Dive a little deeper into the technical architecture of cryptocurrency. In particular, look at the role of the distributed database also known as the blockchain.
- [Instructor] In 2008 the proposal for electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution, required the combination of several innovative technologies. In addition to solving the double-spend problem through proof-of-work and cryptography for authentication, it required all transactions to be logged in an immutable ledger. This ledger would take the form of a distributed database, and would reside on the device of every Bitcoin participant.
That is everyone who is buying or selling Bitcoin, or using it to purchase or sell an item or service. The details of every approved transaction would be recorded in a block of data in every version of the ledger. Today we know this distributed ledger technology as Blockchain. The name refers to the fact that every block of data appends to the previous block in a chain so to speak. No block can ever be edited or deleted, and therefore forms an unbreakable chain.
Curiously, the original Satoshi Nakamoto paper makes no reference to the terms distributed ledger technology or Blockchain. Let's briefly go deeper into the design of this Blockchain database. In 2009 upon the creation of Bitcoin, the first transaction took place. It was known as the Genesis Block. A block contains some basic information including the time the block was added to the ledger, and the transaction detail.
Let's use an example to understand what happens for each transaction. We have two users Alice and Bob. Alice wants to give Bob a half a Bitcoin. She might be giving him a gift of money, or buying a product from Bob. We can assume that Alice has the half a Bitcoin to give, and we can know this because there will be an existing set of records in the Blockchain which validates this. Alice initiates the transaction.
The details of her transaction is broadcast across a network of Bitcoin users. You'll recall I mentioned the double-spend problem. Well in simple terms, we don't want Alice to be able to spend the money she's already committed twice, right? If she could do that the integrity of the system would be voided and Bitcoin would not work. The proposal for Bitcoin is based on the ability to solve the double-spend problem. So how does it do this? Once Alice broadcasts her transaction request to the Bitcoin network, specific users know as Bitcoin miners intercept it and a unique competition is held to find a winner who can validate that it is a valid transaction.
This is a process known as proof-of-work. They are going to try to be the first to derive the mathematical output for a predetermined input that is being proposed by the Bitcoin system. Why do they do this? Because if they win the competition they get free Bitcoins. These are issued from a total finite reserve that started at 21 million Bitcoins. Next we'll look more deeply at this competition, and the role of miners.