How Bitcoin Works in 5 Minutes (Technical)
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How Bitcoin Works in 5 Minutes (Technical)


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.

100 thoughts on “How Bitcoin Works in 5 Minutes (Technical)

  1. This explanation could have been decent-ish if the narrator didn't across as some-one aiming to be the Guiness Book of Records "World's Fastest Cue Reader". 

  2. Severely you've lost me after the first 30 seconds. Now I k.ow whAt I'm going to watch if I can't fall asleep. Deep scary stuff though man. 😒

  3. The tech background sufficient (but not necessary) to understand this material is an electrical engineering background. Particularly, classes on information security (crypto/network security and the like). It would be fallacious to think an IT or software background would give you the sufficient education needed to understand this. That is in NO way a mockery to those fields of course. Apples and oranges, ya know?

  4. This video got progressively more confusing, I wish I was good with computers and coding. Tried computer science in college failed miserable.

  5. Yeah thanks for going technical! There are so many vids ''how does this work'' that actually don't say anything informative

  6. Thank you for explaining this in simple terms. (I still don't understand it yet but was able to get a lot.) I will do more research now, cheers.

  7. are the cryptographic functions encrypted themselves? Is is possible for someone to find these crypto function keys and use them to decrypt bits?

  8. The 22 min video is much better than this one. Although, I had to watch it like 4 times to get a better understanding of it . The BitCoin system is really complicated and is very very advanced . Watching that video is a must if you are planning on getting into the BitCoin world.
    Thanks for it video creator !!

  9. You have to be kidding. I am supposed to trust this system? Lotteries determine when I am paid? "Trust" a web of nameless, faceless computers with who knows who sitting at their keyboards. Algorithms and probabilities? I don't think so. "bitcoins are created from thin air and awarded to their account…."  (actual text)

  10. With all the mathematical accuracy, nothing in the concept will stop anybody from Bitcoin itself to run away with the actual cash; and, everybody else holds a ledger with no value. It is a conspiracy and these fools should be put in jail like Bernie Madoff.

  11. Bitcoin mining is the future!!! No government to ruin it either . Its not hard to understand just dont think so hard lmao. Idk my iq but im sure its more than 161 if i could understand this.!

  12. so lets say someone were to
    intentionally spam the blockchain with shit orders,
    cant this problem simply be solved by forcing
    all of the legitimate transactions to increase their transaction fees?

  13. in a nutshell bit coin in an incentive providing for participating to maintaining the ledge thats required to keep track of all transactions made involving them. a signature is given to each person that has a bitcoin, and is stored either in a wallet for yourself, or on the coin itself which is what other users use as their ledger. to keep accurate track of when and how a bitcoin was used, a mathematical equation is assigned for that transaction and the first computer thats able to solve it will be used as the "timestamp" so to speak, and that computer is awarded a bitcoin (or some fraction ofa bitcoin if a pool was used)

    thats pretty much what i gathered from this

  14. The central banks must be so shitting themselves right now. Just imagine how banks would stop stealing trillions, currencies would not get devaluated and how fair the global economy would become. The only problem is money laundering… that's bad.

  15. well, how would I decide the value of an item in bitcoin? Suppose I have a $15 book, how much will it worth in Bitcoins?

  16. Sadly, this is probably the future. If it succeeds it will be the biggest transfer of wealth ever know to man. It will eliminate any handshake or signature and exchange it for wealth through the biggest computer system that its creator knows how to build who knows how to manipulate computer data. R.I.P. J.D. Rockefeller and Bill Gates.

  17. Wow that's confusing. The guy who created this was definitely a genious to have all these checks and balances to have such a sustainable system. And no one even knows who created this system.

  18. 2140? The only true coin of the future is going to be food, land, tools and manpower. Good luck eating your bit coins

  19. how much bitcoin do u think a quantum computer could make if they existed/got working cause i know people have made a quantum computer but getting it to predict the correct mathematical outcome is a hurdle .

  20. How do you buy bitcoins? Is it possible to buy bitcoins with your regular visa bankcard?
    If so how do you go about it?

  21. We still don'tave anything that is physical, If there is a problem like electricity or computer or even government problems, all your value goes away. Why don't we just use real money? I mean REAL money!

  22. There are many mistakes in this video. There is no "balance" in bitcoin, only transactions. The blocks are the essential element securing the network (including the problem of time) and they are left out. Nobody tries to link their own transactions to the ledger, people try to link blocks, and this allows them to put a transaction to themselves at the end of the block (generating new coins). Understanding Bitcoin is complicated and will not take 5 minutes, if you're interested I'd recommend the course at coursera.org. If you are only willing to spend 5 minutes understanding bitcoin then go grab a beer and forget about it.

  23. nice (Y) this is what I was searching for. Mining

    But one question, how many bitcoins are there and how they get their value as compared to any currency?

  24. Great graphics but talks so fast about so much technical detail in just 5 mins that after watching it twice I still only vaguely understand it.

  25. I didn't feel like you explained the double spending prevention and how it translates to the block-chain. How does the "lottery" determine which transaction is legitimate? The way it's explained above implies that both transactions would enter the pool and whichever hash match occurs first gets added to the end of the chain. It obviously can't work this way. Thanks for the video! Lots of good information here.

  26. not sure about bitcoin. I can't put it in my wallet like a dollar bill or put it away like gold or silver coins. And its not really a scarcity item as it could be replicated over and over again, or be remade into another type ie Eth, dogecoin, etc.

  27. oh and pc players, these bitcoin miners are the reason that no decent gpus are available. So thanks miners who should get a real job

  28. You're kidding me! Someone is supposed to understand this?! This is an example of why Bitcoin doesn't work, won't ever work.

  29. Yeah, it makes it very clear that this is most likely a Wall Street /bankster backed plan to move us off fiat currency and into digital fiat currency. Thanks for taking the time.

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