The biggest challenge to creating a digital currency is not the security issue but an issue of “double spending”.
How do you prevent a user from sending the same amount of currency to 2 or more different people?
In this 3rd episode of Bitcoin For Non-Technical People, I will discuss the brilliant solution that Satoshi Nakamoto developed to eliminate the problem with “double spending” which plagued many computer scientist and cryptographers before him.
I will also discuss how the Bitcoin network authenticates a payment on the most secure payment network on the market.
Bitcoin Is Based On Cryptography
Bitcoin is considered a crypto-currency and based on cryptography.
In case you don’t know what cryptography is…
…‘crypto’ simply means secret…
… and ‘graphy’ means writing…
So cryptography is the science or study of writing a secret message so that other people don’t know what it is.
Bitcoin is a virtual currency that is also referred to as a:
- digital currency
- or electronic currency, etc.
It doesn’t matter what you call it so don’t let those labels like crypto-currency, virtual currency, digital currency, electronic money, etc. confuse you.
It just all means that it’s going through the internet or it’s in the form of electricity.
It’s not in the physical form that you normally see as gold or silver or coins or a piece of paper.
Creating an entirely new currency is not easy.
The first challenge for Satoshi Nakamoto (inventor of bitcoin) to make this new currency system so that it can benefit 99% of people like you and I on Main Street was to make sure that the currency could not be spent twice since it was in a digital form.
What Is A Bitcoin Public
Ledger Or Blockchain?
Remember, bitcoin uses a “public ledger” technology called a “blockchain”.
Just a quick review here in case you forgot….
The blockchain is nothing more than an electronic public ledger that is available to everyone in the world for free.
It’s just a public notebook that indicates all the transactions that’s ever been done in the bitcoin world.
Let’s say that you wanted to send me money…
If you want to send me let’s say, a U.S. dollar, in the fiat money system, you would send me a dollar.
On the other hand, in the bitcoin system, it’s going to be called a “bitcoin”.
It’s not going to be a dollar because it’s a bitcoin system now.
When you send a bitcoin, one of the first things that Satoshi was concerned about was that it actually came from you and it actually goes to me and not to someone else.
Satoshi created bitcoin by borrowing the latest computer science, mathematical science and cryptography technology that software companies and spy agencies (like the CIA, FBI, and all the “big-name” government agencies) use to make ensure that the information (or bitcoin) that is sent across the bitcoin network will go to the correct person.
That was one of the keys to making bitcoin possible … is “authenticity”.
Meaning that it comes from you and it’s going to me and not to someone else.
Every time they send you a new software update they make sure that they authenticate with your computer so that your computer knows that it’s coming from Microsoft directly, it’s not coming from a scam website.
They authenticate that first which is very easy to do with current technology.
What Is A Double Spend?
The authentication part was easy.
However, the part that was very, very, difficult was to create this new digital currency or “digital cash” system was the “double spend” issue.
Double spend means that if you were to send me a dollar (since it’s an electronic money) what’s to prevent you from sending that “same” one dollar to someone else?
If you can do that, infinitely, then it would just be the same as these people over the central banks who randomly print money without ever having to work for it.
Obviously, such a new “digital currency” would not work.
For 20-30 years, since cryptography came into existence and into heavy study using computers and stuff, a bunch of people have been trying to figure out how to create a digital currency or digital cash that could NOT be double spent.
Satoshi was not the first person to attempt to create a currency that could NOT be double spent.
However, he/she was the first person to come up with a system (based on existing technology) that brilliantly prevented a double spend transaction.
That brilliant and innovative system is what we call the “blockchain” or the “public ledger” in the bitcoin world.
How Satoshi Used The Blockchain
To Avoid Double Spending
What Satoshi proposed is that all the transactions that’s ever made – remember I told you in the previous video that every block takes ten minutes to create?
Every ten minutes, the bitcoin system goes around the world and gathers all the transactions and records how much everybody spends.
In the next ten minutes another block would come up and be added to the public ledger or blockchain.
What Satoshi did to prevent this double-spending issue (which was a huge issue) because lots of math scientists, lots of computer scientists have tried to figure out how to create a currency system where we can send it to another human being without it being double spent and used again to be sent to someone else.
What Satoshi did was pure genius…
She said, “What if we create a public ledger and we make it public so that all the transactions ever made are recorded inside this public ledger?”
What happens when you send me a bitcoin, is that it gets recorded in the public ledger and it will show a -1 in your account to show that you have deducted 1 bitcoin from your account.
Likewise, in the same public ledger, my account will show that I have received +1 bitcoin.
Now I have +1 in my account and you have a -1 in your account. All this is recorded in the public ledger or blockchain.
Let’s say that I want to spend that bitcoin and I want to send it to, let’s say, I don’t know, let’s just make up a name.
I’m just going to say John because in America John Doe is a common name that we use for all examples.
What happens when I send 1 bitcoin to John Doe?
The first thing that the bitcoin system is going to do is to make sure that I have that bitcoin so it will go and scan the blockchain and check to see if I, in fact, do have a bitcoin to send to someone else.
It’s going to go back through the public ledger (blockchain) and check for my account balance, “Oh, there it is! There goes that transaction where Tai received one bitcoin from you.”
What’s going to happen is it’s going to authenticate that and say, “So Tai does have a bitcoin.” Now I am authorized to send that bitcoin to John.
How Do Banks
Get More Money?
Keep in mind that in the old banking system or what they call the ‘legacy banking system’ – legacy just means the old or outdated system.
In the legacy banking system (that only benefits the 1% on Wall Street) they don’t have to go back and check to see if they have the money or not.
If they don’t have it, they just simply print a bunch of numbers on the computer and they instantly have more money.
It’s not like they have to print out a piece of paper or anything.
They just go into their computer and type in their password, hit a few buttons and boom! They instantly have more money in their account.
This is what they call in America “the good ol’ boy system“.
Bitcoin is NOT based on a good old boy system.
It’s based on proof!
It’s based on proof that you actually have that money in your account to spend or to send to someone else before you are allowed to make a transaction.
When I send a bitcoin to John, the transaction gets recorded in the next block of information in the public ledger (blockchain).
Remember, this public ledger is called a “blockchain” because it’s a chain of blocks and each block contains all the bitcoin transactions in the world that happened up to that point.
The number of blocks continues to grow bigger and bigger as new blocks (of bitcoin transactions) are added every 8-10 minutes.
In the future, if John wants to send that same bitcoin that he received from me and let’s say that he wants to send it to Barack Obama.
I’m going to say Obama just for the hell of it since everybody knows who he is. He’s probably not going to like to receive bitcoin because he wants to keep the legacy banking system in place. I don’t know. I’m not Obama so I can’t say. I’ve never met the guy, I don’t know.
A lot of people say things about the President but they’ve never met him in person, they don’t know him, they don’t hang out with him. I’m not going to say anything about him because I really don’t know him. I haven’t researched his biography or anything like that so I don’t want to throw things out there that I don’t know about.
It’s hard enough to try to figure out things that I barely know, much less try to talk about something that I don’t know. But I’m going to use his name here anyway because everybody knows who he is just for the hell of it.
Let’s just say that if John wants to send that one bitcoin to Obama… before he can send it, the bitcoin system has to go back through the public ledger to check in past history to make sure that John even has a bitcoin.
The system will go back and find the block in the public ledger that previously contains the transaction between John and I.
The system will scan that block of transactions and it will show that John indeed has a bitcoin.
After the system verifies that John does have a bitcoin to send, the public ledger gets updated to show that there’s a -1 for John and there’s a +1 for Obama.
That’s how the bitcoin public ledger works.
At any given time, you can go back through all the bitcoin transaction history and check to see all the transactions.
That block chain technology completely eliminates the problem of double spending which was a huge problem that prevented the creation of a purely digital form of money or cash.
This process of making the ledger public so that everybody can see how much money is inside each account was a huge innovative invention by Satoshi Nakamoto.
Until Satoshi invented the public ledger (blockchain) technology, no one was able to resolve the issue of a double spend when using a digital currency.
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Click here to watch part 4.