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  • At a very basic level, Bitcoin is just a digital file or ledger that contains names and balances,

  • and people exchange money by changing this file. When Bob sells Carol a lawn mower for

  • 5.2 Bitcoins, Bob's balance goes up by 5.2, and Carol's down by 5.2. There's no gold or

  • government issued money backing these numbers.

  • Bob is only willing to trade his real-life lawn mower for a higher number in this digital file

  • because he has faith that other people will also trust the system.

  • So who maintains this ledger and makes sure no one cheats? One goal of Bitcoin is to avoid

  • any centralized control, so every participant maintains their own copy of the ledger.

  • One surprising consequence of this is that everyone can see everyone else's balances,

  • although the real system only uses account numbers and not names, so there's some level of anonymity.

  • If everyone maintains their own ledger, how are all the ledgers kept in sync as money

  • is transferred? At a basic level, when you want to send money, you simply tell everyone

  • else by broadcasting a message with your account number, the receiver's, and the amount. Everyone

  • across the entire world then updates their ledger.

  • As a quick aside, I'm describing how Bitcoin works for power users--people who help maintain

  • the system. You can also just use the system to send a receive money, though, without maintaining

  • a ledger.

  • If sending money is as simple as creating a message with some account numbers, what's

  • to stop a thief, Alice, from spending Bob's money by using his account number? Like a

  • pen and paper check, Bitcoin requires a kind of signature to prove that the sender is the

  • real owner of an account, but it's based on math rather than handwriting.

  • When a new account number is created, it comes along with a private key mathematically linked

  • to that account number. If you've heard of a Bitcoin wallet, these keys are what it holds,

  • and are what allow you to create signatures.

  • To create a signature, a private key and the text from a transaction are fed into a special

  • cryptographic function. Another function allows other people to check the signature, making

  • sure it was created by the account owner, and that it applies to that specific transaction.

  • Unlike the handwritten version, these signatures can't be copied and reused in the future,

  • as they're unique to each transaction.

  • While the mathematical signatures prove who sent a transaction, they can't prove when

  • it was sent, and this turns out to be problematic.

  • In our traditional banking system, if Alice wrote two checks, but only had enough money

  • to cover one of them, the bank would pay the first person attempting to cash his check,

  • but refuse the 2nd, because Alice's account would be empty.

  • So the order of these checks is critical, because it determines who should get paid.

  • Unfortunately, order is much harder to determine in Bitcoin, where instead of single bank,

  • there are individuals all over the world. Network delays might cause transactions to

  • arrive in different orders at different places, and fraudsters could lie about timestamps.

  • Two recipients might both think their transaction is first and ship a product, effectively allowing

  • Alice to spend her money twice! Bitcoin prevents this by providing a way for the entire world

  • to decide on transaction order.

  • As new transactions are created, they go into a pool of pending transactions. And from here,

  • they'll be sorted into a giant chain that locks in their order.

  • To select which transaction is next, a kind of mathematical lottery is held. Participants

  • select a pending transaction of their choice, and begin trying to solve a special problem

  • that will link it to the end of the chain. The first person to find a solution wins,

  • and gets to have their transaction selected as the next in the chain.

  • So what's this linking problem? It's based on a special function called a cryptographic

  • hash. As scary as this sounds, it just mixes up its inputs and spits out a number, but

  • it's special because it's irreversible. There's no easy way to start with an output and then

  • find an input that generates it other than making lots of guesses. And this is literally

  • what people are doing in Bitcoin--feeding this function random numbers until the output

  • meets certain criteria.

  • Besides a random guess, you also input a transaction from the pending pool and chain, which is

  • where the linking part comes in.

  • So the lottery provides a way for the entire world to decide which transaction is next,

  • but the math behind it also helps ensure that everyone agrees about past transactions, too.

  • Suppose you're joining the network for the first time, and request a copy of the transaction

  • chain to get caught up, but receive several different versions. Which one should you trust?

  • Ideally, you would trust the one that the majority of people are using, but determining

  • this on the internet is difficult. What would stop a single person from voting millions

  • of times? Bitcoin prevents this by requiring people to solve math problems to vote. This

  • causes each vote to have a cost in computing power, making it unlikely that a single person

  • or group could ever afford to outvote or out-compute the majority of users.

  • The transaction ordering process described before actually provides the voting system.

  • Part of the input to the linking problem is a transaction from the end of a chain, so

  • each guess is effectively a vote for that chain. But how are all the votes tallied?

  • Because the cryptographic hash function has well defined statistical properties, you can

  • look at any given answer and estimate how many guesses it took to find it, just like

  • estimating how many coin flips it would take to get 100 heads in a row. So the links in

  • a chain not only put transactions in order, but also act as an effective vote tally, making

  • it easy to see which chain most people are using.

  • Finally, how does the money get created? Every time someone wins the lottery to pick the

  • next transaction in the chain, new Bitcoins are created out of thin air and awarded to

  • their account.

  • Solving these problem is commonly called "mining," as this is how money enters the system, but

  • the main purpose of the math is to make sure everyone's ledgers agree. The math simply

  • provides a convenient way to randomly distribute money into the world. In fact, sometime around

  • 2140, no more money will be created, and participants will only be paid from fees added on to transactions.

  • I hope this gives you a quick sense for how Bitcoin works. If you'd like a more detailed

  • summary, check out my 22 minute video: How Bitcoin Works Under the Hood.

At a very basic level, Bitcoin is just a digital file or ledger that contains names and balances,

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How Bitcoin Works in 5 Minutes

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    賴叮噹 posted on 2014/06/05
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