Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. Let me cut to the chase. Matt Levine,
Speaker 1: my colleague on the Bloomberg Opinion side of the house,
Speaker 1: is perhaps the greatest finance blogger ever to do it,
Speaker 1: and in what is both a flex and a service,
Speaker 1: He's just written tens of thousands of words on the
Speaker 1: subject of crypto for a special issue of Bloomberg Business Week.
Speaker 1: Matt's gone deep into the blockchain to break down its origins,
Speaker 1: it's possible, futures, and the current state of a technology
Speaker 1: that's showing up everywhere in industries ranging from finance to
Speaker 1: shipping too, of course video games. And we're going to
Speaker 1: be bringing his exploration to you in audio form thanks
Speaker 1: to the talents of Bloomberg editor and professional voice actor
Speaker 1: Mark Ledoff. You'll get weekly chapters of the special Crypto
Speaker 1: issue of Bloomberg Business Week. Welcome to the second chapter
Speaker 1: of the special audio edition of the Bloomberg Business Week
Speaker 1: Crypto issue, written by Matt Levine and narrated by Mark Leadoff.
Speaker 1: Did you miss a chapter? You can find it right
Speaker 1: here in the Bloomberg Crypto podcast feed, section three one
Speaker 1: final diggression the crypto in crypto, cryptography is the study
Speaker 1: of secret messages, of coding and decoding. Most of what
Speaker 1: I talked about in this article won't be about cryptography.
Speaker 1: It will be about you know, pon zis. But the
Speaker 1: base layer of crypto really is about crypt photography, so
Speaker 1: it will be helpful to know a bit about it.
Speaker 1: The basic thing that happens in cryptography is that you
Speaker 1: have an input a number, a word, a string of text,
Speaker 1: and you run some function on it and it produces
Speaker 1: a different number or word or whatever as an output.
Speaker 1: The function might be the Caesar cipher. Shift each letter
Speaker 1: of a word by one or more spots in the alphabet,
Speaker 1: so Caesar becomes dib fits or pig Latin, shift the
Speaker 1: first consonants of the word to the end, and add a,
Speaker 1: so Caesar becomes easier say, or something more complicated. A
Speaker 1: useful property in cryptographic function is that it be one way.
Speaker 1: This means it's easy to turn the input string into
Speaker 1: the output string, but hard to do it in reverse.
Speaker 1: It's easy to compute the function in one direction, but
Speaker 1: impossible in the other. The classic example is that multiplying
Speaker 1: two large prime numbers is quite straightforward, factoring an enormous
Speaker 1: number into two large primes is hard. The Caesars for
Speaker 1: is easy to apply and easy to reverse, but some
Speaker 1: forms of encoding are easy to apply and much more
Speaker 1: difficult to reverse. That makes them better for secret codes.
Speaker 1: What I call a one way function in the text
Speaker 1: is more strictly a function that we hope is one
Speaker 1: way based on current understanding of computer technology and math
Speaker 1: and cryptography. One example of this is a hashing function,
Speaker 1: which takes some input text and turns it into a
Speaker 1: long number of a fixed size. So I could run
Speaker 1: a hashing function on this article. A popular one is
Speaker 1: called shaw to six, which was invented by the National
Speaker 1: Security Agency, and generate a long incomprehensible number from it.
Speaker 1: To make it more incomprehensible, it's customary to write this
Speaker 1: number in hexadecimal so that it will have the digit
Speaker 1: zero through nine, but also a through f. I could
Speaker 1: send you the number, and say I wrote an article
Speaker 1: and rent it through a shaw toft si hashing algorithm,
Speaker 1: and this number was the result. You'd have the number,
Speaker 1: but you wouldn't be able to make heads or tails
Speaker 1: of it. In particular, you couldn't PLoP it into a
Speaker 1: computer program and to code it, turning the hash back
Speaker 1: into this article. If you want to try it for yourself,
Speaker 1: there are various shaw to fifty six calculators online. One
Speaker 1: is at zorbin dot com. Or if you want to
Speaker 1: program it yourself or do some hashing with pencil and paper,
Speaker 1: there is a US government publication f I p s
Speaker 1: pub that spells out the algorithm, or it's on Wikipedia.
Speaker 1: The hashing function is one way. The hash tells you
Speaker 1: nothing about the article, even if you know the hashing function.
Speaker 1: The hashing function basically shuffles the data in the article.
Speaker 1: It takes each letter of the article, represented as a
Speaker 1: binary number, a series of bits zeros and ones, and
Speaker 1: then shuffles around the zeros and ones lots of times,
Speaker 1: mashing them together until they are all jumbled up and unrecognizable.
Speaker 1: The hashing function gives clear, step by step instructions for
Speaker 1: how to shuffle the bits together, but they don't work
Speaker 1: in reverse. It's like stirring cream into coffee. Easy to do,
Speaker 1: hard to undo. Applying a shaw to fifty six algorithm
Speaker 1: will create a sixty four digit number for data of
Speaker 1: any size. You can imagine hash of the entire text
Speaker 1: of James Joyce's seven thirty page novel Ulysses goes three
Speaker 1: F one two zero four two b six d F
Speaker 1: two three by eight or eight night. It fits in
Speaker 1: the same sixty four character space as the hash of
Speaker 1: Hi I'm Matt, which starts with eight six d and
Speaker 1: ends with zero four four. But what if I wrote
Speaker 1: hi I'm Matt with a comma instead of an exclamation mark.
Speaker 1: Then it starts with nine f five and ends with
Speaker 1: fifty eight B. There's no apparent relationship between the numbers
Speaker 1: for Hi I'm Matt and Hi I'm Matt. The two
Speaker 1: original inputs were almost exactly identical, the hash outputs are
Speaker 1: wildly different. This is a critical part of the hashing
Speaker 1: function being one way. If similar inputs mapped to similar outputs,
Speaker 1: then it would be too easy to reverse the function
Speaker 1: and decipher messages. But for practical purposes, each input maps
Speaker 1: to a random output. Since hashes spit out a fixed
Speaker 1: number of digits, it's possible that two different inputs could
Speaker 1: map to the same hash. This is called a collision,
Speaker 1: but a sixty four digit hexadecimal number allows for a
Speaker 1: lot of different hashes. Sixteen to sixty four or about
Speaker 1: ten to the seventy seven of them, or many billion
Speaker 1: times more than the number of atoms on Earth. What's
Speaker 1: the point of a secret code that can't be decoded?
Speaker 1: For one thing, it's a way to verify. If I
Speaker 1: sent you a hash of this article, it wouldn't give
Speaker 1: you the information you need to recreate the article. But
Speaker 1: if I then sent you the article, you could plot
Speaker 1: that into a computer program the show to fifty six
Speaker 1: algorithm and generate a hash, and the hash you generate
Speaker 1: will exactly match the number I sent you, and you'll say,
Speaker 1: ah ha, yes, you hashed that article. All right. It's
Speaker 1: impossible for you to decode the hash, but it's easy
Speaker 1: for you to check that I encoded it correctly. Exercise
Speaker 1: for the reader. I have included some hashes of some
Speaker 1: texts in this article, and I have talked about the
Speaker 1: hash of this article, but I haven't included the hash
Speaker 1: of this article in the article? Why not believe me?
Speaker 1: I wanted to. This would be dumb to do with
Speaker 1: this article, but the principle has uses. A simple everyday
Speaker 1: one is passwords If I have a computer system and
Speaker 1: you have a password to log into the system, I
Speaker 1: need to be able to check that your password is correct.
Speaker 1: One way to do this is for my system to
Speaker 1: store your password and check what you tie up against
Speaker 1: what I've stored. I have a little text file with
Speaker 1: all the passwords, and it has password one two three
Speaker 1: written next to your user name, and you type password
Speaker 1: one two three on the login screen, and my system
Speaker 1: checks what you type against the file and sees that
Speaker 1: they match and lets you log in. But this is
Speaker 1: a dangerous system. If someone steals the file, they would
Speaker 1: have everyone's password. It's better practice for me to hash
Speaker 1: the passwords. You type password one two three as your
Speaker 1: password when setting up the account, and I run it
Speaker 1: through a hash function and get back zero zero eight
Speaker 1: dot dot dot six zero one, and I store that
Speaker 1: on my list. When you try to log in, you
Speaker 1: type your password and I hash it again, and if
Speaker 1: it matches the hash on my list, I let you in.
Speaker 1: If someone steals the list, they can't decode your password
Speaker 1: from the hash, so they can't log into the system.
Speaker 1: It's beyond the scope here, but there's a lot more
Speaker 1: cryptographic fund Rainbow tables salt, etcetera involved in defeating or
Speaker 1: strengthening this type of security. There are other more crypto
Speaker 1: nerdy uses for hashing. One is a sort of time stamping.
Speaker 1: Let's say you predict some future event and you want
Speaker 1: to get credit when it does happen, but you don't
Speaker 1: want to just go on Twitter and now and say
Speaker 1: I predict that the Jets will win the super Bowl
Speaker 1: in to avoid being embarrassed or influencing the outcome, or whatever.
Speaker 1: One thing you could do is right the Jets will
Speaker 1: win the super Bowl in four on a piece of paper,
Speaker 1: put it in an envelope, Seal the envelope, and ask
Speaker 1: me to keep it until the super Bowl, after which
Speaker 1: you'll tell me either to open the envelope or burn it.
Speaker 1: But this requires you and everyone else to trust me.
Speaker 1: Another trustless thing you could do is type the Jets
Speaker 1: will win the super Bowl in four into a cryptographic
Speaker 1: hash generator, and it will spit out six four b
Speaker 1: dot dot dot eight four seven, and then you can
Speaker 1: tweet here is a shot to fifty six hash of
Speaker 1: a prediction. I am making six four b dot dot
Speaker 1: dot eight four seven. Everyone will say, well, aren't you annoying?
Speaker 1: But they won't be able to decode your prediction, and
Speaker 1: then in a while, when the Jets win the Super Bowl,
Speaker 1: you can say, see I called it. You retweet the
Speaker 1: hashed tweet and the plain text of your prediction. If
Speaker 1: anyone is so inclined, they can go to a hash
Speaker 1: calculator and check that the hash really matches your prediction.
Speaker 1: Then all the glory will accrue to you. Aside from hashing,
Speaker 1: another important one way function is public key encryption. I
Speaker 1: have two numbers called a public key and a private key.
Speaker 1: These numbers are long and random looking, but they're related
Speaker 1: to each other using a publicly available algorithm. One number
Speaker 1: can be used to lock a message and the other
Speaker 1: can unlock it. The two key system solves a classic
Speaker 1: problem with codes. If the key I used to encrypt
Speaker 1: a message is the same one, you will need to
Speaker 1: decode it. At some point. I'll have to have sent
Speaker 1: you that key. Anyone who steals the key in transit
Speaker 1: can read our messages. With public key encryption, no one
Speaker 1: needs to share the secret key. The public key is public,
Speaker 1: I can send it to everyone posted on my Twitter
Speaker 1: feed whatever. The private key is private, and I don't
Speaker 1: give it to anyone you want to send me a
Speaker 1: secret message. You write the message and run it through
Speaker 1: the encryption algorithm which uses one the message and to
Speaker 1: my public key, which you have to generate an encrypted
Speaker 1: message that you send to me. Then I run the
Speaker 1: message through a decryption program that uses one the encrypted
Speaker 1: message and to my private key, which only I have
Speaker 1: to generate the original message, which I can read. You
Speaker 1: can encrypt the message using my public key, but nobody
Speaker 1: can decrypt it using the public key. Only I can
Speaker 1: decrypt it using my private key. The function is one
Speaker 1: way as far as you're concerned, but I can reverse
Speaker 1: it with my private key. A related idea is a
Speaker 1: digital signature. Again, I have a public key and a
Speaker 1: private key. My public key is posted in my Twitter bio.
Speaker 1: I want to send you a message, and I want
Speaker 1: you to know that I wrote it. I run the
Speaker 1: message through an encryption program that uses one the message
Speaker 1: and to my private key. Then I send you one
Speaker 1: the original message and to the encrypted message. You use
Speaker 1: a decryption program that uses one the encrypted message and
Speaker 1: to my public key to decrypt the message. The decrypted
Speaker 1: message matches the original message. This proves to you that
Speaker 1: I encrypted the message, so you know that I wrote it.
Speaker 1: I could have just sent you a Twitter d M instead,
Speaker 1: but this is more cryptographic. Imagine a simple banking system
Speaker 1: in which bank accounts are public. There's a public list
Speaker 1: of accounts, and each one has a public balance and
Speaker 1: a public key. I say to you, I control account
Speaker 1: number zero zero, one, two, three, four, five, six, seven,
Speaker 1: eight nine, which has two fifty dollars in it, and
Speaker 1: I'm going to send you fifty dollars. I send you
Speaker 1: a digitally signed message saying here's fifty dollars, and you
Speaker 1: decode that message using the public key for the account,
Speaker 1: and then you know that I do, in fact control
Speaker 1: that account, and everything checks out. That's the basic idea
Speaker 1: at the heart of bitcoin, though there are also more
Speaker 1: complicated I d is. We'll be right back with more
Speaker 1: from Bloomberg Business Week Special Crypto issue, written by Matt
Speaker 1: Levine a narrated by Mark Ledorff. Section four. Now back
Speaker 1: to bitcoin. How does it work? The simple form of
Speaker 1: bitcoin goes like this. There's a big public list of addresses,
Speaker 1: each with a unique label that looks like random numbers
Speaker 1: and letters and some balance of bitcoin in it. An
Speaker 1: address might have the label one A, one Z P,
Speaker 1: one e f F two, the mpt f L five
Speaker 1: f n A and a balance of sixty eight point
Speaker 1: six bitcoin. By the way, that address one A one
Speaker 1: dot dot dot f n A is famous in crypto lore.
Speaker 1: It's the address that received the first bitcoin. Presumably it
Speaker 1: belongs to Satoshi Nakamoto. The address acts as a public key.
Speaker 1: Actually it's a hash of the public key, but it
Speaker 1: is in fact perfectly legitimate cryptographic terminology to refer to
Speaker 1: the pub key hash as a public key itself, wrote
Speaker 1: Metallic Bitterran, creator of Ethereum, another major blockchain, in white paper,
Speaker 1: explaining that project good enough for Vitalic, good enough for
Speaker 1: me if I own those bitcoin. What that means is
Speaker 1: I possess the private key corresponding to that address, effectively
Speaker 1: the password accessing the account. Because I have the private key,
Speaker 1: I can send you a bitcoin by signing a message
Speaker 1: to you with my private key. You can check that
Speaker 1: signature against my public key and against the public list
Speaker 1: of addresses and bitcoin balances. That information is enough for
Speaker 1: you to confirm that I control the bitcoin that I'm
Speaker 1: sending you, but not enough for you to figure out
Speaker 1: my private key and steal the rest of my bitcoin.
Speaker 1: That kind of means I can send you a bitcoin
Speaker 1: without you trusting me, or me trusting you, or either
Speaker 1: of us trusting a bank to verify that I have
Speaker 1: the money. We define an electronic coin as a chain
Speaker 1: of digital signatures, so Toshi wrote, the combination of public
Speaker 1: address and private key is enough to define a coin.
Speaker 1: Cryptocurrency is called cryptocurrency because it's a currency derived from cryptography.
Speaker 1: You'll notice that all we've done here is exchange a
Speaker 1: message and somehow called the result of that a currency.
Speaker 1: The traditional financial system isn't so different. Banks don't move
Speaker 1: around sacks of gold or even very many paper bills.
Speaker 1: They're keepers of databases. What happens, roughly when I make
Speaker 1: a hundred dollar payment to you is my bank sends
Speaker 1: a message to your bank telling it to update its ledger. Similarly,
Speaker 1: in bitcoin, the messages change a public ledger of who
Speaker 1: holds what, but who maintains that. The rough answer is
Speaker 1: that the Bitcoin network, thousands of people who use bitcoin
Speaker 1: and run it software on their computers, keeps the ledger
Speaker 1: collaboratively and redundantly. There are thousands of copies of the ledger.
Speaker 1: Every note on the network has its own list of
Speaker 1: how many bitcoin are in each address. Then when we
Speaker 1: do a transaction, when I send you a bitcoin, we
Speaker 1: don't just do it privately. We broadcast it to the
Speaker 1: entire network, so everyone can update their lists. If I
Speaker 1: send you a bitcoin from my address and my signature
Speaker 1: on the transaction is valid, everyone will update their ledgers
Speaker 1: to add one bitcoin to your address and subtract one
Speaker 1: from mine. The ledger is not really just a list
Speaker 1: of addresses and their balances. It's actually a record of
Speaker 1: every single transaction. Actually it's only that, not a list
Speaker 1: of addresses and their balances at all. I describe it
Speaker 1: that way in the text for convenience, and you can
Speaker 1: reconstruct the list of addresses and balances from the record
Speaker 1: of all transactions, and people do. But that's not technically
Speaker 1: what a bitcoin's ledger is. The ledger is maintained by
Speaker 1: everyone on the network, keeping track of every transaction for themselves.
Speaker 1: There's a section in the Bitcoin white paper titled Reclaiming
Speaker 1: disk Space about how the network can in effect compress
Speaker 1: some of the data it keeps about old transactions using
Speaker 1: Merkel trees, all of which is beyond the scope of
Speaker 1: this piece. But people in crypto say Merkel trees a lot.
Speaker 1: So there you go. All of that's nice, but now
Speaker 1: instead of trusting a bank to keep the ledger of
Speaker 1: your money, you're trusting thousands of anonymous strangers. What if
Speaker 1: we accomplished Well, it's not quite as bad as that
Speaker 1: each transaction is provably correct. If I send a bitcoin
Speaker 1: from my address to yours and sign it with my
Speaker 1: private key, the network will include the transaction. If I
Speaker 1: try to send a bitcoin from someone else's addressed to
Speaker 1: yours and don't have the private key, everyone on the
Speaker 1: network can see that it's fake and won't include the transaction.
Speaker 1: Everyone runs open source software to update the ledger for
Speaker 1: transactions that are verifiable. Everyone keeps the ledger, but you
Speaker 1: can prove that every transaction in the ledger is valid,
Speaker 1: so you don't have to trust them too much much. Incidentally,
Speaker 1: I am saying that everyone keeps the ledger, and that
Speaker 1: was probably roughly true in early bitcoin's life, but no longer.
Speaker 1: There are thousands of people running full nodes which download
Speaker 1: and maintain and verify the entire Bitcoin ledger themselves using
Speaker 1: open source official bitcoin software, but there are millions more
Speaker 1: not doing that, just having some bitcoin and trusting that
Speaker 1: everybody else will maintain the system correctly. Their basis for
Speaker 1: this trust, though, is slightly different from the basis for
Speaker 1: your trust in your bank. They could, in principle verify
Speaker 1: that everyone verifying the transactions is verifying them correctly. Philosophically,
Speaker 1: they're part of a trustless system, so they can feel
Speaker 1: a bit better about trusting it. Notice too, that there's
Speaker 1: a financial incentive for everyone to be honest. If everyone
Speaker 1: is honest, then this is a working payment system that
Speaker 1: might be valuable. If lots of people are dishonest and
Speaker 1: put fake transactions in their ledgers, then no one will
Speaker 1: trust bitcoin and it will be worthless. What's the point
Speaker 1: of stealing bitcoin if the value of bitcoin is zero.
Speaker 1: This is a standard approach in crypto cryptosystems try to
Speaker 1: use economic incentives to make people act honestly, rather than
Speaker 1: trusting them to act honestly. That's most of the story,
Speaker 1: but it leaves some small problems. Where did all the
Speaker 1: bitcoin come from? It's fine to say that everyone on
Speaker 1: the network keeps a ledger of every bitcoin transaction that
Speaker 1: ever happened, and your bitcoin can be traced back through
Speaker 1: a series of previous transactions, but traced back to what
Speaker 1: how do you start the ledger. Another problem is that
Speaker 1: the order of transactions matters. If I have one bitcoin
Speaker 1: in my account and I send it to you, and
Speaker 1: then I send it to someone else who actually has
Speaker 1: the bitcoin. This seems almost trivial, but it's tricky. Bitcoin
Speaker 1: is a decentralized network that works by broadcasting transactions to
Speaker 1: thousands of nodes, and there's no guarantee they'll all arrive
Speaker 1: in the same order everywhere, and if everyone doesn't agree
Speaker 1: on the order, bad things double spending or people sending
Speaker 1: the same bitcoin to two different places can happen. Transactions
Speaker 1: must be publicly announced road Satoshi, and we need a
Speaker 1: system for participants to agree on a single history of
Speaker 1: the order in which they were received. That system, I'm
Speaker 1: sorry to say, is the blockchain. Coming up next, you'll
Speaker 1: hear more from Matt Levine's special Crypto issue of Bloomberg
Speaker 1: Business Week, narrated by Mark Leadoff, Section five oh the blockchain.
Speaker 1: Every Bitcoin transaction is broadcast to the network. Some computers
Speaker 1: on the network they're called miners, compile the transactions as
Speaker 1: they arrive into a group called a block. At some point,
Speaker 1: a version of a block becomes as it were official,
Speaker 1: the list of transactions in that block, in the order
Speaker 1: in which they're listed, becomes canonical part of the official
Speaker 1: bitcoin record. We say that the block has been mined. Actually,
Speaker 1: a block becomes really canonical when it has five confirmations,
Speaker 1: when it has been mined, and then another block has
Speaker 1: been mined that refers back to it, and then another
Speaker 1: block has been mined referring to that block, et cetera,
Speaker 1: five times, so that the chain has continued five blocks
Speaker 1: after the block in question. In bitcoin, a new block
Speaker 1: is mined roughly every ten minutes. You can see a
Speaker 1: finished block online on any block explorer site. For example,
Speaker 1: block seven five nine six five mined on September is
Speaker 1: basically a list of two d and sixty six transactions
Speaker 1: between different addresses. An address starting BC one q and
Speaker 1: S sent point zero zero five to bitcoin to an
Speaker 1: address starting sixteen q z C seven thirty nine v
Speaker 1: g g L split point zero one two bitcoin between
Speaker 1: one four in r d K and thirty seven oh
Speaker 1: one E three, and so on. The miners then start
Speaker 1: compiling a new block, which will also eventually be mined
Speaker 1: and become official. Here's where hashing becomes important. That new
Speaker 1: block will refer to the block before it by containing
Speaker 1: a hash of that block. This confirms that the block
Speaker 1: before it one is correct and accepted by the network,
Speaker 1: and two came before it. In time, each block will
Speaker 1: refer to the previous block in a chain. Oh, yes,
Speaker 1: a block chain. The blockchain creates an official record of
Speaker 1: what transactions the network has agreed on and in what order.
Speaker 1: The hashes are time stamps, they create an agreed order
Speaker 1: of transactions. You could imagine a simple system for doing this.
Speaker 1: Every ten minutes, a minor proposes a list of transactions
Speaker 1: and all the computers on the Bitcoin network vote on it.
Speaker 1: If it gets a majority, it becomes official and is
Speaker 1: entered into the blockchain. Unfortunately, this is a bit too simple.
Speaker 1: There are no rules about who can join the Bitcoin network.
Speaker 1: Anyone who hooks up a computer and runs the open
Speaker 1: source Bitcoin software can do it. You don't have to
Speaker 1: prove you're a good person or even a person. You
Speaker 1: can hook up a thousand computers if you want. This
Speaker 1: creates a risk of what's sometimes called a Sibyl attack,
Speaker 1: named not after the ancient Greek prophetesses, but rather after
Speaker 1: the ninety three book about a woman who claimed to
Speaker 1: have multiple personalities. The idea of a cibil attack is
Speaker 1: that in a system where the ledger is collectively maintained
Speaker 1: by the group, and anyone can join the group without permission,
Speaker 1: you can spin up a bunch of computer nodes so
Speaker 1: that you look like thousands of people. Then you verify
Speaker 1: bad transactions to yourself and everyone is like, ah, well,
Speaker 1: look at all of these people verifying the transactions, and
Speaker 1: they accept your transactions as the majority consensus, and either
Speaker 1: you managed to steal some money or you at least
Speaker 1: throw the whole system into chaos. The solution to this
Speaker 1: is to make it expensive to verify transactions. To minor block,
Speaker 1: bitcoin miners do an absurd and costly thing again. It
Speaker 1: involves hashing. Each miner takes a summary of the list
Speaker 1: of transactions in the block, along with a hash of
Speaker 1: the previous block. Then the miner sticks another arbitrary number
Speaker 1: called a nonce on the end of the list. The
Speaker 1: minor runs the whole thing list plus nons through a
Speaker 1: shaw to fifty six hashing algorithm. This generates a sixty
Speaker 1: four digit hexadecimal number. If that number is small enough,
Speaker 1: then the miner has mined the block. If not, the
Speaker 1: minor tries again with a different nons. What small enough
Speaker 1: means is set by the bitcoin software and can be
Speaker 1: adjusted to make it easier or harder to mind a block.
Speaker 1: The goal is an average of one block every ten minutes.
Speaker 1: The more miners there are and the faster their computers are,
Speaker 1: the harder it gets. Right now, small enough means that
Speaker 1: the hash has to start with nineteen zeros. A recent
Speaker 1: successful one looked like this, nineteen zeros followed by six
Speaker 1: C nine yard yata eight f f to zero three.
Speaker 1: It's like a game of twenty questions where you're constantly
Speaker 1: guessing a number that will work, except you get no clues,
Speaker 1: and it's many, many, many times more than twenty guesses.
Speaker 1: It is vanishingly, vanishingly unlikely that any particular input, any
Speaker 1: list of transactions plus a nonce will hash to a
Speaker 1: number that starts with nineteen zero's. The odds are roughly
Speaker 1: seventy five sex tillion to one against. So the miners
Speaker 1: run the hash algorithm over and over again, trillions of times,
Speaker 1: guessing a different nons each time, until they get a
Speaker 1: hash with the right number of zeros. Vitalic again. Because
Speaker 1: Shaw Toft six is designed to be a completely unpredictable
Speaker 1: pseudo random function. The only way to create a valid
Speaker 1: block is simply trial and error, repeatedly incrementing the nonce
Speaker 1: and seeing if the new hash matches. The total hash
Speaker 1: rate of the Bitcoin network is something north of two
Speaker 1: hundred million terra hashes per second. That is two hundred
Speaker 1: quintillion hash calculate lations per second, which is one a lot,
Speaker 1: but two a lot fewer than seventy five sextillion. It
Speaker 1: takes many seconds six hundred on average at two hundred
Speaker 1: quintillion hashes per second to guess the right nons and
Speaker 1: mina block. This is a race. Only one minor gets
Speaker 1: to mina block, and that minor gets rewarded with bitcoin.
Speaker 1: To minor block is also to mine new coins to
Speaker 1: pry them out of the system after much computational work,
Speaker 1: like finding a seam of gold after picking through rock,
Speaker 1: hence the metaphor. When miners find the right number of zeros,
Speaker 1: they've published the block and it's hash to the Bitcoin network.
Speaker 1: Everyone else reviews the block and decides if it's valid.
Speaker 1: Valid means all the transactions on the list are valid.
Speaker 1: The hash is correct, it has the right number of zeros, etcetera.
Speaker 1: If they do, then they start work on the next block.
Speaker 1: They take the hash of the previous block, plus the
Speaker 1: transactions that have come in since then, plus a new
Speaker 1: non's and try to find a new hash. Each block
Speaker 1: builds on the one before Section six. Mining all of
Speaker 1: this is incredibly costly. Miners need special hardware to do
Speaker 1: all of these hashing calculations over and over again, and
Speaker 1: these days run huge farms of always on computers. Mining
Speaker 1: bitcoin uses as much electricity as various medium sized countries.
Speaker 1: This is not great for the environment. The most famous
Speaker 1: description of bitcoin, attributed to a Twitter poster, might be
Speaker 1: imagine if keeping your car idling seven produced solved Pseudoku's,
Speaker 1: you could trade for heroin. And it is in some
Speaker 1: sense purely wasteful. People sometimes say bitcoin miners are like
Speaker 1: solving difficult math problems to do their mining, but they aren't. Really.
Speaker 1: They're brute force guessing quintillions of numbers per second to
Speaker 1: try to get the right hash. No math problems are
Speaker 1: being solved, and nothing is added to the world's knowledge
Speaker 1: by those quintillions of guesses. But the miners are solving
Speaker 1: an important problem for bitcoin, which is the problem of
Speaker 1: keeping its network and its ledger of transactions secure. It's
Speaker 1: demonstrably costly to confirm bitcoin transactions, so it's hard to fake,
Speaker 1: hard to run a civil attack. That's why Satoshi and
Speaker 1: everyone else calls this method of confirming transactions proof of work.
Speaker 1: If you produce the right hash for a block, it
Speaker 1: proves you did a lot of costly computer work. You
Speaker 1: wouldn't do that lightly. Proof of work. Mining is a
Speaker 1: mechanism for creating consensus among people with an economic stake
Speaker 1: in a system without knowing anything else about them. You'd
Speaker 1: never mind bitcoin if you didn't want bitcoin to be valuable.
Speaker 1: If you're a bitcoin miner, you're invested in bitcoin in
Speaker 1: some way. You've bought computers and paid for electricity and
Speaker 1: made an expensive, exhausting bet on bitcoin. You have proven
Speaker 1: that you care, so you get to say in verifying
Speaker 1: the bitcoin ledger and you get paid. You get paid bitcoin,
Speaker 1: which gives you even more of a stake in the system.
Speaker 1: These bitcoin come out of nowhere. They're generated by this
Speaker 1: mining by the core bitcoin software. In fact, all bitcoin
Speaker 1: are generated by mining. There was never an initial allocation
Speaker 1: of bitcoin to Satoshi, Knakamoto or two early investors, or
Speaker 1: anyone else. This is the answer to the question of
Speaker 1: where bitcoin come from. They were all mined. Originally, the
Speaker 1: mining reward, which is set by the software, was fifty
Speaker 1: bitcoin per block. Currently it's six point twenty five bitcoin.
Speaker 1: One important point about these mining rewards is that they
Speaker 1: cost bitcoin users money. Every block, roughly every ten minutes,
Speaker 1: six point twenty five new bitcoin are produced out of
Speaker 1: nowhere and paid to miners for providing security to the network.
Speaker 1: That works out to more than six billion dollars per year.
Speaker 1: That is six point twenty five bitcoin every ten minutes,
Speaker 1: or thirty seven point five per hour, or nine per day,
Speaker 1: multiplied by three sixty five days a year, multiplied by
Speaker 1: the price of bitcoin. This cost is indirect. It is
Speaker 1: a form of inflation, and as the supply of bitcoin grows,
Speaker 1: each coin in theory becomes worth a little less all
Speaker 1: else being equal. Famously, though there will only ever be
Speaker 1: twenty one million bitcoin, it's written into the code. So
Speaker 1: what happens when that limit is reached. What incentive could
Speaker 1: miners have to keep the bitcoin network running? Transaction fees?
Speaker 1: The bitcoin code also lets miners collect a slice of
Speaker 1: each transaction, and this will become the only method for
Speaker 1: rewarding them once the last coin is mined. Current estimates
Speaker 1: are that this won't happen until Right now, the bitcoin
Speaker 1: network is paying around one point five percent of its
Speaker 1: value per year to miners. That's lower than the inflation
Speaker 1: rate of the US dollar. Still, it's worth noting every
Speaker 1: year the miners who keep the Bitcoin system secure capture
Speaker 1: a small but meaningful chunk of the total value of bitcoin.
Speaker 1: Bitcoin users get something for that six billion dollars. Security
Speaker 1: and decentralization. If you can make a lot of money
Speaker 1: mining bitcoin, a lot of people will want to mine bitcoin.
Speaker 1: This will make it harder for one person to accumulate
Speaker 1: most of the mining power in bitcoin. If one person
Speaker 1: or group got a majority of the mining power, they
Speaker 1: could do bad things. They could mine a bad block,
Speaker 1: double spending coins, reversing recent transactions, et cetera. This is
Speaker 1: called a attack. When there are billions of dollars up
Speaker 1: for grabs for miners, people will invest a lot of
Speaker 1: money in mining and it will be expensive to compete
Speaker 1: with them. And if you invested billions of dollars to
Speaker 1: accumulate a majority of the mining power in bitcoin, you
Speaker 1: would probably care a lot about maintaining the value of
Speaker 1: bitcoin and so you'd be unlikely to use your powers
Speaker 1: for evil. Thank you Matt Levine, and thank you Mark Ladoff.
Speaker 1: As a reminder, if you're looking for these episodes in
Speaker 1: the Crypto Feed, will be publishing them every Sunday through December.
Speaker 1: If you'd like to read this issue in print form,
Speaker 1: you can head on over to Bloomberg dot com slash
Speaker 1: the Crypto Story. This is Bloomberg Crypto, a daily podcast
Speaker 1: from Bloomberg and I Heart Radio. For more shows from
Speaker 1: I Heart Radio, visit the I Heart Radio app, Apple Podcasts,
Speaker 1: or wherever you get your podcasts. Send us your comments, questions,
Speaker 1: or suggestions for the show to Crypto at Bloomberg dot
Speaker 1: net or find us on Twitter. We're at Crypto. The
Speaker 1: supervising producer of Bloomberg Crypto is Vicky very Galina. Our
Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Faruke
Speaker 1: and Sharon Barriro. Our associate producers are Ty Butler and
Speaker 1: Moses on Them. Dasta wonder At is our engineer. Original
Speaker 1: music by Leo Sidron Im Stacy Maria Shmaal. We'll be
Speaker 1: back tomorrow