One way of thinking about what Bitcoin is and what money is in general comes from an island in the Pacific Ocean called Yap, and in Yap they don’t have metal. So to create money, what they do, is sail in open boats 250 miles across the Pacific in a neighbouring island called Palau where they have a particular kind of limestone that they don’t have in Yap.
And they extract the limestone and shape it into these distinctive circular shapes with a hole in the middle. Some of them are massive, they go up to 12 feet and they sail these stones, they’re called Rai Stones back to Yap and where they used as currency. The thing about them is, they’re impossible to steal because they’re very, very big but by the same token, you can’t fake them because there’s none of that limestone on Yap and they’re kind of a record of the labor that went into the making them because again, there’s no shortcut. You can’t kind of half-baked pretend to extract it and shape it.
You either extracted it or you haven’t, but they’re impossible to move because they’re so big and so what happens with some of the Rai is that they rest that outside someone’s house and if someone wants to buy something with it to spend the money, what they do is that they agree that the ownership of the stone is transferred even though the stone itself is in one location.
So if you’re buying another persons house, you would use your Rai Stones to buy it so that Rai Stone belongs to you even though it hasn’t moved. On the way back to Palau, the 250-mile sea to Yap, they’ve been caught by a storm that people who’ve extracted the Rai Stones and if had to choose between the stone or their own lives, so they’ve chucked it overboard. But then when they get back to Yap, they said they extracted this 12-foot Rai Stone with a hole in the middle but they we had to chuck it overboard and it’s generally accepted, “okay yeah, that’s fine. That’s still your Rai Stone.” They’ve been able to spend the money embodied in that stone, even though the actual stone is 5 miles down in the bottom of the Pacific, but still everyone who agrees who owns it and that actually is what modern money is.
That’s the crucial thing about the nature of money and that’s why Bitcoin is so adaptable to the modern world of money, because Bitcoin is that register. It’s a contemporary, it’s a 21st century universal version of that Rai Stone, sitting outside someone’s house, where all you need to know about it is who owns it and that ownership can be indefinitely transferred.
The way Bitcoin works is based on cryptography or code. The first stage is the public key, private key concept of a Bitcoin when sent to an address which is just a string of letters and numbers, and then that transaction is sent to the Bitcoin network which has a series of what’s called nodes on it, these are computers all linked up that effectively make Bitcoin run. What they do is they take a chunk of these transactions, they do it 10 minutes at a time, and they run them through a thing called a hash. Now a hash function is a very standard cryptographic technique, you can look them up on the internet, there are loads of them. There are different ones that give different answers and that takes a string of text of any length, you can do it with anything from “the sky is blue” to the entire text of the Bible and you run it through a hash function and you come out with the same length irrespective of the length or complexity of the text, the string of letters and numbers that are completely sensitive to the initial input.
So if you change a comma, you’ll get a totally different reply every letter and number different. The computers on the network, they’re called or known as miners. What the miners on the network do, is they take this 10 minute block of transactions and they run it through a hash function called SHA 256 and they run it through SHA-256 until they get an answer that has a string of 0’s at the beginning as a specific number of 0’s at the strat and those 0’s are there just to basically make it difficult to get the answer right, so that evey computer in the world can’t immediately jump to the answer, they have to go through this process of work.
There’s no shortcut. It’s just trial and error, and right this second there are trillions of mathematical operations taking place every second attempting to solve Bitcoin hashes, right now. That’s going on all around the world, right now. And the first one to get the correct string of 9’s and then an answer broadcasts it to the network and the network in effect votes on it, it runs it through the protocol that on all the computers running Bitcoin and if enough of them think the transaction is valid, they certify it is valid, they give it a timestamp and then it’s added to this chain of every transaction that has ever happened in Bitcoin.
That’s one of the hardest things to get your head around. But this process has within it’s history, that has function encodes the whole history of all spending in Bitcoin. It’s one of those things where when you explain it to people, they normally say no, I don’t understand because it sounds as if what you’re saying is the whole history of Bitcoin is present in every transaction and that’s exactly right, that is what’s happening.
The whole history of Bitcoin is present in each 10 minute block that’s sealed off and stamped. The idea behind that is that it makes it impossible to fake, you can’t cheat or find a way around that every computer in the network has a copy of this register.
You can’t add money into your own bank balance because every computer on the network has a copy of it. You can’t do what’s called double spending where you spend money in two places at the same time because every computer on the network has a copy of the same register.
That’s the decentralized nature of Bitcoin, it’s the register is everywhere and that’s it’s prime security feature. Then what happens is that the computer that got the answer first broadcast it and got it validated. This is a really clever thing, that computer is paid in Bitcoin for having done the work, because it answers a question of, where’s the incentive? Why would you use tons of computer power and all the energy involve to solve some difficult mathematical puzzle and the answer is because you’re paid in Bitcoin and the Bitcoin has value.
So that’s where the mining metal really comes from, that you’re paid for doing the work and keeping the whole enterprise going.