Consider if Wells Fargo acquires all the other banks

There is only 1 bank now & 1 ledger with all transactions

All transactions go through Wells Fargo

Lets add Bob, Jane and a few more transactions at Target

The software keeps track of how much money people have in their account

Replace Wells Fargo with 100 independent bookkeepers / verifiers

We send a copy of the ledger to all 100 verifiers

Every time there is a new transaction we send it to all 100 verifiers

Anyone can be a verifier, lets look at how they verify the transactions

Its really no different than the banking system

Instead of having many regulated banks, each with their own “centralized” ledgers we now have 1 ledger sent to many “decentralized” verifiers

Another name for Blockchain is DLT or Distributed Ledger Technology

Verification of transactions

Sam is a verifier

The Ledger is split into blocks of transactions

In this case its 2 transactions per block but it could be 3 or more transactions per block, typically less than 10

Sam verifies & signs block 1, Fred verifies & signs block 2, Lucy verifies & signs block 3

We explain below how its verified & signed

Once a block is verified & signed it is copied to all 100 independent verifiers and it cannot be changed unless all 100 got together to commit fraud. It’s immutable

Bitcoin verifiers are also called “miners”, they receive a reward for verifying 1 block, currently 2.5 Bitcoin ! This is how new Bitcoins are mined into the system

This is similar to a gold miner being rewarded for finding new gold

Verify Block 1 / Encryption a.k.a. Cryptography

We do this one block at a time

Every Verifier is working on Block 1, its a race to be first to verify it and get paid 2.5 BTC

The word “crypto” is often used

It means enCRYPTion, we are going to verify using a type of encryption

Encryption is a “rule” to modify words then using the same rule we de-crypt or de-modify the words.

A simple example is a “rule” to “add 1 letter”, so the word HELLO becomes encrypted to IFMMP, simply adding 1 letter, H becomes I, E becomes F & so forth. The rule could be more complex like adding 3 letters. As long as the rule, or “Key”, is known by both parties, we can encrypt and de-crypt

There is an existing mathematical encryption rule called SHA 256, also known as “Hashing”. It’s slightly different in that its a 1-way encryption, it can’t be de-crypted

Go to any Hashing website like: https://www.miraclesalad.com/webtools/sha256.php

Type / paste this string exactly: Tom buys bike from Walmart 100

Look at the Hash, its: 21b675a69bea6c4f378e70714b4b8fc63f196b79d57aa650d13cddf4890011de

Its basically a code that uniquely represents the exact words in the string, make any change to the string and the Hash changes

Lets make a small change, simply add a “period” at the end of the string Tom buys bike from Walmart 100.

Notice the Hash is now completely different, just by adding a “period”

now remove the “period” the hash goes back to 21b675a69bea6c4f378e70714b4b8fc63f196b79d57aa650d13cddf4890011de

Same as before. The Hash is a unique “fingerprint” of the words, the letters & numbers

Now type the entire block 1 transaction data into the string to be Hashed:

Tom buys bike from Walmart 100 Sue pays Tom 30

A new Hash is generated ca800297a12a689353592807dbb906b99f3dba98d7f25edcbd0268bbd7832e58

There is another piece of data we need to add to the block

It’s called a NONCE, its the Verifier’s computer guessing a number - literally

Here we guess: 3001

This “3001” is “extra” data in the transaction so it causes a different Hash

The verifier’s (miner’s) computer keeps guessing different numbers, 3002, 3003 etc. until the hash begins with four zeros, 0000 _ _ _ _

This is the Bitcoin rule to “verify” the transaction

Bitcoin Miners buy computers with high hash rates to do this quickly

Once a miner generates a hash beginning 0000 then the block is verified - it’s only as crazy as digging a hole looking for gold !

Here we see on Sam’s computer, after many false guesses, the NONCE is finally [ 5326 ] and the Hash is 0000b726c02f20a5af4be25b4bc383055dddccf345137bace222d148429d0913

The Block is verified

Lets represent this in a simpler graphic

Here we see Block 1 with a Nonce of 5326 that generated a Hash beginning with 0000, block is now verified. Block 1 was mined by Sam

Block 2 is getting closer to how this looks in reality, the Hash from Block 1 is copied to Block 2 “previous hash”

Block 2 has its own transaction data, a place to guess a Nonce and now has the prior Hash as part of the data of Block 2

All the data in a block, the transaction data, the Nonce & the prior Hash all contribute to the Hash of that block

Block 1 is now “verified & signed” because the Hash begins with 0000 and the Hash is sent to Block 2

All the Miners now focus on Block 2 and start guessing the Nonce

Here Block 2 is Mined by Fred, verified & signed

The 0000 Hash of Block 2 will be sent to Block 3

Here are the 3 blocks, all mined successfully

Notice we only see Sam now

While the other blocks were mined by other miners, every miner simply gets the updated blockchain

In this case we are looking at Sam’s version of the blockchain

Fred & Lucy are looking at their own version, it’s the same

Here we see all 3 miners

They all have the exact same copy of the blockchain

This is normal

Fred is a crook, he changes Block 2: $20 to $30

Here we see the old & new Block 2 on Fred’s copy of the Blockchain

Fred’s copy of Block 2 , the data is now different

The Hash changed because the data changed

The new Hash does not begin 0000 so Fred’s copy of Block 2 is not verified

The new Hash in Block 2 flows to Block 3

So the data in Block 3 changes as the Previous Hash changed

So the Current Hash of Block 3 is different and does not begin 0000

Block 3 is now not verified

all this is only in Fred’s copy of the Blockchain

There is no impact to the other Miners copy of the Blockchain

Fred the crook now RE-MINES Block 2

He finds a new NONCE = 17555 for Block 2 that gives a Hash beginning with 0000 and Block 2 is now verified again

This new Hash flows to Block 3 where Fred RE-MINES and finds a Hash = 967 that gives a Hash beginning with 0000 and Block 3 is verified again

Fred thinks he has got away with his fraud, his Blockchain copy is all check marks - looks good

Recall, all that Fred did is only on his copy of the Blockchain

Lets look at all the copies of the Blockchain, Fred, Lucy & Sam

We only need to look at the last Block in the chain, in this case Block 3

Recall Fred made changes that mean his “Current Hash” in the last Block is diferent than Sam & Lucy’s versions, theirs are identical

Blockchain is a democracy, Lucy & Sam win 2:1

Fred’s version is rejected

The Blockchain continues without Fred’s data

There are over 1 million independent Bitcoin Miners in the world today

It would take 500,001 Miners to collaborate fraudulently to change any data

The Blockchain is deemed immutable, cannot be modified once a Block is verified