Bitcoin Explanation on /biz/ -- 07.31.14.

I'll start with a practical example.

Anyone who is connected to the Bitcoin network is participating
in the construction of a timeline. The timeline itself is just a
ledger of transactions known as the blockchain. The reason we must
have this timeline is that, without a central authority to declare an
official timeline, it is difficult for the network to decide the order
of transactions. Obviously the order is important, or else I could
spend my money in more than one place and nobody would agree on which
came first. Why is it difficult for the network to decide the order of
transactions? Because the network has latency (lag), and not every node is
connected to every other node. Without a central authority to adjudicate
these issues, the network needs some kind of established convention that
allows the construction of a ledger. This convention is, essentially,
the Bitcoin protocol.

If there are 100,000 nodes on the network, and each nodes has on average
8 connections to its peers, then any message from one address to another
will obviously have to pass hands through more than one node for every
node in the network to receive the message. With these made up numbers
it would take something like 6 "hops" on average (I think) for the entire
network to receive the message.

Here's where the magic happens. Since we have this latency problem,
the order of transactions is created through a process driven by the
incentive to collect transaction fees (and for the next hundred years
or so, newly created bitcoins). Suppose I want to send you an amount
of bitcoin. My wallet software broadcasts the newly created transaction
signed with my personal unique signature verifying that I actually own
the coins. The transaction is just a message saying that I want to send
a certain amount of BTC to your address, and I optionally can include
a reward for processing my transaction. Nodes that are processing
transactions simply collect the transactions that offer the highest
transaction rewards and create a list of potential transactions to be
included in a "block". Each transaction in a valid block are agreed to
have occurred at exactly the same time. In order to be considered valid,
a block must not contain transactions that are contradictory to each
other or past transaction, and the block must be accompanied by the
answer to a difficult computational problem. All nodes are competing
to create a new valid block so that they can collect the transaction
fees. This is the way that the network agrees that someone has created
a valid block: any node who broadcasts the correct answer to a variably
difficult computational problem is agreed to have created the next
block. The details of this problem are not important in understanding
how Bitcoin works, just understand that the problem is so difficult that
the approach to solving it is always the same: guessing. Depending on
how many people are guessing and how fast their guessing is as a whole,
the Bitcoin protocol scales the difficulty of the problem so that someone
will likely solve the problem about every 10 minutes.

So each participating node collects transactions on a "best effort"
basis in order to collect transaction fees, and create a timeline of
valid confirmed transactions. Right now, the node who happens to create
the block also gets a reward of 25 BTC, which will decrease to 12.5 BTC
in a few years, and keep halving every few years until the BTC reward
becomes 1 one-hundred-millionth of a BTC. After that period, the reward
will decrease to 0, and the remaining incentive will be the transaction
fees, which will then probably naturally increase by a certain amount
to encourage processing speed.

Here's the final ingredient that makes it all work:

Occasionally, two nodes will create a valid block at the same time. So
this introduces an issue again in constructing the timeline. . . how do
we agree on which block of transactions is valid? It's very similar to
the issue of determining which "double-spend" transaction is valid (a
problem which we've also already solved if we can solve this new problem).

Well, to solve this issue, we agree that each block's "random guess
problem" be dependent on the contents of the preceding block, and (this is
the most important aspect of Bitcoin!!) WE ALSO AGREE TO ACCEPT ONLY THE
LONGEST VALID CHAIN OF BLOCKS. So what this means is that every single
block is perpetually tentative, and when we receive more than one valid
"next block", we tentatively accept both until the next one is received,
which can only possibly be added to one or the other. Naturally, one
chain will end up being longer than the other because it is exponentially
unlikely that any single person will create a valid block more than
once in a row. In order to undo every transaction since the 2nd block
ever created, someone would have to create thousands of valid blocks
within 10 minutes time. This amount of computational power is pretty
much physically impossible. This is true even for blocks as much as an
hour old. So you can rest assured that any block of transactions that
happened even so much as an hour ago are set in stone FOREVER.

There is obviously more to it than this, but this should be enough to
understand why Bitcoin is such a beautiful invention. It also has a
built in scripting language that allows you to create transactions that
require more than one signature to be valid, such as 2 of 2 signatures
for something like a savings fund between a husband and wife, or 2 of 3
signatures for an escrow transaction. Not only this, but the technology
can be used not only for currency, but for anything requiring a public
record or ledger, including a voting system, a list of notaries and deeds,
a public record of domain names and the IPs that belong to them... the
applications are so broad! It is as powerful a concept as the internet
itself. It is an innovation that captures potential that the internet has
always had, but had never been realized until now. It makes centralized
banking, centralized DNS, etc look so fucking primitive.

I would like to add to this technical response why this is such a huge
deal.  everything that mankind has put into the digital world can be
copied. Not only copied, but perfectly copied. That's the whole point
of information transfer, things are copied all over the world. data,
voice, music, movies, everything!

That seemed to mean that money could never be truly digital because
one of the primary tenets of a currency is that it has to be scarce
(or scarce enough). If you can't control people copying and pasting
money then the money is worthless. In the real world that is basically
called counterfeiting money but in the digital world it would be copying
and pasting. The bitcoin protocol that this anon is kindly explaining
is based on a method of ensuring that all "money" information cannot
possibly exist twice in different places because everyone in the network
is reading that 1 bitcoin moved from one wallet to another. That's what
the public blockchain is; the biggest money ledger ever made.

OBLIGATORY ADDRESS SHILLING:
If you appreciated my explanation, please send a BTC tip to 17fPmtETHCh3ybtLAU6XE7RCpMFcChRf9j