a password

02:24 that could be copied and reused by

02:26 someone else a digital signature works

02:28 by utilizing two different but connected

02:30 keys a private key to create a signature

02:32 and a public key that others can use to

02:34 check it you can think of the private

02:36 key as the true password and the

02:38 signature is an intermediary that proves

02:40 you have the password without requiring

02:41 you to reveal it public keys are

02:44 actually the send two addresses in

02:46 Bitcoin so when you send someone money

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 4/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

02:48 you're really sending it to their public

02:50 key to spend money you must prove that

02:52 you're the true owner of a public key

02:54 address where money was sent and you do

02:56 that by generating a digital signature

02:57 from a transaction message and your

02:59 private key other nodes in the network

03:01 can use that signature in a different

03:03 function to verify that it corresponds

03:05 with your public key through the math

03:07 behind the digital signature they are

03:08 able to verify that the sender owned a

03:10 private key without actually seeing the

03:12 private key importantly because the

03:15 signature depends on the message it will

03:16 be different for every transaction and

03:18 therefore can't be reused by someone for

03:20 a different transaction this dependence

03:22 on the message also means that no one

03:24 can modify the message while passing it

03:26 along the network as any changes to the

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 5/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

03:28 message would invalidate the signature

03:29 the math behind this is fairly complex

03:32 and while I won't try to explain it

03:34 fully now here are some topics you can

03:35 google to get started elliptic curve

03:38 digital signature algorithm and

03:40 mathematical trapdoor more the end of

03:42 the video

03:44 so far we know that digital signatures

03:46 are used to ensure a transaction is

03:48 authorized

03:48 but I've oversimplified how old nodes in

03:51 the network keep track of account

03:52 balances in fact no records of account

03:55 balances are kept at all if you don't

03:57 keep track of how much money any given

03:58 person has how do you know if they have

04:00 enough to send to someone else instead

04:02 of balances ownership of funds is

04:04 verified through links to previous

04:06 transactions here's how this works to

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 6/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

04:08 send five bitcoins to Bob Alice must

04:10 reference other transactions where she

04:12 received five or more bitcoins these

04:14 reference transactions are called inputs

04:16 other nodes verifying this transaction

04:19 will check those inputs to make sure

04:20 Alice was in fact the recipient and also

04:23 that the inputs add up to five or more

04:24 bitcoins let's look at a real

04:26 transaction to see this in practice this

04:29 transaction references six inputs for a

04:31 total of 139 point 6 bitcoins in the

04:35 output section notice that there are two

04:36 lines the first one of these is actually

04:38 going back to the sender as change for

04:40 the transaction a simplifying rule

04:42 states that each input must be used up

04:44 completely in a transaction so if you're

04:47 trying to send an amount that doesn't

04:48 exactly match one of your inputs you

04:50 need to send any remaining amount back

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 7/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

04:51 to yourself through these reference

04:54 input linkages ownership of bitcoins is

04:56 passed along in a kind of chain where

04:58 the validity of each transaction is

04:59 dependent on previous transactions but

05:02 how can you trust those previous

05:03 transactions you can't and you should

05:05 check their inputs too in fact when you

05:07 first install a Bitcoin wallet software

05:09 it downloads every transaction ever made

05:11 and checks each one's validity all the

05:13 way back to the very first transaction

05:15 remember you're dealing with complete

05:17 strangers so it's important to verify

05:19 every transaction for yourself this

05:21 process can take over 24 hours but it

05:23 only needs to be done once once a

05:25 transaction has been used once it is

05:27 considered spent and cannot be used

05:29 again otherwise someone could double

05:31 spend an input by referencing it in

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 8/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

05:33 multiple transactions when verifying a

05:36 transaction in addition to the other

05:38 checks nodes also make sure that inputs

05:40 haven't already been spent to be

05:42 explicit for each input nodes check

05:44 every other transaction ever made to

05:46 make sure that input hasn't already been

05:47 used before while this may seem

05:49 time-consuming as there are now over 20

05:51 million transactions it's made fast

05:53 within index of unspent transactions so

05:56 instead of a ledger of balances

05:58 Bitcoin nodes keep track of a giant list

06:00 of transactions owning bitcoins means

06:02 that there are transactions in this list

06:04 that point to your name and haven't been

06:05 spent or in other words used as inputs

06:07 and other transactions one interesting

06:09 consequence of this ownership structure

06:11 is that figuring out your own balance

06:13 requires iterating through every

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 9/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

06:14 transaction ever made and adding up all

06:16 your unspent inputs another interesting

06:19 note about transactions is that the

06:20 system can support more complex ones

06:22 than simply sending funds to one person

06:24 you may have noticed a cryptic looking

06:26 line of text in the output shown

06:28 previously it turns out the outputs are

06:30 more like puzzles to be solved rather

06:31 than simple two addresses rather than

06:34 emailing sending money in Bitcoin is

06:36 more like putting money in a public

06:37 Locker and attaching a math puzzle that

06:39 must be solved to open it the puzzle is

06:41 defined using a special scripting

06:42 language and while it's typically

06:43 designed so that only a single owner of

06:45 a public key can solve it more complex

06:48 conditions are possible for instance two

06:50 out of three signatures could be

06:51 required for an escrow based transaction

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 10/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

06:53 another example is the very first

06:55 Bitcoin transaction ever made which was

06:57 a puzzle that anyone could solve

06:59 while most Bitcoin software hides the

07:02 scripting layer for you you're free to

07:03 write your own software and claim

07:05 conditions although this can be risky

07:06 over 2,600 bitcoins were lost in one

07:09 batch of transactions due to a malformed

07:11 address this highlights an important

07:14 part of Bitcoin as there is no bank or

07:16 credit card company you can appeal to

07:18 any user error mistakes can result in

07:20 permanent loss of bitcoins and not just

07:22 from your own account but from the

07:23 Bitcoin economy overall if you lose your

07:26 private key any funds associated with

07:28 the corresponding public key will be

07:30 gone forever because people will likely

07:32 lose private keys due to hard drive

07:34 crashes and insufficient backups this

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 11/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

07:36 means the Bitcoin currency will

07:37 eventually be a deflationary one

07:40 before explaining the final piece that

07:42 secures Bitcoin mining I want to

07:45 highlight a few points about anonymity

07:46 in Bitcoin if you access Bitcoin through

07:49 a Tor network that hides your IP address

07:51 you can use Bitcoin without ever

07:53 revealing anything more than your public

07:55 key and to avoid someone linking your

07:57 transactions together remember they're

07:59 all publicly stored on every computer

08:01 you can generate a new public key for

08:03 every incoming transaction it is

08:05 possible however to inadvertently link

08:07 public keys together in the transaction

08:10 shown earlier six input transactions

08:12 were used as sources and despite the

08:14 fact that all those inputs were sent to

08:15 different addresses they all became

08:17 linked in that transaction the sender

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 12/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

08:19 proved that he owned all of those

08:20 addresses by supplying the digital

08:22 signature to unlock each one

08:23 researchers have in fact use these links

08:25 to study Bitcoin user behavior you might

08:27 think that generating a public key

08:29 receiving address could potentially

08:30 create a link to your true identity

08:32 but even this step is anonymous and

08:34 amazingly can be done with no connection

08:36 to the network you simply click a button

08:38 in your wallet software and it randomly

08:40 generates a new private and public key

08:42 because there are so many different

08:44 possible addresses there's no reason to

08:46 even check if someone else already has

08:47 that key compare this to setting up for

08:49 an email address where almost everything

08:51 you might try has been taken in fact if

08:54 you did get someone else's key you would

08:55 have access to all their money this is

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 13/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

08:58 the total number of possible Bitcoin

08:59 addresses these large numbers protect

09:02 the Bitcoin system in several ways so

09:04 it's useful to try to appreciate just

09:05 how big they are some estimates for the

09:08 number of grains of sand in the entire

09:09 world are around seven-and-a-half

09:11 million trillion now imagine that every

09:14 grain of sand represented an entire

09:16 other earth of additional grains and

09:17 you're still much smaller than the

09:19 possible number of Bitcoin addresses

09:22 let's recap Bitcoin security so far by

09:25 verifying the digital signature we know

09:27 that only the true owner could have

09:28 created the transaction message and to

09:30 make sure the sender actually has money

09:32 to spend we also check each referenced

09:34 input making sure it is unspent but

09:36 there is still one large security hole

09:38 in the system that can make this unspent

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 14/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

09:40 check unreliable and this has to do with

09:42 the order of transactions considering

09:44 that transactions are past node by node

09:46 through the network there's no guarantee

09:48 that the order in which you receive them

09:50 represents the order in which they were

09:51 created

09:52 and you shouldn't trust a timestamp

09:53 because someone could easily lie about

09:55 the time a transaction was created

09:57 therefore you have no way to tell

09:59 whether one transaction came before

10:00 another and this opens up the potential

10:02 for fraud a malicious user Alice could

10:05 send a transaction giving money to Bob

10:07 wait for Bob to ship a product and then

10:09 send another transaction referencing

10:11 that same input back to herself because

10:13 of differences in propagation times some

10:15 nodes on the network would receive the

10:16 second double spending transaction

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 15/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

10:18 before the one to Bob and when Bob's

10:20 transaction arrived they would consider

10:22 it invalid because it's trying to reuse

10:24 an input so Bob would be out both his

10:26 ship product and is money overall there

10:29 would be disagreement across the network

10:30 about whether Bob or Alice had the money

10:32 because there's no way to prove which

10:34 transaction came first in light of this

10:36 there needs to be a way for the entire

10:38 network to agree about the order of

10:40 transactions which is very much a

10:41 daunting challenge in a decentralized

10:43 system Bitcoin solution is a clever way

10:46 to both determine and safeguard the

10:48 ordering through a kind of mathematical

10:49 race the Bitcoin system orders

10:52 transactions by placing them in groups

10:54 called blocks and linking those blocks

10:56 together in something called the

10:58 blockchain note that this is different

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 16/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

11:00 from the transaction chain we discussed

11:02 earlier the blockchain is used to order

11:04 transactions whereas the transaction

11:06 chain keeps track of how ownership

11:08 changes each block has a reference to

11:10 the previous block and this is what

11:12 places one block after another in time

11:13 you can traverse the references

11:15 backwards all the way to the very first

11:17 group of transactions ever made

11:18 transactions in the same block are

11:20 considered to have happened at the same

11:22 time and transactions not yet in a block

11:24 are called unconfirmed or unordered any

11:27 node can collect a set of unconfirmed

11:29 transactions into a block and broadcast

11:31 it to the rest of the network as a

11:32 suggestion for what the next block in

11:34 the chain should be

11:35 because multiple people could create

11:37 blocks at the same time there could be

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 17/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

11:39 several options to choose from so how

11:41 does the network decide what should be

11:42 next we can't rely on the order that

11:44 blocks arrived because as explained with

11:46 transactions above they may arrive in

11:48 different orders at different points in

11:50 the network part of Bitcoin solution is

11:52 that each valid block must contain the

11:54 answer to a very special mathematical

11:55 problem computers run the entire text of

11:59 a block plus an additional random guess

12:00 through something called a cryptographic

12:01 hash until the output is below a certain

12:04 value a hash function creates a short

12:06 digest from any arbitrary length of text

12:08 in our case the result is a 32 byte

12:10 number here are some examples of the

12:13 specific hash function Bitcoin uses

12:15 sha-256 now how much the output changes

12:18 in result of a single extra period at

12:20 the end of the third example the output

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 18/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

12:23 is completely unpredictable so the only

12:25 way to find a particular output value is

12:27 to make random guesses it's very much

12:29 like guessing the combination to a lock

12:31 you might get lucky on your first guess

12:33 but on average it takes many guesses in

12:35 fact in Bitcoin it would take a typical

12:38 computer several years of guessing to

12:39 solve a block with every computer in the

12:41 entire network all guessing numbers it

12:43 takes about 10 minutes on average for

12:45 someone to find a solution the first

12:47 person to solve a math problem broadcast

12:49 their block and gets to have their group

12:51 of transactions accepted as the next in

12:53 the chain the randomness in the math

12:55 problem effectively spreads out when

12:57 people find a solution making it

12:59 unlikely that two people will solve it

13:00 at the same time occasionally however

13:03 more than one block will be solved at

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 19/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

13:05 the same time leading to several

13:06 possible branches in this case you

13:09 simply build on top of the first one you

13:10 received others may have received the

13:12 blocks in a different order and will be

13:14 building on the block they first

13:15 received the tie gets broken when

13:18 someone solves the next block the

13:20 general rule is that you always

13:21 immediately switch to the longest branch

13:23 available the math makes it rare for

13:25 blocks to be solved at the same time and

13:27 even more rare for this to happen

13:28 multiple times in a row the end result

13:31 is that the blockchain quickly

13:32 stabilizes meaning that everyone is in

13:34 agreement about the order of blocks a

13:36 few back from the end of the chain

13:38 the fact that there's some ambiguity in

13:40 the end of the chain has some important

13:42 implications for transaction security

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 20/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

13:44 for instance if your transaction finds

13:47 itself in one of the shorter branches it

13:48 will lose its place in line within the

13:50 blockchain typically this just means it

13:53 will go back to the pool of unconfirmed

13:54 transactions and be included in a later

13:56 block

13:57 unfortunately this potential for

13:59 transactions to lose their place opens

14:01 the door to the very double spend attack

14:02 that was our original motivation for an

14:05 ordering system let's look at how a

14:07 double spend attack would work in the

14:09 system described so far a fraudster

14:11 Alice sends money to Bob Bob then waits

14:14 for the transaction to get confirmed

14:15 into the blockchain and then ships a

14:17 product now because nodes always

14:20 switched to a longer branch if Alice can

14:22 generate a longer branch that replaces

14:24 the transaction to Bob with one to

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 21/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

14:25 someone else

14:26 his money will effectively get erased

14:28 Bob's transaction will initially get

14:30 tossed back into the unconfirmed pool

14:32 but since Alice has replaced it with

14:34 another transaction that uses its same

14:36 input nodes will now consider Bob's

14:37 transaction invalid because it's

14:39 referencing an already spent input so

14:43 how does the ordering system prevent

14:44 Alice from defrauding Bob you might

14:47 think that Alice could pre compute a

14:48 chain of blocks to spring on the network

14:50 at just the right time but the math

14:52 puzzles in each block actually prevent

14:53 this we need to look a little deeper

14:56 into the cryptographic hash explained

14:57 earlier to fully understand why as

14:59 mentioned previously solving a block

15:02 involves trying to get the cryptographic

15:03 hash of the block to be below a certain

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 22/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

15:05 value and you do that by trying

15:07 different random numbers at the end of

15:08 the block

15:10 once solved the hash output is like a

15:12 fingerprint that uniquely identifies

15:14 that block if even a single character in

15:17 the block is changed the blocks hash

15:19 would be completely different just like

15:21 we saw before when an additional period

15:23 was added

15:25 the hash output or fingerprint is

15:27 actually what's used as the previous

15:29 block reference one result of this is

15:32 that there's no way to switch out a

15:33 block in the middle of the chain because

15:35 the hash value for the new block would

15:37 be different and the next blocks

15:38 reference would no longer point to it

15:40 and Sutlej but even more importantly a

15:43 block cannot be solved before the

15:44 previous block is solved the previous

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 23/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

15:47 block reference is part of the text that

15:48 goes through the hash function so any

15:50 changes to it would require resolving

15:53 getting back to Alice this is why she

15:55 can't pre compute a branch she can only

15:57 start solving blocks once the block she

15:59 wants to build on is solved and it's

16:01 hash value is known she is therefore in

16:04 a race with the rest of the network

16:05 until Bob ships a product which is when

16:07 she wants to present a longer branch one

16:11 last question is whether Alice might be

16:13 able to outpace everyone if she had an

16:14 extremely fast computer or perhaps a

16:17 roomful of computers but even with

16:19 thousands of computers she would be

16:21 unlikely to win the race to solve a

16:22 block because she isn't racing any one

16:24 computer but rather the entire network

16:26 you can think of it like a lottery she

16:29 can operate thousands of computers or

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 24/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

16:31 equivalently

16:31 buy thousands of lottery tickets but

16:33 even then it's much more likely that

16:35 someone else would win she would need

16:37 control of half the total computing

16:39 power in the entire network to have a

16:41 50% chance of solving a block before

16:43 someone else and much more to have a

16:45 high probability of winning several

16:46 blocks in a row faster so transactions

16:49 in the blockchain are protected by a

16:50 mathematical race one that pits in

16:52 attacker against the entire rest of the

16:54 network a consequence of blocks building

16:56 on top of each other is that

16:58 transactions further back in the chain

16:59 are more secure an attacker would have

17:01 to outpace the network for a longer

17:03 amount of time but carry out a double

17:04 spend attack replacing the block further

17:06 back in the chain so the system is only

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 25/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

17:09 vulnerable to a double spend attack near

17:11 the end of the chain which is why it's

17:12 recommended to wait several blocks

17:14 before considering received money final

17:17 one less comment on the blockchain

17:19 before explaining the final pieces of

17:20 the Bitcoin system amazingly nothing

17:23 described so far requires any trust when

17:26 you receive information from strangers

17:28 in the Bitcoin network you can check for

17:30 yourself that block solutions are

17:31 correct and because the math problems

17:33 are so hard you know that there's no way

17:35 any attack

17:36 could have generated them on their own

17:37 the solutions are proof that the

17:39 computing power of the entire network

17:41 was brought to bear now that we've

17:43 discussed how money is transferred

17:45 through digital signatures and

17:46 transaction chains and how the order of

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 26/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

17:48 those transactions is protected in the

17:50 blockchain let's go over the final piece

17:52 where bitcoins come from to send money

17:56 you must reference a previous

17:57 transaction where you were the recipient

17:59 but how do coins get into this ownership

18:00 chain in the first place as a way to

18:03 slowly and randomly generate and

18:05 distribute coins a reward is given to

18:07 whoever solves a block this is why

18:09 solving blocks is called mining although

18:11 it's real purpose is to verify

18:13 transactions and safeguard the

18:14 blockchain every four years the block

18:16 reward is cut in half so eventually no

18:19 more coins will be released about 21

18:21 million in total will be created bear in

18:23 mind that you can send down to one 100

18:25 millionth of a Bitcoin so the total

18:27 number available will likely not limit

18:29 the currencies usability once the block

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 27/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

18:31 reward sees what incentive will miners

18:33 have to process transactions in addition

18:36 to the block reward miners also get any

18:38 transaction fees that can optionally be

18:40 included with transactions right now

18:42 miners will include transactions with no

18:44 fees into blocks because their main

18:45 incentive is the block reward but in the

18:48 future transactions will likely be

18:49 processed in order of the fees attached

18:51 and ones without fees will likely be

18:53 ignored so sending money in Bitcoin will

18:55 probably not be free but will hopefully

18:57 still be cheaper than current credit

18:59 card fees as mentioned before on average

19:02 it would take several years for a

19:04 typical computer to solve a block so an

19:06 individual's chance of ever solving one

19:08 before the rest of the network which

19:09 typically takes 10 minutes is very low

19:11 to receive a steadier stream of income

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 28/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

19:14 many people join groups called mining

19:16 pools that collectively work to solve

19:18 blocks and distribute rewards based on

19:20 work contributed these acts a lot like

19:22 lottery pools among co-workers except

19:24 that some of these pools are quite large

19:26 and comprise more than 20% of all the

19:28 computers in the network the fact that

19:31 some of these pools are so large has

19:32 some important implications about

19:34 security as mentioned before it's very

19:37 unlikely for an attacker to solve

19:38 several blocks in a row faster than the

19:40 rest of the network but it is possible

19:42 and the probability increases as the

19:44 attacker is processing power gains in

19:46 proportion to the rest of the network in

19:48 fact one of these money pool

19:50 BTC guild has solved six blocks in row

19:52 by itself and has voluntarily limited

19:54 its members to ward off distrust in the

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 29/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

19:56 entire Bitcoin network even with

19:58 substantial computing power the farther

20:00 back in the blockchain a transaction

20:02 gets the harder it would be for an

20:03 attacker to change it the current

20:05 recommendation is to wait for a

20:06 transaction to make it into at least one

20:08 block or get one confirmation before

20:10 considering it final and for larger

20:12 transactions wait for at least six

20:14 blocks in light of BTC guilds ability to

20:16 solve six blocks in a row you might want

20:18 to wait even longer by design each block

20:21 takes about ten minutes to solve so

20:23 waiting for six blocks would take about

20:25 an hour compared to the several seconds

20:27 a credit-card transaction takes waiting

20:29 this long for a confirmation may seem

20:31 burdensome but keep in mind that credit

20:33 card customers can claim a stolen card

20:35 months later to have charges reversed

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 30/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

20:37 for merchants called chargebacks so

20:39 bitcoin is actually much faster from a

20:41 merchants perspective the particulars of

20:43 ten minutes was somewhat arbitrary but

20:45 extremely short times could lead to

20:47 instability and longer ones would delay

20:49 confirmations as more computers during

20:51 the network and specialized hardware is

20:53 designed specifically for mining the

20:55 block solution time would get very small

20:57 to compensate every two weeks all the

20:59 Bitcoin software recalibrates the

21:01 difficulty of the math problem to target

21:03 ten minutes for comparison a similar

21:06 digital currency called litecoin has

21:08 been able to operate with a two and a

21:09 half minute block time in summary

21:12 bitcoin is a mathematically protected

21:14 digital currency that is maintained by a

21:16 network of peers digital signatures

21:18 authorized individual transactions

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 31/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

21:20 ownership is passed via transaction

21:22 chains and the ordering of those

21:24 transactions is protected in the

21:26 blockchain by requiring difficult math

21:28 problems to be solved with each block

21:30 would-be attackers are pitted against

21:32 the entire rest of the network in a

21:33 computational race they are unlikely to

21:35 win Bitcoin promises many interesting

21:38 ideas such as insulation from government

21:40 meddling anonymity and potentially lower

21:42 transaction fees it also has many

21:44 challenges as it is currently very

21:46 difficult to exchange bitcoins for other

21:48 currencies and it has been cited as a

21:50 haven for illegal activity and tax

21:52 evasion so governments may try to ban it

21:54 also the mathematical race that protects

21:57 the blockchain uses a substantial amount

21:58 of electricity if you'd like to view a

22:01 written version of this video you can

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 32/33
10/11/2017 (24) How Bitcoin Works Under the Hood - YouTube

22:03 one on my personal blog imponderable

22:05 things calm the blog also has some

22:08 additional explanations of the math

22:10 behind the digital signatures and

22:11 cryptographic hashes that underlie the

22:13 system

22:22 you

https://www.youtube.com/watch?v=Lx9zgZCMqXE&t=22s 33/33

You might also like