Bitcoin basics: where it's from, how it works
Bitcoin is the oldest and biggest cryptocurrency. Understanding how it works requires understanding where it comes from, because the underlying technologies have come far from their original purposes. Phil Sansom told the story to Eva Higginbotham, with help from Yilmaz Yavuz and Finn Brunton...
Phil - I want to start today by introducing you to a guy called Yilmaz, who's a shopkeeper... but he's got this side hustle.
Yilmaz - You can trade between from a grand to 10 grand a day.
Phil - A grand to 10 grand?
Yilmaz - Yes, you can, yes. The best I've done is a six grand, and the worst I've lost is eight grand in 10 minutes. It's a good buzz man - very good buzz! It's like getting high, but it's nice. You should get on it, it's the future! The future is crypto.
Eva - What a rollercoaster.
Phil - Right? And he's not a millionaire or anything.
Eva - Just a regular guy; runs a shop; loses eight grand every so often, makes eight grand every so often...
Phil - I mean, he's not alone; he's one of millions of others like him out there. And the thing that they're trading, as he said, is 'crypto'.
Eva - Cryptocurrencies. So that's like Bitcoin?
Phil - Yeah. I mean, how much do you understand about this stuff?
Eva - I know a small amount, I would say. I have looked up things like Bitcoin, but it's one of those things that I've read about and heard about, but has not really settled into my brain in a way that I remember.
Phil - I think the best way to understand it is by kind of understanding where it comes; from specifically where the first of them that you mentioned, Bitcoin, comes from. So here is Finn Brunton, who is professor of science and technology studies at the University of California Davis, to take us through it.
Finn - What we think of as cryptocurrency is called 'crypto' because it's based in two primary technologies, both of which have to do in different ways with cryptography: the art and science of secret codes. Now, when we think of cryptography, we think of the idea of a cipher that you have the key to so I can send you the secret message; but there's another role that that cipher plays, and has always played through the history of cryptography, which is identification. If I can write something in a secret code that theoretically only I would have access to, then when you decrypt that, you can be fairly assured that I was the one who wrote it. This was on the minds of a lot of computer scientists in the 1960s and 70s, because they were beginning to realise that computers were going to be everywhere. And that posed this immediate problem, which is: how do you prove that you are who you claim to be over a computer network? And the solution that they came upon was a really ingenious one called 'splitting the key' into a public part and a private part.
Phil - The idea here in our technology number one, which is known as 'public key cryptography' is that there's these two keys that Finn is talking about: the public key and the private key. If you take your message and use one of the keys to then encode it, you can only use the other one to decode it.
Eva - It's like the key allows you to access the message in the code. How can there be two keys and two ways of understanding one code?
Phil - I have this analogy which is from cryptographer Sarah Mieklejohn, which helped me. It's kind of like if I said, "here is a safe," like a physical safe, "that I'm putting out publicly for anyone to use to send me a message." Anyone who wants to send me a message - say it's you - could write it down, and put it in the safe and shut the door. And the door locks when it shuts. Only I know the combination of the safe and so only I can open it. Anyone can encode, but only I can decode.
Eva - And so being able to close the door, that's the public key. And being able to open the door, that's the private key.
Phil - Exactly. The way they get there is obviously not with a physical safe; they get there with some extremely complicated maths. But the use of it that's important here is: in our safe analogy, it's like I've written a message on a wall, and beside it I've left my safe - which everyone knew was closed but is now open - and they go, "only Phil could have done that because only he has the code."
Eva - Okay. Yeah, I get it.
Phil - So technology number one, that's solving the problem of verifying your identity online.
Eva - And that's important in general?
Phil - In general. But so far nothing to do with cryptocurrencies! Back to Finn Brunton for technology number two.
Finn - Technology number two is kind of a related question when you think about it. You can think of question number two being, "how do I prove that something happened when I claim it happened?" If I can prove that I am who I claim to be, and then I, say, transact some money with you over the internet, how can I prove that I sent that money to you when I claim that I did? If you were to say, "well, no, that never happened," and then I produce the receipts, you can just say, "well, you could have made these in Microsoft Word!"
Phil - You know, who was really concerned about this stuff back in the early days of the internet?
Eva - Who?
Phil - Scientists! Scientists really want to be able to prove that they publish something first.
Eva - Mm, yes, that's true.
Finn - One of the solutions to this problem, and in many ways the most ingenious and sophisticated, is a technology called the blockchain. And we often talk about the blockchain as something that comes from cryptocurrency, but it significantly precedes it. A blockchain is a somewhat complex means for doing a very, very simple thing extremely well. And the simple thing that it does is to create a record to which information can be added, but never altered or removed; that can be shared, distributed, among some wide group of people who don't necessarily need to trust each other, there doesn't need to be a trusted third party that you're relying on to maintain the ledger. And it works like this. Let us say that we want to do something very simple and straightforward: we want to establish who wrote what when. We're all poets, so we want to publish our poems and not have people say that they wrote our poems instead of us. So we have a website where we post the first lines of our poem, and then the time and date on which we posted those lines. And then we create a hash of it. And a hash is a method in computer science for taking some blob of data of any length, and out of that, generating a short string of data which corresponds to it. You can just think of it as like a mechanism to produce a kind of very reliable word salad. We take our first line of our poem, our time and date stamp; we generate a hash of that; and then we post those things together. You can think of that as like a little block of data. The part that makes it into a blockchain is that the next person to post is going to post their time and date stamp, the first line of their poem, the hash of that data together, plus the previous hash in the chain; and then they're going to hash all of those together! And what that means is that as this keeps going forward, as each new post incorporates the hashes generated from the previous post, any change to any of the previous data in the chain is going to be immediately apparent. Which means that very, very quickly, as links in the chain keep getting added, you're going to find yourself in a situation where no one can alter the data that was previously entered without having to fake the entire thing.
Phil - Okay. And say, for example, I'm one of those poets, and I really hate that I used the word 'lily', and I want to change it to 'rose' in one of my poems, because it would just make it a lot better. What's to stop me just going in, and I go to two years ago in the blockchain and I change the word 'lily' to 'rose', and then in each of the little hashes I just change where it says 'lily' to 'rose' there as well, or change the corresponding bit?
Finn - The thing that would happen - and the reason why the blockchain is so robust - has to do with the mechanics of hashing itself. To change even a single bit of information in the data is going to completely alter the hash, which is going to completely alter the hash of the hash that is made in the next link in the chain, and so on down the line. So it will be absolutely and glaringly obvious that this whole chain has now been altered, including all of the subsequent activity.
Eva - It sounds really clever. So you're adding to it, and that means that by the end, if you were to try to make any difference, any change right at the beginning, it would be ridiculously difficult in order to do that for everything all the way through.
Phil - Yes.
Eva - What does the blockchain look like?
Phil - It looks like looking at the matrix, those numbers running down the screens, honestly.
Eva - I'm on board.
Phil - We've got our two technologies. Do you remember what they were?
Eva - The first one is about being able to identify yourself...
Phil - Public key cryptography.
Eva - Public key cryptography. The second is about being able to prove time online, and you do that using the blockchain. The blockchain is about time. I don't know how that's related to... how is that related to money though?
Phil - So far it's not! Because we're still back decades ago. The 'why' of cryptocurrencies comes from around the same time, and that includes movements like 'cypherpunks' and 'cryptoanarchists'.
Finn - And this is where we bring in the ideologies, which are quite distinct from the technologies and end up being rather awkwardly fused together with them in the form of cryptocurrencies. One core premise of most American libertarian ideologies is that money should, to some extent and in some way, be out of the control of states. The idea of sovereign central banks under the guidance of government issuing money is a danger, is a long-term threat; the promise of digital money was in many ways the opportunity to reinvent money in some new context. The challenge was always, "well, then what is the money to be?" Because of course, one of the best things that computers are good for is their ability to perfectly reproduce data. Which is kind of a problem if the data that you're transacting is supposed to be money, right? Like in the most obvious kind of seemingly ludicrous sense, why don't we just say, "this string of characters corresponds to money". Well, therefore I'm just going to 'control-c control-v' that money over and over again and spend it as many times as I like. And many different experimental projects to build new kinds of digital money foundered on this problem. And the solution was something that would be based on a blockchain. Because a blockchain provides a way for someone to say, "well, on the blockchain, I have the irrefutable right to this set of tokens and I can pass them over to you." And if someone were to try to cut and paste the rights to that money somewhere else, it wouldn't do anything, it wouldn't mean anything. All the money would do is exist on this closed ledger system.
Eva - So the benefit here is that you can trust that you've genuinely been given some tokens online which represent money, because they've used this blockchain to prove not only who gave you the money, but that the money actually happened in time - the money transfer actually happened at a certain time.
Phil - And the clever thing on top of that is that once you have that record, you don't even need the token - the money - physically, digitally, at all.
Eva - It's like one giant bank statement that says what everyone gave everyone at any time.
Phil - That's it! That's Bitcoin.
Eva - Boy. How hard is that to keep online?
Phil - There's a network of people that all keep copies of it. For now we're going to skip over a lot of history, because there's obviously decades of attempts at this digital cash; until all this stuff, the technology and the ideas, actually got brought together.
Finn - It got brought together late in the year in 2008. And the reason why that date is especially relevant is that that is right in the middle of the global credit crunch. And it happens to be in that context, in that exact moment, that a pseudonymous person whose identity is still not known - they worked under the name Satoshi Nakamoto, possibly a person, possibly a team - circulated a white paper on a mailing list devoted to cryptography which outlined how you could combine these different technologies together - combine public key, combine blockchain - to produce a system that they call Bitcoin: a peer to peer distributed anonymous system for producing digital money.
Eva - How much is a Bitcoin worth?
Phil - A Bitcoin at the time of recording is worth just over $55,000.
Eva - Oh my goodness gracious!
Phil - Whoever this Satoshi Nakamoto is - if they are even a person, and if they're even alive, and they can still access their Bitcoin - then they might well be the 27th richest person on Earth.