The Essence of How Bitcoin Works (Non-Technical)



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. With that said, on to how it works! Bitcoin lets people exchange money electronically
as easily as sending an email or text. To send money, you use what’s called a “Wallet”
app to type in an amount, enter or scan a recipient’s account number, and hit ”Send”.
The recipient will then see the money pop up in their account. So how does it work? At a basic level Bitcoin
is just a ledger with account numbers and balances. When Bob sends Carol 5 Bitcoins,
his balance goes down by 5, and Carol’s goes up by 5. There’s no gold or government-issued
money backing these numbers, just people’s belief that the numbers are worth something,
and a system that prevents unfair changes. Part of this system makes sure that no one
can spend money from someone else’s account. Every time you hit “Send”, your Wallet
app sends a message to the Bitcoin network describing how the ledger should change, including
the sender’s and recipient’s account numbers and the amount to transfer. So what’s to
prevent a thief from creating a message transferring money from someone else’s account? Bitcoin requires a kind of signature on each
message to prove that it was created by the true account owner. The signature serves the
same purpose as a handwritten signature on a paper check, but it’s based on math rather
than handwriting. The math comes from the world of cryptography,
which is normally used to hide secret messages, but in Bitcoin, has been re-purposed to prove
ownership. Each Bitcoin account number has an associated key that only the true account
owner knows, and is used to create signatures by encrypting transaction messages. Others
test the signature by trying to decrypt it. If successful, they know the signature was
created by the true account owner. In addition to not relying on handwriting
analysis, these math-based signatures also can’t be copied and reused on other transactions,
since the signatures are unique to each transaction. So these signatures keep unauthorized transactions
from changing the ledger, but who exactly is checking the signatures, and overall, maintaining
the ledger? Surprisingly, anyone who wants to! One of the main goals of Bitcoin is to provide
a decentralized system, meaning no single company or government can control it. Every
time someone sends money, a transaction message is passed around to all the people who want
to help maintain the ledger, who I’ll call “maintainers.” Each maintainer keeps a
personal copy of the ledger and updates it whenever they receive a new transaction with
a valid signature. With ledgers spread all over the world, traffic
delays–and occasionally fraud–can lead to differences in those ledgers. So how does
the world decide which version to use? Like in other democratic systems, there’s
a vote, but it’s a bit different than a typical ballot system. Maintainers “vote”
by trying to solve a special puzzle based on their version of the ledger. The first
person to solve a puzzle announces their solution and everyone updates to that version.
So the vote turns out to be a kind of mathematical race, but it’s designed to favor the majority’s
version. This is because the more people there are working on a particular version, the faster
it will be solved. Because new transactions are constantly being
generated, this voting process repeats over and over again so maintainers can continually
agree about new transactions. So why math problems instead of, say, emailing
in votes to decide on a ledger? 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. 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–an 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, and 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, and in fact, after 2140 no
more money will be created. In summary, 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. And finally,
the maintainers reach consensus with each other through a math-based voting process. I hope this gives you a quick sense for how
Bitcoin works. If you’d like to dive deeper into the rabbit hole, check out my 22-minute
video: How Bitcoin Works under the Hood. Also, feel free to subscribe for more concise
tech explanations.

27 thoughts on “The Essence of How Bitcoin Works (Non-Technical)

  1. a meteor will stike earth today. we will all die. and maybe some will survive. world goes back by a few hundred years. and i wont have to understand this. too complex !!!

  2. The only thing I don't understand is how the value of the coin is determined. Who decided it was worth more or less than a dollar and how does that change?

  3. Like here if you also came from the technical 5 minute video AND the long 22 minute before that one…:)

  4. So what happens when quantum computing comes along that will make it effortlessly fast for anyone with one to compute the hash for the blockchain so computational complexity alone cannot be used as a trust metric?

  5. It would really just be easier to stop paying taxes and watch government dry up like a fish out of water.
    The elaborate engineering that's required to stay out of the crosshair of the world wide mafia called government is astounding.
    Are these cunts really that scary? I mean look at most of them. White hair, suits, no shoulders…
    A good punch to the face and they'd sure fold up like a wooden ruler. And yet, still THIS!

  6. Question. After 2140 no more bitcoins will be created. So, who and why will be motivated to validate transactions (via ledgers).

  7. Oh god this is going to sound embarrassing if a family member sees this, plus it sounds silly because everyone else is doing this too but this is a genuine cry for help, I'm really low on money, I've lost my flat and losing my job, its hard being a single mother with money I get from a 15hr shift getting £70 a week, all goes to my kids, food and usual cycle of bills, oh my god here i am begging for money..who would have thought my life would lead to this…its so depressing, I'm hoping this would be a turn over for me in my life, I really hope I do get help from the internet, I'm thinking of creating a video to show the change of what the people of the internet can do to a suffering family, always hear so many good things of how the internet helps those in need…I really am in need…help me please…thank you :'( 

    This is my bitcoin address is 173c8LnzRgB5XYztsdGuynmjqx2pyYNT4x 
    Please help me

  8. All of your Bitcoin videos are extremely helpful; I've used them to show my friends and family how Bitcoin works!

  9. CuriousInventor… Our Digit-DNA System has a new enemy to face and defeat BitCoin, cos it's almost the same as the Fed Reserve. Cos both are speculative and has no real and legit fund and support. BitCoin has its own inflation and is at hand of only those who have an EXPENSIVE EQUIPMENT to generate a fckg single coin, which cannot be generated by all the population. Our Digit-DNA has the most legit fun and support THE HUMAN CAPITAL, with total human control by the people, not by corrupt leaders. Crypto currencies are speculative and have lots of vulnerabilities. The Digit-DNA has no tech-vulnerabilities. If BitCoin wish to work together, then we will generate a WORLDWIDE BUDGET with no need to be generated by complex math formulas, neither need any comp to generate them. People from small communities and neighborhoods will control themselves as they will control and support themselves. Are you with us? or with the economical terrorists and speculators?

  10. I STILL can't fully grasp how this actually works or benefits me over just using "normal" money the way I currently use it, which is either spending physical cash or spending it digitally online.

    Also; something about it just makes me wary. Like it promises to offer a more "fair" monetary system than the current one that's controlled by banks and governments etc, where the richer get ever richer and the rest of us struggle day to day to ever get ahead, BUT I am suspicious that it's really just been created by some genius who's devised a way for him/her to get rich, along with a few of the lucky ones who get in first or figure out how to use the system to their advantage, while everyone else just gets caught up in another system designed to tie them into slowly but surely making someone else rich while they never really make any meaningful amount of money.

    It feels like I'm missing something, something that isn't obvious but that in a fair system really should to totally transparent and easily/fully understandable (certainly after it's been explained), which is exactly how people get tricked into being part of something designed to take advantage of their optimistic ignorance.

    Is this really not just another way for a few early birds or those in positions of power (large groups working together and backed by more money than anyone else so they can mine more than everyone else etc) to get rich and everyone else who comes late to the party and who can't afford to do mass mining to ultimately help the lucky few get ever more rich while hoping in vain that they can somehow get rich themselves but in reality they never actually will and will instead be in exactly the same position they always are, which is struggling to get ahead in the world while the "elites' get ever more rich at their expense?

    I mean; as just one example of something that does't sit quite right with me; How can I possibly have a number/key or digital "signature' that no one could ever just hack my computer and steal then use for their own gain? It's a bold claim to say "that only the true account owner knows" when talking about anything that works online on the Internet. I mean surely I have to store that key somewhere, if I'm ever going to be able to remember it (given how long and random it looks), and surely most people are going to store it on their computer (so they don't have to keep entering it every time) and even if they don't store it there; well surely they have to type it via their keyboard at times, which itself could be tracked via sophisticated keypress hacking type software or whatever. Not that I'm suggesting traditional online banking and spending is any more secure than this but I'm just curious and cautious.

    Why do I get that feeling in my gut that something isn't quite right about all of this?

    I mean how the hell can no one in the world know who actually created Bitcoin??? That's just suspicious right there.

  11. The potential implications of the development of distributed consensus technologies is revolutionary. 

    Bitcoin is an open source peer to peer decentralized digital currency. There is no possible fraud, since is cryptographycally secured by a distributed global mathematical algorithm and public decentralized open source ledger, a revolutionary disruptive technology called 'Blockchain'. 

    This could be the future of money for everything, from donations, micropayments, money transfers, online shopping and bill payments, etc. 

    Empowering and welcoming to the game to billions of unbanked people. And the blockchain peer-to-peer open source decentralized secure technology will be used for many more applications, like escrow, contracts, voting, global ledger, etc.

     Please don't be like the ones that were dismissing the internet not long ago as a "den of pedophiles, drug dealers and terrorists". The blockchain is the biggest thing since the internet and will benefit also the billions of under and un-banked people. 

    Transfer money anywhere, safely, no fees, no middlemen, no charge-backs for merchants and no fraud. 
    These are just physical businesses accepting bitcoin, with tens of thousands more online: 

    http://cointerest.org/map 

    http://coinmap.org/

    If you want to learn more:

    http://www.reddit.com/r/Bitcoin/

    https://www.weusecoins.com/en/

    https://bitcoin.org/en/

    http://www.thebitcoinpage.com/

    Bitcoin Cryptocurrency Crash Course with Andreas Antonopoulos – Jefferson Club Dinner Meetup

    "Not having an internet strategy in 1995 is the equivalent of not having a bitcoin strategy now.” 
    -Moe Levin

    Note: Bitcoin yearly gains so far since creation:

    2009   +4,867% 

    2010   +387%

    2011   +1,320%

    2012   +170%

    2013   +5,317%

    2014   +????%

  12. The Bitcoin/Litecoin and clone Alt Currency branches support architecture is fundamentally flawed. The block discovery difficulty and hash rate power to mine coins has increased to the point that you need a small server farm to achieve a small amount of profit.  Recent cloud farming services have moved in because they can operate more efficiently to keep mining profitable. 

    Lack of scalability (en.bitcoin.it/wiki/Scalability) and future network support is Bitcoin’s and other clones “albatross around their neck.”  As of Sep 11, 2014, 13,250,900 out of the total possible 21 million Bitcoin’s are in circulation. Bitcoin’s support network is rapidly approaching a point where large scale mining will no longer be profitable.  You don’t need to be an economist to realize that when doing something is not profitable, people stop doing it.  

    After coin mining is no longer profitable, the support networks processing power will shrink and verifying huge block chains will take longer making it unusable as a functional daily currency.  Bitcoin could eventually become the sole digital currency (gold standard) that others are valued against.  Observing current markets, it’s well on it’s way.

    NXT’s nxt.org support architecture makes more sense, it’s eco-friendly and processing power is scaleable to achieve fast block processing times. Trust, transaction speed and security are ultimately the deciding factors that will make any digital currency viable.  Depending on peoples acceptance, it’s marketplace could eventually be a serious competitor to PayPal and eBay, due to lower transaction fees. 

  13. This video is excellent and together with the longer one (I just now re-watched) really go a long way toward explaining how this concept works.  I highly recommend both videos for folks who want to understand this technology.

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