Voiceover: Bitcoin is a new virtual currency system
that's been gathering a lot of attention recently,
and I thought I would do a series of videos
where I really dive into the innards of bitcoin
and explain how it works in detail,
and my plan for this first video in this series
is to describe some of those mechanics
at a high level.
And then what I'll do in subsequent videos
is dive a bit deeper into all of the underlying aspects
that I have touched upon within this first video.
And my hope is that by the end of this video series,
you'll know not only what a bitcoin is,
but you'll also understand the mechanics
of how transactions are initiated.
You'll see how verification occurs
for those transactions,
and you'll also learn what it means for someone
to really engage in a process
known as "bitcoin mining",
and that may be a term that you've heard
if you've had any interest in bitcoin recently.
I do want to point out, also,
that the bitcoin scheme is fairly involved.
It requires some time to really cover
all of the relevant details,
and to me the best way to really wrap your head
around a scheme like bitcoin
is to really suspend belief for a bit
and get exposed to all of these relevant details.
Now, undoubtedly, you'll have a lot of questions
along the way,
but my hope is that by the end of this video series,
all of the relevant stones will have been overturned
and your questions will have been
appropriately answered,
but it might take some time to get there,
and in part, that's because I'll try to describe things
in a way that's sensible
and that might involve leaving some details out
until I can explain enough pieces of the scheme
and then add in those details in as I go along
so that you're not inundated
with too many minor points and nuances
along the way,
but you get a feel for the overall system
as I go through things.
With that, let me go ahead and just dive right in.
First of all, I do want to point out
that bitcoin has been described, really,
as a decentralized currency
because there's no real central bank or entity
that's involved in generating or transacting bitcoins,
and, in fact, what happens in the content of a bitcoin
is all the transactions really require
what's known as a peer-to-peer network,
a network of just individual hosts that essentially
collectively agree on different aspects
of how the protocol is implemented and used.
Bitcoin itself is also referred to sometimes
as a cryptocurrency,
and by a cryptocurrency,
I mean that we use a lot of cryptographic techniques
in order to facilitate or to really enable
bitcoin transactions to take place,
and I'll do separate videos
on some of these techniques,
but just take it at face value right now,
that it's decentralized
and is a type of cryptocurrency.
I also want to point out that the term "bitcoin" itself
can in fact be a bit confusing,
and in many ways, bitcoin transactions
don't really resemble traditional coin transactions
so much as they represent really entries
in some type of a global ledger,
and by that, I mean let's say you have
a transaction taking place,
and let's say the transaction is taking place
within, or among two parties,
and we'll call them Alice and Bob,
which are traditional names that are used
in many cryptographic protocols
to describe the parties involved,
and imagine that Alice wants to transfer,
or really wants to assign,
a certain number of bitcoins that she possesses
over to Bob,
and you can think of this transaction, really,
as an entry in a ledger of some sort,
and I also want to point out before proceeding
that even though I've used terms
like Alice and Bob,
what I really mean in the context of bitcoin
is not the actual identities in the physical sense,
but really that Alice and Bob are identities
in the bitcoin system,
and these identities are just,
in actual implementation,
are just collections of numbers
that do not have to be tied
with Alice and Bob's real-world identities.
In that capacity, you can think of bitcoin at any,
it really is effectively being,
of being pseudonyms,
rather than real names,
and the idea is that bitcoin really becomes more
of a pseudonymous protocol,
where people are addressed by their pseudonyms,
and that provides some level of privacy
to users that want to transact
using the bitcoin system.
Now, in a transaction between Alice and Bob,
what Alice will basically do
is specify a few different numbers.
She has to specify how many bitcoins
she wants to allocate to Bob.
Let's say Alice started off with 50 bitcoins of her own.
She might decide that she wants to give,
let's say, 30 of these bitcoins over to Bob,
and let's say she wants to have
some number of bitcoins returned back to her,
so you have to specify,
or Alice has to specify, rather,
how much change she's going to get,
so in this case, let's say her change is going to be
18 bitcoins for herself,
and then the remaining 2 bitcoins are going to be
a transaction fee,
and we'll talk about what a transaction fee means
a little later,
and I think I'll also dive into it in future videos,
but it's basically an incentive for other nodes
in the bitcoin network to help Alice
in essentially validating some of the details
of this transaction for Bob.
Now, Alice will take these transaction details
and apply what's known as a digital signature
to these transaction details,
and a digital signature is basically
the mathematical analog of a traditional signature.
It really binds Alice's identity to the details
of this transaction.
And by Alice's identity, again,
I mean her identity within the bitcoin system,
and this binding is really done
in a cryptographically strong way.
Now, the details of this transaction
once it takes place,
are going to be broadcast out,
so Alice is going to take these transaction details
and effectively just broadcast them out
to all the nodes in the peer-to-peer network
that represent bitcoin nodes.
Now, Bob, when he receives information
about this transaction,
he receives it over the peer-to-peer network.
He'll probably sandy check
some part of the transaction.
For example, he might check that the numbers
work out correctly,
that Alice, let's say, started off with 50 bitcoins
and is not trying to transfer
more than 50 bitcoins to him, and so on and so forth.
He's going to have some mathematical assurance
because of some of the cryptography involved
that some of these claims are accurate,
that Alice, let's say, has the bitcoins
that she's claimed to possess,
and that she's expressed an interest
to assign those bitcoins to him,
but what he won't know yet is whether
Alice has really tried to transfer those same bitcoins
to anyone else over the course of time
or maybe just prior to that point.
the way that we handle that situation,
and by the way, I should point out
that this concept of Alice trying to, let's say,
spend coins twice,
in the context of digital cash
and electronic currency systems,
this concept is known as double spending,
and it's something you have to worry about
when you have virtual currencies
because it's very easy for someone to just copy
the numbers that represent this transaction
and try to use them elsewhere.
The way we basically handle
and reduce the risk of double spending
is through a specific set of nodes
in this peer-to-peer network
who are known as bitcoin miners.
You might have heard this term bitcoin miners,
and the bitcoin miners are basically
specific individuals,
specific nodes within this peer-to-peer network,
and what they basically do is they take
all of the transactions that they see,
and remember,
they're listening to all of these transactions,
and not just Alice and Bob's,
but other transactions that are taking place,
and they'll take those transactions,
and ultimately, they will take those transactions
and will compile them
into what's known as a transaction block.
So it's basically a recording
of all the previously unrecorded transactions.
If you think of a single transaction
let's say, as a ledger item,
you could think of a transaction block
as representing, let's say, an entire page
in a ledger book.
These bitcoin miners will also include in this block,
in addition to all these unrecorded transactions,
they will also include in this block
a special transaction that's meant just for themselves
to basically reward themselves for the effort
of doing this mining.
Now, a transaction block will also contain
an encoding of the previous transaction block,
so there's going to be some level of continuity,
and then bitcoin miners will also include
a specially-crafted sequence of numbers
associated with these transactions,
and this sequence of numbers is known
as a proof of work,
and it's called a proof of work
because it's sometihng that's really hard to generate,
something that requires a lot of effort to do,
and that kind of makes it hard for just anybody
to get involved with bitcoin mining willy-nilly,
but it requires that they really exhibit or exert
some computational effort,
basically in exchange for getting this extra reward
of a payment,
and also in exchange for getting
this transaction fee that they're going to be promised
by Alice to engage in this sort of work.
I'll talk about what proof-of-work protocols are
in a separate video in more detail.
Now, because each transaction block
contains information about previous transactions,
really what you end up having
is not just a single block.
You ultimately have what you can think of as a chain
of transactions,
and you can call this a transaction block chain.
The idea is as soon as a bitcoin miner
is able to construct a transaction block chain
containing all these unrecorded transactions,
and this proof of work,
it'll broadcast the details of that chain out
to all of the nodes, all of the peers
on that peer-to-peer network for bitcoin.
And then once the newly-broadcast chain
gets kind of verified and meets the right properties,
the nodes on the network
are just going to go ahead and start using it,
and they're going to start appending
new transaction blocks to that chain.
They're going to take anything
that hasn't yet been processed
and start incorporating it into the transaction chain
that was broadcast out by the node
who came up with the proof of work correctly.
Now, this transaction block chain,
really what we're going to be doing
in the context of bitcoin
is the nodes are only going to consider
the transaction block chain that reflects
the greatest amount of work to generate its contents,
and again, there's this proof of work that I mentioned
that is used to kind of determine
or identify what the, what work was involved
in coming up with the transaction block chain.
The one that's the longest is going to be considered
sacrosanct within the bitcoin system.
Future miners are supposed to only work
off the chain that has the most work put into it.
Now, what's remarkable here
is that the whole process is decentralized.
There is no bank or no centrally-trusted entity
that was actually involved in the transaction.
Hopefully this first video gave you
a bit of description, a flavor, if you will,
for the high-level mechanics of the bitcoin system.
There are a lot of stones I have left unturned,
and what I'll do in subsequent videos
is start covering those details,
and I'm sure you have a lot of questions,
and hopefully the future videos
will help answer some of those questions for you.