But how does bitcoin actually work?

About this video

• Video Title: But how does bitcoin actually work?
• Channel: 3Blue1Brown
• Speakers: Grant Sanderson
• Duration: 00:25:16

Overview

This video explains the fundamental concepts behind Bitcoin and cryptocurrencies by walking through the hypothetical invention of a similar system. It covers ledgers, digital signatures, decentralization, hash functions, blockchains, and the proof-of-work consensus mechanism, aiming to provide a clear understanding of the underlying technology.

Key takeaways

• Digital Currency Fundamentals: Bitcoin is a decentralized digital currency without government or bank oversight, whose value and function stem from its underlying technology.
• Ledgers and Digital Signatures: A communal ledger tracks transactions, secured by digital signatures created using public and private key pairs, ensuring authenticity and preventing forgery.
• Decentralization: Instead of a central authority, every participant keeps a copy of the ledger, and consensus is reached through a system of trustless verification.
• Cryptographic Hash Functions: These functions take any input and produce a fixed-size output (hash). They are deterministic but highly sensitive to input changes, making them useful for verifying data integrity.
• Proof of Work and Blockchains: A blockchain is a chain of blocks, each containing transactions and a "proof of work" (a solution to a computationally intensive problem). This proof secures the chain, as altering any block requires re-computing the work for all subsequent blocks.
• Consensus Mechanism: The network agrees on the valid blockchain by deferring to the longest chain, which represents the most computational work invested. This makes it computationally infeasible to alter the history of transactions.
• Mining and Block Rewards: Miners create new blocks by solving the proof-of-work problem and are rewarded with newly created currency and transaction fees. This process introduces new currency into circulation.
• Scarcity and Transaction Fees: The Bitcoin supply is capped at 21 million, and the block reward halves approximately every four years (halvening). Transaction fees incentivize miners to include transactions in blocks, especially as block rewards diminish.