Speaker 1: Text with Technology with tech Stuff from stuff dot com.
Speaker 1: Hey there, and welcome to tech Stuff. I am your host,
Speaker 1: Jonathan Strickland. I'm an executive producer at How Stuff Works,
Speaker 1: and I'm in pain right now. People who are watching
Speaker 1: the live stream know that just before I recorded this episode,
Speaker 1: I eight Caroline her reaper corn Chip. So if you
Speaker 1: want to watch me do dumb things immediately before I
Speaker 1: do my job, go to twitch dot tv slash tech
Speaker 1: Stuff and you can watch me record these live. But
Speaker 1: let's put that aside. First of all, Happy New Year,
Speaker 1: Welcome to two thousand eighteen. I'm recording this at the
Speaker 1: end of seen, but by the time it goes out
Speaker 1: it'll be so I'm sure the New Year has transformed
Speaker 1: everything around us and we don't even recognize the world
Speaker 1: of tomorrow, which I guess is today for you. But
Speaker 1: today I wanted to talk about a technology that's been
Speaker 1: around for a few years. Actually, elements of this technology
Speaker 1: been around for decades, but people are talking about it
Speaker 1: now more than ever and mentioning it as the technology
Speaker 1: of the future. And what I'm talking about is the
Speaker 1: technology of blockchain. So this is an interesting technology. It's
Speaker 1: safe to say that I think you know. The most
Speaker 1: famous example of something that's dependent upon blockchain technology is bitcoin.
Speaker 1: Everyone's heard about bitcoin at this point, but it is
Speaker 1: important to remember that bitcoins are an implementation on top
Speaker 1: of blockchain technology, but not all blockchain technology has to
Speaker 1: be Bitcoin. So what the heck is blockchain? Well, i'm
Speaker 1: gonna talk about blockchain, I'm gonna talk about bitcoin. I'm
Speaker 1: gonna talk about other uses of blockchain, but we will
Speaker 1: mention Bitcoin quite a bit because again, it's the most
Speaker 1: famous um implementation of blockchain technology and the reason why
Speaker 1: anyone is really talking about it at all today because
Speaker 1: it showed the potential for this technology. Now it's the
Speaker 1: implementation of a collection of different really good ideas put
Speaker 1: forward in an innovative way to create a distributed record
Speaker 1: of transactions. That we can trace this technology back to
Speaker 1: a name, but not to an actual person, and by
Speaker 1: that I mean we can trace the concept to a
Speaker 1: person or group of persons who used the name Satoshi Nakamoto.
Speaker 1: If that name sounds familiar, probably means you've read up
Speaker 1: on bitcoin, because that's where blockchain got start. It was
Speaker 1: all on this white paper that was written about bitcoin
Speaker 1: by someone or someone's going by the name Satoshi Nakamoto. Now,
Speaker 1: the mystery of who is Satoshi Nakamoto is interesting, but
Speaker 1: rather immaterial to our subject matter. So let's just say
Speaker 1: there's a lot of speculation as to who ultimately is
Speaker 1: behind the pseudonym. According to at least one post from
Speaker 1: Nakamoto supposedly is someone from Japan who was born in
Speaker 1: n but there's been a lot of speculation that that
Speaker 1: is just a misdirection and in fact Nakamoto is really
Speaker 1: someone who is originally from America or the European Union.
Speaker 1: And that's all we know really. Now, what's really important
Speaker 1: to us is that Nakamoto published the paper on a
Speaker 1: mailing list that focused on cryptography, and this was back
Speaker 1: in two thousand and eight. The first message in that
Speaker 1: thread of messages was titled bitcoin P two p E
Speaker 1: cash paper and it hit that mailing list on Saturday,
Speaker 1: November one, two thousand eight. That's what I love about
Speaker 1: the Internet. It means that if you go to a
Speaker 1: message board, you can actually see the date when something
Speaker 1: is posted, so you can have a very specific mention
Speaker 1: of when something came into being. In fact, I could
Speaker 1: even give you a time stamp if I still had
Speaker 1: that page open to tell you what time it was
Speaker 1: posted there. But the message contained a link to a
Speaker 1: paper and white paper about this concept, and that paper
Speaker 1: is still available in PDF format for free, So if
Speaker 1: you'd like to read the whole thing, you can find
Speaker 1: it at bitcoin dot org slash bitcoin dot pdf. Now
Speaker 1: a lot of what I'm going to cover today comes
Speaker 1: straight from that paper. Now, the abstract of that paper
Speaker 1: lays out Nakamoto's general approach, so I'm going to quote
Speaker 1: the abstract here. A purely peer to peer version of
Speaker 1: electronic cash would allow online payments to be sent directly
Speaker 1: from one party to another without going through a financial institution.
Speaker 1: Digital signatures provide part of the solution, but the main
Speaker 1: benefits are lost if a trusted third party is still required.
Speaker 1: To prevent double spending, we propose a solution to the
Speaker 1: double spending problem using a peer to peer network. The
Speaker 1: network time stamps transactions by hashing them into an ongoing
Speaker 1: chain of a hash based proof of work, forming a
Speaker 1: wreck heard that cannot be changed without redoing the proof
Speaker 1: proof of work. The longest chain not only serves as
Speaker 1: proof of the sequence of events witnessed, but proof that
Speaker 1: it came from the largest pool of CPU power. As
Speaker 1: long as a majority of CPU power is controlled by
Speaker 1: nodes that are not cooperating to attack the network, they'll
Speaker 1: generate the longest chain and outpaced attackers. The network itself
Speaker 1: requires minimal structure. Messages are broadcast on a best effort basis,
Speaker 1: and nodes can leave and rejoin the network at will,
Speaker 1: accepting the longest proof of work chain as proof of
Speaker 1: what happened while they were gone. So this is all
Speaker 1: about keeping that record of transactions that take place across
Speaker 1: a system, and the ongoing record that keeps getting built
Speaker 1: onto is also used to verify, uh, everything that happens
Speaker 1: and to make certain that people are not able to
Speaker 1: spend the same units more than once. Now, Nakamoto was
Speaker 1: specifically talking about creating a digital currency, namely bitcoin, but
Speaker 1: it turns out this decentralized peer to peer ledger system
Speaker 1: could be used for lots of different stuff. Essentially any
Speaker 1: sort of transaction, not just the ones involving spending digital
Speaker 1: currency to purchase goods and services or even storing data online.
Speaker 1: It would serve as the foundation for blockchain, which some
Speaker 1: people are going so far as to call web three
Speaker 1: point oh, which I absolutely hate but that would send
Speaker 1: me down a rant about web two point oh, and
Speaker 1: I've already done old episodes about that years ago, so
Speaker 1: we'll not read tread that ground. To understand blockchain and
Speaker 1: why so many people are convinced that it's going to
Speaker 1: be the tech of the future, it helps understand how
Speaker 1: transactions work in a traditional system. So let's start super
Speaker 1: basic with bartering system. So this is the old tip
Speaker 1: for tat approach. You have something I want, I've got
Speaker 1: something you want. We agree upon the relative value of
Speaker 1: those two things, and we do an exchange. So let's
Speaker 1: say you make chairs and I breed chickens, and we
Speaker 1: have to agree how many chickens does it out to
Speaker 1: be valuable as valuable as a chair or vice versa,
Speaker 1: and then we make the exchange. Pretty straightforward system, but
Speaker 1: it has some major downsides. One of the big downsides
Speaker 1: is I might really need that chair, but it may
Speaker 1: turn out the carpenter has no need for my chickens,
Speaker 1: so it doesn't matter how many chickens I offer against
Speaker 1: the chair. The carpenter has no use for the chickens,
Speaker 1: So I don't get the chair, and I'm unable to
Speaker 1: sit down, and I am sad. Now I could go
Speaker 1: out and try and find a different carpenter who does
Speaker 1: need chickens, or maybe I find someone else who needs
Speaker 1: chickens but is offering up something else entirely, and hope
Speaker 1: that whatever that thing is is something that the carpenter wants,
Speaker 1: and I've exchanged that for the chair. But this whole
Speaker 1: process is cumbersome and messy unless the two parties in
Speaker 1: question already possess exactly what the other party wants. Now,
Speaker 1: another drawback is portability. It would be a real drag
Speaker 1: to carry chairs and chickens around everywhere you went, just
Speaker 1: when you needed to buy something. So sy alleviates that problem.
Speaker 1: It acts as a store of value. Members of a
Speaker 1: population agree upon what the units of that type of
Speaker 1: money are worth in comparison to goods and services, and
Speaker 1: it's easier to carry that stuff around than than actual products.
Speaker 1: So step one in a currency is to have everyone
Speaker 1: agree that yes, this currency, this money represents value, and
Speaker 1: that the value is steady enough for us to make
Speaker 1: transactions happen. So, in other words, when I go out
Speaker 1: with my dollar bill and I'm ready to go buy something,
Speaker 1: I know that by the time I get to the store,
Speaker 1: that dollar bill is worth more or less the same
Speaker 1: as it was when I left the house. This is
Speaker 1: actually one of the big criticisms level that gets bitcoin.
Speaker 1: By the way, the value of bitcoin changes so dramatically
Speaker 1: so quickly that discourages anyone from using it as an
Speaker 1: actual currency. In fact, people have said that by the
Speaker 1: time a transaction can complete, the value of the bitcoins
Speaker 1: can change so dramatically that it comp etally changes the
Speaker 1: nature of the transaction itself. But we'll get into that
Speaker 1: a little bit more a little bit later on. Now,
Speaker 1: most currencies require some sort of backing institution to work,
Speaker 1: and that might be a government or a bank, or
Speaker 1: a combination of the two. And this is an entity
Speaker 1: that can help guarantee the value of a currency and
Speaker 1: that it remains stable. Also connect as a third party
Speaker 1: during certain types of transactions, and third parties become even
Speaker 1: more important when you start getting into concepts like credit.
Speaker 1: You could have a specific credit with a particular store
Speaker 1: or vendor, but these days it's far more common to
Speaker 1: see people build up credit with an agency and use
Speaker 1: a credit card to make purchases against that credit. Now
Speaker 1: transactions require the involvement of additional agencies to verify that
Speaker 1: the person making the purchase has the available credit to
Speaker 1: do so, and that the vendor is authorized to accept
Speaker 1: such credit. As more societies and populations interact with one another,
Speaker 1: this process of transaction becomes way more complicated. So then
Speaker 1: you've got things like exchange rates for currencies, and you've
Speaker 1: got processing fees for payment service providers. You've got various
Speaker 1: ledgers to keep track of purchases and sales. Information tends
Speaker 1: to be in silos. It is not transparent. It is
Speaker 1: privately held, which means you're not able to really get
Speaker 1: a look at it. They're all independent from one another,
Speaker 1: and this creates potential vulnerabilities that less honest people can exploit.
Speaker 1: Then you've got the concept of disputes. Disputes can can
Speaker 1: become a point of exploitation. Third parties frequently must mediate
Speaker 1: disputes between buyers and sellers. Now, a dispute could arise
Speaker 1: for many reasons. For example, and maybe that the delivered
Speaker 1: goods don't match what was advertised. In the case of
Speaker 1: physical goods, this can be a hassle. In the case
Speaker 1: of services, it's even more thorny because how do you
Speaker 1: get a refund for a service that's already been rendered,
Speaker 1: even if that service wasn't what you had hoped for.
Speaker 1: Are you did get something out of it and you
Speaker 1: can't return it. It's it's a service, not a not
Speaker 1: a product, So it's problematic. These third parties have to
Speaker 1: spend a lot of money mediating disputes between these buyers
Speaker 1: and sellers, and they tend to recapture those costs by
Speaker 1: increasing the transaction fees they charge for using their services.
Speaker 1: The transaction fees are what the amount of money that
Speaker 1: gets paid to the service as opposed to going straight
Speaker 1: to paying off the vendor for whatever you're purchasing. This
Speaker 1: makes smaller transactions less practical, since more of the transaction
Speaker 1: itself is going to this processing fee than it is
Speaker 1: to revenue for the merchant. This is why you might
Speaker 1: encounter some vendors they have a minimum charge amount for
Speaker 1: any credit card purchases. Now, this in turn becomes an
Speaker 1: issue of trust, and since trusted third party is part
Speaker 1: of the name, you can imagine that's a big deal.
Speaker 1: Merchants might demand more information from customers before accepting a
Speaker 1: specific type of transaction, because without knowing more about their customers,
Speaker 1: the merchant might want to worry about fraudulent disputes. A
Speaker 1: fraudulent dispute may cost the money. They might have to
Speaker 1: foot the bill and they end up getting the raw
Speaker 1: end of the deal. They might end up being out
Speaker 1: of a product and they don't get paid for it.
Speaker 1: So this is particularly an issue with online payments. You
Speaker 1: can make exchanges using actual currency in person, and that
Speaker 1: avoids many of these problems because you don't need a
Speaker 1: third party. It can just be a direct exchange that
Speaker 1: here's my money, thank you for the thing, I'll be
Speaker 1: on my way. But if you're buying something online, that's
Speaker 1: not really an option. You essentially have to use some
Speaker 1: other third party service, whether it's credit card or PayPal
Speaker 1: or something along those lines. There really wasn't a way
Speaker 1: to make a purchase without also relying on a third party,
Speaker 1: and as a result, those third parties tend to be
Speaker 1: big targets for hackers. They go after them because this
Speaker 1: is sort of the the central point where a lot
Speaker 1: of money has to pass through on any given day. Now,
Speaker 1: Nakamoto's design was meant to change all of that. Third
Speaker 1: parties would become obsolete because the system itself would serve
Speaker 1: as a record of transactions and also the authorization tool
Speaker 1: required to verify those transactions. The verification process would create
Speaker 1: a situation that was, in the words of Nakamoto, quote
Speaker 1: computationally impractical to reverse end quote. Now, that meant that
Speaker 1: the amount of processing power required to change the transaction
Speaker 1: record so that you would be able to commit fraud
Speaker 1: would require so much computational power that no one would
Speaker 1: have ready access to it. In addition, the record of
Speaker 1: transactions would exist across an entire period of peer network,
Speaker 1: so you would have to do so much work to
Speaker 1: commit fraud that it would be a diminishing returns situation.
Speaker 1: You would actually be spending more or money trying to
Speaker 1: get ahead of the system than you would ever recapture
Speaker 1: from committing fraud. In fact, it would make way more
Speaker 1: sense to dedicate that computational power to working legitimately within
Speaker 1: the system and earning money that way. But we'll talk
Speaker 1: about that a little bit more later on. Before I
Speaker 1: get into that, let's take a quick break to thank
Speaker 1: our sponsor, the peer to peer decentralized network I was
Speaker 1: talking about. That's the key year. It's what gives transactions
Speaker 1: legitimacy and transparency keeps the system itself stable even if
Speaker 1: it's a cryptocurrency system like Bitcoin. Even if the cryptocurrency
Speaker 1: has a fluctuating value, the system itself is still stable.
Speaker 1: It's also necessary so that no party can abuse the system,
Speaker 1: such as spending the same digital currency twice. Now what
Speaker 1: I mean by that is, well, let's let's take a
Speaker 1: real physical world example and then compare it with a
Speaker 1: digital example and see how they're different. Let's say that
Speaker 1: you have in your possession of valuable physical commodity. We'll
Speaker 1: say it's a a vinyl single. In fact, let's say
Speaker 1: it's a vinyl single of the greatest song ever written,
Speaker 1: which we all know is Hooked on a Feeling by
Speaker 1: Blue Sweet. So a friend of yours is willing to
Speaker 1: trade a Sweet Hollow shadowless Mutube Pokemon card in exchange
Speaker 1: for your limited edition vinyl single of Hooked on a Feeling.
Speaker 1: So you make the trade. You hand over the single,
Speaker 1: they hand over the card, And once you do, that
Speaker 1: vinyl single is no longer in your possession, right, it's gone.
Speaker 1: You've given it to your friend, so you can't spend
Speaker 1: it again. You aren't able to make that trade a
Speaker 1: second time with someone else. But let's switch this to
Speaker 1: the digital world. Let's say that you've convinced the same
Speaker 1: friend to part with that sweet sweet card in exchange
Speaker 1: for an MP three of hooked on a Feeling. Well,
Speaker 1: that's a vy because you can make endless digital copies
Speaker 1: of the MP three and you can spend it over
Speaker 1: and over in traits like that. So if you find
Speaker 1: that your other friends also what an MP three have
Speaker 1: hooked on a feeling, then you can just keep on
Speaker 1: trading that same file. You're just copying it over and
Speaker 1: over again, so it's like you're spending the same dollar repeatedly. Clearly,
Speaker 1: if you want a digital currency to work within a system,
Speaker 1: you have to build in a mechanism to make sure
Speaker 1: someone can't just spend the same units of currency repeatedly.
Speaker 1: It has to be able to track when something has
Speaker 1: been spent and mark that down so that you cannot
Speaker 1: spend it again because you no longer possess it. Once
Speaker 1: they make a transaction, the unit of currency has to
Speaker 1: be transferred to a new owner with no copy left behind.
Speaker 1: The distributed ledger helps ensure this by making sure everyone
Speaker 1: has a copy of what's going on, and it avoids
Speaker 1: the issue of having a centralized authority like an exchange
Speaker 1: change or a bank or a government that is in
Speaker 1: charge of saying yes, that transaction was legitimate. Because again,
Speaker 1: if you have a central point, then that's the point
Speaker 1: that's the most vulnerable. Everyone's going to attack it. If
Speaker 1: it's distributed, it's way harder to take advantage of it
Speaker 1: because it's spread across an entire network of computers. So
Speaker 1: a distributed ledger helps ensure this safety. Everyone in the
Speaker 1: system can see the record of transactions, and thus everyone
Speaker 1: knows if you've already spent those digital units. The distributed
Speaker 1: ledger is sort of like a shared online document or
Speaker 1: a spreadsheet. So if you've used something like Google spreadsheets
Speaker 1: and a shared work group, that's an okay example. It's
Speaker 1: not exactly the same thing, but it's similar enough that
Speaker 1: we can kind of draw some analogies. So you have
Speaker 1: authorized users who can access and view and edit the
Speaker 1: same spreadsheet. They don't possess a localized copy of the
Speaker 1: spreadsheet the way you would with something like traditional versions
Speaker 1: of Excel or Lotus one, two three. And this is
Speaker 1: a good thing because in the old days of working
Speaker 1: with these documents, you might get a copy of a
Speaker 1: document you make some changes, you would save it. That
Speaker 1: would create a new copy of the document somewhere else.
Speaker 1: The older version still exists because someone sent that to you.
Speaker 1: You then send your version to somebody, they make changes,
Speaker 1: they save it. Now there's a third copy out there,
Speaker 1: and so on and so forth, and you end up
Speaker 1: with all these different copies of a document. You ultimately
Speaker 1: have to reconcile them all, decide which one is the
Speaker 1: definitive copy, which one has the the most accurate changes
Speaker 1: in it, And it's a huge hassle if the other
Speaker 1: person had made some changes that you didn't agree with,
Speaker 1: and you've got to go back and forth on this,
Speaker 1: and the separate instances of the same sort of file
Speaker 1: create a huge amount of headaches. Blockchain ledgers kind of
Speaker 1: get around this by having a shared document where everyone
Speaker 1: can see it. Now, granted, it's it's kind of like
Speaker 1: there are copies everywhere, but every copy of it has
Speaker 1: to agree with all the other copies. Ultimately, it gets
Speaker 1: a little messy in the short term, but in the
Speaker 1: long term, all the copies have to agree with one another,
Speaker 1: and they're distributed across the entire network, so it's more
Speaker 1: like a shared spreadsheet. Where if I make a change
Speaker 1: in that spreadsheet, everyone else will see that change, or
Speaker 1: if really, I should say, if I make an addition
Speaker 1: to it. Because the way blockchain has worked, it's meant
Speaker 1: to allow for more information to be added to the
Speaker 1: block chain the chain of blocks, and each block is
Speaker 1: a block of data. So blockchain ledgers are a record
Speaker 1: of transactions. In fact, they are a record of transactions
Speaker 1: that date all the way back to the formation of
Speaker 1: the blockchain. And this is a distributed record, meaning every
Speaker 1: computer or node if you prefer, because that's what these
Speaker 1: computers are called, every node on this network and this
Speaker 1: peer to peer network can access that ledger. So to
Speaker 1: perform a transaction with bitcoins, because again bitcoins being the
Speaker 1: most famous implementation of the blockchain technology. First you need
Speaker 1: a wallet, and the wallet exists as your repository of bitcoins.
Speaker 1: Associated with the wallet are two security keys. One of
Speaker 1: them is a public key, which you share with other
Speaker 1: people on the network, and one is a private key,
Speaker 1: which you keep for your very own. The keys are
Speaker 1: connected to one another, but they are different, so the
Speaker 1: public key and the private key are not the same
Speaker 1: code essentially are same same characters. If you prefer but
Speaker 1: they are connected to one another. Encrypting a message with
Speaker 1: a public key makes it impossible essentially to read without
Speaker 1: the corresponding private key. So if you wanted to send
Speaker 1: me a message and you wanted to make sure that
Speaker 1: I was the only person who could read that message,
Speaker 1: you would use my public key, which everyone has access to,
Speaker 1: and you would encrypt your message. Now, the only thing
Speaker 1: that can decrypt that message is my private key, and
Speaker 1: I'm the only one who possesses it. So that way
Speaker 1: you know that the message you're sending me is safe
Speaker 1: until I open it, because I'm the only one who
Speaker 1: has the key to access it. Likewise, if I send
Speaker 1: something out with my private key encrypting the data, that's
Speaker 1: like a digital signature that's saying this message had to
Speaker 1: come from Jonathan Strickland because it used his private key,
Speaker 1: and I know that because I can decrypt it with
Speaker 1: Jonathan Strickland's public key, which I have access to, and
Speaker 1: that means that it's it's authenticated as coming from me. Now,
Speaker 1: these are both very important concepts when it comes to transactions.
Speaker 1: If I send out a message that I want to
Speaker 1: make a transaction and use my private key, then again
Speaker 1: only my public key, which is known to all nodes
Speaker 1: on the network, can decrypt this message, and that authenticates
Speaker 1: that the message actually came from me, no one else.
Speaker 1: No one's able to impersonate me and spend my money
Speaker 1: on my account, So all the nodes can see that ledger,
Speaker 1: and when it's time to make a transaction, the parties
Speaker 1: involved send a message out to the network using their
Speaker 1: cryptographic keys. And a simple way to think about this
Speaker 1: is that one party's bitcoin wallet will decrease by a
Speaker 1: certain amount, and the other party's bitcoin wallet will increase
Speaker 1: by that same amount. So let's say I'm buying something
Speaker 1: for point zero zero zero five bitcoins, because you can
Speaker 1: divide bitcoins up to like a hundred million places, and
Speaker 1: the message that's sent out to the network is Jonathan's
Speaker 1: wallet should decrease by point zero zero zero five bitcoins
Speaker 1: and the Caso Hut's account should go up by point
Speaker 1: zero zero zero five bitcoins. Although I should point out
Speaker 1: that the blockchain isn't actually keeping track of how much
Speaker 1: money is in my account. It doesn't care. Instead, it
Speaker 1: keeps track of where all the units of currency in
Speaker 1: the system are. Because all that history is contained within
Speaker 1: the ledger. The nodes have to verify that I actually
Speaker 1: have point zero zero zero five bit points, and they
Speaker 1: do that by looking at the transaction history, all the
Speaker 1: transactions where money was deposited to me versus money coming
Speaker 1: out of my account to make certain that I actually
Speaker 1: have that amount. So it's not really looking at my
Speaker 1: account balance so much as it's just looking at the
Speaker 1: transaction history. It's kind of a fine line to look at,
Speaker 1: but that's how the system works. And if I do
Speaker 1: have those units, then it will verify my transmission of
Speaker 1: those units tokso hut, And if it works, then I
Speaker 1: get caso, which makes me happy. Now, the notes will
Speaker 1: add this transaction to their individual copies of this shared ledger,
Speaker 1: and the new transaction will join other transactions made at
Speaker 1: that same time to form a block. This this data.
Speaker 1: So think of it and it looks like a think
Speaker 1: of it like a physical block. That block represents a
Speaker 1: certain number of transactions that took place within a given
Speaker 1: amount of time. A new block forms approximately every ten minutes.
Speaker 1: That's designed by the creators of the Bitcoin blockchain experience.
Speaker 1: They wanted it to be on average ten minutes for
Speaker 1: it to generate a new block of this at the
Speaker 1: very least, you get a generation of a block that
Speaker 1: will release more bitcoins into circulation. This is the process
Speaker 1: of mining where you get new bitcoins to enter the system.
Speaker 1: So in the case of bitcoins UH, you you do
Speaker 1: this so that you can earn more. But other blockchain
Speaker 1: implementations might go a totally different way and not use
Speaker 1: any kind of cryptocurrency at all. Although you have to
Speaker 1: figure out some way to give an incentive to people
Speaker 1: to actually operate the nodes in order to verify these transactions,
Speaker 1: because it does require some computational work to do this,
Speaker 1: so there's a balance there. The blocks have to be validated,
Speaker 1: So you've got all these different nodes on your system
Speaker 1: that are all working to form the next block in
Speaker 1: the blockchain, and to validate a block to validate that
Speaker 1: list of transactions, it requires a certain amount of computational power,
Speaker 1: and it's a good amount of power at this point.
Speaker 1: Once a block is validated, then it joins the chain
Speaker 1: of blocks of transactions that came before it UH And
Speaker 1: in fact, the value of the new block is partly
Speaker 1: determined by the value of all the preceding blocks, because
Speaker 1: each verified block contains values of those previous blocks. Trying
Speaker 1: to fool the system so that you can spend the
Speaker 1: same bitcoins twice is really hard to do because every
Speaker 1: ten minutes, another block is being added to this blockchain,
Speaker 1: and pretty soon you've got your transaction that you're worried
Speaker 1: about that's far behind the most current block of transaction.
Speaker 1: So I'll give you an example. Let's say that I'm
Speaker 1: a dishonest jerk so and so, and I want to
Speaker 1: spend some bitcoins, but I already spent them in the past.
Speaker 1: In fact, in this particular blockchain random example, the transaction
Speaker 1: I made happened in block number forty two, and later
Speaker 1: on I decide, hey, there's this other stuff I want
Speaker 1: to buy, but I've already spent all my bitcoins. But
Speaker 1: if I if I can fool the system into thinking
Speaker 1: I never spent the last ones, then I could spend
Speaker 1: them again and buy this other thing I want. However,
Speaker 1: that transaction was all the way back in forty two,
Speaker 1: and every block that went after forty two has that
Speaker 1: information built into it, and it's currently up to block
Speaker 1: number sixty seven. Here's the thing about blockchain. Whichever blockchain
Speaker 1: is the longest is considered to be the most valid,
Speaker 1: So if you could dedicate enough computational power. In theory,
Speaker 1: you could go back change the data in block number
Speaker 1: forty two, But then you would have to solve all
Speaker 1: those computational problems and rebuild blocks forty two through sixty seven,
Speaker 1: and then get to sixty eight before the rest of
Speaker 1: the entire system could get block sixty So you would
Speaker 1: have your one computer or even family of computers working
Speaker 1: on this problem. Meanwhile, the entire Bitcoin system would be
Speaker 1: working against you just in the regular process of validating
Speaker 1: all the transactions, so the likelihood of you being able
Speaker 1: to catch up and then pass the rest of the
Speaker 1: blockchain system is next to nothing. The only way that
Speaker 1: you could really commit fraud on this system is if
Speaker 1: you controlled more of the computing power on the system
Speaker 1: than legitimate nodes in the system. So if you had
Speaker 1: more than of all the CPU processing power in the
Speaker 1: Bitcoin blockchain family, if you possessed that much of it,
Speaker 1: then you could potentially commit fraud. However, it would be
Speaker 1: way easier for you to just use it legitimately and
Speaker 1: make more money that way, a then for you to
Speaker 1: go back and spend the same money you spent ages
Speaker 1: ago again. In other words, it makes more sense to
Speaker 1: follow the rules because you're going to make out like
Speaker 1: a bandit. Then it would if you try to actually
Speaker 1: be a bandit, it would be less profitable and more frustrating. So,
Speaker 1: Nakamoto says, the entire design the system is such that
Speaker 1: discourages cheating in this way, so it convinces you to
Speaker 1: play by the rules rather than try and cheat, because
Speaker 1: you're way more likely to make headway playing by the rules,
Speaker 1: uh more or less. Although these days you've got to
Speaker 1: have a whole lot of computers to to really have
Speaker 1: a chance. Now, the process of validating, like I said,
Speaker 1: it's called mining, and it's called that because whichever no
Speaker 1: validates the next block in the chain earns a certain
Speaker 1: number of bitcoins, which changes over time. Every few years,
Speaker 1: it has an amount, so eventually you'll get down to
Speaker 1: fractions of bitcoins, and then ultimately you're gonna get to
Speaker 1: a point where all the bitcoins that were will ever exist,
Speaker 1: will be in circulation and you'll never create more. But
Speaker 1: in the meantime, it's incentive for people to participate in
Speaker 1: this system and validate those transactions because they get something
Speaker 1: out of it. By validating transactions, they get rewarded these bitcoins.
Speaker 1: So participating means earning money. You accumulate wealth in this way. Really,
Speaker 1: I shouldn't say earning money, I should say wealth because
Speaker 1: it's slightly different from money in my opinion. Now, more specifically,
Speaker 1: for a block to be valid and become the next
Speaker 1: block in a blockchain, it must contain the answer to
Speaker 1: a complex mathematical problem that's created through a cryptographic hash function,
Speaker 1: and the way to solve this problem is guessing. Yep,
Speaker 1: You've got to guess random numbers, and that these random
Speaker 1: numbers will combine with the previous blocks content in order
Speaker 1: to create a specific result. According to a Medium article
Speaker 1: titled how does the blockchain Work? Which is a pretty
Speaker 1: good article I recommend reading it, it would take a
Speaker 1: typical computer about a year worth of processing to suss
Speaker 1: out the problem for a single block. But in the
Speaker 1: world we live in where people are dedicating hefty processing
Speaker 1: resources like grids of computers in order to solve these
Speaker 1: problems and to validate blockchain transactions, it takes about ten minutes,
Speaker 1: and again that was by design. This is also why
Speaker 1: you might hear people say that there's no point in
Speaker 1: getting into bitcoin mining unless you can make an enormous
Speaker 1: investment in computing power upfront, because there's just no way
Speaker 1: to compete with the more beefy mining operations out there.
Speaker 1: They're using way more computer processing power. It's also why
Speaker 1: graphics cards can be hard to come by, because, as
Speaker 1: it turns out, graphics processing units are really really good
Speaker 1: for those kinds of problems. Fun fact, though, the system
Speaker 1: actually adjusts the difficulty of this math problem based on
Speaker 1: the amount of processing power throne at the math problems.
Speaker 1: I'll talk a little bit more about that later, but
Speaker 1: in other words, the harder you try to find them,
Speaker 1: the harder they are to find. Mind. All right, So
Speaker 1: you've got this concept of validating a block, and you've
Speaker 1: got all these different nodes working to do it. They're
Speaker 1: all trying to guess at this random number and find
Speaker 1: the right random number so that it can end up
Speaker 1: adding the next block to the blockchain and getting this
Speaker 1: bitcoin reward. But what would happen if two or more
Speaker 1: nodes came up with the right solution at the same time. Well,
Speaker 1: each of those blocks could potentially be the next one
Speaker 1: on the chain, so they almost all kind of occupy
Speaker 1: what the next block would be. But none of them
Speaker 1: are solidly connected to the blockchain. Yet what will then
Speaker 1: happen is the system will continue to validate the next
Speaker 1: block of transactions, so this would be twenty minutes out
Speaker 1: from that original moment. And if one of those nodes
Speaker 1: is able to put up the next block of transactions
Speaker 1: that adds onto one of the previous ones that comes
Speaker 1: the longest chain in the group, that one becomes the
Speaker 1: valid answer and the others are discarded. So, uh, one
Speaker 1: example I saw said, let's say you've got three different
Speaker 1: nodes A, B, and C, and A, B and C
Speaker 1: all present their solutions that are more or less the
Speaker 1: same time, so they could each be the next block
Speaker 1: on the blockchain. Well, they're all just kind of nebulously
Speaker 1: hovering at the very end of the blockchain, but none
Speaker 1: of them have solidly been connected yet. And then you
Speaker 1: get solution in for the next block, the one after
Speaker 1: either A, B or C, and it's attached to block B. Well,
Speaker 1: that means that block B is now part of the
Speaker 1: longest chain because it's not just B, it's also B
Speaker 1: plus N. And because A and C do not have
Speaker 1: another block after them, they're discarded. Those are no longer
Speaker 1: the the right blocks for that blockchain, and they don't
Speaker 1: earn any bitcoins. Womp, womp. So interesting system. Essentially, it
Speaker 1: rarely happens that nodes present simultaneous answers, but it is possible.
Speaker 1: It's just that eventually down the line, one of those
Speaker 1: chains is going to be longer than the others and
Speaker 1: it will end up becoming the official ones. So the
Speaker 1: system self corrects after at least a few blocks. Now,
Speaker 1: there are some drawbacks to the bitcoin world, and one
Speaker 1: of those is that it's not difficult to lose access
Speaker 1: to your own bitcoins. If you forget your password to
Speaker 1: your wallet, or you lose access to the machine that
Speaker 1: your wallet is on, you're out of luck. There are
Speaker 1: stories about people who have lost potentially millions of dollars
Speaker 1: worth of bitcoins because they no longer have the hard
Speaker 1: drive they were stored the whilet was stored on, or
Speaker 1: they lost the password or whatever. It's terrible stories like that.
Speaker 1: There are also third party services that act as bitcoin wallets,
Speaker 1: but these are prime targets for hackers and thieves. More
Speaker 1: than one bitcoin wallet company or bitcoin exchange has had
Speaker 1: to explain to customers that hackers managed to steal significant
Speaker 1: some of bitcoins from the service, and it turns out
Speaker 1: trust is still needed in this post trust economic environment.
Speaker 1: And the only reason for that is because you had
Speaker 1: to have these other entities in place to facilitate transactions.
Speaker 1: And uh, that's where the real problem was. It's that
Speaker 1: there's that that again creates this target. It's not distributed
Speaker 1: across the entire network. It has these little focused points
Speaker 1: that hackers can look at and say, let's let's aim
Speaker 1: at this and see if we can make away with
Speaker 1: a big old digital heist. Another drawback of bitcoins is liquidity,
Speaker 1: being able to convert bitcoins into some other form of
Speaker 1: wealth that you could actually spend, because, as it turns out,
Speaker 1: bitcoins are very hard to spend, largely because their value
Speaker 1: can fluctuate so dramatically from the beginning of a transaction
Speaker 1: to the end of one, and several people have complained
Speaker 1: that it's difficult to offload bitcoins when you need to. Again,
Speaker 1: if you decide to offload your bitcoins and in the
Speaker 1: process of actually trying to validate that that exchange, the
Speaker 1: value has changed to the point where you wouldn't have
Speaker 1: gotten rid of them, it kind of freezes you. And
Speaker 1: also it's hard to find buyers. Everyone wants to get
Speaker 1: at bitcoins, but not a lot of people want to
Speaker 1: actually spend the money to buy them, so it does
Speaker 1: get very complicated. Also, there's just a few hundred bitcoin
Speaker 1: owners who possess enough of the percentage of bitcoins in
Speaker 1: circulation that they could completely upset the economic order if
Speaker 1: they were to offer up their bitcoins for purchase. That
Speaker 1: around the same time, if they were all to sell
Speaker 1: their bitcoins, then it would be almost akin to a
Speaker 1: run on the banks. People predict that such a thing
Speaker 1: would make the prices plummet afterward. So you get these
Speaker 1: large entities, these these people or organizations that own a
Speaker 1: ton of bitcoins, making an enormous amount of money in
Speaker 1: the short term, and then the value of bitcoins would
Speaker 1: drop out from under it. As a result. In the
Speaker 1: bitcoin community, those entities are referred to as whales. Now
Speaker 1: get a lot more to say about blockchain technology, but
Speaker 1: before I do that, let's take another quick break and
Speaker 1: thank our sponsor. Now, as I've said, the whole process
Speaker 1: uh that we've just talked about is used by bitcoin
Speaker 1: to validate cryptocurrency transactions. But that's just one potential use
Speaker 1: of blockchain. There's a Wired article that is titled two
Speaker 1: thousand eighteen The Year of the Cryptocurrency Craze, and it
Speaker 1: talks about how blockchains can be used for anything that
Speaker 1: you can make a list of, like land ownership. So
Speaker 1: not only could you make such a system so it's
Speaker 1: easier to deal with those sort of transactions, the system
Speaker 1: itself becomes the record of ownership. It's like a deed
Speaker 1: or a title to a car. If I were to
Speaker 1: purchase land using a blockchain approach, that transaction would become
Speaker 1: part of the block chain's history. So if some huckster
Speaker 1: wanted to try and post as the legitimate owner of
Speaker 1: the land and try and sell it to some sucker,
Speaker 1: which is the old you know, I got this bridge
Speaker 1: in Brooklyn, you gotta see routine, the system would reject
Speaker 1: this transaction because the nodes in the system would start
Speaker 1: looking for the digital information that represents that parcel of
Speaker 1: land in its transaction history and try to verify that
Speaker 1: the land does in fact belong to the huckster, that
Speaker 1: at some point in the past I sold or traded
Speaker 1: this land to that person and it's connected to the system.
Speaker 1: And once the nodes look back and they see there's
Speaker 1: no such record, that's not the case. They can reject
Speaker 1: the transaction. The conman cannot fleece another mark because the
Speaker 1: system knows. Oh, looking at this record of transactions, I
Speaker 1: see that the actual true owner of the land is
Speaker 1: Jonathan Strickland, So I know that this is a fake attempt.
Speaker 1: But if I were to sell that land again using
Speaker 1: this blockchain system, the notes would first verify that I'm
Speaker 1: the rightful owner. They would look through that transaction history.
Speaker 1: They'd say, yes, Jonathan bought that land at this time,
Speaker 1: stamp because here's the record within my system, And it
Speaker 1: would then make sure that I had not at any
Speaker 1: point gotten rid of that and given it to someone
Speaker 1: else or sold it to someone else. Once a note
Speaker 1: validates that, a new transaction can be authorized, and I
Speaker 1: can sell the land to a new owner, and all
Speaker 1: the records in the system update with this transaction across
Speaker 1: the entire peer to peer network, and everyone knows that
Speaker 1: the ownership of that land has changed hands, and I
Speaker 1: wouldn't be allowed to sell that same land again because
Speaker 1: the system reflects that I no longer own it now.
Speaker 1: This is one of the most powerful aspects to the
Speaker 1: blockchain approach. There's no need to appeal to some sort
Speaker 1: of authority figure. You don't need a government or a
Speaker 1: financial institution to keep a record of all the transactions.
Speaker 1: You don't need notaries, you don't need any verification that
Speaker 1: this is a lawful transaction, because the economic system itself
Speaker 1: keeps that record and verifies it. The process secures itself
Speaker 1: as it's perpetuated, so it's kind of like a self
Speaker 1: policing system, just based on the way it's designed and
Speaker 1: because of that unalterable record. There have been other suggested
Speaker 1: uses for blockchain technology, for example, using it to keep
Speaker 1: track of supply chain issues. I've seen it for food services.
Speaker 1: The idea of being that by connecting everything, you could
Speaker 1: more easily identify if a potential problem comes up. Let's
Speaker 1: say that there's a disease outbreak that could affect a
Speaker 1: certain kind of crop. You could check the blockchain and
Speaker 1: use that to prevent that food from entering into the
Speaker 1: rest of your supply and thus contaminating potential customers. The
Speaker 1: precious gems industry is looking into using blockchain in order
Speaker 1: to trace diamonds and other gemstones to make sure the
Speaker 1: ones on the market aren't conflict gemstones, so they make
Speaker 1: sure that the ones that are on the market are
Speaker 1: all from legitimate sources that haven't been using forced labor
Speaker 1: or other awful awful methods to mine those gemstones. There's
Speaker 1: a cloud storage company called store s t o r
Speaker 1: J which uses blockchain technology to create distributed data storage banks.
Speaker 1: So it encrypts the data, but if you have the key,
Speaker 1: you can decrypt the data, and you would. When you
Speaker 1: retrieve a document from this cloud service, it sends it
Speaker 1: from whatever would be the closest slash fastest computer on
Speaker 1: the system to you. So whichever node would be able
Speaker 1: to most quickly get the data to you, it sends
Speaker 1: it from there. And the idea is that this not
Speaker 1: only creates a distributed storage network, but it also speeds
Speaker 1: things up a little bit through that actual architecture. For
Speaker 1: many types of information, block chains make a lot of sense.
Speaker 1: Anytime you want a public record of transactions or changes,
Speaker 1: a block chain could be a good solution. There needs
Speaker 1: to be some sort of system in place to create
Speaker 1: an incentive to participate in the block chain, since the
Speaker 1: process of validation requires computational power, and that in turn
Speaker 1: means there are energy costs to consider. In other words,
Speaker 1: validating transactions comes at a cost, so there needs to
Speaker 1: be an offset of those costs to make the system viable.
Speaker 1: In the case of bitcoin, the incentive is more units
Speaker 1: of cryptocurrency, more bitcoins. Miners are rewarded for their computational
Speaker 1: power by potentially earning more bitcoins through validating transactions, but
Speaker 1: it's a first come, first served approach that in turn
Speaker 1: creates an incentive among miners to consistently turn more computational
Speaker 1: power toward validating blocks, and it can even lead hackers
Speaker 1: to create armies of bot net like computers just to
Speaker 1: help mind for bitcoins. So they're not going after data,
Speaker 1: they're not trying to send you spam. They're literally trying
Speaker 1: to infect your computer so they can turn it into
Speaker 1: one of the seven dwarfs as they mine for bitcoins.
Speaker 1: In fact, bitcoin mining is responsible for an awful lot
Speaker 1: of energy consumption. According to the digit digit Economist website,
Speaker 1: bitcoin mining consumes thirty two tarot watt hours of power annually,
Speaker 1: or two fifty kilowatt hours per transaction. Now thirty two
Speaker 1: taro watt hours is equivalent to the power consumption of
Speaker 1: Denmark over the course of a year more or less,
Speaker 1: and two KWA hours is the same amount of energy
Speaker 1: you'd use to power your home for more than a week.
Speaker 1: Eric Holthouse predicted that by twenty bitcoin mining will consume
Speaker 1: as much electricity as what the entire world is using
Speaker 1: this year, in well last year. For you guys who
Speaker 1: are listening because it's coming out early. That's pretty dramatic.
Speaker 1: But it turns out it's not really as simple as that,
Speaker 1: because here's how it boils down. The more energy you use,
Speaker 1: the more you will ultimately have to pay. Because you're
Speaker 1: using up more energy. There's a certain amount of energy
Speaker 1: rate that you're paying. The more you're using, the higher
Speaker 1: that electric bill is going to be. If you're using
Speaker 1: so much energy, that's requiring power companies to supply even
Speaker 1: more than they normally would. Energy prices as a whole
Speaker 1: will also increase. So not only are you using more
Speaker 1: per unit of time, but that cost per unit of
Speaker 1: time goes up. This is the basic idea behind supply
Speaker 1: and demand. Your demand for energy has increased, the supply
Speaker 1: has not necessarily increased, at least not simultaneously with demand.
Speaker 1: Prices go up. Well, if prices go up, that starts
Speaker 1: to eat into your profit. As you mind bitcoins. There's
Speaker 1: no guarantee that you're going to find the next block.
Speaker 1: So if the energy prices increase to the point that
Speaker 1: it's no longer profitable to do bitcoin mining, you'll ease off.
Speaker 1: You'll create a little relief on the system. Now, the
Speaker 1: difficulty of those complex mathematical problems isn't static I mentioned earlier.
Speaker 1: It's dependent upon how much processing power is being thrown
Speaker 1: at them. So every two thousand sixteen blocks, the blockchain
Speaker 1: system takes a look at how long the average block
Speaker 1: went before it was validated. The goal is to keep
Speaker 1: that time as close to ten minutes per block as possible. Now,
Speaker 1: if there's an enormous amount of computing power directed at
Speaker 1: the problem, that means the mathematical problem has to be
Speaker 1: harder to solve, to balance out the massive amounts of
Speaker 1: computer power that's being shot at it. But if people
Speaker 1: start dropping out of minding because it's getting too expensive
Speaker 1: to run the computer systems that are validating these blocks,
Speaker 1: the energy bills are so high that there's no more profit,
Speaker 1: people start to drop away. People back off. The system
Speaker 1: will actually notice this, They'll see that it's taking longer
Speaker 1: and longer to validate a block of the chain because
Speaker 1: there's not as much processing power being thrown at it,
Speaker 1: So then it will adjust that computational problem. It will
Speaker 1: make it less difficult to solve, to try and get
Speaker 1: back to that ten minute mark, so it gets easier
Speaker 1: to solve blocks. And meanwhile, because the profit margin has
Speaker 1: been whittled away and energy prices are high, more and
Speaker 1: more miners have dropped out of the system, at least temporarily,
Speaker 1: which decreases the demand for energy. Prices will gradually readjust
Speaker 1: and become lower again, and it becomes profitable to mine
Speaker 1: bitcoins all over again. The whole process starts up. Now.
Speaker 1: A lot of these companies are using various types of
Speaker 1: cryptocurrency as an incentive to be part of this, and
Speaker 1: some of them are using cryptocurrency in a way as
Speaker 1: to say this is an investment, and your investment into
Speaker 1: the system will eventually pay off in profit because the
Speaker 1: value of what you hold will increase over time. Others say,
Speaker 1: your participation in this system is what gives the system value,
Speaker 1: so the more people who participate, the more valuable the
Speaker 1: system is, and the more you will get out of
Speaker 1: it as a result. So it's two slightly different approaches
Speaker 1: UH and a lot of these companies are using what
Speaker 1: they're called i c o s initial coin offerings. It's
Speaker 1: kind of like an initial public offering, except instead of
Speaker 1: offering up stock, they're talking about offering up cryptocurrency or
Speaker 1: tokens in a system so that they're able to do
Speaker 1: whatever it is they're trying to do, and that could
Speaker 1: be pretty much anything. It's an interesting world, and there
Speaker 1: are a lot of people who are wondering if this
Speaker 1: is going to be the next evolution of finance, or
Speaker 1: if this is going to be a bubble that once
Speaker 1: it bursts, it doesn't recover. Some people are pretty sure
Speaker 1: that there's gonna be a bubble that bursts and it
Speaker 1: will be fine after that, after the market readjustment. It's
Speaker 1: just that people are gonna lose a lot of money
Speaker 1: in the short term, but it'll survive and keep going.
Speaker 1: And then there's some people who say, no, this is
Speaker 1: gonna inflate to a point where people are going to
Speaker 1: be on paper millionaires and then it's going to crash,
Speaker 1: and then the various cryptocurrencies will be worth nothing and
Speaker 1: people will abandon it because of that massive failure. What
Speaker 1: actually turns out we'll have to wait and see. Honestly,
Speaker 1: I think that cryptocurrencies are here to stay, but I
Speaker 1: do think we're gonna see occasional market corrections, as they say,
Speaker 1: and we'll see that value drop precipitously. A few times.
Speaker 1: We've actually seen that at the end of twenty seventeen,
Speaker 1: where there are times where the cost of a bitcoin
Speaker 1: was more than sixteen thousand dollars and other times when
Speaker 1: it was less than eight thousand dollars, and it was
Speaker 1: just fluctuating back and forth wildly day to day. That's
Speaker 1: probably gonna keep going for a while until there's a
Speaker 1: real market correction, and then we'll see maybe steady gains
Speaker 1: from there on out. That's a guess on my part. Well,
Speaker 1: that concludes our talk about blockchain technology the technology of
Speaker 1: the future. I look forward to doing a whole lot
Speaker 1: more episodes and talking to all sorts of tech, whether
Speaker 1: it's old or new. Who knows. Maybe our next one
Speaker 1: will be some sort of ancient technology, uh maybe something
Speaker 1: like ancient or or maybe uh like nineteen century medical technology.
Speaker 1: Because I was just thinking I need more nightmare fuel
Speaker 1: material and that will certainly supply it. But maybe you
Speaker 1: have suggestions for things I should talk about in future
Speaker 1: episodes of tech Stuff. If you do, you can send
Speaker 1: me a message. The email address for this show is
Speaker 1: tech Stuff at how stuffworks dot com, or you can
Speaker 1: draw me a line on Facebook or Twitter. The handle
Speaker 1: for both of those social networks is tech Stuff hs W. Again,
Speaker 1: I record these shows live on twitch dot tv slash
Speaker 1: tech Stuff every Wednesday and Friday, so just swing by
Speaker 1: there you'll see the schedule. You can join in, be
Speaker 1: part of the chat room, and watch as a fumble
Speaker 1: my way through the world of technology gravely and with
Speaker 1: abandoned and with that law too again, really sin. For
Speaker 1: more on this and thousands of other topics, is that
Speaker 1: how staff works dot com.