WEBVTT - How Blockchain Works 0:00:04.480 --> 0:00:12.200 Text with Technology with tech Stuff from stuff dot com. 0:00:12.200 --> 0:00:14.800 Hey there, and welcome to tech Stuff. I am your host, 0:00:14.960 --> 0:00:18.239 Jonathan Strickland. I'm an executive producer at How Stuff Works, 0:00:18.280 --> 0:00:21.400 and I'm in pain right now. People who are watching 0:00:21.440 --> 0:00:25.480 the live stream know that just before I recorded this episode, 0:00:25.600 --> 0:00:30.520 I eight Caroline her reaper corn Chip. So if you 0:00:30.560 --> 0:00:33.720 want to watch me do dumb things immediately before I 0:00:33.760 --> 0:00:36.199 do my job, go to twitch dot tv slash tech 0:00:36.280 --> 0:00:38.519 Stuff and you can watch me record these live. But 0:00:39.159 --> 0:00:41.640 let's put that aside. First of all, Happy New Year, 0:00:41.880 --> 0:00:44.560 Welcome to two thousand eighteen. I'm recording this at the 0:00:44.640 --> 0:00:47.200 end of seen, but by the time it goes out 0:00:47.400 --> 0:00:51.880 it'll be so I'm sure the New Year has transformed 0:00:51.920 --> 0:00:54.560 everything around us and we don't even recognize the world 0:00:55.080 --> 0:00:59.000 of tomorrow, which I guess is today for you. But 0:00:59.160 --> 0:01:01.920 today I wanted to talk about a technology that's been 0:01:01.960 --> 0:01:05.120 around for a few years. Actually, elements of this technology 0:01:05.160 --> 0:01:08.440 been around for decades, but people are talking about it 0:01:08.760 --> 0:01:11.720 now more than ever and mentioning it as the technology 0:01:11.760 --> 0:01:14.039 of the future. And what I'm talking about is the 0:01:14.080 --> 0:01:20.320 technology of blockchain. So this is an interesting technology. It's 0:01:20.319 --> 0:01:22.400 safe to say that I think you know. The most 0:01:22.480 --> 0:01:28.200 famous example of something that's dependent upon blockchain technology is bitcoin. 0:01:28.440 --> 0:01:32.120 Everyone's heard about bitcoin at this point, but it is 0:01:32.160 --> 0:01:36.560 important to remember that bitcoins are an implementation on top 0:01:36.680 --> 0:01:40.640 of blockchain technology, but not all blockchain technology has to 0:01:40.680 --> 0:01:45.160 be Bitcoin. So what the heck is blockchain? Well, i'm 0:01:45.160 --> 0:01:48.480 gonna talk about blockchain, I'm gonna talk about bitcoin. I'm 0:01:48.520 --> 0:01:51.440 gonna talk about other uses of blockchain, but we will 0:01:51.640 --> 0:01:54.240 mention Bitcoin quite a bit because again, it's the most 0:01:54.280 --> 0:01:59.760 famous um implementation of blockchain technology and the reason why 0:02:00.000 --> 0:02:03.400 anyone is really talking about it at all today because 0:02:03.440 --> 0:02:07.920 it showed the potential for this technology. Now it's the 0:02:07.920 --> 0:02:12.040 implementation of a collection of different really good ideas put 0:02:12.080 --> 0:02:15.919 forward in an innovative way to create a distributed record 0:02:16.160 --> 0:02:20.000 of transactions. That we can trace this technology back to 0:02:20.080 --> 0:02:23.359 a name, but not to an actual person, and by 0:02:23.400 --> 0:02:26.720 that I mean we can trace the concept to a 0:02:26.760 --> 0:02:32.080 person or group of persons who used the name Satoshi Nakamoto. 0:02:32.360 --> 0:02:34.520 If that name sounds familiar, probably means you've read up 0:02:34.520 --> 0:02:38.280 on bitcoin, because that's where blockchain got start. It was 0:02:38.360 --> 0:02:41.560 all on this white paper that was written about bitcoin 0:02:41.800 --> 0:02:47.560 by someone or someone's going by the name Satoshi Nakamoto. Now, 0:02:47.560 --> 0:02:52.480 the mystery of who is Satoshi Nakamoto is interesting, but 0:02:52.800 --> 0:02:55.919 rather immaterial to our subject matter. So let's just say 0:02:55.919 --> 0:02:58.639 there's a lot of speculation as to who ultimately is 0:02:58.680 --> 0:03:03.440 behind the pseudonym. According to at least one post from 0:03:03.520 --> 0:03:07.680 Nakamoto supposedly is someone from Japan who was born in 0:03:07.760 --> 0:03:10.840 n but there's been a lot of speculation that that 0:03:11.080 --> 0:03:15.919 is just a misdirection and in fact Nakamoto is really 0:03:16.000 --> 0:03:19.840 someone who is originally from America or the European Union. 0:03:20.400 --> 0:03:23.880 And that's all we know really. Now, what's really important 0:03:23.880 --> 0:03:26.640 to us is that Nakamoto published the paper on a 0:03:26.720 --> 0:03:29.959 mailing list that focused on cryptography, and this was back 0:03:30.000 --> 0:03:33.040 in two thousand and eight. The first message in that 0:03:33.200 --> 0:03:36.880 thread of messages was titled bitcoin P two p E 0:03:37.120 --> 0:03:40.680 cash paper and it hit that mailing list on Saturday, 0:03:40.920 --> 0:03:44.680 November one, two thousand eight. That's what I love about 0:03:44.720 --> 0:03:46.480 the Internet. It means that if you go to a 0:03:46.480 --> 0:03:48.880 message board, you can actually see the date when something 0:03:48.960 --> 0:03:52.200 is posted, so you can have a very specific mention 0:03:52.280 --> 0:03:54.400 of when something came into being. In fact, I could 0:03:54.440 --> 0:03:56.200 even give you a time stamp if I still had 0:03:56.240 --> 0:03:58.360 that page open to tell you what time it was 0:03:58.440 --> 0:04:01.160 posted there. But the message contained a link to a 0:04:01.240 --> 0:04:04.880 paper and white paper about this concept, and that paper 0:04:04.920 --> 0:04:08.640 is still available in PDF format for free, So if 0:04:08.680 --> 0:04:11.200 you'd like to read the whole thing, you can find 0:04:11.240 --> 0:04:16.200 it at bitcoin dot org slash bitcoin dot pdf. Now 0:04:16.240 --> 0:04:18.560 a lot of what I'm going to cover today comes 0:04:18.640 --> 0:04:22.280 straight from that paper. Now, the abstract of that paper 0:04:22.360 --> 0:04:25.919 lays out Nakamoto's general approach, so I'm going to quote 0:04:26.000 --> 0:04:30.240 the abstract here. A purely peer to peer version of 0:04:30.279 --> 0:04:33.800 electronic cash would allow online payments to be sent directly 0:04:33.839 --> 0:04:37.880 from one party to another without going through a financial institution. 0:04:38.480 --> 0:04:41.680 Digital signatures provide part of the solution, but the main 0:04:41.760 --> 0:04:45.080 benefits are lost if a trusted third party is still required. 0:04:45.120 --> 0:04:48.640 To prevent double spending, we propose a solution to the 0:04:48.680 --> 0:04:52.719 double spending problem using a peer to peer network. The 0:04:52.800 --> 0:04:56.120 network time stamps transactions by hashing them into an ongoing 0:04:56.240 --> 0:04:59.680 chain of a hash based proof of work, forming a 0:04:59.680 --> 0:05:03.159 wreck heard that cannot be changed without redoing the proof 0:05:03.200 --> 0:05:06.000 proof of work. The longest chain not only serves as 0:05:06.000 --> 0:05:08.640 proof of the sequence of events witnessed, but proof that 0:05:08.680 --> 0:05:12.120 it came from the largest pool of CPU power. As 0:05:12.160 --> 0:05:14.600 long as a majority of CPU power is controlled by 0:05:14.640 --> 0:05:18.120 nodes that are not cooperating to attack the network, they'll 0:05:18.160 --> 0:05:22.240 generate the longest chain and outpaced attackers. The network itself 0:05:22.279 --> 0:05:26.200 requires minimal structure. Messages are broadcast on a best effort basis, 0:05:26.400 --> 0:05:28.960 and nodes can leave and rejoin the network at will, 0:05:29.240 --> 0:05:32.000 accepting the longest proof of work chain as proof of 0:05:32.040 --> 0:05:34.400 what happened while they were gone. So this is all 0:05:34.440 --> 0:05:39.240 about keeping that record of transactions that take place across 0:05:39.240 --> 0:05:43.839 a system, and the ongoing record that keeps getting built 0:05:43.839 --> 0:05:49.080 onto is also used to verify, uh, everything that happens 0:05:49.240 --> 0:05:52.440 and to make certain that people are not able to 0:05:52.800 --> 0:05:56.719 spend the same units more than once. Now, Nakamoto was 0:05:56.760 --> 0:06:00.920 specifically talking about creating a digital currency, namely bitcoin, but 0:06:00.960 --> 0:06:04.080 it turns out this decentralized peer to peer ledger system 0:06:04.080 --> 0:06:07.400 could be used for lots of different stuff. Essentially any 0:06:07.480 --> 0:06:10.719 sort of transaction, not just the ones involving spending digital 0:06:10.720 --> 0:06:15.440 currency to purchase goods and services or even storing data online. 0:06:15.560 --> 0:06:18.960 It would serve as the foundation for blockchain, which some 0:06:19.000 --> 0:06:20.960 people are going so far as to call web three 0:06:21.000 --> 0:06:24.719 point oh, which I absolutely hate but that would send 0:06:24.720 --> 0:06:27.160 me down a rant about web two point oh, and 0:06:27.240 --> 0:06:30.520 I've already done old episodes about that years ago, so 0:06:30.600 --> 0:06:35.000 we'll not read tread that ground. To understand blockchain and 0:06:35.040 --> 0:06:36.839 why so many people are convinced that it's going to 0:06:36.880 --> 0:06:39.160 be the tech of the future, it helps understand how 0:06:39.200 --> 0:06:42.360 transactions work in a traditional system. So let's start super 0:06:42.400 --> 0:06:45.840 basic with bartering system. So this is the old tip 0:06:45.880 --> 0:06:48.080 for tat approach. You have something I want, I've got 0:06:48.120 --> 0:06:51.000 something you want. We agree upon the relative value of 0:06:51.040 --> 0:06:54.279 those two things, and we do an exchange. So let's 0:06:54.279 --> 0:06:57.600 say you make chairs and I breed chickens, and we 0:06:57.640 --> 0:07:00.400 have to agree how many chickens does it out to 0:07:01.200 --> 0:07:04.800 be valuable as valuable as a chair or vice versa, 0:07:04.920 --> 0:07:07.880 and then we make the exchange. Pretty straightforward system, but 0:07:07.920 --> 0:07:11.240 it has some major downsides. One of the big downsides 0:07:11.360 --> 0:07:14.120 is I might really need that chair, but it may 0:07:14.160 --> 0:07:16.480 turn out the carpenter has no need for my chickens, 0:07:16.920 --> 0:07:19.360 so it doesn't matter how many chickens I offer against 0:07:19.360 --> 0:07:21.600 the chair. The carpenter has no use for the chickens, 0:07:21.760 --> 0:07:24.320 So I don't get the chair, and I'm unable to 0:07:24.360 --> 0:07:26.720 sit down, and I am sad. Now I could go 0:07:26.760 --> 0:07:29.400 out and try and find a different carpenter who does 0:07:29.520 --> 0:07:32.840 need chickens, or maybe I find someone else who needs 0:07:32.920 --> 0:07:36.119 chickens but is offering up something else entirely, and hope 0:07:36.120 --> 0:07:39.239 that whatever that thing is is something that the carpenter wants, 0:07:39.240 --> 0:07:41.880 and I've exchanged that for the chair. But this whole 0:07:41.960 --> 0:07:46.240 process is cumbersome and messy unless the two parties in 0:07:46.320 --> 0:07:51.160 question already possess exactly what the other party wants. Now, 0:07:51.160 --> 0:07:54.920 another drawback is portability. It would be a real drag 0:07:54.960 --> 0:07:57.880 to carry chairs and chickens around everywhere you went, just 0:07:58.080 --> 0:08:01.680 when you needed to buy something. So sy alleviates that problem. 0:08:01.680 --> 0:08:04.400 It acts as a store of value. Members of a 0:08:04.440 --> 0:08:07.840 population agree upon what the units of that type of 0:08:07.840 --> 0:08:11.720 money are worth in comparison to goods and services, and 0:08:11.800 --> 0:08:16.800 it's easier to carry that stuff around than than actual products. 0:08:16.840 --> 0:08:19.360 So step one in a currency is to have everyone 0:08:19.400 --> 0:08:24.720 agree that yes, this currency, this money represents value, and 0:08:24.760 --> 0:08:27.400 that the value is steady enough for us to make 0:08:27.440 --> 0:08:30.680 transactions happen. So, in other words, when I go out 0:08:30.680 --> 0:08:33.200 with my dollar bill and I'm ready to go buy something, 0:08:33.720 --> 0:08:35.559 I know that by the time I get to the store, 0:08:35.600 --> 0:08:37.760 that dollar bill is worth more or less the same 0:08:37.800 --> 0:08:40.439 as it was when I left the house. This is 0:08:40.440 --> 0:08:43.079 actually one of the big criticisms level that gets bitcoin. 0:08:43.160 --> 0:08:46.040 By the way, the value of bitcoin changes so dramatically 0:08:46.120 --> 0:08:49.360 so quickly that discourages anyone from using it as an 0:08:49.400 --> 0:08:52.920 actual currency. In fact, people have said that by the 0:08:53.040 --> 0:08:57.360 time a transaction can complete, the value of the bitcoins 0:08:57.400 --> 0:09:00.719 can change so dramatically that it comp etally changes the 0:09:00.800 --> 0:09:04.360 nature of the transaction itself. But we'll get into that 0:09:04.400 --> 0:09:07.560 a little bit more a little bit later on. Now, 0:09:07.559 --> 0:09:11.920 most currencies require some sort of backing institution to work, 0:09:12.400 --> 0:09:15.040 and that might be a government or a bank, or 0:09:15.040 --> 0:09:17.760 a combination of the two. And this is an entity 0:09:17.800 --> 0:09:20.320 that can help guarantee the value of a currency and 0:09:20.360 --> 0:09:22.800 that it remains stable. Also connect as a third party 0:09:22.840 --> 0:09:27.040 during certain types of transactions, and third parties become even 0:09:27.040 --> 0:09:29.840 more important when you start getting into concepts like credit. 0:09:30.400 --> 0:09:33.360 You could have a specific credit with a particular store 0:09:33.480 --> 0:09:36.040 or vendor, but these days it's far more common to 0:09:36.040 --> 0:09:39.200 see people build up credit with an agency and use 0:09:39.240 --> 0:09:42.920 a credit card to make purchases against that credit. Now 0:09:43.760 --> 0:09:47.360 transactions require the involvement of additional agencies to verify that 0:09:47.440 --> 0:09:50.480 the person making the purchase has the available credit to 0:09:50.559 --> 0:09:53.840 do so, and that the vendor is authorized to accept 0:09:53.840 --> 0:09:58.400 such credit. As more societies and populations interact with one another, 0:09:58.480 --> 0:10:02.800 this process of transaction becomes way more complicated. So then 0:10:02.840 --> 0:10:05.800 you've got things like exchange rates for currencies, and you've 0:10:05.840 --> 0:10:10.160 got processing fees for payment service providers. You've got various 0:10:10.240 --> 0:10:14.199 ledgers to keep track of purchases and sales. Information tends 0:10:14.200 --> 0:10:17.400 to be in silos. It is not transparent. It is 0:10:17.440 --> 0:10:19.640 privately held, which means you're not able to really get 0:10:19.640 --> 0:10:22.800 a look at it. They're all independent from one another, 0:10:23.160 --> 0:10:27.599 and this creates potential vulnerabilities that less honest people can exploit. 0:10:28.760 --> 0:10:32.320 Then you've got the concept of disputes. Disputes can can 0:10:32.400 --> 0:10:36.480 become a point of exploitation. Third parties frequently must mediate 0:10:36.520 --> 0:10:40.880 disputes between buyers and sellers. Now, a dispute could arise 0:10:40.880 --> 0:10:43.520 for many reasons. For example, and maybe that the delivered 0:10:43.559 --> 0:10:47.040 goods don't match what was advertised. In the case of 0:10:47.080 --> 0:10:49.760 physical goods, this can be a hassle. In the case 0:10:49.800 --> 0:10:53.480 of services, it's even more thorny because how do you 0:10:53.559 --> 0:10:56.920 get a refund for a service that's already been rendered, 0:10:56.960 --> 0:10:59.840 even if that service wasn't what you had hoped for. 0:11:00.000 --> 0:11:02.200 Are you did get something out of it and you 0:11:02.200 --> 0:11:05.040 can't return it. It's it's a service, not a not 0:11:05.160 --> 0:11:09.319 a product, So it's problematic. These third parties have to 0:11:09.360 --> 0:11:13.160 spend a lot of money mediating disputes between these buyers 0:11:13.160 --> 0:11:16.520 and sellers, and they tend to recapture those costs by 0:11:16.559 --> 0:11:20.640 increasing the transaction fees they charge for using their services. 0:11:21.920 --> 0:11:24.880 The transaction fees are what the amount of money that 0:11:24.880 --> 0:11:27.920 gets paid to the service as opposed to going straight 0:11:27.960 --> 0:11:32.240 to paying off the vendor for whatever you're purchasing. This 0:11:32.320 --> 0:11:37.160 makes smaller transactions less practical, since more of the transaction 0:11:37.200 --> 0:11:40.520 itself is going to this processing fee than it is 0:11:40.600 --> 0:11:44.040 to revenue for the merchant. This is why you might 0:11:44.120 --> 0:11:47.199 encounter some vendors they have a minimum charge amount for 0:11:47.240 --> 0:11:50.880 any credit card purchases. Now, this in turn becomes an 0:11:50.880 --> 0:11:55.360 issue of trust, and since trusted third party is part 0:11:55.360 --> 0:11:57.440 of the name, you can imagine that's a big deal. 0:11:57.840 --> 0:12:01.680 Merchants might demand more information from customers before accepting a 0:12:01.720 --> 0:12:06.719 specific type of transaction, because without knowing more about their customers, 0:12:06.920 --> 0:12:10.640 the merchant might want to worry about fraudulent disputes. A 0:12:10.679 --> 0:12:13.800 fraudulent dispute may cost the money. They might have to 0:12:13.880 --> 0:12:16.400 foot the bill and they end up getting the raw 0:12:16.480 --> 0:12:18.480 end of the deal. They might end up being out 0:12:18.600 --> 0:12:21.360 of a product and they don't get paid for it. 0:12:22.160 --> 0:12:26.440 So this is particularly an issue with online payments. You 0:12:26.440 --> 0:12:29.640 can make exchanges using actual currency in person, and that 0:12:29.720 --> 0:12:33.120 avoids many of these problems because you don't need a 0:12:33.160 --> 0:12:35.439 third party. It can just be a direct exchange that 0:12:35.600 --> 0:12:39.120 here's my money, thank you for the thing, I'll be 0:12:39.200 --> 0:12:41.840 on my way. But if you're buying something online, that's 0:12:41.840 --> 0:12:44.720 not really an option. You essentially have to use some 0:12:44.760 --> 0:12:48.439 other third party service, whether it's credit card or PayPal 0:12:48.600 --> 0:12:51.440 or something along those lines. There really wasn't a way 0:12:51.440 --> 0:12:54.520 to make a purchase without also relying on a third party, 0:12:55.000 --> 0:12:57.640 and as a result, those third parties tend to be 0:12:57.720 --> 0:13:01.680 big targets for hackers. They go after them because this 0:13:01.760 --> 0:13:04.400 is sort of the the central point where a lot 0:13:04.480 --> 0:13:07.240 of money has to pass through on any given day. Now, 0:13:07.360 --> 0:13:10.280 Nakamoto's design was meant to change all of that. Third 0:13:10.320 --> 0:13:15.840 parties would become obsolete because the system itself would serve 0:13:15.920 --> 0:13:20.120 as a record of transactions and also the authorization tool 0:13:20.200 --> 0:13:25.880 required to verify those transactions. The verification process would create 0:13:25.880 --> 0:13:29.319 a situation that was, in the words of Nakamoto, quote 0:13:29.760 --> 0:13:34.560 computationally impractical to reverse end quote. Now, that meant that 0:13:34.640 --> 0:13:38.240 the amount of processing power required to change the transaction 0:13:38.320 --> 0:13:41.360 record so that you would be able to commit fraud 0:13:41.679 --> 0:13:45.760 would require so much computational power that no one would 0:13:45.800 --> 0:13:48.480 have ready access to it. In addition, the record of 0:13:48.520 --> 0:13:51.360 transactions would exist across an entire period of peer network, 0:13:51.440 --> 0:13:53.640 so you would have to do so much work to 0:13:53.679 --> 0:13:58.720 commit fraud that it would be a diminishing returns situation. 0:13:58.760 --> 0:14:01.360 You would actually be spending more or money trying to 0:14:01.360 --> 0:14:04.280 get ahead of the system than you would ever recapture 0:14:04.360 --> 0:14:07.080 from committing fraud. In fact, it would make way more 0:14:07.160 --> 0:14:11.720 sense to dedicate that computational power to working legitimately within 0:14:11.760 --> 0:14:15.080 the system and earning money that way. But we'll talk 0:14:15.120 --> 0:14:17.720 about that a little bit more later on. Before I 0:14:17.760 --> 0:14:20.720 get into that, let's take a quick break to thank 0:14:20.760 --> 0:14:30.480 our sponsor, the peer to peer decentralized network I was 0:14:30.560 --> 0:14:34.480 talking about. That's the key year. It's what gives transactions 0:14:34.600 --> 0:14:39.400 legitimacy and transparency keeps the system itself stable even if 0:14:39.680 --> 0:14:44.240 it's a cryptocurrency system like Bitcoin. Even if the cryptocurrency 0:14:44.280 --> 0:14:47.720 has a fluctuating value, the system itself is still stable. 0:14:48.000 --> 0:14:51.640 It's also necessary so that no party can abuse the system, 0:14:51.640 --> 0:14:54.800 such as spending the same digital currency twice. Now what 0:14:54.840 --> 0:14:56.640 I mean by that is, well, let's let's take a 0:14:56.720 --> 0:14:59.640 real physical world example and then compare it with a 0:14:59.680 --> 0:15:03.040 digital example and see how they're different. Let's say that 0:15:03.120 --> 0:15:09.120 you have in your possession of valuable physical commodity. We'll 0:15:09.120 --> 0:15:12.560 say it's a a vinyl single. In fact, let's say 0:15:12.560 --> 0:15:15.120 it's a vinyl single of the greatest song ever written, 0:15:15.160 --> 0:15:17.640 which we all know is Hooked on a Feeling by 0:15:17.640 --> 0:15:20.680 Blue Sweet. So a friend of yours is willing to 0:15:20.760 --> 0:15:26.840 trade a Sweet Hollow shadowless Mutube Pokemon card in exchange 0:15:26.880 --> 0:15:30.320 for your limited edition vinyl single of Hooked on a Feeling. 0:15:31.000 --> 0:15:33.359 So you make the trade. You hand over the single, 0:15:33.480 --> 0:15:35.960 they hand over the card, And once you do, that 0:15:36.160 --> 0:15:39.720 vinyl single is no longer in your possession, right, it's gone. 0:15:39.840 --> 0:15:42.080 You've given it to your friend, so you can't spend 0:15:42.080 --> 0:15:45.680 it again. You aren't able to make that trade a 0:15:45.680 --> 0:15:48.840 second time with someone else. But let's switch this to 0:15:48.920 --> 0:15:51.560 the digital world. Let's say that you've convinced the same 0:15:51.680 --> 0:15:56.200 friend to part with that sweet sweet card in exchange 0:15:56.200 --> 0:15:59.640 for an MP three of hooked on a Feeling. Well, 0:15:59.640 --> 0:16:03.160 that's a vy because you can make endless digital copies 0:16:03.440 --> 0:16:06.680 of the MP three and you can spend it over 0:16:06.720 --> 0:16:09.040 and over in traits like that. So if you find 0:16:09.080 --> 0:16:11.000 that your other friends also what an MP three have 0:16:11.040 --> 0:16:13.560 hooked on a feeling, then you can just keep on 0:16:13.640 --> 0:16:16.280 trading that same file. You're just copying it over and 0:16:16.320 --> 0:16:21.080 over again, so it's like you're spending the same dollar repeatedly. Clearly, 0:16:21.720 --> 0:16:24.240 if you want a digital currency to work within a system, 0:16:24.280 --> 0:16:26.320 you have to build in a mechanism to make sure 0:16:26.400 --> 0:16:30.479 someone can't just spend the same units of currency repeatedly. 0:16:31.000 --> 0:16:33.400 It has to be able to track when something has 0:16:33.400 --> 0:16:37.280 been spent and mark that down so that you cannot 0:16:37.360 --> 0:16:40.520 spend it again because you no longer possess it. Once 0:16:40.560 --> 0:16:43.200 they make a transaction, the unit of currency has to 0:16:43.240 --> 0:16:46.880 be transferred to a new owner with no copy left behind. 0:16:47.800 --> 0:16:53.360 The distributed ledger helps ensure this by making sure everyone 0:16:53.440 --> 0:16:56.320 has a copy of what's going on, and it avoids 0:16:56.360 --> 0:17:00.000 the issue of having a centralized authority like an exchange 0:17:00.040 --> 0:17:03.640 change or a bank or a government that is in 0:17:03.760 --> 0:17:08.080 charge of saying yes, that transaction was legitimate. Because again, 0:17:08.119 --> 0:17:11.680 if you have a central point, then that's the point 0:17:11.680 --> 0:17:13.919 that's the most vulnerable. Everyone's going to attack it. If 0:17:13.920 --> 0:17:17.040 it's distributed, it's way harder to take advantage of it 0:17:17.080 --> 0:17:20.920 because it's spread across an entire network of computers. So 0:17:21.320 --> 0:17:24.679 a distributed ledger helps ensure this safety. Everyone in the 0:17:24.720 --> 0:17:27.360 system can see the record of transactions, and thus everyone 0:17:27.400 --> 0:17:30.639 knows if you've already spent those digital units. The distributed 0:17:30.680 --> 0:17:33.560 ledger is sort of like a shared online document or 0:17:33.600 --> 0:17:36.360 a spreadsheet. So if you've used something like Google spreadsheets 0:17:36.359 --> 0:17:39.560 and a shared work group, that's an okay example. It's 0:17:39.560 --> 0:17:41.879 not exactly the same thing, but it's similar enough that 0:17:41.920 --> 0:17:44.720 we can kind of draw some analogies. So you have 0:17:44.840 --> 0:17:48.840 authorized users who can access and view and edit the 0:17:49.000 --> 0:17:53.080 same spreadsheet. They don't possess a localized copy of the 0:17:53.119 --> 0:17:56.440 spreadsheet the way you would with something like traditional versions 0:17:56.480 --> 0:17:59.240 of Excel or Lotus one, two three. And this is 0:17:59.240 --> 0:18:01.840 a good thing because in the old days of working 0:18:01.840 --> 0:18:04.280 with these documents, you might get a copy of a 0:18:04.320 --> 0:18:07.040 document you make some changes, you would save it. That 0:18:07.080 --> 0:18:10.359 would create a new copy of the document somewhere else. 0:18:10.440 --> 0:18:14.720 The older version still exists because someone sent that to you. 0:18:14.720 --> 0:18:18.960 You then send your version to somebody, they make changes, 0:18:19.000 --> 0:18:21.359 they save it. Now there's a third copy out there, 0:18:21.680 --> 0:18:23.320 and so on and so forth, and you end up 0:18:23.359 --> 0:18:26.680 with all these different copies of a document. You ultimately 0:18:26.720 --> 0:18:29.520 have to reconcile them all, decide which one is the 0:18:29.640 --> 0:18:33.880 definitive copy, which one has the the most accurate changes 0:18:33.880 --> 0:18:37.800 in it, And it's a huge hassle if the other 0:18:37.880 --> 0:18:41.199 person had made some changes that you didn't agree with, 0:18:41.280 --> 0:18:42.800 and you've got to go back and forth on this, 0:18:43.359 --> 0:18:46.200 and the separate instances of the same sort of file 0:18:46.280 --> 0:18:50.480 create a huge amount of headaches. Blockchain ledgers kind of 0:18:50.480 --> 0:18:55.560 get around this by having a shared document where everyone 0:18:55.680 --> 0:18:58.080 can see it. Now, granted, it's it's kind of like 0:18:58.119 --> 0:19:01.640 there are copies everywhere, but every copy of it has 0:19:01.680 --> 0:19:05.120 to agree with all the other copies. Ultimately, it gets 0:19:05.160 --> 0:19:07.119 a little messy in the short term, but in the 0:19:07.200 --> 0:19:09.919 long term, all the copies have to agree with one another, 0:19:10.240 --> 0:19:13.120 and they're distributed across the entire network, so it's more 0:19:13.200 --> 0:19:15.760 like a shared spreadsheet. Where if I make a change 0:19:15.760 --> 0:19:19.359 in that spreadsheet, everyone else will see that change, or 0:19:19.359 --> 0:19:21.400 if really, I should say, if I make an addition 0:19:21.480 --> 0:19:24.520 to it. Because the way blockchain has worked, it's meant 0:19:24.560 --> 0:19:27.640 to allow for more information to be added to the 0:19:27.680 --> 0:19:31.040 block chain the chain of blocks, and each block is 0:19:31.040 --> 0:19:34.800 a block of data. So blockchain ledgers are a record 0:19:34.840 --> 0:19:37.760 of transactions. In fact, they are a record of transactions 0:19:37.800 --> 0:19:40.000 that date all the way back to the formation of 0:19:40.040 --> 0:19:43.480 the blockchain. And this is a distributed record, meaning every 0:19:43.520 --> 0:19:46.560 computer or node if you prefer, because that's what these 0:19:46.600 --> 0:19:49.959 computers are called, every node on this network and this 0:19:50.000 --> 0:19:53.119 peer to peer network can access that ledger. So to 0:19:53.160 --> 0:19:58.439 perform a transaction with bitcoins, because again bitcoins being the 0:19:58.480 --> 0:20:02.680 most famous implementation of the blockchain technology. First you need 0:20:03.000 --> 0:20:08.800 a wallet, and the wallet exists as your repository of bitcoins. 0:20:08.840 --> 0:20:13.359 Associated with the wallet are two security keys. One of 0:20:13.400 --> 0:20:15.720 them is a public key, which you share with other 0:20:15.760 --> 0:20:18.520 people on the network, and one is a private key, 0:20:18.560 --> 0:20:21.880 which you keep for your very own. The keys are 0:20:21.880 --> 0:20:24.720 connected to one another, but they are different, so the 0:20:24.760 --> 0:20:26.720 public key and the private key are not the same 0:20:27.560 --> 0:20:31.720 code essentially are same same characters. If you prefer but 0:20:31.840 --> 0:20:34.960 they are connected to one another. Encrypting a message with 0:20:35.000 --> 0:20:39.960 a public key makes it impossible essentially to read without 0:20:40.000 --> 0:20:43.399 the corresponding private key. So if you wanted to send 0:20:43.440 --> 0:20:45.879 me a message and you wanted to make sure that 0:20:45.920 --> 0:20:48.400 I was the only person who could read that message, 0:20:48.720 --> 0:20:52.119 you would use my public key, which everyone has access to, 0:20:52.600 --> 0:20:55.240 and you would encrypt your message. Now, the only thing 0:20:55.280 --> 0:20:58.159 that can decrypt that message is my private key, and 0:20:58.200 --> 0:21:01.080 I'm the only one who possesses it. So that way 0:21:01.119 --> 0:21:04.280 you know that the message you're sending me is safe 0:21:04.720 --> 0:21:07.400 until I open it, because I'm the only one who 0:21:07.400 --> 0:21:11.520 has the key to access it. Likewise, if I send 0:21:11.560 --> 0:21:16.120 something out with my private key encrypting the data, that's 0:21:16.119 --> 0:21:20.359 like a digital signature that's saying this message had to 0:21:20.440 --> 0:21:24.919 come from Jonathan Strickland because it used his private key, 0:21:24.960 --> 0:21:27.760 and I know that because I can decrypt it with 0:21:27.840 --> 0:21:32.000 Jonathan Strickland's public key, which I have access to, and 0:21:32.080 --> 0:21:35.560 that means that it's it's authenticated as coming from me. Now, 0:21:35.560 --> 0:21:39.800 these are both very important concepts when it comes to transactions. 0:21:40.359 --> 0:21:42.040 If I send out a message that I want to 0:21:42.040 --> 0:21:45.119 make a transaction and use my private key, then again 0:21:45.320 --> 0:21:47.639 only my public key, which is known to all nodes 0:21:47.640 --> 0:21:50.680 on the network, can decrypt this message, and that authenticates 0:21:51.080 --> 0:21:53.560 that the message actually came from me, no one else. 0:21:53.640 --> 0:21:56.639 No one's able to impersonate me and spend my money 0:21:56.680 --> 0:22:00.520 on my account, So all the nodes can see that ledger, 0:22:00.520 --> 0:22:03.400 and when it's time to make a transaction, the parties 0:22:03.480 --> 0:22:06.400 involved send a message out to the network using their 0:22:06.400 --> 0:22:08.960 cryptographic keys. And a simple way to think about this 0:22:09.480 --> 0:22:12.760 is that one party's bitcoin wallet will decrease by a 0:22:12.800 --> 0:22:16.680 certain amount, and the other party's bitcoin wallet will increase 0:22:16.800 --> 0:22:19.800 by that same amount. So let's say I'm buying something 0:22:19.880 --> 0:22:23.879 for point zero zero zero five bitcoins, because you can 0:22:23.920 --> 0:22:27.000 divide bitcoins up to like a hundred million places, and 0:22:27.080 --> 0:22:30.040 the message that's sent out to the network is Jonathan's 0:22:30.040 --> 0:22:34.640 wallet should decrease by point zero zero zero five bitcoins 0:22:34.920 --> 0:22:37.680 and the Caso Hut's account should go up by point 0:22:37.800 --> 0:22:41.479 zero zero zero five bitcoins. Although I should point out 0:22:41.520 --> 0:22:43.800 that the blockchain isn't actually keeping track of how much 0:22:43.800 --> 0:22:46.760 money is in my account. It doesn't care. Instead, it 0:22:46.880 --> 0:22:49.840 keeps track of where all the units of currency in 0:22:49.880 --> 0:22:53.879 the system are. Because all that history is contained within 0:22:53.960 --> 0:22:57.040 the ledger. The nodes have to verify that I actually 0:22:57.160 --> 0:23:00.840 have point zero zero zero five bit points, and they 0:23:00.840 --> 0:23:03.919 do that by looking at the transaction history, all the 0:23:03.960 --> 0:23:08.320 transactions where money was deposited to me versus money coming 0:23:08.359 --> 0:23:11.160 out of my account to make certain that I actually 0:23:11.200 --> 0:23:13.600