Video - Bitcoin 101 - Understanding Bitcoin pt. 2 of 3 - A Beginners Guide With Help from Wikipedia

This episode (number two) focuses on THE BLOCK CHAIN. What's amazing is that this central term was left out of the Wikipedia paragraph entirely. It would be like talking about Albert Einstein and not mentioning Relativity or E=mc2.


Hello, this is James D'Angelo and welcome to part two of this monster three-part series just covering the first paragraph in the Wikipedia page about Bitcoin.  Today we're going to be looking at really the main central idea of Bitcoin.  And it's left out of this paragraph, but all these other ideas apply so it's imperative that we cover the blockchain.  And remember this is not a technical video.  We're not going to talk about coding, we're not going to talk about individual pieces of data, we're going to give you an idea for why the blockchain exists, why it's a genius idea and how it works?  So here its comes.

Hello, this is James D'Angelo and welcome to the Bitcoin 101 blackboard series.  Today we're just looking at the very first paragraph from Wikipedia on Bitcoin.  Now, you might be coming from the wiki page and notice that the things changed.  Well, that's how we keep Wikipedia is.  It changes fairly frequently.  Just in the time that I've done these videos it's changed hundreds of times.  But for the most part, the first paragraph stays sort of the same and you see a lot of the same terms in these.  Many of them are very, very difficult terms.  So, if you're talking about digital signatures these are PhD type programs.  These are major inventions of monster coding in cryptography that solved enormous problems in the history of computer science.  Okay, so don't expect that even in this one hour that we're going to do that you're going to walk out completely understanding these ideas.  The hope for this two-part series is just to give you a better flavor or understanding of some of the complexities involved in Bitcoin.  Give you a better idea of what's going on underneath the hood.

Now, most likely you've already seen the first part of the series, but if you've skipped and you're trying to watch the second part well, there's good reason to just jump to this one because in today's episode we're going to be looking at the essence of what Satoshi Nakamoto invented when he developed Bitcoin.  He used a lot of other technologies, this open source, these ideas of peer to peer, digital signatures, but in today's episode we're going to be covering his major invention and that's actually kind of agregiously left out of this first paragraph, and that's called the blockchain.

And in many ways, everything that we're going to talk about today revolves around this blockchain.  And all these ideas really revolve around sort of the central idea of how to protect a digital currency in the mad, mad world of the internet.  The internet is just rife with thieves and hackers and people trying to tear down systems just for fun.  You can work in any country, any place in the world and you could launch a serious attack to a major corporation just by trying to hack your way in and break it.  So, Bitcoin because it kind of exists without any sort of central authority, needed to be even more protected, more geniusly constructed to protect itself from all the slings and arrows of all the hacking that's going to go on, right.  There's a lot of value in Bitcoin.  There's $10 billion in there right now.  If someone was able to hack in, well, the prize is really big.

Now, while that may seem dangerous, there's also a beauty to it.  Because there is such a big prize for cracking Bitcoin and that Bitcoins been around already five years without being hacked.  It's starting to look like this might be a system that's not easily hacked and each day that passes sort of increases the sense of security if you're working in Bitcoin.  So, this idea was so novel that when it came out no one was going to invest a lot of money in it.  But it's kept surviving and, in fact, it kept improving because its open source code, it started to build a greater sense of security.  And now, as there are more and more computers, hundreds of thousands of them cranking away processing, these sort of protective algorithms as Satoshi Nakamoto put in.  It's becoming even stronger.  So, Bitcoin and we'll talk about it later it's protected by five peta hashes of computing power and that's the most computing power thrown at one application that we've ever seen in history.

Okay so let's jump into this paragraph and remind ourselves that the paragraph is not perfect.  It's going to be edited and it's probably not even in the right order.  So I'm going to adjust it a little bit as I tried to describe some of the main ideas.  So, in the first episode we ended right here.  And of course, we didn't do any of this perfect justice.  The whole idea of digital signatures might require a undergraduate degree or maybe even a master's degree and certainly to get a better feel for it we'll require a few videos and we're planning on doing that.  But let's move forward.  Transactions are verified by a decentralized network of computers all over the world, okay.  And the big word here is decentralized.  But before we get there let's talk about what a transaction is, okay.  Most people get it right away, but a Bitcoin transaction is basically just a purchase, okay, and there can be other types of transactions but the most common one is a purchase.

So if I walk in with my cell phone a Veggie Galaxy right here in Cambridge and I get a veggie burger and sort of a cheesecake and the bill comes out to be around $10.  Well, I can send them that equivalent amount in Bitcoin.  Beep, beep, beep, beep.  And as soon as I press send a transaction is created and it's not sent just to Veggie Galaxy, in fact, it's not even sent directly to Veggie Galaxy, it's sent to the network.  Okay.  And the network sort of absorbs this transaction and hundreds of thousands of points and comes to just one central idea of whether that transaction was valid.  And we're going to be talking about how that transaction works, but almost instantaneously Veggie Galaxy will get a confirmation that I have initiated the transaction.  And in truth, a lot of restaurants will move forward with just that, but to have true security to truly know that you're going to receive those funds it's better to wait until you get not just as zero confirmation but a one, two, three, four, five, six confirmations.  We'll talk about what that means, but a very safe amount three, four, five confirmations takes about 45 minutes, okay.

Now that's not to say that most restaurants are going to make you wait 45 minutes for a coffee, but that's how the Bitcoin network works.  The older transaction is the more set in stone it becomes.  So, if you're worried about the particular transaction say you sold a car you're going to want to hold on and have a coffee with the person who's buying for about an hour.  So, transactions are verified by a decentralized network of computers all over the world.  Now, it's really important to understand decentralized because when Satoshi Nakamoto was writing and building Bitcoin in 2008, decentralized was one of his major design goals.  So, decentralize was a design criterion and why was he trying to make it decentralized?  Well, he even wrote it down a little bit.  He said that if you could come up with a decentralized currency, well, you could avoid the central authorities of things like PayPal or Banks or even Governments.  All right, these are all central authorities where they maintain sort of their own Ledger and their own balances and they allow customers to come in and they hold everything privately.  And because they're able to sort of privately control the ledger and they're privately able to control some of the money supply.  Well, they're given a lot of additional powers.  So, banks do the fractional reserve system or the U.S. government can create money out of thin air.  This was very troubling not only to Satoshi Nakamoto in 2008, but to many, many people as sort of there were bank bailouts happening by the federal government which really meant a lot of inflation and a lot of printing money, okay.  And this was a big concern.

So in 2008, there were things like the Occupy Wall Street movement taking place where people are running out in the streets to protest sort of the powers, an egregious abuses of the Banks.  So, while they were running in the streets Satoshi Nakamoto, the anonymous or pseudonymous developer of Bitcoin was inside trying to code a solution.  Now, he wasn't the only one.  We've talked about it before but for 15 maybe even 20 years programmers have been working very, very hard to come up with sort of a decentralized currency, okay.  One that relied on no individual's trust, one that sort of ran by itself autonomously without making any moral decisions or any chargeback decisions or anything like that.  So decentralized was a goal to avoid the central authorities of banks, okay.  And Satoshi even talked about this.

Now, he was partially inspired by a thing called BitTorrents, which most people are aware of.  BitTorrents, I can't remember if it's one T or two, I think it's one T.  And Torrents in general are a sort of decentralized way to transfer music files or video files or books or any sort of digital media.  And Torrents, in general, were getting a lot of attention because they were very, very hard for governments to shut down.  There are a lot of stories in those years of governments trying to attack these Torrents but not having much success.  And on the flipside, there was E-gold a digital currency based on gold.  And there was Liberty Dollar, Liberty Reserve the one in the U.S., right, and in those years while BitTorrents and Torrents were doing very well because they were decentralized.  These two organizations were being attacked by governments.  And they were being attacked very easily because they were run by individual people who were holding all the information about their currency on their servers, on their drives, all right, these two companies were centralized alternative currencies and they were in those years failing.  And as all these stories were unwinding, Satoshi Nakamoto was taking the idea of these failures and deciding that he had to make his currency decentralized.

Okay, so once again decentralized means no central authority.  How is this accomplished in real life?  Well, even this took some thinking on Satoshi Nakamoto's part.  Because most financial transactions, banks, when they send financial transactions across the internet encrypt them fiercely.  So, if you have an encrypted file well that can really only be read by one person and that kind of reminds you of being a central authority.  So, Satoshi Nakamoto had to come up with a different way of doing things and what he did, he decided to not encrypt his transaction.  So, any Bitcoin transaction is done in plaintext, it can be read by anyone.  The advantages of that are, that now anyone can read it, maintain it, verify transactions.  The trouble is if you make it in plain text well, people can alter it.  And this is the big issue with Bitcoin.  This is the genius solutions how to make a plain text Public Ledger where all transactions are readable without giving up people's identities and without making it subject to massive changes by individuals, right.

Remember a Ledger is for example, James deposits $1,000 for banks ledgers are very trivial right because they control all the information.  Well, on the next day James withdraws $40 and the ledger is maintained very well by a bank, but if this the ledger was put out plain text and open to the public well then people could start inserting things willy-nilly, right?  James could come in even without depositing cash into the system and James could say he deposited a billion dollars.  I could just add to this Public Ledger and again everything that Bitcoin is, is really ways to defend against abuses.  So that's really all Bitcoin is.  All the great technologies, everything that we're reading here are ways to defend against people coming in and changing numbers on this ledger and making more coins or crashing the system entirely or getting someone's ID, right.  No IDs are actually used in Bitcoin.  That's one way around the big problem that banks have, right.  They're storing all your information which means, they have to protect it like crazy, okay.  And if they get hacked and everyone's information goes public which happens fairly frequently well, then there's major problems with the bank or the credit card, right.  Target got hacked the other day, and four million people's personal information were being sold on the black market, including their credit card number, their pins, their addresses and their names.  I mean this is really a tragedy of sort of the old system and why credit cards have real problems and why something like Bitcoin which is using digital signatures which avoids the storage of passwords on a central server is really kind of the modern flavor.  So Satoshi Nakamoto was putting together very modern, modern protocol and very modern system.

And again, everything that he did, everything that we're reading about in this first paragraph is always to defend against malware hackers and all sorts of internet thieves, okay.  And so, every one of these items decentralized, double spending, miners, proof of work, blockchain are all about protection.  So, let's go further.  Transactions are verified by decentralized network of computers all over the world.  Well, we haven't talked exactly how decentralized works yet.  Decentralized is any system where all the important information, all the documents and everything are kept not just by one central authority, but by more than one and hopefully many, many more than one.  And Bitcoin accomplishes this by providing free software that anyone can download.  The software is called Bitcoin-Qt and you can get it at and you download the software.  Now, initially a software kind of downloads pretty quickly because that's just the application but then it needs all the transaction files.  So, it takes about three days right now to download and verify all 16 gigabytes of data that it needs to run correctly.

And what is the sixteen gigabytes of data?  Well, this is every transaction ever made on the Bitcoin network.  So, Bitcoin was launched over 5 years ago, January 3rd, 2009, and on that day there were some transactions.  New coins were created and after a few months people started exchanging between each other.  Every single transaction from the first pizza bought in 2010 to cars and stuff being bought this year, to all sorts of drug purchases that were done on Silk Road, every single transaction, Fed, seizures of money everything is now loaded into your computer.  And it's readable.  So you can go through this, you can print this file up and you could read the dates and times of all these transactions.  How many Bitcoin were sent?  You could go back and find out how much Bitcoin is worth every dollar and find the exact amount that people were paying for every one of the items they were paying for.  And your computer actually goes through it and verifies to make sure all the transactions are correctly spent, meaning that someone had the right amount of Bitcoins in their account before they spend it.  So, they're loaded in your computer and they're verified.

Now, anyone can do this.  So, I do this right, I download Bitcoin-Qt wait to three days and then my computer now is one node on the Bitcoin network.  And hundreds of thousands of people do this.  So right now, there are hundreds thousands of people with a full Bitcoin node and if all the other computers say if 99,000 computers went down tomorrow Bitcoin still operates just fine because everyone's got a copy of the ledgers.  So, if you saw a fight club where the guys blowing up the banks to try and get rid of all transaction history, well, Bitcoin that's very difficult because you have to find every one of these people and they're all over the world, right.  So right now, someone's downloading this Qt software in Japan, in Brazil, in Argentina, in Colombia, in the U.S.A., in Canada and South Africa, in Uganda and they're running a full node and they're verifying transactions.  They're participating in the network.  And every one of these people who are letting their computers verify transactions as they're happening have a name, okay.  And these people are called miners.

So if you look at the Bitcoin network, right, there's nodes everywhere.  Here is one in Colombia, here is one in Japan, here is another one in Africa and they're just opening up all the time.  Then another 10 in Colombia, and another 12 in Japan and a 1,000 in U.S.A.  Another 40 in Germany, right, 16 in Holland.  They're just opening up all over the place.  If you wanted to try and shut this down it is decentralized, there is no central thing to attack.  You can't send in a government or an army to try and attack Bitcoin because they're everywhere, they're unknown.  We don't know where they are, who they are and what exactly they're doing it for, totally, totally decentralized.  So, the good news is we've gotten through the first sentence of the few sentences we're trying to cover today.  So transactions are verified by a decentralized network of computers all over the world.  Decentral to avoid bank control.

And again, it was based on the idea of BitTorrents and that's probably why Bitcoin is named Bitcoin.  And Bitcoin is even more decentralized than BitTorrent.  There's been a few thing learned in the 15 years since BitTorrents were introduced.  And Torrents are even more decentralized than BitTorrent is, okay, the original BitTorrent.  Things have improved, computer technology, the software ideas have gotten stronger and stronger.  So, let's go to the next sentence.  And this whole section is kind of out of order as we talked about before egregiously leaves out the idea of the blockchain.  And the blockchain, we'll start covering that in more and more detail as we move forward.  It's just a Public Ledger.  And we've talked about this public ledger.  And so, the blockchain is nothing more than all the transactions in text files, okay.  And these transactions are protected by this thing called hashes, and this is a very common way to protect things right now.  If you download certain software you'll see that hash word, if you go to Apple and you're downloading their software they'll even give you the SHA-1 hash of that software which basically allows you to verify whether that software has been altered by any sort of third party.  So the hash is kind of a fingerprint, or sort of a DNA of the actual software, one tiny speck of it.  And so hash is very tiny.  You download this enormous amount of software and you can check it with this tiny little piece of code that lets you know if that software is the valid software.  Where all these text files, all these blocks in the blockchain are verified using hashes and Bitcoin uses a lot of the SHA256 type of hash.  And we're not going to go fully into detail on that.  That's really a full video onto itself but SHA256 hashes is another kind of 15-year-old technology.  That's very, very important on the internet today and it's very useful in terms of protecting things.

And miners use SHA256, creation of addresses on Bitcoin uses SHA256, there is a lot of SHA256 going on protecting the blockchain uses SHA256.  So, this SHA256 is very, very important and it's definitely worth understanding better.  And we'll cover that in a full video.  So, they leave out the blockchain and in this first paragraph I doubt that we'll last forever right as Wikipedia upgrades we'll start talking about this because the blockchain really is the genius invention of Satoshi Nakamoto in Bitcoin.

So, let's move forward, specialized computers use a proof of work system to prevent people from copying and spending.  Remember we're talk again about defense of a digital currency sitting out there in the nasty seas of the internet.  The ocean of malware and hackers and everyone, all right.  So specialized computers use a proof of work system, prevent people from copying and spending the same Bitcoin multiple times.  If you could spend the same Bitcoin multiple times well then Bitcoins not worth anything.  So they have to come up with some way to protect the system from double spending and they're talking about that right here.  A problem for digital currency is known as double spending.  In this sentence, it's got a few problems.  Specialized computers use a proof of work of system.  Well, you don't need a specialized computer to use the proof of work system.  You can use any computer.  My computer runs the Bitcoin-Qt software and it works just fine.  But the more specialized computer you use the more likely you're going to receive rewards.  So, the faster and better your computer is at resolving Bitcoin transactions the more likely you're going to win sort of this lottery.  And the lottery is 25 Bitcoins every six to ten minutes, sometimes you'll see it as quickly as three or four minutes.  And as Bitcoin approaches the price of around a thousand dollars well that lottery every few minutes is $25,000.  Well, that's pretty exciting to a lot of people I mean I would love to win the lottery.

So the better your computer is the more likely you're going to win this lottery and we'll talk about that.  This is part of the many features of mining and miners.  And we have that on schedule to talk about right up here.  So, this is all the features of miners are right here.  So, you don't need a specialized computer but the more specialized the more you using ASICs application specific integrated circuits, the more likely you're going to win the reward.  But you can still use your computer, run the proof or work system and verify transactions and feel like you're contributing to the Bitcoin network, okay, and preventing people from double spending.  Now, it says this is a problem for digital currencies known as double spending.  Well, the dollar for the most part these days is digital.  And banks prevent double spending by just keeping their ledger central.  So, you're not able to put $100 into your bank account and then go to two different ATMs really quickly and pull out one hundred bucks from each of them.  Okay, banks because they've centralized all the ledger are not really worried about your double spending.  But they do time stamp all transactions and make sure that you can't take out the same money twice.

So this problem is really a problem of decentralized digital currencies.  And the double spending problem was such a big deal in 2008 when Satoshi Nakamoto was programming that.  It was considered the holy grail.  It was the holy grail of digital currencies.  If you could solve the double spending problem, many people speculated that you could become very, very rich but you could also become very, very famous.  Because if someone could figure out a way to program around the double spending problem they would have solved the biggest problem with digital currencies.  Everything else was sort of considered, people understood that you probably use digital signature.  People understood that you're going to use other forms of transacting and how the protocols were going to work and how you're going to send the signals around, but they were stuck with this major problem of double spending.  Every system that people came up with was either centralized or had this huge failure mode of double spending.  People could spend the same Bitcoins or the same coins in the system more than once.  And we'll talk about, more about that as we start to figure out the system but let's keep reading to this paragraph.

So non-specialized computers use a proof of work system to prevent people from copying and spending the same Bitcoin multiple times.  A problem for digital currencies known as double spending.  The operators of these computers known as miners are rewarded with transaction fees and newly minted Bitcoins.  Okay, so we've started to discuss miners and we've talked about sort of this lottery reward of these 25 Bitcoins, okay, which are fresh Bitcoins, they've never been used in the system before.  These are virgin Bitcoins.  That are given out every few minutes.  And there's transacting fees which is actually important, people think that oh, I can send anything in Bitcoin for free.  Well, that's not true.  Bitcoin really does suggest and may soon require that you add a transaction fee.  Now, the transaction fee hopefully is going to be very, very small and stay small forever.  So, if you're sending $10 you might send a penny as a transaction fee.  But it turns out these huge advantages to having transaction fees.  So, if you're familiar with email spam since no one charges for sending emails people can send as much as they want.  So, people will send millions of spam emails.  Well, if there was just a tiny, tiny fee on emails it might not hurt the individual user.  I send about 30 emails a week, 100 email a week.  If the price for sending an email was one tenth of one cent that might not be so expensive.  I'll still send all my emails and never think about the price.  But if you're a spammer and you're sending millions of emails now you're looking at spending a thousand dollar or tens of thousands of dollars to do all your spamming, then you're less likely to spam.

So people talk a lot about making it expensive to send transactions over the internet to stop people from sending too many, doing a lot of fraud, doing a lot of hacking and doing a lot of service attacks on a system by just spamming so many requests.  So, transaction fees tiny, tiny transaction fees are actually a good thing.  Tiny fees could be good.  It actually protects the system from too much clutter.  And the other way to protect from all these transactions proof of work.  And we're going to jump into all of this right now and try and put it all together.  So, what we're going to need to do is open up a new page.  So, as we spoke about it's really easy for a bank to maintain a ledger.  So, if you deposit a hundred bucks well the bank records it and then if you go to withdraw forty bucks they know you have a hundred bucks and they subtract the forty and now you have a balance of sixty.  This is easy.  It turns out that's only been easy if it's centralized.

And there are reasons for this.  There are a number of reasons for the problems of creating a distributed public ledger, right.  Remember this is a private centralized ledger.  All right, so if you want to create a Public Ledger well you have to do things differently.  And one of the big problems with creating a Public Ledger on the internet is actually network speeds.  People like to think that if I send an email it arrives immediately.  Well, it doesn't arrive immediately.  It arrives in a second or two, okay, one to two seconds.  And sometimes can take as long as 15 to 30 seconds.  And for sending emails to your friends this isn't much of a problem but when you're dealing with money and transactions and trying to maintain a ledger, this delay can be a very big problem.  So, say a bank when you took out that forty dollars at one ATM it took forty some odd seconds to update its ledger.  So for forty seconds there was a space there where I could maybe run to another ATM and try and pull out a hundred dollars even though my balance should be sixty if this one has not been inserted, if it has not been recorded yet on the bank's Ledger well if I run fast enough I could pull out the hundred so my balance would now be negative forty.

So this delay is really problematic.  If you're dealing with digital currencies and we can think of it another way.  When I walk in the Veggie Galaxy and I get my veggie burger and my cheesecake and I pressed send on that transaction will that transaction as we've talked about is broadcast to a network of computers all over the world?  Well, what's likely going to happen is kind of sort of how gossip spreads.  It's kind of like how a virus spreads, right, computers are very fast so it spreads very fast but when I send my transaction from Cambridge, you know, in Boston it's not clear which nodes it's going to hit first.  We don't know how gossip will travel or viruses will travel, but it's likely that the first node I hit might be in New York.  And then, the next note I hit might be over here in Paris.  And then those nodes will broadcast and maybe it'll hit over here in China and then maybe it'll hit down here in Brazil.  Now, this propagation time will even depend on how well your wallet is made.  So, if a wallet is not designed very well and it sends a transaction slowly or takes a while to process the transaction or if the exchange itself is running some sort of inner workings or being a little bit cautious it will take even longer so you can end up with, you know, in some cases I've seen transactions broadcast in 30 minutes.  Especially if you're dealing with an exchange it's trying to sort of save money by not buying and selling all the times doing some internal transactions, right.

So if I send my transaction to Veggie Galaxy for $10 it doesn't as we talked about go only to Veggie Galaxy or directly to Veggie Galaxy.  It goes out into the network and Veggie Galaxy may be hooked up very closely with the node in Brazil.  But not very closely with the one in China.  So, if I turned around as soon as I sent my $10 Veggie Galaxy and I tried to send my same $10 say I only had $10 to my buddy Dave.  And I made sure that I was sending it to the Chinese node which didn't get record of my Veggie Galaxy transaction right away, well then I'd have successfully sent money to Dave as well.  I'd have to double spend.  I'd have to send the same money to two people.  And computers are fast so you could program that so you could quadruple spend or send a million transactions in just a second.  And this is really bad because the network is not as fast as we like, so computers work very fast in two seconds but the network in this case really doesn't.  So, this network lag is a big problem.  If, when I pressed send it went to all nodes instantly then it would be very easy to maintain this Public Ledger.  As soon as you received a send request you say that James sent 10 bucks to Veggie Galaxy and you do it as soon as you could and then updating the ledgers very easy.  Well, the genius method that Satoshi Nakamoto used to get around this problem was to cause a little delay in the system.  And the delay he used was basically creating a bucket and this bucket is sort of like a buffer.  Because in that crazy time in those 10 seconds right so many shenanigans can be run that is like well let's not even accept any transactions as soon as they're sent.  Let the network know, and Veggie Galaxy knows that I've initiated transaction right away but that's not a confirmed transaction.

So all transactions for 10 minutes in the Bitcoin system are stuffed into this buffer.  So, if I'm trying to double spend to Dave and I'm trying to double spend to Veggie Galaxy well, they both stuff into the same buffer, they're not confirmed by the network.  It's not saying I approve, this buffer is unconfirmed and really just not valid Bitcoin transactions.  And the idea of this is that this buffer will hold transactions for approximately 10 minutes.  And I like to think of this bucket, this buffer as sort of cement.  So right now you've got really wet cement and sitting right next to the bucket maybe we'll have a mold.  A little brick mold for example, I don’t know how to draw this very well but we'll give it a shot.  So we'll have a mold for making bricks.  And so, at the end of 10 minutes these transactions get poured into this mold, concrete still pretty wet and that brick gets plopped on top of the ledger.  Remember these are all transactions.  Okay, so this is really just accounting.  So, this buffer is just a bunch of plain text transactions, not a crypted and this brick of transactions, wet brick of transaction so it gets poured in here at the end of 10 minutes.  It gets popped on top of our little house that we're building, right.  And underneath it is the previous 10 minutes.  So here is the previous 10 minutes of transactions, and because it was only 10 minutes ago this cement is still a little wet too but it's harder and each time you go down another brick you get slightly drier blocks of cement until around here they're starting to get pretty darn hard around five or six.  This cements' getting very hard.

And Bitcoin works in a way that its cement gets harder each time you get lower.  I've never really liked the idea of a chain unless you're a programmer and you understand the SHA256 key that they're using.  I like to think of it as a tower of bricks.  Each brick containing 10 minutes of transaction.  And at the very bottom, right, there is now around 300,000 of these bricks and a new one gets added every 10 minutes or so.  At the very bottom is the very first brick and this thing is very hard and they're actually even call it a block.  These are blocks, blockchain.  This brick or this block is called the Genesis block.  Maybe a Biblist type reference, right, at the very beginning is the genesis.  Genesis is the first pages of the Bible.  The Genesis block.  And this is very hard.  These transactions are so hard.  And the way this is set up, this tower, this blockchain, right, is that it's impossible to break into here and change the transactions in here without wrecking everything above it.  And it takes a lot of power, a lot of energy to break through the top of the blockchain.

So and each brick takes successively more power and in fact it's almost exponentially more power so it's very, very hard to break down.  So, the first wet bricks are somewhat easy with all the computing power.  Right, now Bitcoin it's about billion dollar worth of energy to start breaking through the first wet bricks, and it get farther and farther down, it's going to take much, much more.  So, if you wanted to tear apart the entire blockchain so that no one would notice and rebuild it back up with all new transactions in it.  You're talking about a giga billion dollars, I don't even know if that's a new term.  All right, a giga billion amount of dollars but the other thing about it is there's not enough electricity to generate a ball on earth.  If you took all the coal, the oil and convert all the electricity just to do the computing power to do this there isn't enough.  This is one of the most rock-solid things ever built in software.  And what protects it?  What is making it so hard?

Well, that's where this proof of work comes in, and we're going to talk about that.  So, we're getting an idea for how the blockchain is built.  We've got these transactions coming in any time there is sort of a double spends stuck into this buffer.  Well, the buffer has a very simple and easy to follow algorithm for any time it sees two transactions trying to spend the same funds.  It throws them both out.  So that's convenient if you want to get away with double spending your Veggie Burger.  So, you send the transaction to Veggie Galaxy and immediately you try and double spend, you try and sent it to another node, okay, your wallet probably won't let you do it, your blockchain wallet, you're specialize wallet.  But if you're able to program a Bitcoin you can send a transaction very easily.  In fact, you could send thousands of them.

So if you want to avoid paying Veggie Galaxy well you double spend that transaction in those 10 minutes.  if Veggie Galaxy accepts your funds and you walk out the door in those 10 minutes well what's going to happen is your transactions going to get reversed back to you.  Because it was double spent.  That's why people say that you need to wait at least one confirmation.  If the money is worth something to you and each one of these blocks, each 10-minute block of harder and harder cement is considered a confirmation.  So, you're just under more and more time, more and more transactions.  So here is the fifth confirmation, right here.  And that fifth confirmation takes about 45 minutes to an hour to receive.  So, if you're selling coffees and you want your business to work quickly you might work off of a zero confirmation, this buffer is the zero confirmations.  You have not been told that that money has been spent, you've been told that it's only been attempted to be spent.

Okay.  And a lot of coffee shops will run off of that because it's difficult to double spend and it's also inconvenient to make the customer wait for 10 minutes.  So, for coffees you might see a lot of zero confirmations happening.  And there is ways around this people are coming up with genius ways around this, you could spend on the same network.  So, if I have a Coinbase account and I'm spending to a Coinbase account.  Coinbase can be the sort of tiny centralized authority providing this sort of comfort to the merchant they receive the funds right away and they will get those funds so there is a number of services that will crop up to sort of allow faster transactions to happen.  But right now, if you using pure Bitcoin you want to wait depending on how valuable it is.  And if you're selling a house as I mentioned, you probably want to wait until the transaction somewhere down here in the blockchains, so every 10 minutes new blocks are getting tossed on.  Okay, and these are the new blocks and keeps getting higher and higher and as I said right now it's about 300,000 blocks.

Okay, so we're going to stop here.  This is the end of part two of this three-part series.  So now you're starting to get a very good idea for how the blockchain works and why this blockchain is so important for Bitcoin.  In the next episode, Part three we're going to be talking a lot about proof of work.  And proof of work is this genius idea developed not by Satoshi Nakamoto but in 1997 by a guy named Adam Back to prevent spamming for emails.  And it's really, really clever stuff but Satoshi Nakamoto incorporated this idea to protect Bitcoin.  So, it's very important to understand.  Please remember to like, subscribe, comment, do all those things you might do, we'll catch you in Part three.

Written by James DeAngelo on January 5, 2014.