WEBVTT Kind: captions Language: en 00:00:00.099 --> 00:00:04.230 The goal of this video is to explain the essence of how Bitcoin works without any jargon or 00:00:04.230 --> 00:00:09.670 scary math. It is not, however, an introduction to what Bitcoin is or why it matters, for 00:00:09.670 --> 00:00:15.760 that, check out the great intro video at bitcoin.org. With that said, on to how it works! 00:00:15.760 --> 00:00:20.750 Bitcoin lets people exchange money electronically as easily as sending an email or text. To 00:00:20.750 --> 00:00:25.140 send money, you use what’s called a “Wallet” app to type in an amount, enter or scan a 00:00:25.140 --> 00:00:29.060 recipient’s account number, and hit ”Send”. The recipient will then see the money pop 00:00:29.060 --> 00:00:30.590 up in their account. 00:00:30.590 --> 00:00:35.129 So how does it work? At a basic level Bitcoin is just a ledger with account numbers and 00:00:35.129 --> 00:00:39.280 balances. When Bob sends Carol 5 Bitcoins, his balance goes down by 5, and Carol’s 00:00:39.280 --> 00:00:44.059 goes up by 5. There’s no gold or government-issued money backing these numbers, just people’s 00:00:44.059 --> 00:00:49.260 belief that the numbers are worth something, and a system that prevents unfair changes. 00:00:49.260 --> 00:00:53.659 Part of this system makes sure that no one can spend money from someone else’s account. 00:00:53.659 --> 00:00:56.949 Every time you hit “Send”, your Wallet app sends a message to the Bitcoin network 00:00:56.949 --> 00:01:01.059 describing how the ledger should change, including the sender’s and recipient’s account numbers 00:01:01.059 --> 00:01:05.479 and the amount to transfer. So what’s to prevent a thief from creating a message transferring 00:01:05.479 --> 00:01:07.460 money from someone else’s account? 00:01:07.460 --> 00:01:11.280 Bitcoin requires a kind of signature on each message to prove that it was created by the 00:01:11.280 --> 00:01:15.759 true account owner. The signature serves the same purpose as a handwritten signature on 00:01:15.759 --> 00:01:19.119 a paper check, but it’s based on math rather than handwriting. 00:01:19.119 --> 00:01:23.340 The math comes from the world of cryptography, which is normally used to hide secret messages, 00:01:23.340 --> 00:01:28.420 but in Bitcoin, has been re-purposed to prove ownership. Each Bitcoin account number has 00:01:28.420 --> 00:01:32.770 an associated key that only the true account owner knows, and is used to create signatures 00:01:32.770 --> 00:01:38.030 by encrypting transaction messages. Others test the signature by trying to decrypt it. 00:01:38.030 --> 00:01:42.390 If successful, they know the signature was created by the true account owner. 00:01:42.390 --> 00:01:46.079 In addition to not relying on handwriting analysis, these math-based signatures also 00:01:46.079 --> 00:01:51.869 can’t be copied and reused on other transactions, since the signatures are unique to each transaction. 00:01:51.869 --> 00:01:57.850 So these signatures keep unauthorized transactions from changing the ledger, but who exactly 00:01:57.850 --> 00:02:02.749 is checking the signatures, and overall, maintaining the ledger? Surprisingly, anyone who wants to! 00:02:03.880 --> 00:02:08.069 One of the main goals of Bitcoin is to provide a decentralized system, meaning no single 00:02:08.069 --> 00:02:12.830 company or government can control it. Every time someone sends money, a transaction message 00:02:12.830 --> 00:02:16.970 is passed around to all the people who want to help maintain the ledger, who I’ll call 00:02:16.970 --> 00:02:20.500 “maintainers.” Each maintainer keeps a personal copy of the ledger and updates it 00:02:20.500 --> 00:02:24.950 whenever they receive a new transaction with a valid signature. 00:02:24.950 --> 00:02:29.000 With ledgers spread all over the world, traffic delays--and occasionally fraud--can lead to 00:02:29.000 --> 00:02:33.530 differences in those ledgers. So how does the world decide which version to use? 00:02:33.530 --> 00:02:36.550 Like in other democratic systems, there’s a vote, but it’s a bit different than a 00:02:36.550 --> 00:02:41.060 typical ballot system. Maintainers “vote” by trying to solve a special puzzle based 00:02:41.060 --> 00:02:45.620 on their version of the ledger. The first person to solve a puzzle announces their solution 00:02:45.620 --> 00:02:50.170 and everyone updates to that version. So the vote turns out to be a kind of mathematical 00:02:50.170 --> 00:02:54.330 race, but it’s designed to favor the majority’s version. This is because the more people there 00:02:54.330 --> 00:02:58.140 are working on a particular version, the faster it will be solved. 00:02:58.140 --> 00:03:01.780 Because new transactions are constantly being generated, this voting process repeats over 00:03:01.780 --> 00:03:08.300 and over again so maintainers can continually agree about new transactions. 00:03:08.300 --> 00:03:12.970 So why math problems instead of, say, emailing in votes to decide on a ledger? Without a 00:03:12.970 --> 00:03:17.810 central authority to register voters, it would be hard to enforce one vote per person--a 00:03:17.810 --> 00:03:22.090 single person could create multiple accounts to vote more than once, or even millions of 00:03:22.090 --> 00:03:28.320 times. The math problems prevent this by making each vote have a cost in computers and electricity. 00:03:28.320 --> 00:03:32.390 This means out-voting, or out-solving the majority to take over the ledger would effectively 00:03:32.390 --> 00:03:35.810 require out-spending the majority--an unlikely event. 00:03:35.810 --> 00:03:41.290 So the math enables a fair vote in a decentralized system. Two more important details about how 00:03:41.290 --> 00:03:43.590 it does this: 00:03:43.590 --> 00:03:47.870 To prevent someone from pre-solving a puzzle to win the race, each puzzle builds on previous 00:03:47.870 --> 00:03:51.540 answers, and the winner is not just the most recent solution, but the ledger version with 00:03:51.540 --> 00:03:54.900 the most total solutions. 00:03:54.900 --> 00:03:58.680 The puzzles are also extraordinarily special in that there are no tricks to solving them 00:03:58.680 --> 00:04:03.030 faster, other than by buying more computers and electricity. It’s this property that 00:04:03.030 --> 00:04:07.610 underlies the entire system, and gives people assurance that solutions are truly from the 00:04:07.610 --> 00:04:08.900 majority, and not a clever attacker. 00:04:08.900 --> 00:04:15.480 A final note about how money is created. Every time a puzzle is solved, a small award is 00:04:15.480 --> 00:04:19.510 added to the solver’s balance, effectively creating money “out of thin air.” This 00:04:19.510 --> 00:04:23.560 award acts as an incentive for people to help maintain the ledger, and is in addition to 00:04:23.560 --> 00:04:27.070 small fees senders attach to transactions. 00:04:27.070 --> 00:04:30.820 Because maintainers acquire newly created money through computation, they are typically 00:04:30.820 --> 00:04:35.010 called “miners,” but their main purpose is really to manage the ledger, not to create 00:04:35.010 --> 00:04:39.280 money. The voting system simply provides a convenient way to randomly distribute money 00:04:39.280 --> 00:04:46.280 into the world, and in fact, after 2140 no more money will be created. 00:04:46.410 --> 00:04:50.600 In summary, Bitcoin is an electronic currency that’s based on a collaboratively maintained 00:04:50.600 --> 00:04:55.590 ledger. People transfer money by sending messages to maintainers describing where and how much 00:04:55.590 --> 00:04:59.750 money should move. Maintainers make sure that the messages are from the true account owners 00:04:59.750 --> 00:05:04.040 by checking digital signatures. And finally, the maintainers reach consensus with each 00:05:04.040 --> 00:05:06.570 other through a math-based voting process. 00:05:06.570 --> 00:05:11.930 I hope this gives you a quick sense for how Bitcoin works. If you’d like to dive deeper 00:05:11.930 --> 00:05:16.240 into the rabbit hole, check out my 22-minute video: How Bitcoin Works under the Hood. 00:05:16.240 --> 00:05:19.660 Also, feel free to subscribe for more concise tech explanations.