How Crypto Currency Works
Let’s say there is a coin that is currently worth hundreds of US dollars, but it is not made of gold, platinum, or any precious metal. In fact, it is not the kind of coin you can hold in your hand or stick to a piggy bank. It is a digital currency, which means that it only exists electronically. I am talking about bitcoin. Bitcoin does not work like most money. It is not linked to a state or government, so it does not have a central issuing authority or regulatory body. Basically, that means there is no organization deciding when to make more bitcoins, calculate how many to produce, keeping track of where they are, or investigating fraud.
So how does Bitcoin work as a currency, or does it have any value? Well, Bitcoin would not exist without a whole network of people and a little thing called crypto. In fact, it is sometimes described as the world’s first cryptocurrency AND this is how it works. Bitcoin is a fully digital currency, and you can exchange bitcoins between computers on a worldwide peer-to-peer network. The complete point of most peer-to-peer networks is to share things, like letting people make super legal copies of music or movies to download. If bitcoin is a digital currency, what is it preventing you from doing a lot of counterfeiting copias y hacerse fabulosamente rico? Well, unlike an mp3 or video file, a bitcoin is not a duplicate data string. A bitcoin is actually an entry in a huge global ledger called a blockchain, for reasons we’ll be here in a minute. The blockchain records every bitcoin transaction.That has ever happened. And, as of the end of 2016, the entire ledger is about 107 gigabytes of data. So when you send someone bitcoins, it’s not like you are sending them a bunch of files. Instead, you’re basically writing the exchange in that big ledger, kind of like, “Michael sends Hank 5 bitcoins.” Now, maybe you’re thinking, “But wait. You said Bitcoin doesn’t have a central authority to keep track of everything! Even though the blockchain is a central registry, there is no official group of people who update the book. and keep track of all money like a bank does: it’s decentralized. In fact, anyone can volunteer to keep the blockchain up to date with all new transactions. And a ton of people do it. It all works because there are a lot of people doing keep track of the same, to make sure All transactions are accurate. Like, imagine you’re playing a game of poker with some friends, but none of you have poker chips, and you left your cash at home. There is no money on the table, so some of you pull out a few notebooks and start writing down who bets how much, who wins and who loses. You don’t completely trust anyone else, so everyone keeps their books separate. And at the end of each hand, you all compare what you’ve written . That way, if someone makes a mistake or tries to cheat and get extra money for them, that discrepancy gets caught. After a couple of hands, you can fill a page in your notebook with notes on the movement of money. You can think of each page as a “block of minutes.” Eventually, your notebook will have pages and pages of information – a chain of those blocks. So: blockchain. Now if thousands of people are separately keeping the bitcoin blockchain, how are all the ledgers kept in sync? To continue our poker analogy: Think of the entire bitcoin peer-to-peer network as a really huge poker table with millions of people. Some only exchange money, but many volunteers keep accounting books. So, when you want to send or receive money, you have to announce it to everyone in the table, so that the people who follow up can update their ledgers. So for each transaction, you are announcing a couple of things to the bitcoin network: their account number, the account number of the person you are sending bitcoins to, and how many bitcoins you want to send.
And all the users who keep copies of the blockchain will add their transaction to the current block. Having a group of people track transactions seems like a very good security measure. But if all it takes to send bitcoins is a couple of account numbers, that seems like it could be a security issue. It’s a big problem with normal money, just thinking of all the ways that criminals try to steal other people’s credit card information. And with bitcoin, there is no central bank to notice that something strange is going on to shut down for fraud, as if it just seems like you suddenly spent your whole life saving on jerky beef . So what’s stopping Hank from pretending he is me and he only sends all my bitcoins? Bitcoins are kept quite secure thanks to crypto, which is why it is considered a cryptocurrency. Specifically, bitcoin is kept safe because of keys, which are basically bits of information that can be used to make mathematical guarantees about messages, like “hey, this is really from me!” When you create an account on the bitcoin network, which you may have heard called a “wallet,” that account is tied to two unique keys: a private key and a public key. In this case, the private key may take some data and basically mark it, also known as signing it, so that other people can verify those signatures later if they want. So let’s say I want to send a message to the network that says “Michael sends 3 bitcoins to Olivia”. I sign that message using my private key, which only I have access to, and no one else can replicate.Then I send that signed message to the bitcoin network, and everyone can use my public key to make sure my signature comes out.
That way, everyone keeps track of all Bitcoin Trading knows how to add my transaction to their copy of the blockchain. In other words, if the public key works, that is proof that the message was signed by my private key and is something I wanted to send. Unlike a handwritten signature or credit card number, this proof of identity is not something that can be forged by a scammer. The “who” part of each transaction is obviously important, to make sure that the right people are exchanging bitcoins. But the “when” also matters. If you had a thousand dollars in your bank account, for example, and tried to buy two things for a thousand dollars each, the bank would honor the first purchase and deny the second. If the bank did not do that, you could spend the same money multiple times. Which … may sound incredible, but it’s also terrible. A financial system cannot function like this, because nobody would be paid. So if I only have enough money to pay Olivia or Hank, but I try to pay both of them, there is a check built into the bitcoin system. Both the bitcoin network and your wallet automatically check their previous transactions to make sure you have enough bitcoins to send the first sites. But there is another problem that could happen with time: Because many people keep copies From worldwide blockchain, network delays mean that you will not always receive the requested transaction in the same order. So now you have a lot of people with a lot of slightly different blocks to choose from, but none of them is necessarily wrong. Okay, bitcoin. How do you solve that problem? Turns out, actually, it’s problem solving. Maths problems. To add a transaction block to the chain, each person who maintains a ledger has to solve a special type of math problem created by a cryptographic hash function.
A hash function is an algorithm that takes an input of any size, and converts it to an output with a fixed size. For example, suppose you had this string of numbers as your input AND our sample hash function says to add All numbers together. So in this case the output would be 10. What makes hash functions really good for crypto is that when they give you an input it’s really easy to find the output. But it is really difficult to get an output and find out the original input. Incluso en este ejemplo súper simple, hay many number strings that add up to 10) The only way to find out that the entry was “1-2-3-4” is to guess until hazlo bien. Now, the hash function that bitcoin uses is called SHA256, which stands for 256 Bit Secure Hash Algorithm. And it was originally developed by the States National Security Agency of the States. Computers that were specifically designed to solve SHA256 hashing problems, on average, about ten minutes to guess the solution for each one. That means they are gaining billions and billions of guesses before they understand it Right. Whoever solves the hash first adds the following transaction block to the blockchain, which then generates a new math problem that it needs to be resolved. If multiple people make blocks at about the same time, the network chooses one to continue building, which becomes the longest, and the most reliable chain.
And any transaction in those alternative branches of the chain put back in a pool to be added in later blocks. These volunteers spend thousands of dollars. on special computers built to solve SHA256 problems and run your electric bills upstairs to keep those machines running. But why? What do they get from maintaining the blockchain? Is it just community service? Well bitcoin actually has a built in system to reward them. Today, every time you win the race to add a block to the blockchain, 12 and a half new Bitcoins are created from scratch and awarded to your account. In fact, you may know bitcoin counters by another name – miners. That’s because keeping the blockchain up to date is like balancing a proverbial spike on those hashing issues, hoping to get rich. When bitcoins were first created in 2009, they actually had no perceived value. Dozens of bitcoins would have been worth the same as a lot of pennies. However, as of November 10, 2016, a bitcoin is worth $ 708. So 12 and a half bitcoins are worth $ 8,850.That ‘s a good part of the change! Every bitcoin that exists was created to reward a bitcoin miner. In addition to the big payout when they add a new transaction block, miners are also essentially tipting a very small amount for every transaction they add to the ledger. It is also worth noting that every 210,000 blocks, the number of coins generated when a new block is added that is halved. So what started as a 50 bitcoin reward? decreased to 25, then 12 1/2. It will only be around 6 bitcoins in a couple More years, and continue to decrease. Eventually, there will be so many transactions in one block, it will still be worth it for miners to mainly receive tips.
According to current projections, the last bitcoin – probably around the 21 millionth coin – will be mined in the year 2140. This decreasing number of bitcoins is actually modeled on the speed at which things like gold are mined from the ground. . And the idea is that maintaining the supply of bitcoins limited will raise its value in an hour. So is it a good idea to invest in bitcoin? Now that’s … not really a type of Bitcoin question SciShow still volatile and experimental. Many people love it, and many people think it is doomed to failure. We just think it’s an interesting idea, and it makes us wonder what crypto might do for us next. Thanks for reading this episode of SciShow, brought to you by our customers on Patreon.