A Blockchain Explained with Subway Cars
[Music] so i went on a quest the other day to try and find a really good comprehensive video explaining how the blockchain works and i honestly could not find one on youtube because to understand bitcoin and ethereum and nfts you have to understand the underlying technology the blockchain and it's not an easy concept to grasp this script took me hours to write just to try and simplify this concept so you've seen this technology used for cryptocurrencies and collectibles and memes but you don't need to understand everything about it just like you don't need to understand how the banking system works to pay with a credit card but bitcoin has become a store of value and investment security and a lot of venture firms have raised tons of money us dollars that is to invest in blockchain companies because blockchain has the potential to reshape the way we think about money so here's our attempt at explaining the blockchain with something [Music] we have a blast making these videos and what we're really good at is taking complex topics and company stories and turning them into simple 15-minute videos or 15-minute slide decks so if you need help with telling your company's story to your investors you want to check us out at slidebee.com so let's start by understanding the concept of a ledger ledgers have been used since since forever thousands of years to keep track of accounts and transactions whether it was the production of barley and ancient mesopotamia or the ownership of property to the ownership of people calvin candy so a ledger essentially logs transactions along with other details like the amount and the date and the person who verified it or who authorized it and that's usually in the form of a signature so even then there were some basic security mechanisms in place for example ink can't be easily erased pages and entries were chronological and numbered so new entries couldn't really be faked and for years ledgers were books they were kept in safe locations and owned by a trustworthy person so you essentially trusted the owner of a lender to not cheat and to not add fake entries or tear out pages so there are some terms here on keeping a good ledger for example signatures to verify that transactions were real trust in whoever is keeping the ledger and this is not too different from our current system today as i swipe to enter the subway in an instant of a second the mta gateway detects a unique code in my card and sends the info to their bank the bank uses the mastercard network to talk to my bank bank of america and then bank of america checks their ledger to confirm i have funds in my account to pay and then the bank sends a confirmation back via this mastercard network to the mta bank so the mta final confirms to the gateway that this is all well and i guess across so each band keeps a general ledger for every one of their customers you see a glimpse of that when you get your account statements every month so your ledger essentially says that you deposited some money to open your account and then you swipe to pay for lunch so the bank checks your record to confirm you have enough funds and then adds a record saying that you paid that money to the restaurant meaning some money moved from your account to theirs and it gets tracked the ledger so then maybe somebody paid you back for lunch a certain amount of money moved back from their account to yours then say you want to buy an extra beer as overpriced as they are here so you swipe again but this time the bank sees your balance is not enough so the transaction is denied so as the owner of the account you are signing and you're verifying those transactions by using your credit card which in this case functions as sort of a password the same way your password functions on the online banking and we think of this as bills exchanging hands and physical money moving from one account to the other but in this day and age there's no physical money involved there's no bills moving from one account to the other it's just this huge ledger that's keeping track of everything numbers being added and subtracted from accounts now your bank's ledger is what's called a centralized ledger bank of america owns it they're the only ones who can make changes to it and it's their job to maintain it it's their job to make sure that it's not tampered with or deleted you essentially trust the bank to keep a good track of that letter but they do have full control over the ledger so there's a remote possibility that the bank could make a mistake or maybe even shut down the stock market is now down 21 what in the world is happening on wall street two-year no yields went from 190 to 166. so bitcoin was conceptualized by an anonymous person or group that identified themselves as satoshi nakamoto and part of the myth around bitcoin is that we still don't know who satoshi is anyway he she or they essentially brought together a bunch of concepts technologies such as cryptography and they wrote a white paper that was published in 2009. this was the middle of the real estate market crash in the u.s so it inevitably rode in a wave of mistrust in the banking system by the way we haven't talked about the 2008 market crash we figured you've already watched the big short but maybe you want us to cover it so do let us know in the comments so anyway in this white paper this proposed cryptocurrency offered theoretical solutions for many problems with centralized banking the fees to send money or accept payments the trust problem with banks even the central bank's ability to print new money based on political decisions so bitcoin as a currency that can be used to pay for things is built on top of a blockchain and the blockchain is in essence a ledger just like the one your bank keeps and we're gonna use the bitcoin example because it was really the first successful implementation of a blockchain and because it was the cryptocurrency that sparked everything every day i see bitcoin number three this will be better than bitcoin you'll get rich overnight i went in big i put in a few million into bitcoin a couple hundred thousand dollars at the start and it's appreciated more than 5 000 since then so the bitcoin ledger again that document that keeps track of every single transaction it doesn't depend on a single entity or a single server it's not a book it's rather distributed it was designed as a way for multiple computers working together each one of them with a stored copy of the ledger and with a creative and super secure system to ensure that none of those transactions can be tampered with or that nobody can tamper with the data so this ledger is not just a list of transactions instead it's divided into blocks which is a really clever way satoshi figured out to allow this thing to work so each block contains a batch of transactions whenever you send money to someone using the blockchain what you are essentially doing is adding an entry to the ledger saying that a certain value moved from one account to the other so in traditional banking the bank itself is the only entity that can add to the ledger it's their ledger but in a blockchain anybody can add transactions and therefore it's free and the technology uses an incredible system extremely secure system to make sure that all these transactions are real so in a blockchain transactions are grouped into blocks on bitcoin specifically each block is about one megabyte in size which means that it can store about 2500 transactions so a transaction is again a log or a record saying that a certain amount of money a certain value moved from one account to the other just like with your credit card transactions in order for a transaction to be valid the origin account needs to have enough funds and the record needs to be signed by the owner of the account to verify it's real just like in the traditional system now as transactions are made between accounts they are broadcast to all computers in the network and each one of them begin grouping them into a new block so let's see how a new block is created in the network the first thing the computers do is get the code of the last block in the network that way we know that we are linked between each other we're linked to that last block and that gives us a chain as transactions are received by the computers on the network they begin listing them inside of this let's call it an in-progress block and once the block is finished they send it to the rest of the network so that instead of pointing to the previous block they now link to this new latest block in the blockchain now if creating a block were really really easy different computers would create multiple blocks at the same time and they would broadcast them and then the blockchain would become forked that that means that there would be no way of knowing which of the forks to follow so by design creating a new block needed to be hard just like each transaction needs to be verified by the sender of the money each block needs to be verified by the creator with a process that's intentionally very difficult creating a block needs to be deliberately hard so that only one block is created at a time and on bitcoin this is done with a system called proof of work [Music] so as this in progress block begins filling up with transactions the computer creating that block automatically begins trying to solve a puzzle and this is where cryptography comes in again what the network wants for this computer or any computer in the network is to have to go through a lot of work to create a block but we also don't want other computers to have to go through that same work to check the block to ensure that it's valid so for this a cryptography formula is used and in the case of bitcoin it's a function called sha-256 which is used for a bunch of other things your browser is using it right now to connect to youtube to watch this video so technically it's called a hash function so if you take the information in this in progress block everything inside it the number of the block behind it every transaction that you've added and you run it through a sha-256 formula and number will come up and that number is really really unpredictable and it sounds like random it's made up of ones and zeros and it's 256 characters long and changing any value inside the block will produce a new number and it's not just one digit difference all 256 digits are going to be different so since that number is so unpredictable changing something could give you billions and billions of possibilities just really advanced math stuff though it's very easy to calculate for a computer so in order to create a block and prove that it wasn't easy the computer creating the block needs to find a way so the result of this operation starts with 30 zeros that is attaching a number at the end of the rest of this data so that the result of the sha starts with 30 zeros and here's the trick there is nothing you can do to calculate that number in reverse we can know the formula of the chat 256 but it can't be reverse engineered nobody has solved it and it's unlikely that anybody will anytime soon the only way to find that add-on number is to try one and then another and then another until one of those results gives you 30 zeros so on average you will have to test about a billion numbers in order to get a result and this is a lot of work even for a computer because it's so many unpredictable options that getting that number right is almost like winning the lottery the plan here is that a computer should take a few minutes to solve this puzzle now why would anyone burn out their computer to log transactions and try random numbers to find a random number to complete this formula because when you create a block there's another huge benefit to it you can create money for yourself so a new block has been created but remember this is a ledger it's supposed to keep track of transactions moving from one account to the other but it's not a money printer so if all of these accounts are empty how does money get created where do these coins come from if you create a transaction from an empty account it's going to get rejected or if you just add money to a random account it's going to be rejected by the network by design except for one because the creator of a blog gets to add a little reward for themselves the creator of block gets to put money into their own accounts they get to add new coins into the general supply of coins of money of currency for the network that reward is the reason why this is called mining essentially the computer is performing this repetitive task this boring task of just finding this special number in exchange for this reward that has monetary value mining once the block is created it gets broadcast to the network and once half of the computers in the network adopted and added to their own copy of the blockchain and start mining the next block that comes after that then this block is considered confirmed and for all certain purposes it's unchangeable because remember each block contains the hash of the previous block that means that if somebody tried changing something in a block made days ago it would mean that the hash of this block would change which would change the hash of the next block and the next block all blocks would need to be recalculated if you change something and that is the main reason why a blockchain is such a trustworthy way to store data now satoshi predicted that as the network grew a lot more people would join it a lot more advanced computers would also be joining and start calculating this puzzle as the network grows bigger the difficulty of this needs to grow as well it's adjusted automatically simply by changing the number of zeros required on the proof of work which is pretty clever the more zeros the harder the number is to find so another important difference is that the amount of coins that get created is also limited the ledger started with a balance of zero for everyone for the first few blocks the reward for solving the puzzle was 50 bitcoin every single coin in circulation today was created this way mined by a miner and then sold or transferred to somebody else you can actually go and look at the first block of the bitcoin blockchain it points to the previous block which is block zero it has no transactions because nobody was using it yet and it had a 50 bitcoin award for the miner who found it so the reward for finding a block decreases with time right now it's at 6.25 bitcoin and it continues to decrease that's the award per created block and by 2140 all bitcoins allowed will have been mined and no new ones will be created inflation will not be possible the supply is limited to 21 million coins now at the very beginning nobody would pay anything to own a unit of this someone decided to put a spare computer to mine wasted a bunch of electricity in exchange for nothing numbers on a stream or technically numbers in a ledger that nobody cared about but as people began trusting the system they began assigning value to the numbers in that ledger real world value dollar value to having an account number with bitcoin and having value inside that account this was sent on the dollar for the first few years but as you probably know a bitcoin is now worth about thirty thousand dollars bitcoin going bananas the cryptocurrency topping 61 000 for the first time ever where is it going it's probably going to 100 then 150 then 200 000. this is very
much a supply and demand game like the stock market people assign value to these things and pay other people who own them if people trust the system then the value goes up mining has become a profitable business too but not as profitable as you might think so the award for finding a blog today like i said is 6.25 bitcoin which is not far from 200 000 at the current exchange rate the challenge is the network is so big your chances of finding the solution to this puzzle with your old laptop are close to zero the bitcoin mining industry looks like this it's thousands of computers testing values to find a solution to the puzzle doing this in the us for example would actually end up losing you money because your power bill and the cost of the computers would not be compensated by the rewards that you could get finding blocks so a lot of mining happens in iceland for example because of the naturally cold weather and the cheap geothermal power but there are there are a couple of problems that satoshi did not address first it's its power power consumption 0.55 of the world's power consumption is now used for bitcoin mining and a lot of that is happening in countries where energy does not come from clean sources becoming a serious contributor to the greenhouse gas emissions the worst part of this is that these are computers doing honestly silly operations you're testing a billion numbers to be able to find one that works to solve the puzzle more on the technical side there's a problem of scalability if you account for the size of the block and how hard it is to find you'll see that the blockchain is limited to about 2400 transactions every 10 minutes which it takes to my block so by comparison visa can process about 1700 transactions per second which makes your swipe at the turnstile very fast unlike bitcoin which can take minutes or even hours to actually confirm a transaction another problem is speculation who is to say how much a bitcoin is worth the market determines that just like with any other currency [Music] but bitcoin's price is so unstable so volatile it can't really be used as a currency it went from 60 000 to 30 000 per bitcoin in a matter of weeks if used as a currency then the price of goods and services would need to change to make up for these fluctuations even the machines that are sold specifically designed to mine bitcoin are sold in fiat currencies so to become a currency and to be used for payments bitcoin needs to have a more stable price it makes no sense as a currency if it's purchasing power can half in a matter of weeks also the network needs to supply many more transactions per second other people defend bitcoin's potential as a store of value like gold gold is the most traditional store of value and there's a limited supply of it on the planet and it has problems like security you can still gold very easily i guess but bitcoin is potentially safer than that but once again until price volatility is solved it can't really be a store of value the reality is that bitcoin today is more of a speculative assets one that many people buy for the odd chance of the price going up kind of like a gamble but this video was not about bitcoin it was really about the blockchain and that is probably the most important higher potential part of this whole mess just on currencies the bitcoin blockchain was the first to gain popularity but there are others there are other blockchains like litecoin and deutsche and they're completely separate blockchains with a different ledger with its own set of rules block sizes and algorithms and the fact that the bitcoin blockchain white paper proved to be successful the fact that people adopted it and started using it and that assigned value to these coins opened a whole world of developers and cryptographers who decided to put their computers to mind or to develop applications on top of the blockchain or to invent new variations of technology that could be put to other uses thanks to this innovation so two fantastic examples of this are smart contracts and nfts and you should let us know in the comments which of the two you'd like us to cover first we're already working on them we wanted to include them in a single video but that would have been probably 30 or 40 minutes long so as much as i love writing these scripts remember my full-time job is running slightly and helping other founders with their pitch sticks and their stories and their financials and their storytelling so check out all the ways our product and our team can help you at slidebean.com if you want to stay on top of our company and technology teardowns you should check out our new company forensics newsletter just hit the link in the description subscribe and you'll get a you'll get an email from us every week with the latest news on startups hit that subscribe button and we'll see you next week [Music] [Music] [Music] you
2021-08-19 02:44
