Cryptocurrency and Why We Mine Bitcoin

The math problem being solved
while mining for cryptocurrency is actually, “Which number, when tacked on to the end of
the blockchain, produces a hash that starts with a whole bunch of zeros?” If you don’t
know anything about cryptocurrencies, this probably sounds pretty opaque. Let’s back
up a second. With traditional digital media, if I send
you a file, there’s no guarantee that I didn’t keep a
copy of the file for myself. If you want to send money
digitally (that is, actually transfer from one person
to another and guarantee I can’t re-spend it), what you
really need is a trusted party to keep a ledger – a list
of balances and transactions between accounts. When you
receive money from someone, you ask this trusted party
to update the ledger, decreasing your balance
and increasing someone else’s. This is essentially
how modern banking works. There’s a problem though, that makes this
ledger approach fundamentally different from cash.
With cash, I hand you money and you walk away. There is no third party necessary to facilitate
the transaction. Sometimes, we don’t want a third party; maybe
I’m buying something secret, or private, or illegal.
Maybe I’m wanted by some scary people who will go after
the people I transact with in order to get to me.
Or maybe the people I transact with have such people after them. Or maybe I’m
just privacy-conscious, and the idea of having a bank,
clearing house, or exchange track my purchases is jarring.
So, how can we have a trusted ledger without having a trusted third party?
The idea is this: in the spirit of bittorrent, a bunch of nodes connect together,
and none have any authority over any other. When I want to transact with someone,
I cryptographically sign a message that says “I am sending a balance from address A to
address B.” I broadcast the message to the network,
and it gets passed around until everyone has seen it.
Since I’ve signed the message using cryptography magic,
all nodes can guarantee that the owner of address A consents to this transaction.
But how do we know address A actually has the money to spend?
Enter the blockchain. This is a distributed public ledger that says
which accounts (addresses) have what balances.
All transactions that enter the ledger need to be
from addresses that have appropriate balances; if there are invalid transactions, then the
nodes will reject it. So, every transaction has a complete audit
trail leading back to when the coins were first
created, so we can guarantee people aren’t
just inventing coins out of thin air. But how do we decide which version of the
blockchain (distributed ledger) is the correct one?
Couldn’t I, as a node equal to all other nodes, present a version of the blockchain where
I didn’t give away money to someone else, effectively
reversing a transaction? This is where “mining” of the cryptocurrency
comes in. All of the valid transactions are packaged
up into a “block” and all of the nodes in the network
try to solve a hard problem, the problem mentioned at the beginning of
this video. The only way to get a hash that starts
with a bunch of zeros is to guess and check many,
many times, until I stumble on the correct answer.
Everyone is racing to find this answer, because the person who finds it gets to writ
e a transaction that generates free coins and puts
them into an address of their choosing. Anyone can stumble on the answer at any time,
so the difficulty of the problem is adjusted by the network until a correct answer is found,
on average, every ten minutes. Now, if I want to rewrite a portion of the
blockchain, I invalidate the hash that was found.
In order to get the rest of the network to accept it,
I need to find a new random number that, when combined with the block, produces a hash
that correctly solves the problem. But the entire network combined can only find
one such answer every ten minutes; for me to do it myself would take years!
And by the time I did find an answer, the rest of the network will have found many,
many more blocks and tacked them onto the end,
and the rest of the world will use the longer blockchain,
so all of my work has been wasted. So that’s basically it; you contribute computing
resources towards this problem that, by its very nature,
secures the network against attackers trying to double-spend.
In return, you get to generate money for use on that network.

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