Bitcoin and Blockchain basics

Hello everyone, thanks for joining my name is Ravi Nalliyappa I recently did a presentation to a group of people on blockchain basics After the presentation many people reached out to me asking if there is a recording of the presentation I did not record at that time, but now that I am starting my winter vacation I thought I would record one for those of you that are interested This presentation has two parts part one starts with evolution of currencies Goes into the detail of what a Bitcoin is its characteristics the technology it uses etc and ends with a view of blockchain transaction part two goes into the details of blockchain beyond crypto currencies such as smart contracts private blockchain etcetera To keep this recording at a consumable length

I will focus only on part one So let's jump in starting with evolution of currencies When I talk to people about Bitcoin or any other cryptocurrency for that matter They often ask me What gives Bitcoin its value and who guarantees its value? I I Prepared the slide to show the currencies in historical context You will see that it has not always been that someone such as a government that guaranteed its value The historical evolution of currency is complex, but this is a very simplified view About nineteen thousand years ago People used barter system to exchange goods or services If someone had a cart of apples and if someone else had a chicken he exchanged the chicken for a number of apples There are many obvious problems with this system of exchange like what if there is no coincidence of wants How do you determine the common measure of value and how do you store wealth etcetera? So the next evolution came in the form of metal coins about three thousand years ago These coins were made of precious metals such as gold or silver So the value of the coin is in the coin itself which is also called as face-value the problem with the metal coins were that Transporting and storing large sums were not only inconvenient, but also very risky So people started storing the coins with someone they trusted such as a local Goldsmith Who in return gave something called as promissory notes mentioning the amount of coins the individual stored with the Goldsmith Banking was next evolution Some of the earliest form of modern-day banks saw the promissory note concept And they came up with a concept called banknotes that had certain value backed up by precious metals They issued the banknotes with either name of a person or with the word "to the bearer" Indicating that the banknote was payable on demand Then came the governments who realized that whoever controls money has the ultimate power They came up with a concept of fiat currency Originally the supply was limited to the amount of gold or silver in reserve however in 1971 Richard Nixon the US president at that time has done away with the gold standard, so What was started as a backed up by gold or silver system has become more of a trust me system In other words Governments can print as much currency as they want which could even lead to hyperinflation Like what we have seen in Zimbabwe and when Venezuela recently as the country's currency was devalued significantly Enter Bitcoin in 2009 that is completely changing the way how every human being perceives currency Bitcoin or other similar cryptocurrencies have two major characteristics One they are completely decentralized meaning no single person or organization is maintaining the program or system two it has limited supply for example There will only be 21 million bitcoins ever produced So you will see that the assignment of monetary value to otherwise insignificant objects such as a metal coin or USD or cryptocurrency Comes because people trust the value of the currency People can use whatever medium of exchange that has certain currency traits it need not just be a government-issued currency Let's jump into how Bitcoin compares to traditional currency and the technology behind it The great Greek philosopher, Aristotle Considered that every object has two uses the first being the original purpose for which the object was designed and The second possibility is to consider the object as a medium of exchange To be a medium of exchange or currency the object has to have certain currency traits It has to be fungible portable durable divisible secure scarce sovereign immutable decentralized The last three traits are arguable for a currency But in my opinion And it is only mine cryptocurrencies score high in most of the traits Now let us look at the technology that makes the Bitcoin unhackable, and how decentralization is achieved Starting with cryptography Bitcoin uses a cryptography algorithm called Sha-256

It works like this the algorithm can take any amount of input It could be a single word or the content of an entire book or even Content of an entire library and produce a fixed 64 digit output As long as the input doesn't change the output will be the same every time you feed the content to the algorithm However, no one will be able to reverse track it to the original content at least no one has done it so far Let us look at a simple example the meaningless statement the quick brown fox jumps over the lazy dog that uses all the alphabets in English language Produces a hash output starting with d7a8 all the way up to e592 – Every time you feed the exact Statement with the exact cases and spaces you will get the exact same output however a small change such as adding a dot at the end will change the statement completely and Unpredictably as you see the dot just doesn't change a few digit at the end But changed the statement completely starting with ef5 3 instead the Bitcoin uses Sha-256 algorithm to encrypt the messages Now on to decentralization in the centralized banking world Your password is stored with the bank, so they can validate your password when you log into your account to send money to someone However in a decentralized world someone has to validate that you own the password without seeing your password How is it possible? to achieve this Bitcoin uses something called as asymmetric encryption This type of encryption uses one key for encryption and another for decryption When you own a Bitcoin all you own is a secret key that corresponds to a public key As a Bitcoin owner you can sign the message using your secret key but anyone can validate that you signed the message as long as They have the message the signature and the public key You will see that the secret key remains with you in this scenario Now let us understand what makes Bitcoin or blockchain unhackable In Bitcoin transactions are grouped into what is called a block A block is a consolidated list of Bitcoin transactions At this time a Block in Bitcoin is one MB in size and it can store approximately 2200 or so transactions Each block is hashed to a unique hashing output So if anyone makes any change to any of the transactions the hash value will change completely When a next block is generated

It is linked to the previous block through previous Hash field and the subsequent block is linked to the prior block and so on These blocks in other words are chained to each other hence the name blockchain These blocks are added at the rate of approximately every 10 minutes We'll get into the details of why ten minutes in the next topic As of December 13 about four hundred and ninety nine thousand eighty blocks have been generated in the Bitcoin blockchain four hundred and ninety nine thousand eighty multiplied by ten is Approximately four point nine million, and that's the number of minutes in the last eight years of Bitcoin existence These blocks are added to the chain by computers owned by people Who play the role of miners and these computers also store these transactions? Since all Bitcoin transactions are public It is also called as open ledger If Someone tampers with a transaction in the block the hash output will change and the link will be broken So to really change a Bitcoin transaction One has to not only change all the subsequent blocks to make the connection and also They have to do it in hundreds of thousands of computers across the world Which is not practically possible for anyone So the miners get rewarded in Bitcoin the computer that successfully mines a block in other words adds the block to the blockchain Gets rewarded with about 125 BTC at this time along with any transaction fees included in those transactions The reward is said to reduce every four years

it started with 50 Bitcoin at the beginning which is in 2009 reduced to 25 in 2012 and then reduced to 125 in 2016 and so on All the 21 million bitcoins are expected to be mined approximately in year 2140 After the time the miners are expected to continue mining in order to collect the transaction fees now on to the final major technology in Bitcoin the proof of work function I Mentioned earlier that blocks are added at the rate of every 10 minutes Why not every 1 second or even every 1 microsecond so Bitcoin can beat traditional credit card companies in speed? Bitcoin has made the transaction intentionally slower using proof of work function to deter any denial of service attack or spam on the Bitcoin network Without the proof of work function Someone with more computing power could easily spam the Bitcoin system With so many invalid new blocks that the system will eventually collapse Proof of work functions like this when all the transactions in a block are hashed The output will look like a random alpha numerical value and the first digit can be anything The Bitcoin system requires a number of leading zeros in the hash output The way to get a leading 0 is by trying various values for a field called nonce as the number of leading zeroes Increases the probability of finding a hash Decreases to so low that the computer has to randomly trillions and trillions of combinations for the value of nonce Once a computer in the network Finds the right nonce that produces the required number of leading zeros It communicates the nonce to the other computers in the network that it has successfully solved the puzzle the other computers can easily verify that This is like opening a number lock everyone has to try various combinations but once someone finds the right combination others can easily verify The computer that successfully finds the right nonce adds a block to the chain and other computers update their record with a new block As a reward the computer that successfully identified the nonce collects the 125 Bitcoin reward along with any transaction fees In summary Bitcoin uses cryptography for encryption Transactions are stored in public distributed ledger It uses proof-of-work to deter attacks

It is unhackable Transactions are immutable The system is completely decentralized number of Bitcoin is limited in supply And new coins come into the world through the process called mining and the very first Bitcoin transaction was valued at 1,300 bitcoins for one us Dollar a dollar invested at that time will be equal to 22 million dollar today Here is an end-to-end view of Bitcoin transaction Rob opens his Bitcoin wallet Scans Laura's public key, which is her Bitcoin address Fills the amount he wants to send and clicks the send button The wallet, then creates a signature using Rob's private key miners add the transactions to the next block

the miner who successfully finds a nonce That produces the required number of leading zeroes Communicates it to other nodes the block is added to the network and then Laura starts seeing the confirmation So that completes overview, thanks for joining if you liked the video, please hit the like button bye for now


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