Understanding Blockchain Basics: Asking for a Friend

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1:30All righty, everybody. We got a really special episode for you this Friday. I'm asking for a friend, but I'm going to do a bit of a mea culpa here because this should have been our first episode, Ash. I fucked up. We got way too degen. So we're pulling it back and we're going to go into the fundamentals of blockchain technology. This is an amazing piece that Ash and Anders Brownworth gave a couple of years ago. So Ash, you know, I know this is one of your favorite videos, but mind teeing it up just a bit for us? Yeah, that's exactly right, Nico. Everything you said. This is an important video for me because it played an incredibly important role in my own development in learning about and understanding blockchains.

2:06Anders had done two of these demonstrations, visual demonstrations for how blockchain worked on YouTube that I actually saw in 2017. And for me, this was kind of the aha moment where I actually understood how blockchains work just by watching him physically walk through all of these steps in a way that was very visual. So it was an incredibly powerful experience for me back in 2017. We asked Anders to come on Real Vision and do both parts together for the first time ever for a Real Vision audience. I was incredibly excited to get to do it. And I'm incredibly excited to get to rebroadcast this because I think it's such an important piece of information for people who are really struggling to get their heads around this basic question.

2:44hey, I get it, it's cool, but how does it actually work? Well, Anders has those answers. MARK BLYTHYNIC Absolutely. Let's get right into it. RAOUL PAL, Anders, welcome to Real Vision. RICK VISCOMI Thank you, Ash. This is a pleasure. RAOUL PAL, It's such a pleasure to have you here. Anders, one of the things that I find so interesting about your demo is that very often when you ask people what a blockchain is, they tell you what it can do. They give you use cases. They say, Bitcoin is digital gold. Ethereum is a place to write smart contracts, but they don't actually tell you what it is. And what I find so fascinating about what you've done here is that your videos do something that I've never seen anyone else do, which is to walk you through in a step-by-step way that's incredibly visual, concept by concept, the underlying technology for how blockchains work.

3:35Yeah, I only learn visually. So this is an outgrowth of having done the Bitcoin deep dive and try to re-explain the basic idea behind it with pictures, because that's the way I think. Yeah. And I should say a little bit about your background. You're currently principal architect at the Federal Reserve Bank of Boston. You're a senior software engineer at Circle. And way back, I think in 2014, you co-taught the first blockchain class at MIT. That's right. I was lucky enough to be picked to do that. It was, it's amazing. You go there and you've got 100 of the best minds in the world, and you're supposed to teach them something that they don't know.

4:21And it's incredibly invigorating. It's a lot of fun. Well, I should say you certainly succeeded in doing that. And finally, I should add, if you enjoy this demo, this walkthrough half as much as I do, shout it from the rafters, tweet it, post about it, tell your friends, share it as broadly as possible. I think this is something really special. Well, thank you very much. So if you want, we can dive right in. Let's dive in. Great. Well, so I think the key is with blockchains, there's only really two cryptographic techniques you have to understand to understand how blockchains work. And we're going to just quickly get a visual feel for how each of those work.

5:06And this one right here we're looking at is called a SHA-256 hash. This is one of them right there. Looks like a bunch of letters and numbers together. It's actually a hex number. And what this is, is a digital fingerprint of whatever I type up here. So I'm going to type something. I'll type my name, A-N-D-E-R-S. Okay. Well, look at that. You know, some kind of, you know, seemingly random looking data. But if I were to take this, let's see, first of all, I should note that that starts with a 1-9-E-A. So let me delete what I wrote there. And I'm going to type exactly the same thing and sure enough 19EA okay so anytime I type exactly the same thing here I get exactly the same hash out of it so in that sense the SHA-256 hash is a digital fingerprint of whatever data I put in here now I can put you know I could put nothing I could put lots of data and you'll see every time I'm typing a key, this is changing.

6:15So you get the idea that this can be calculated very, very quickly. But no matter how much or little I put up here, you're always going to get a SHA-256 hash, which is exactly this long. And importantly, you're not going to be able to go backwards. You're not going to be able to start with this and just intrinsically know what was put in to get it. You can't go in that direction. But it's super easy to go in the other direction, you can tell, because that's how I type and it calculates it very quickly. So I could put anything in here, including like the Library of Congress, and it would always come out to a hash that's just that long.

6:59Okay? That's the critical piece of information. You can go one way very easily, and the other way is impossible. So it only moves in one direction, and whether you type in one character or the entire Library of Congress, the hash always comes back the same length. Right, right. And exactly the same. It will always be exactly the same. If you put in the Library of Congress in exactly the same order, you'll always get exactly the same thing out of it. And we're going to say that this is real time actually happening. This isn't a demo. This isn't a video. This is actually the algorithm being calculated in real time as you see it on the screen.

7:36Yeah. There was somebody had released a shop to 256 hash implementation in JavaScript. So I stole it to make this. That's how I did it. So, yeah, so that's a hash, you know, not very interesting, I guess, in the sense that I can just type stuff and know that I have the same thing. That's, you know, doesn't seem all that interesting. I'm going to make what I call a block out of this. Okay, so this, I mean, it looks very similar to what we were looking at before, but instead of one text area, now I've got three. I've got one that I call a block. We'll call this block number one. I have an entry here I call a nonce.

8:20We'll go into what that is later. And then just some data. You can type, you know, whatever data you want. But basically, this hash here, this SHA-256 hash, is the hash of the concatenation of all this data. So if you take all this stuff, put it together, you get that. Okay. Now, importantly, very importantly, this is an unusual hash because it starts with four zeros in a row. Okay. And completely arbitrarily, I'm just going to say that that makes this block solved. Okay. So what would happen, Ash, if I were to type something in this data area? What's going to happen to this hash? Well, that's going to change as soon as you start typing.

9:06Yeah. What's the chance that it's going to start with zeros? Well, probably 10 ,000 to one, I guess. Right? Yeah, exactly. It's probably not, right? So if I type something, it's going to violate what I call a hash, a solved block. So I'm going to type something. And sure enough, it turns reddish, meaning this is not solved. So how could we solve this block? right i could i could go here and i could put a number see this is my nonce there and told you we get back to this this is uh this is what gives me a field that i can change that doesn't really affect anything else so i put a one there does it start with four zeros no well let's try two well let's try three you know as i'm going here i'm looking for one that starts with four zeros so you can tell i'm not getting it right so what we're doing right here is we're mining Now, I bet you wonder what this mine button does, right?

10:05Well, literally what it does is it starts at one, just like what I was doing, but goes all the way up and does it automatically. And this is literally mining. So I'm gonna hit mine. And there it's thinking for a little bit. And it's going from starting from one, and it's gonna go up to whatever number it needs to get to to find a block that hashes out to something starting with four zeros. And my computer was taking a little bit of time for it, but there we go. Had I gone all the way up to 71 ,000 whatever, I eventually would have run across a hash that starts with four zeros. And so what I'm demonstrating here is we have a block and we have done some work to satisfy what is essentially an arbitrary definition of what a solved block is.

11:01And that is that it starts with four zeros. Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

11:13Right. So that's it. One of the things that I find really interesting about this is the way that you have this divided up. You have a block, you have a nonce, you have the data, and then you have the hash. It's almost a kind of an arbitrary division from the perspective of mining. But what makes the nonce, as I understand it so important, is that you segregate the data out kind of as the payload. You could think of it as perhaps an envelope, and it's the thing inside. And then you calculate the series of numbers going through them, iterating through one by one until you solve for the hash that meets the criteria that we're looking for, which in this case is four leading zeros.

11:50Yep. Yep. That's exactly right. Yeah. Okay. So then to move on, let me ask you, what is, so this is a block. What's a blockchain? Well, I have the benefit of having gone through your demo over a series of years, but it has to do with the way these are chained together. So So show us a little bit about how that works, because I think this is really just the incredible aha moment that many people will have when they're watching this video. Yeah, so this is how you chain blocks together. I'm just going to make a chain of, in this case here, I've got five blocks. These look just like what we were looking at before.

12:29But interestingly, I've added this previous. What is previous? Well, that number is this number, is the previous blocks hash. and this previous is this block's hash, right? So everything else is exactly the same. If I change something here, it's going to break this block, right? But what were to happen if I were to change something here? It's going to change this hash, right? But that gets copied up to here. So we're going to have two broken blocks, right? Sure enough, that's what happens. So you might say, well, that's not the end of the world. We could just re-mine it, right? I could mine these two, and then we would be fine, right?

13:24Well, as we saw, I'm going to fix that one. I'm going to go back one more, and I'm going to add some data here. So now we have three broken blocks. And now I'm going to say, well, if you were to mine it, I just hit mine there, and that thing is thinking, well, that one went relatively fast. I hit this one. That one's taking a little bit of time. And then this one, right? We could re-mine this blockchain and it would be fine. It would satisfy our definition of what we call solved blocks in a chain, right? But the problem is the farther back we go, the more of these you would have to fix, okay? So it takes time to mine each of the blocks.

14:06The farther back you go, the more of that work you have to do. And let's talk about this for a second. This is the work we're doing is literally the proof of work that you hear about in proof of work blockchains. This is the work that they're doing. So we need some way to fix this. We have this problem because, OK, I did the work. But how are you going to know that I've altered this chain, that I've taken some data and I've changed it? Right. How do you know? Well, we can't really know. We just know we have a solved chain here. So what I'm going to do is I'm going to distribute this blockchain.

14:48OK, so we've got exactly the same thing. Five blocks. But this is in peer A. we also have a peer b right and there are five blocks in peer b and here is peer c right we have five blocks okay now how do we know let's say i were to change something i'll go back in time and change this block and i'm gonna you know remind it and uh you know i'm let's say i'm mischievous, right? I shouldn't be doing this. I remind this block. Interesting, takes a long time. And then I remind this block. Okay, so when this completes, I've got my altered chain, right? This is a problem. It's an altered chain, but it satisfied the criteria that we arbitrarily decided was signed, which is those four leading zeros.

15:47It does. Yeah. Yeah. But we need to be able to detect that somebody has gone and maliciously changed something here, right? So how do we know? Well, getting back to the hash, remember how it is a fingerprint of some data. Well, this is actually a fingerprint of all of the data in this chain, including the previous blocks, because the previous hashes are copied up. So literally, all I have to do is check this, right? AEF, ADF, whatever. Is that the same as E4B? No. And here's another one that claims it's E4B, okay? So who's right? Well, democracy, right? We have this chain, peer A, that says it's something, and then two others that disagree.

16:38So the majority wins, and we just forget about this chain. So all of that work that was done was thrown away, essentially. Yeah. And this is such an important point. People frequently ask when they're new to this space, well, how do I know? How can we know whether a particular computer that's telling us something on the blockchain, and Bitcoin, for example, is reliable? How do we know that people didn't kind of go in and tinker around with some of the transactions. And what you're seeing right here is a real-time live demo showing how you can have multiple peers on a network, also called nodes, that have different ultimate hashes, which show that OneChain has been changed.

17:19It's really fascinating. It's actually kind of a revolution in that for the first time in human history, You can generate trust in a way that's decentralized. It doesn't rely on a single centralized actor, a big bank, the Federal Reserve to say, this is the source of truth. You can see it democratically happening in real time in this demo. And I think that's just fascinating. Yeah. So I should also note, though, that this is a very simplistic blockchain, right? We have five blocks here. Right now, the Bitcoin blockchain is something like 680 ,000 blocks long. So if you were to, you know, like one way to compare all the chains would be to literally lay out 600 ,000 blocks and check the first one.

18:05Is this one the same? Yes. Is this next one the same? Yes. Next one the same. Or you could just go to the last hash and realize that that is a fingerprint of that entire chain and compare it against any of the others. So the blockchain can get arbitrarily long, billions, trillions of blocks long, and it will all always boil down to something that's this long and no longer. So it's super easy. Yeah. It's elegant. I mean, it's super easy to just instantly check literally terabytes of data, petabytes of data in one number. It's pretty neat. Elegant is a word that comes up over and over again when you hear people who really understand the math, such as yourself, for how this works.

18:53I should say, if you've heard the term Merkle tree, I know it's a lot of complex cryptography and math behind it, but this is really the basis for basically how you can take a hash of a hash of a hash and aggregate it so that at the end, you can just look at one number and know that the entire chain is authentic. Yeah. And that's actually a really interesting point. We know that the chain is authentic or not. We don't know what change was made, but it doesn't matter. The only thing you care about is that you have the authentic one. If there has been a change, it doesn't matter what the change was we're gonna drop it.

19:35So a hash gives you a real easy way to do that. Now we've got a problem with this blockchain here right this is a blockchain and it's got some data area I can type whatever I want who cares right this is this is not valuable information I'm trying to save you know the the letter a you know that's that's not great so let's do something about that instead of that data area what I'm going to do and this is a blockchain, just like we were looking at before, five blocks long, but the data area I've replaced with what I'm calling transactions. And this is just some amount going from some person to someone else.

20:17And so it's transfers. And there you have it. Now you've got a ledger. That's right. Yeah. But importantly, this is a ledger of transactions, not a ledger of balances. We are not saying John's balance is whatever. We're just saying that some amount of money was sent from one person to another. ED HARRISON Right. And this is such a key concept, I think, for people who think about traditional accountancy. This isn't a stock value, it's a flow variable. It's talking about what's just happened in terms of a transfer. And this is a really also, I think, deeply fascinating and pivotal point in how blockchains work.

20:54ED HARRISON Yeah, these are showing changes of state. It turns out computers are really good at calculating numbers very quickly. So if we were to save the balances here, it would really be duplicate information. We can just say everyone had nothing to start with, and then they got this money through transfers. So that's how this goes. And let me just, you know, just to nail the point home, right? If this is$2 ,700 some amount of dollars, if I were to change that, right, It's going to break the block. And this is very, very important. Even if I were to change literally like one penny, if I were to make this 64 cents, it's going to break the blocks.

21:41That's very important. And now remember, we also have P or B and C, the same thing we had before. So we're going to essentially democratically figure out what the authoritative chain is just by checking who has what and pointing to the one that has the majority as essentially the winner. But I've got a problem in my little system here. I don't know if you can find it easily or not. Any ideas? Hey, everyone, we're gonna take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

22:25All right. I think I see it, but walk us through. Okay. Where does money come from? How do I know that Rick here has$62 to give to Ilsa? How do I know that this much money is in this guy's account for that person? By the way, I don't know if you know all these names. These all come from a movie. If you know what movie that is, you get extra points. Is it Casablanca? It's Casablanca. That's right. Yeah, each one of these are different sort of movies. So the interesting thing here is we have no way of knowing, like money just appears. You know, the money is just moving around. That's great, right?

23:09But we can't just have unconstrained. I can't just like say somebody I make up gives Anders a million dollars. That sounds like a great idea, but it's probably not good in an economic system. So we have to have a way to get money into this system. OK. And so in order to do this, we are going to use what we will call a Coinbase transaction. And we'll zip forward to five here. OK. So I'm just going to add a new transaction at the top of the transaction stack called a Coinbase. And regularly, every one block, I'm going to release$100 to someone. who well this happens to go to the person that has mined this block first okay so now we have a regular transmission of money right i create money in the coinbase so it's uh it's controlled and it oh it's always going to go to someone and then those people can then transfer the money so let's go back to the beginning of this chain the first block here has a 100 coinbase transaction goes to me.

24:19I happen to have created this block. I happen to have solved this block, but there are no transactions because I can't, nobody has any money to send to anyone. So there's just no transactions. Now the second block, you'll notice that I'm the only one sending money. It's all Anders, Anders, Anders, because the money, you know, I'm the only one who has money in the system at this point. And if you add these up, you'll notice that they don't go over$100. Okay. So it's just some basic economic, you know, truths that you want to, you know, have trust in, right? So that'll be the economic role of this system.

25:01So now as I go forward, and you'll see that there are different people money is going from, you'll notice that they were all given money previously. And the amount of money that they're sending is not more than what they got. Right. And so if you sit here and you kind of go through all of them, you'll notice it does actually work. And we have an economic system here where transactions are recorded indelibly. Like if I were to change any, if I tried to change the person's name, right, it's going to break the block. They're recorded indelibly across a bunch of peers. There's peer B, and there's a bunch of peers out there.

25:42We're all agreeing on the flow of funds. It's interesting because most people have heard the term Coinbase, obviously, because of the exchange. Now, you see where that came from. When you scroll back all the way to the first transaction, this is the genesis block. This is the creation of the chain that you're seeing here. Yeah, that's right. And you'll notice there is no previous. So we have this fake all zeros hash that we've put in. Yeah, exactly. This is the genesis block. And a matter of fact, in the code, what you do is you create the first block and you say, OK, this is the official first block.

26:21This is the hash of the first block. In that sense, the first block in public blockchains is very important because you base what you're going to follow on that. But that's all kind of hard set in the code by the time you get it. Right. Yeah. So remember, I said that there were two cryptographic operations that you kind of had to have a sort of a feel for. There is another one that we're going to jump into here. Now, all of what we've seen so far has just relied on this one-way function called a hash. We have an issue though, what if I don't want to put my name or my identity or something that I want to kind of, you know, step away from that somehow.

27:12Okay, so the other cryptographic primitive that I want to introduce is this concept of public and private key pairs, okay? And I'm going to be slightly hand wavy on the math behind this, but I will show you the the truth that it allows. So this is a private key. Okay, it's a pretty long one. And from this private key is derived a public key. Okay, this is many digits long, right? But you could be anything. The one is a private key. It's not a very good one because other people have thought of one before, right? You can just type whatever you want and that's also a private key. It's probably not great because humans aren't very good at coming up with randomness.

28:01That's why I put this little random button. All right, I can press this random button a bunch of times and get some value for my private key. Now, a private key is literally just a number. And as the name would suggest, though, it's a number that you want to keep private. You don't want to ever tell anyone this number. OK, this would be like your email password, right? You don't want to tell people your email password. However, from this private key, I derive this public key. And as the name would suggest, this is public, like my email address. I would want to give you my email address. So the math behind this, as I say, you have to take it on faith that that actually works.

28:45But let me show you what this allows us to do. Let me just add also the public key that you're looking at. You see letters and numbers in it, but that's really just a number. it's just represented in hexadecimal base 16. The short, simple version of it is you can put more digits, more representations of numbers into a shorter space. What you're looking at at the top and what you're looking at the bottom are both just numbers just expressed in a slightly different way. ED HARRISON Yeah, that's exactly right. Great point. These numbers can literally be hundreds of digits long. You want to compress them if you can, so you can see them.