ForbiddenKnowledgeTV
Alexandra Bruce
January 25, 2015
The goal of this video is to explain the essence of how Bitcoin works, without any jargon or scary math. It is not, however, an introduction to what Bitcoin is or why it matters. For that, check out the great intro video at: bitcoin.org.
So, How Does Bitcoin Work? The video gives amore detailed explanation but it could be summarized thus:
Bitcoin is an electronic currency that’s based on a collaboratively maintained ledger. People transfer money by sending messages to “maintainers,” describing where and how much money should move.
Maintainers make sure that the messages are from the true account owners by checking digital signatures. When doubt arises about a transaction, the maintainers reach consensus with each other through a math-based voting process.
Some would argue that without a central authority to register voters, it would be hard to enforce one vote per person – a single person could create multiple accounts to vote more than once, or even millions of times. However, the math problems prevent this by making each vote have a cost in computers and electricity. This means out-voting, or out-solving the majority to take over the ledger would effectively require out-spending the majority – a highly unlikely event.
So the math enables a fair vote in a decentralized system. Two more important details about how it does this: To prevent someone from pre-solving a puzzle to win the race, each puzzle builds on previous answers, and the winner is not just the most recent solution, but the ledger version with the most total solutions.
The puzzles are also extraordinarily special in that there are no tricks to solving them faster, other than by buying more computers and electricity. It’s this property that underlies the entire system, and gives people assurance that solutions are truly from the majority, and not a clever attacker.
A final note about how money is created: Every time a puzzle is solved, a small award is added to the solver’s balance, effectively creating money “out of thin air.†This award acts as an incentive for people to help maintain the ledger. This is in addition to small fees senders attach to transactions. Because maintainers acquire newly-created money through computation, they are typically called “miners,†but their main purpose is really to manage the ledger, not to create money. The voting system simply provides a convenient way to randomly distribute money into the world.
After the year 2140, no more Bitcoin will be created, making it a limited asset and thus giving it inherent value on that basis.
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