How Blockchain Works

let's put that aside. First of all, Happy New Year, Welcome to two thousand eighteen. I'm recording this at the end of seen, but by the time it goes out it'll be so I'm sure the New Year has transformed everything around us and we don't even recognize the world of tomorrow, which I guess is today for you. But today I wanted to talk about a technology that's been

around for a few years. Actually, elements of this technology been around for decades, but people are talking about it now more than ever and mentioning it as the technology of the future. And what I'm talking about is the technology of blockchain. So this is an interesting technology. It's safe to say that I think you know. The most famous example of something that's dependent upon blockchain technology is bitcoin.

Everyone's heard about bitcoin at this point, but it is important to remember that bitcoins are an implementation on top of blockchain technology, but not all blockchain technology has to be Bitcoin. So what the heck is blockchain? Well, i'm

gonna talk about blockchain, I'm gonna talk about bitcoin. I'm gonna talk about other uses of blockchain, but we will mention Bitcoin quite a bit because again, it's the most famous um implementation of blockchain technology and the reason why anyone is really talking about it at all today because it showed the potential for this technology. Now it's the implementation of a collection of different really good ideas put forward in an innovative way to create a distributed record

of transactions. That we can trace this technology back to a name, but not to an actual person, and by that I mean we can trace the concept to a person or group of persons who used the name Satoshi Nakamoto. If that name sounds familiar, probably means you've read up on bitcoin, because that's where blockchain got start. It was all on this white paper that was written about bitcoin

by someone or someone's going by the name Satoshi Nakamoto. Now, the mystery of who is Satoshi Nakamoto is interesting, but rather immaterial to our subject matter. So let's just say there's a lot of speculation as to who ultimately is

behind the pseudonym. According to at least one post from Nakamoto supposedly is someone from Japan who was born in n but there's been a lot of speculation that that is just a misdirection and in fact Nakamoto is really someone who is originally from America or the European Union. And that's all we know really. Now, what's really important to us is that Nakamoto published the paper on a mailing list that focused on cryptography, and this was back

in two thousand and eight. The first message in that thread of messages was titled bitcoin P two p E cash paper and it hit that mailing list on Saturday, November one, two thousand eight. That's what I love about the Internet. It means that if you go to a message board, you can actually see the date when something is posted, so you can have a very specific mention

of when something came into being. In fact, I could even give you a time stamp if I still had that page open to tell you what time it was posted there. But the message contained a link to a paper and white paper about this concept, and that paper is still available in PDF format for free, So if you'd like to read the whole thing, you can find it at bitcoin dot org slash bitcoin dot pdf. Now a lot of what I'm going to cover today comes

straight from that paper. Now, the abstract of that paper lays out Nakamoto's general approach, so I'm going to quote the abstract here. A purely peer to peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required. To prevent double spending, we propose a solution to the

double spending problem using a peer to peer network. The network time stamps transactions by hashing them into an ongoing chain of a hash based proof of work, forming a wreck heard that cannot be changed without redoing the proof proof of work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll

generate the longest chain and outpaced attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof of work chain as proof of

what happened while they were gone. So this is all about keeping that record of transactions that take place across a system, and the ongoing record that keeps getting built onto is also used to verify, uh, everything that happens and to make certain that people are not able to spend the same units more than once. Now, Nakamoto was specifically talking about creating a digital currency, namely bitcoin, but it turns out this decentralized peer to peer ledger system

could be used for lots of different stuff. Essentially any sort of transaction, not just the ones involving spending digital currency to purchase goods and services or even storing data online. It would serve as the foundation for blockchain, which some people are going so far as to call web three point oh, which I absolutely hate but that would send me down a rant about web two point oh, and I've already done old episodes about that years ago, so

we'll not read tread that ground. To understand blockchain and why so many people are convinced that it's going to be the tech of the future, it helps understand how transactions work in a traditional system. So let's start super basic with bartering system. So this is the old tip for tat approach. You have something I want, I've got something you want. We agree upon the relative value of

those two things, and we do an exchange. So let's say you make chairs and I breed chickens, and we have to agree how many chickens does it out to be valuable as valuable as a chair or vice versa, and then we make the exchange. Pretty straightforward system, but it has some major downsides. One of the big downsides is I might really need that chair, but it may turn out the carpenter has no need for my chickens, so it doesn't matter how many chickens I offer against

the chair. The carpenter has no use for the chickens, So I don't get the chair, and I'm unable to sit down, and I am sad. Now I could go out and try and find a different carpenter who does need chickens, or maybe I find someone else who needs chickens but is offering up something else entirely, and hope that whatever that thing is is something that the carpenter wants, and I've exchanged that for the chair. But this whole process is cumbersome and messy unless the two parties in

question already possess exactly what the other party wants. Now, another drawback is portability. It would be a real drag to carry chairs and chickens around everywhere you went, just when you needed to buy something. So sy alleviates that problem. It acts as a store of value. Members of a population agree upon what the units of that type of money are worth in comparison to goods and services, and it's easier to carry that stuff around than than actual products.

So step one in a currency is to have everyone agree that yes, this currency, this money represents value, and that the value is steady enough for us to make transactions happen. So, in other words, when I go out with my dollar bill and I'm ready to go buy something, I know that by the time I get to the store, that dollar bill is worth more or less the same as it was when I left the house. This is actually one of the big criticisms level that gets bitcoin.

By the way, the value of bitcoin changes so dramatically so quickly that discourages anyone from using it as an actual currency. In fact, people have said that by the time a transaction can complete, the value of the bitcoins can change so dramatically that it comp etally changes the nature of the transaction itself. But we'll get into that a little bit more a little bit later on. Now, most currencies require some sort of backing institution to work, and that might be a government or a bank, or

a combination of the two. And this is an entity that can help guarantee the value of a currency and that it remains stable. Also connect as a third party during certain types of transactions, and third parties become even more important when you start getting into concepts like credit. You could have a specific credit with a particular store or vendor, but these days it's far more common to see people build up credit with an agency and use

a credit card to make purchases against that credit. Now transactions require the involvement of additional agencies to verify that the person making the purchase has the available credit to do so, and that the vendor is authorized to accept such credit. As more societies and populations interact with one another, this process of transaction becomes way more complicated. So then you've got things like exchange rates for currencies, and you've

got processing fees for payment service providers. You've got various ledgers to keep track of purchases and sales. Information tends to be in silos. It is not transparent. It is privately held, which means you're not able to really get a look at it. They're all independent from one another, and this creates potential vulnerabilities that less honest people can exploit. Then you've got the concept of disputes. Disputes can can become a point of exploitation. Third parties frequently must mediate

disputes between buyers and sellers. Now, a dispute could arise for many reasons. For example, and maybe that the delivered goods don't match what was advertised. In the case of physical goods, this can be a hassle. In the case of services, it's even more thorny because how do you get a refund for a service that's already been rendered, even if that service wasn't what you had hoped for. Are you did get something out of it and you can't return it. It's it's a service, not a not

a product, So it's problematic. These third parties have to spend a lot of money mediating disputes between these buyers and sellers, and they tend to recapture those costs by increasing the transaction fees they charge for using their services. The transaction fees are what the amount of money that gets paid to the service as opposed to going straight

to paying off the vendor for whatever you're purchasing. This makes smaller transactions less practical, since more of the transaction itself is going to this processing fee than it is to revenue for the merchant. This is why you might encounter some vendors they have a minimum charge amount for any credit card purchases. Now, this in turn becomes an issue of trust, and since trusted third party is part of the name, you can imagine that's a big deal.

Merchants might demand more information from customers before accepting a specific type of transaction, because without knowing more about their customers, the merchant might want to worry about fraudulent disputes. A fraudulent dispute may cost the money. They might have to foot the bill and they end up getting the raw end of the deal. They might end up being out of a product and they don't get paid for it.

So this is particularly an issue with online payments. You can make exchanges using actual currency in person, and that avoids many of these problems because you don't need a third party. It can just be a direct exchange that here's my money, thank you for the thing, I'll be on my way. But if you're buying something online, that's not really an option. You essentially have to use some other third party service, whether it's credit card or PayPal

or something along those lines. There really wasn't a way to make a purchase without also relying on a third party, and as a result, those third parties tend to be big targets for hackers. They go after them because this is sort of the the central point where a lot of money has to pass through on any given day. Now,

Nakamoto's design was meant to change all of that. Third parties would become obsolete because the system itself would serve as a record of transactions and also the authorization tool required to verify those transactions. The verification process would create a situation that was, in the words of Nakamoto, quote

computationally impractical to reverse end quote. Now, that meant that the amount of processing power required to change the transaction record so that you would be able to commit fraud would require so much computational power that no one would have ready access to it. In addition, the record of transactions would exist across an entire period of peer network, so you would have to do so much work to commit fraud that it would be a diminishing returns situation.

You would actually be spending more or money trying to get ahead of the system than you would ever recapture from committing fraud. In fact, it would make way more sense to dedicate that computational power to working legitimately within the system and earning money that way. But we'll talk about that a little bit more later on. Before I get into that, let's take a quick break to thank our sponsor, the peer to peer decentralized network I was

talking about. That's the key year. It's what gives transactions legitimacy and transparency keeps the system itself stable even if it's a cryptocurrency system like Bitcoin. Even if the cryptocurrency has a fluctuating value, the system itself is still stable. It's also necessary so that no party can abuse the system, such as spending the same digital currency twice. Now what I mean by that is, well, let's let's take a real physical world example and then compare it with a

digital example and see how they're different. Let's say that you have in your possession of valuable physical commodity. We'll say it's a a vinyl single. In fact, let's say it's a vinyl single of the greatest song ever written, which we all know is Hooked on a Feeling by Blue Sweet. So a friend of yours is willing to trade a Sweet Hollow shadowless Mutube Pokemon card in exchange for your limited edition vinyl single of Hooked on a Feeling.

So you make the trade. You hand over the single, they hand over the card, And once you do, that vinyl single is no longer in your possession, right, it's gone. You've given it to your friend, so you can't spend it again. You aren't able to make that trade a second time with someone else. But let's switch this to the digital world. Let's say that you've convinced the same friend to part with that sweet sweet card in exchange

for an MP three of hooked on a Feeling. Well, that's a vy because you can make endless digital copies of the MP three and you can spend it over and over in traits like that. So if you find that your other friends also what an MP three have hooked on a feeling, then you can just keep on trading that same file. You're just copying it over and

over again, so it's like you're spending the same dollar repeatedly. Clearly, if you want a digital currency to work within a system, you have to build in a mechanism to make sure someone can't just spend the same units of currency repeatedly. It has to be able to track when something has been spent and mark that down so that you cannot

spend it again because you no longer possess it. Once they make a transaction, the unit of currency has to be transferred to a new owner with no copy left behind. The distributed ledger helps ensure this by making sure everyone has a copy of what's going on, and it avoids the issue of having a centralized authority like an exchange change or a bank or a government that is in charge of saying yes, that transaction was legitimate. Because again, if you have a central point, then that's the point

that's the most vulnerable. Everyone's going to attack it. If it's distributed, it's way harder to take advantage of it because it's spread across an entire network of computers. So a distributed ledger helps ensure this safety. Everyone in the system can see the record of transactions, and thus everyone knows if you've already spent those digital units. The distributed ledger is sort of like a shared online document or a spreadsheet. So if you've used something like Google spreadsheets

and a shared work group, that's an okay example. It's not exactly the same thing, but it's similar enough that we can kind of draw some analogies. So you have authorized users who can access and view and edit the same spreadsheet. They don't possess a localized copy of the spreadsheet the way you would with something like traditional versions of Excel or Lotus one, two three. And this is a good thing because in the old days of working with these documents, you might get a copy of a

document you make some changes, you would save it. That would create a new copy of the document somewhere else. The older version still exists because someone sent that to you. You then send your version to somebody, they make changes, they save it. Now there's a third copy out there, and so on and so forth, and you end up

with all these different copies of a document. You ultimately have to reconcile them all, decide which one is the definitive copy, which one has the the most accurate changes in it, And it's a huge hassle if the other person had made some changes that you didn't agree with, and you've got to go back and forth on this, and the separate instances of the same sort of file create a huge amount of headaches. Blockchain ledgers kind of get around this by having a shared document where everyone

can see it. Now, granted, it's it's kind of like there are copies everywhere, but every copy of it has to agree with all the other copies. Ultimately, it gets a little messy in the short term, but in the long term, all the copies have to agree with one another, and they're distributed across the entire network, so it's more like a shared spreadsheet. Where if I make a change in that spreadsheet, everyone else will see that change, or if really, I should say, if I make an addition

to it. Because the way blockchain has worked, it's meant to allow for more information to be added to the block chain the chain of blocks, and each block is a block of data. So blockchain ledgers are a record of transactions. In fact, they are a record of transactions that date all the way back to the formation of the blockchain. And this is a distributed record, meaning every computer or node if you prefer, because that's what these computers are called, every node on this network and this

peer to peer network can access that ledger. So to perform a transaction with bitcoins, because again bitcoins being the most famous implementation of the blockchain technology. First you need a wallet, and the wallet exists as your repository of bitcoins. Associated with the wallet are two security keys. One of them is a public key, which you share with other people on the network, and one is a private key,

which you keep for your very own. The keys are connected to one another, but they are different, so the public key and the private key are not the same code essentially are same same characters. If you prefer but they are connected to one another. Encrypting a message with a public key makes it impossible essentially to read without

the corresponding private key. So if you wanted to send me a message and you wanted to make sure that I was the only person who could read that message, you would use my public key, which everyone has access to, and you would encrypt your message. Now, the only thing that can decrypt that message is my private key, and I'm the only one who possesses it. So that way you know that the message you're sending me is safe until I open it, because I'm the only one who

has the key to access it. Likewise, if I send something out with my private key encrypting the data, that's like a digital signature that's saying this message had to come from Jonathan Strickland because it used his private key, and I know that because I can decrypt it with Jonathan Strickland's public key, which I have access to, and that means that it's it's authenticated as coming from me. Now, these are both very important concepts when it comes to transactions.

If I send out a message that I want to make a transaction and use my private key, then again only my public key, which is known to all nodes on the network, can decrypt this message, and that authenticates that the message actually came from me, no one else. No one's able to impersonate me and spend my money on my account, So all the nodes can see that ledger, and when it's time to make a transaction, the parties involved send a message out to the network using their

cryptographic keys. And a simple way to think about this is that one party's bitcoin wallet will decrease by a certain amount, and the other party's bitcoin wallet will increase

by that same amount. So let's say I'm buying something for point zero zero zero five bitcoins, because you can divide bitcoins up to like a hundred million places, and the message that's sent out to the network is Jonathan's wallet should decrease by point zero zero zero five bitcoins and the Caso Hut's account should go up by point zero zero zero five bitcoins. Although I should point out that the blockchain isn't actually keeping track of how much

money is in my account. It doesn't care. Instead, it keeps track of where all the units of currency in the system are. Because all that history is contained within the ledger. The nodes have to verify that I actually have point zero zero zero five bit points, and they do that by looking at the transaction history, all the transactions where money was deposited to me versus money coming out of my account to make certain that I actually

have that amount. So it's not really looking at my account balance so much as it's just looking at the transaction history. It's kind of a fine line to look at, but that's how the system works. And if I do have those units, then it will verify my transmission of those units tokso hut, And if it works, then I get caso, which makes me happy. Now, the notes will add this transaction to their individual copies of this shared ledger, and the new transaction will join other transactions made at

that same time to form a block. This this data. So think of it and it looks like a think of it like a physical block. That block represents a certain number of transactions that took place within a given amount of time. A new block forms approximately every ten minutes. That's designed by the creators of the Bitcoin blockchain experience. They wanted it to be on average ten minutes for it to generate a new block of this at the very least, you get a generation of a block that

will release more bitcoins into circulation. This is the process of mining where you get new bitcoins to enter the system. So in the case of bitcoins UH, you you do this so that you can earn more. But other blockchain implementations might go a totally different way and not use

any kind of cryptocurrency at all. Although you have to figure out some way to give an incentive to people to actually operate the nodes in order to verify these transactions, because it does require some computational work to do this,

so there's a balance there. The blocks have to be validated, So you've got all these different nodes on your system that are all working to form the next block in the blockchain, and to validate a block to validate that list of transactions, it requires a certain amount of computational power, and it's a good amount of power at this point.

Once a block is validated, then it joins the chain of blocks of transactions that came before it UH And in fact, the value of the new block is partly determined by the value of all the preceding blocks, because

each verified block contains values of those previous blocks. Trying to fool the system so that you can spend the same bitcoins twice is really hard to do because every ten minutes, another block is being added to this blockchain, and pretty soon you've got your transaction that you're worried about that's far behind the most current block of transaction.

So I'll give you an example. Let's say that I'm a dishonest jerk so and so, and I want to spend some bitcoins, but I already spent them in the past. In fact, in this particular blockchain random example, the transaction I made happened in block number forty two, and later on I decide, hey, there's this other stuff I want to buy, but I've already spent all my bitcoins. But if I if I can fool the system into thinking I never spent the last ones, then I could spend

them again and buy this other thing I want. However, that transaction was all the way back in forty two, and every block that went after forty two has that information built into it, and it's currently up to block number sixty seven. Here's the thing about blockchain. Whichever blockchain is the longest is considered to be the most valid,

So if you could dedicate enough computational power. In theory, you could go back change the data in block number forty two, But then you would have to solve all those computational problems and rebuild blocks forty two through sixty seven, and then get to sixty eight before the rest of the entire system could get block sixty So you would have your one computer or even family of computers working

on this problem. Meanwhile, the entire Bitcoin system would be working against you just in the regular process of validating all the transactions, so the likelihood of you being able to catch up and then pass the rest of the blockchain system is next to nothing. The only way that you could really commit fraud on this system is if you controlled more of the computing power on the system

than legitimate nodes in the system. So if you had more than of all the CPU processing power in the Bitcoin blockchain family, if you possessed that much of it, then you could potentially commit fraud. However, it would be way easier for you to just use it legitimately and make more money that way, a then for you to go back and spend the same money you spent ages ago again. In other words, it makes more sense to follow the rules because you're going to make out like

a bandit. Then it would if you try to actually be a bandit, it would be less profitable and more frustrating. So, Nakamoto says, the entire design the system is such that discourages cheating in this way, so it convinces you to play by the rules rather than try and cheat, because you're way more likely to make headway playing by the rules, uh more or less. Although these days you've got to have a whole lot of computers to to really have

a chance. Now, the process of validating, like I said, it's called mining, and it's called that because whichever no validates the next block in the chain earns a certain number of bitcoins, which changes over time. Every few years, it has an amount, so eventually you'll get down to fractions of bitcoins, and then ultimately you're gonna get to a point where all the bitcoins that were will ever exist,

will be in circulation and you'll never create more. But in the meantime, it's incentive for people to participate in this system and validate those transactions because they get something out of it. By validating transactions, they get rewarded these bitcoins. So participating means earning money. You accumulate wealth in this way. Really, I shouldn't say earning money, I should say wealth because

it's slightly different from money in my opinion. Now, more specifically, for a block to be valid and become the next block in a blockchain, it must contain the answer to a complex mathematical problem that's created through a cryptographic hash function, and the way to solve this problem is guessing. Yep, You've got to guess random numbers, and that these random numbers will combine with the previous blocks content in order to create a specific result. According to a Medium article

titled how does the blockchain Work? Which is a pretty good article I recommend reading it, it would take a typical computer about a year worth of processing to suss out the problem for a single block. But in the world we live in where people are dedicating hefty processing resources like grids of computers in order to solve these problems and to validate blockchain transactions, it takes about ten minutes,

and again that was by design. This is also why you might hear people say that there's no point in getting into bitcoin mining unless you can make an enormous investment in computing power upfront, because there's just no way to compete with the more beefy mining operations out there. They're using way more computer processing power. It's also why graphics cards can be hard to come by, because, as it turns out, graphics processing units are really really good

for those kinds of problems. Fun fact, though, the system actually adjusts the difficulty of this math problem based on the amount of processing power throne at the math problems. I'll talk a little bit more about that later, but in other words, the harder you try to find them, the harder they are to find. Mind. All right, So you've got this concept of validating a block, and you've

got all these different nodes working to do it. They're all trying to guess at this random number and find the right random number so that it can end up adding the next block to the blockchain and getting this bitcoin reward. But what would happen if two or more nodes came up with the right solution at the same time. Well, each of those blocks could potentially be the next one on the chain, so they almost all kind of occupy what the next block would be. But none of them

are solidly connected to the blockchain. Yet what will then happen is the system will continue to validate the next block of transactions, so this would be twenty minutes out from that original moment. And if one of those nodes is able to put up the next block of transactions that adds onto one of the previous ones that comes the longest chain in the group, that one becomes the

valid answer and the others are discarded. So, uh, one example I saw said, let's say you've got three different nodes A, B, and C, and A, B and C all present their solutions that are more or less the same time, so they could each be the next block on the blockchain. Well, they're all just kind of nebulously hovering at the very end of the blockchain, but none

of them have solidly been connected yet. And then you get solution in for the next block, the one after either A, B or C, and it's attached to block B. Well, that means that block B is now part of the longest chain because it's not just B, it's also B plus N. And because A and C do not have another block after them, they're discarded. Those are no longer the the right blocks for that blockchain, and they don't

earn any bitcoins. Womp, womp. So interesting system. Essentially, it rarely happens that nodes present simultaneous answers, but it is possible. It's just that eventually down the line, one of those chains is going to be longer than the others and it will end up becoming the official ones. So the system self corrects after at least a few blocks. Now, there are some drawbacks to the bitcoin world, and one of those is that it's not difficult to lose access

to your own bitcoins. If you forget your password to your wallet, or you lose access to the machine that your wallet is on, you're out of luck. There are stories about people who have lost potentially millions of dollars worth of bitcoins because they no longer have the hard drive they were stored the whilet was stored on, or they lost the password or whatever. It's terrible stories like that. There are also third party services that act as bitcoin wallets,

but these are prime targets for hackers and thieves. More than one bitcoin wallet company or bitcoin exchange has had to explain to customers that hackers managed to steal significant some of bitcoins from the service, and it turns out trust is still needed in this post trust economic environment. And the only reason for that is because you had to have these other entities in place to facilitate transactions. And uh, that's where the real problem was. It's that

there's that that again creates this target. It's not distributed across the entire network. It has these little focused points that hackers can look at and say, let's let's aim at this and see if we can make away with

a big old digital heist. Another drawback of bitcoins is liquidity, being able to convert bitcoins into some other form of wealth that you could actually spend, because, as it turns out, bitcoins are very hard to spend, largely because their value can fluctuate so dramatically from the beginning of a transaction to the end of one, and several people have complained

that it's difficult to offload bitcoins when you need to. Again, if you decide to offload your bitcoins and in the process of actually trying to validate that that exchange, the value has changed to the point where you wouldn't have gotten rid of them, it kind of freezes you. And also it's hard to find buyers. Everyone wants to get at bitcoins, but not a lot of people want to actually spend the money to buy them, so it does

get very complicated. Also, there's just a few hundred bitcoin owners who possess enough of the percentage of bitcoins in circulation that they could completely upset the economic order if they were to offer up their bitcoins for purchase. That around the same time, if they were all to sell their bitcoins, then it would be almost akin to a run on the banks. People predict that such a thing

would make the prices plummet afterward. So you get these large entities, these these people or organizations that own a ton of bitcoins, making an enormous amount of money in the short term, and then the value of bitcoins would drop out from under it. As a result. In the bitcoin community, those entities are referred to as whales. Now get a lot more to say about blockchain technology, but before I do that, let's take another quick break and

thank our sponsor. Now, as I've said, the whole process uh that we've just talked about is used by bitcoin to validate cryptocurrency transactions. But that's just one potential use of blockchain. There's a Wired article that is titled two thousand eighteen The Year of the Cryptocurrency Craze, and it talks about how blockchains can be used for anything that

you can make a list of, like land ownership. So not only could you make such a system so it's easier to deal with those sort of transactions, the system itself becomes the record of ownership. It's like a deed or a title to a car. If I were to purchase land using a blockchain approach, that transaction would become

part of the block chain's history. So if some huckster wanted to try and post as the legitimate owner of the land and try and sell it to some sucker, which is the old you know, I got this bridge in Brooklyn, you gotta see routine, the system would reject this transaction because the nodes in the system would start looking for the digital information that represents that parcel of land in its transaction history and try to verify that the land does in fact belong to the huckster, that

at some point in the past I sold or traded this land to that person and it's connected to the system. And once the nodes look back and they see there's no such record, that's not the case. They can reject the transaction. The conman cannot fleece another mark because the system knows. Oh, looking at this record of transactions, I see that the actual true owner of the land is Jonathan Strickland, So I know that this is a fake attempt.

But if I were to sell that land again using this blockchain system, the notes would first verify that I'm the rightful owner. They would look through that transaction history. They'd say, yes, Jonathan bought that land at this time, stamp because here's the record within my system, And it would then make sure that I had not at any point gotten rid of that and given it to someone

else or sold it to someone else. Once a note validates that, a new transaction can be authorized, and I can sell the land to a new owner, and all the records in the system update with this transaction across the entire peer to peer network, and everyone knows that the ownership of that land has changed hands, and I wouldn't be allowed to sell that same land again because the system reflects that I no longer own it now. This is one of the most powerful aspects to the

blockchain approach. There's no need to appeal to some sort of authority figure. You don't need a government or a financial institution to keep a record of all the transactions. You don't need notaries, you don't need any verification that this is a lawful transaction, because the economic system itself keeps that record and verifies it. The process secures itself as it's perpetuated, so it's kind of like a self policing system, just based on the way it's designed and

because of that unalterable record. There have been other suggested uses for blockchain technology, for example, using it to keep track of supply chain issues. I've seen it for food services. The idea of being that by connecting everything, you could more easily identify if a potential problem comes up. Let's say that there's a disease outbreak that could affect a certain kind of crop. You could check the blockchain and use that to prevent that food from entering into the

rest of your supply and thus contaminating potential customers. The precious gems industry is looking into using blockchain in order to trace diamonds and other gemstones to make sure the ones on the market aren't conflict gemstones, so they make sure that the ones that are on the market are all from legitimate sources that haven't been using forced labor

or other awful awful methods to mine those gemstones. There's a cloud storage company called store s t o r J which uses blockchain technology to create distributed data storage banks. So it encrypts the data, but if you have the key, you can decrypt the data, and you would. When you retrieve a document from this cloud service, it sends it from whatever would be the closest slash fastest computer on the system to you. So whichever node would be able to most quickly get the data to you, it sends

it from there. And the idea is that this not only creates a distributed storage network, but it also speeds things up a little bit through that actual architecture. For many types of information, block chains make a lot of sense. Anytime you want a public record of transactions or changes,

a block chain could be a good solution. There needs to be some sort of system in place to create an incentive to participate in the block chain, since the process of validation requires computational power, and that in turn means there are energy costs to consider. In other words, validating transactions comes at a cost, so there needs to be an offset of those costs to make the system viable. In the case of bitcoin, the incentive is more units

of cryptocurrency, more bitcoins. Miners are rewarded for their computational power by potentially earning more bitcoins through validating transactions, but it's a first come, first served approach that in turn creates an incentive among miners to consistently turn more computational power toward validating blocks, and it can even lead hackers to create armies of bot net like computers just to help mind for bitcoins. So they're not going after data,

they're not trying to send you spam. They're literally trying to infect your computer so they can turn it into one of the seven dwarfs as they mine for bitcoins. In fact, bitcoin mining is responsible for an awful lot of energy consumption. According to the digit digit Economist website, bitcoin mining consumes thirty two tarot watt hours of power annually,

or two fifty kilowatt hours per transaction. Now thirty two taro watt hours is equivalent to the power consumption of Denmark over the course of a year more or less, and two KWA hours is the same amount of energy you'd use to power your home for more than a week. Eric Holthouse predicted that by twenty bitcoin mining will consume as much electricity as what the entire world is using this year, in well last year. For you guys who

are listening because it's coming out early. That's pretty dramatic. But it turns out it's not really as simple as that, because here's how it boils down. The more energy you use, the more you will ultimately have to pay. Because you're using up more energy. There's a certain amount of energy rate that you're paying. The more you're using, the higher that electric bill is going to be. If you're using so much energy, that's requiring power companies to supply even

more than they normally would. Energy prices as a whole will also increase. So not only are you using more per unit of time, but that cost per unit of time goes up. This is the basic idea behind supply and demand. Your demand for energy has increased, the supply has not necessarily increased, at least not simultaneously with demand. Prices go up. Well, if prices go up, that starts to eat into your profit. As you mind bitcoins. There's no guarantee that you're going to find the next block.

So if the energy prices increase to the point that it's no longer profitable to do bitcoin mining, you'll ease off. You'll create a little relief on the system. Now, the difficulty of those complex mathematical problems isn't static I mentioned earlier. It's dependent upon how much processing power is being thrown at them. So every two thousand sixteen blocks, the blockchain system takes a look at how long the average block went before it was validated. The goal is to keep

that time as close to ten minutes per block as possible. Now, if there's an enormous amount of computing power directed at the problem, that means the mathematical problem has to be harder to solve, to balance out the massive amounts of computer power that's being shot at it. But if people start dropping out of minding because it's getting too expensive to run the computer systems that are validating these blocks, the energy bills are so high that there's no more profit,

people start to drop away. People back off. The system will actually notice this, They'll see that it's taking longer and longer to validate a block of the chain because there's not as much processing power being thrown at it, So then it will adjust that computational problem. It will make it less difficult to solve, to try and get back to that ten minute mark, so it gets easier

to solve blocks. And meanwhile, because the profit margin has been whittled away and energy prices are high, more and more miners have dropped out of the system, at least temporarily, which decreases the demand for energy. Prices will gradually readjust and become lower again, and it becomes profitable to mine bitcoins all over again. The whole process starts up. Now.

A lot of these companies are using various types of cryptocurrency as an incentive to be part of this, and some of them are using cryptocurrency in a way as to say this is an investment, and your investment into the system will eventually pay off in profit because the value of what you hold will increase over time. Others say, your participation in this system is what gives the system value, so the more people who participate, the more valuable the system is, and the more you will get out of

it as a result. So it's two slightly different approaches UH and a lot of these companies are using what they're called i c o s initial coin offerings. It's kind of like an initial public offering, except instead of offering up stock, they're talking about offering up cryptocurrency or tokens in a system so that they're able to do whatever it is they're trying to do, and that could

be pretty much anything. It's an interesting world, and there are a lot of people who are wondering if this is going to be the next evolution of finance, or if this is going to be a bubble that once it bursts, it doesn't recover. Some people are pretty sure that there's gonna be a bubble that bursts and it will be fine after that, after the market readjustment. It's just that people are gonna lose a lot of money in the short term, but it'll survive and keep going.

And then there's some people who say, no, this is gonna inflate to a point where people are going to be on paper millionaires and then it's going to crash, and then the various cryptocurrencies will be worth nothing and people will abandon it because of that massive failure. What actually turns out we'll have to wait and see. Honestly, I think that cryptocurrencies are here to stay, but I do think we're gonna see occasional market corrections, as they say,

and we'll see that value drop precipitously. A few times. We've actually seen that at the end of twenty seventeen, where there are times where the cost of a bitcoin was more than sixteen thousand dollars and other times when it was less than eight thousand dollars, and it was just fluctuating back and forth wildly day to day. That's probably gonna keep going for a while until there's a real market correction, and then we'll see maybe steady gains

from there on out. That's a guess on my part. Well, that concludes our talk about blockchain technology the technology of the future. I look forward to doing a whole lot more episodes and talking to all sorts of tech, whether it's old or new. Who knows. Maybe our next one will be some sort of ancient technology, uh maybe something like ancient or or maybe uh like nineteen century medical technology. Because I was just thinking I need more nightmare fuel

material and that will certainly supply it. But maybe you have suggestions for things I should talk about in future episodes of tech Stuff. If you do, you can send me a message. The email address for this show is tech Stuff at how stuffworks dot com, or you can draw me a line on Facebook or Twitter. The handle for both of those social networks is tech Stuff hs W. Again, I record these shows live on twitch dot tv slash tech Stuff every Wednesday and Friday, so just swing by

there you'll see the schedule. You can join in, be part of the chat room, and watch as a fumble my way through the world of technology gravely and with abandoned and with that law too again, really sin. For more on this and thousands of other topics, is that how staff works dot com.