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  • Say there’s a coin that’s currently worth hundreds of U.S. dollars, but it’s not made

  • of gold, or platinum, or any precious metal.

  • In fact, it’s not the kind of coin you can hold in your hand or stick in a piggy bank.

  • It’s a digital currency, which means it only exists electronically.

  • I’m talking about bitcoin.

  • Bitcoin doesn’t work like most money.

  • It isn’t attached to a state or government, so it doesn’t have a central issuing authority

  • or regulatory body.

  • Basically, that means there’s no organization deciding when to make more bitcoins, figuring

  • out how many to produce, keeping track of where they are, or investigating fraud.

  • So how does bitcoin work as a currency, or have any value at all?

  • Well, bitcoin wouldn’t exist without a whole network of people and a little thing called

  • cryptography.

  • In fact, it’s sometimes described as the world’s first cryptocurrency.

  • And here’s how it works.

  • Bitcoin is a fully digital currency, and you can exchange bitcoins between computers in

  • a worldwide peer-to-peer network.

  • The whole point of most peer-to-peer networks is sharing stuff, like letting people make

  • copies of super legal music or movies to download.

  • If bitcoin is a digital currency, what’s stopping you from making a bunch of counterfeit

  • copies and becoming fabulously wealthy?

  • Well, unlike a mp3 or a video file, a bitcoin isn’t a string of data that can be duplicated.

  • A bitcoin is actually an entry on a huge, global ledger called the blockchain, for reasons

  • well get to in a minute.

  • The blockchain records every bitcoin transaction that has ever happened.

  • And, as of late 2016, the complete ledger is about 107 gigabytes of data.

  • So when you send someone bitcoins, it’s not like youre sending them a bunch of

  • files.

  • Instead, youre basically writing the exchange down on that big ledgersomething like,

  • Michael sends Hank 5 bitcoins.”

  • Now, maybe youre thinking, “But, wait.

  • You said bitcoin doesn’t have a central authority to keep track of everything!”

  • Even though the blockchain is a central record, there’s no official group of people who

  • update the ledger and keep track of everybody’s money like a bank doesit’s decentralized.

  • In fact, anybody can volunteer to keep the blockchain up to date with all the new transactions.

  • And a ton of people do.

  • It all works because there are lots of people keeping track of the same thing, to make sure

  • all transactions are accurate.

  • Like, imagine youre playing a game of poker with some pals, but none of you have poker

  • chips, and you left your cash at home.

  • There’s no money on the table, so a few of you get out some 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 ledgers separately.

  • And at the end of every hand, you all compare what youve written down.

  • That way, if someone makes a mistake, or tries to cheat and snag some extra money for themselves,

  • that discrepancy is caught.

  • After a couple hands, you might fill up a page of your notebook with notes about the

  • money movement.

  • You can think of each page as a “block of transactions.”

  • Eventually, your notebook will have pages and pages of information – a chain of those

  • blocks.

  • Hence: blockchain.

  • Now, if thousands of people are separately maintaining the bitcoin blockchain, how are

  • all the ledgers kept in sync?

  • To stick with our poker analogy: think of the entire bitcoin peer-to-peer network as

  • a really huge poker table with millions of people.

  • Some are just exchanging money, but lots of volunteers are keeping ledgers.

  • So when you want to send or receive money, you have to announce it to everyone at the

  • table, so the people keeping track can update their ledgers.

  • So for every transaction, youre announcing a couple of things to the bitcoin network:

  • your account number, the account number of the person youre sending bitcoins to, and

  • how many bitcoins you want to send.

  • And all of the users who are keeping copies of the blockchain will add your transaction

  • to the current block.

  • Having a bunch of people keep track of transactions seems like a pretty good security measure.

  • But if all it takes to send bitcoins is a couple of account numbers, that seems like

  • it might be a security problem.

  • It’s a huge problem with regular moneyjust think about all the ways criminals try to

  • steal other people’s credit card information.

  • And with bitcoin, there’s no central bank to notice anything weird going on to shut

  • down fraud, like if it looked like suddenly you spent your entire life savings on beef

  • jerky.

  • So what’s stopping Hank from pretending he’s me and just sending himself all of

  • my bitcoins?

  • Bitcoins are kept pretty safe thanks to cryptography, which is why it’s considered a cryptocurrency.

  • Specifically, bitcoin stays secure because of keys, which are basically chunks of information

  • that can be used to make mathematical guarantees about messages, likehey, this is really

  • from me!”

  • When you create an account on the bitcoin network, which you might have heard called

  • a “wallet,” that account is linked to two unique keys: a private key, and a public

  • key.

  • In this case, the private key can 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 nobody else

  • can replicate.

  • Then, I send that signed message out to the bitcoin network, and everyone can use my public

  • key to make sure my signature checks out.

  • That way, everyone keeping track of all the bitcoin trading knows to add my transaction

  • to their copy of the blockchain.

  • In other words, if the public key works, that’s proof that the message was signed by my private

  • key and is something I wanted to send.

  • Unlike a handwritten signature, or a credit card number, this proof of identity isn’t

  • something that can be faked by a scam artist.

  • Thewhopart of each transaction is obviously important, to make sure the right

  • people are swapping bitcoins.

  • But thewhenmatters, as well.

  • 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 one.

  • If the bank didn’t do that, you’d be able to spend the same money multiple times.

  • Whichmight sound awesome, but it’s also terrible.

  • A financial system can’t work like that, because no one would get paid.

  • So if I only have enough money to pay Olivia or Hank, but I try to pay them both, there’s

  • a check built into the bitcoin system.

  • Both the bitcoin network and your wallet automatically check your previous transactions to make sure

  • you have enough bitcoins to send in the first place.

  • But there’s another problem that might happen with timing:

  • Because lots of people are keeping copies of the blockchain all over the world, network

  • delays mean that you won’t always receive the transaction requests in the same order.

  • So now youve got a bunch of people with a bunch of slightly different blocks to pick

  • from, but none of them are necessarily wrong.

  • Okay, bitcoin.

  • How do you solve that problem?

  • Turns out, it’s by actually solving problems.

  • Math problems.

  • To add a block of transactions to the chain, each person maintaining a ledger has to solve

  • a special kind of math problem created by a cryptographic hash function.

  • A hash function is an algorithm that takes an input of any size, and turns it into an

  • output with a fixed size.

  • For example, let’s say you had this string of numbers as your input

  • And our example hash function says to add all of the numbers together.

  • So, in this case, the output would be 10.

  • What makes hash functions really good for cryptography is that when youre given an

  • input, it’s really easy to find the output.

  • But it’s really hard to take an output and figure out the original input.

  • Even in this super simple example, there are lots of strings of numbers that add up to

  • 10.

  • The only way to figure out that the input was ‘1-2-3-4’ is to just guess until you

  • get it right.

  • Now, the hash function that bitcoin uses is called SHA256, which stands for Secure Hash

  • Algorithm 256-bit.

  • And it was originally developed by the United States National Security Agency.

  • Computers that were specifically designed to solve SHA256 hash problems take, on average,

  • about ten minutes to guess the solution to each one.

  • That means theyre churning through billions and billions of guesses before they get it

  • right.

  • Whoever solves the hash first gets to add the next block of transactions to the blockchain,

  • which then generates a new math problem that needs to be solved.

  • If multiple people make blocks at roughly the same time, then the network picks one

  • to keep building upon, which becomes the longest, and most trusted chain.

  • And any transactions in those alternate branches of the chain get put back into a pool to be

  • added onto later blocks.

  • These volunteers spend thousands of dollars on special computers built to solve SHA256

  • problems, and run their electricity bills up sky high to keep those machines running.

  • But why?

  • What do they get out of 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 out of thin air, and awarded to your account.

  • In fact, you might know the bitcoin ledger-keepers by another name: miners.

  • That’s because keeping the blockchain updated is like swinging a proverbial pickaxe at those

  • hash problems, hoping to strike it rich.

  • When bitcoins were first created in 2009, they didn’t really have any perceived value.

  • Tens of bitcoins would have been worth the same as a bunch of pennies.

  • As of November 10th, 2016, though, one bitcoin is worth 708 US dollars.

  • So 12 and a half bitcoins are worth 8,850 dollars.

  • That’s a nice chunk of change!

  • Every single bitcoin that exists was created to reward a bitcoin miner.

  • Besides the big payout when they add a new block of transactions, miners are also essentially

  • tipped a very small amount for each transaction they add to the ledger.

  • It’s also worth noting that every 210,000 blocks, the number of coins generated when

  • a new block is added goes down by half.

  • So what started as a reward of 50 bitcoins decreased to 25, then 12 and a half.

  • Itll only be around 6 bitcoins in a couple more years, and keep decreasing.

  • Eventually, there will be so many transactions in a block, that itll still be worthwhile

  • for miners to mostly be paid in tips.

  • According to current projections, the last bitcoinprobably around the 21 millionth

  • coinwill be mined in the year 2140.

  • This decreasing number of bitcoins is actually modelled off the rate at which things like

  • gold are dug out of the earth.

  • And the idea is that keeping the supply of bitcoins limited will raise their value over

  • time.

  • So, is investing in bitcoin a good idea?

  • Now that’s... not really a SciShow kind of question.

  • Bitcoin is still volatile, and experimental.

  • A lot of people love it, and a lot of people think it’s doomed to fail.

  • We just think it’s an interesting idea, and it makes us wonder what cryptography might

  • do for us next.

  • Thanks for watching this episode of SciShow, brought to you by our patrons on Patreon.

  • If you want to help support this show, just go to patreon.com/scishow.

  • And don’t forget to go to youtube.com/scishow and subscribe!

Say there’s a coin that’s currently worth hundreds of U.S. dollars, but it’s not made

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