← The Peter McCormack Show
The Peter McCormack Show
Beginner’s Guide #6: How Bitcoin Works with Shinobi - WBD187
02:01:00
Location: Skype Date: Friday, 17th January Project: Block Digest Role: Host Welcome to the Beginner's Guide to Bitcoin. Bitcoin can be intimidating for beginners. The protocol is complicated, the community can be aggressive and unforgiving, silly...
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- [00:01]
Peter McCormack
Welcome to the what Bitcoin did podcast.
- [00:07]
Shinobi
Hi there, how are you all? Welcome to the what Bitcoin did podcast which is brought to you by the mighty Kraken. The best place to buy and sell bitcoin. I'm your host, Peter McCormack and today I have part six of my Bitcoin beginner's Guide. I've got a monster interview with Shinobi getting into the weeds of how Bitcoin works at a technical level.
- [00:25]
Peter McCormack
But before that, I have a message from my show sponsors.
- [00:28]
Shinobi
So firstly, today's show is brought to you by Kelman Law. And I know if I get myself into any Bitcoin trouble, if I need some legal support, it's going to be Kelman Law I'm going to be calling. They are run by Bitcoin OGs and based out in New York. And like other crypto lawyers you find online, these guys actually understand Bitcoin and Fintech and of course, and most importantly, they accept Bitcoin as payment. If you're not accepting Bitcoin as payment, can you really claim to be a bitcoin lawyer? So one of the partners, Zachary Kelman, is known for drafting a bill submitted to US Congress in 2014 aimed at exempting on chain Bitcoin transactions from US regulations. The other founding partner is Daniel Kelman, who's been on my show as part of my Mount Gox series. He was helping me understand the complexities around civil rehabilitation. The Kelman Law team is staffed with lawyers with expertise in litigation, dispute resolution, anti money laundering and US and international corporate structure for fintech businesses or companies operating in the Bitcoin space. So if you've got a fintech business or you've got a dispute involving Bitcoin, maybe somebody owes you some Bitcoin, or you just need legal advice related to Bitcoin or fintech, open up your email and send a message to Infoelman Law. That's Kelman Law. K E L M A N with one L, not two. Or just go to their website www.kelman.law. also, today's show is brought to you by Dropbit, the only mobile wallet I use for sending and receiving Bitcoin. And have you downloaded it yet? Have you tried out the drop bit wallet? I've got a call with the team next week. We're going to be discussing their plans for 2020, including some ideas I've got for the wallet. So why do I love the Dropbot wallet? Well, mainly it's the speed of development, all the cool ideas they're working on. When I started working with them, they had the basic features of being able to use QR codes and addresses, but also the ability to te bitcoin. But since then, they have added the ability to tweak bitcoin. They've added lightning support, they've added batch 32 support, they've added the ability to buy bitcoin from within the wallet. They absolutely crushed it in 2019 and they're going to do the same again this year. I know it. I cannot wait to see what's coming up. So, seriously, start off your week in the right way. Go and download the Drop Bit Wallet. It's available for the iPhone and Android. Just head over to Dropbit app, which is D R O P B I T app. Okay, so onto the show today and we have Shinobi, the host of Block Digest. And this one, I'm going to say it's a monster. So far in my beginner's guide to Bitcoin, we've taken a look at what bitcoin is, where it came from and why you might need it. And today we're going to look a little bit deeper of how it works at a technical level. And listen, if you're new to bitcoin, I'm going to tell you now, it's a journey. Some call it a rabbit hole, as it's such a unique form of money. And on my journey, I've often found the more technical aspects a little bit complicated, a little bit hard for me to get my head around. But with time and dedication, you can learn how it works. And this chat with Shinobi highlights for me on a personal level how far I think I've come in the past three years. So you're going to hear us cover all the most important parts of how the protocol works, from consensus rules to how transactions and wallets work, to mining and nodes. And just a note. While Shinobi does an amazing job at breaking down these topics, you may find some of it quite complicated and hard to follow. Worry. My suggestion is just soak it all up and then perhaps follow up with some YouTube videos. Or you can even revisit this interview. Think of it like a jigsaw puzzle. You may understand some of the basics to begin with, say, the 21 million hard cap, but how nodes and miners work together might be a bit too much. But just take your time, keep coming back, keep learning, and eventually you'll see how these jigsaw pieces fit together and how Bitcoin is such a beautifully designed protocol. So I hope you enjoy this one. I think it's a massive episode as ever. If you've got any questions, you can reach out to me. My email address is hellohatbitcoindid.com.
- [04:23]
Peter McCormack
Hey, Shinobi, how you doing?
- [04:25]
Shinobi
I'm doing all right. How about you, Peter?
- [04:28]
Peter McCormack
I'm doing pretty good. This is the second time we've done this. Very different circumstances. I think I'll put the other one in the show notes. I think people can listen to that because that'll be kind of funny.
- [04:37]
Shinobi
I think it'll be fun.
- [04:41]
All right.
- [04:41]
Peter McCormack
So I've been doing this beginner's guide. I've got friends coming to me saying, pete, tell me about bitcoin. And I send some of to lops website, which is useful, but I thought it'd be better to put kind of like a sequential bunch of interviews together to take people through a bunch of different bits related to bitcoin, just to.
- [04:57]
Shinobi
Kind of help them get started.
- [04:59]
Peter McCormack
So I started with Andreas, why we need bitcoin, like what is the reason it exists. I've then covered what money is. I then went through explaining the pre history of bitcoin, all the different projects, bitgold ecash, so people had an understanding what was coming on beforehand. Then I sat down with Stefan Navera and we talked about what bitcoin is like at a top level. And then I've just covered bitcoin's history, like a short version of the bitcoin's history with Marty, Ben. And now I want to get a little bit more technical. And what I'm going to say is like, anyone listening, you know, they're not going to get it all after this. This is really just a starting point to explain how it works, but really they're going to have to go down the rabbit hole. So you ready to go go and do this?
- [05:45]
Shinobi
Yeah, absolutely. And before we get started, just to.
- [05:49]
Unknown
Kind of make that point for everybody.
- [05:51]
Shinobi
Listening, I just want to say right.
- [05:53]
Unknown
Off the bat here, I supported Bitcoin XT when I first got to this space. Like that whole narrative of big blocks that got me at first before I actually took my time and kind of thought everything through. So it does take time.
- [06:11]
Peter McCormack
Yeah, I mean, it's okay to make mistakes, you know, as long as you kind of learn from them. I mean, I spoke to Jameson Lott very early on and, you know, he was a supporter at one point of Bigger Blocks, which, you know, people will have heard me and Marty talk about in the last show and, you know, when I first got in and you know, I did an interview with Roger Vere because I was like, well, these bigger blocks sound interesting. You know, I understand the argument. You know, I think as long as you, as long as you understand that if you, if you sympathize him with like maybe a bigger block or a smaller block, there's plenty of arguments to hear about and, you know, there's no right or wrong way of learning, I would say.
- [06:47]
Shinobi
Yeah, exactly. I mean, it's like you, you don't just throw a high school kid, freshman.
- [06:53]
Unknown
Year into a college like molecular biology.
- [06:57]
Shinobi
Class and just expect him to immediately.
- [07:00]
Unknown
Get what the hell is going on like that. Things don't work like that though.
- [07:04]
Peter McCormack
So we're patient. Just take your time.
- [07:06]
Shinobi
Even if there's something really confusing in.
- [07:08]
Peter McCormack
This session, don't worry about it. There's stuff in the show notes to help you. Just keep digging and keep, you know, keep learning. So. Okay, well, look, what we want to talk about today is how bitcoin works. And I don't want to cover lightning. I just want to cover how the bitcoin based chain works. You know, the original starting point of bitcoin. But before we go into that, one of the things I thought would be good is to just talk about what the key principles of bitcoin are. Because, you know, this isn't just like my, my, my first real exposure to digital money would have been in kind of computer games where it was just a replacement for money within a game. Whether it's my son on FIFA and he's got his points to buy and trade things. You know, they're my first exposures to digital money. But this is completely different. This is actual a replacement for real.
- [07:56]
Shinobi
Money in the real world.
- [07:58]
Peter McCormack
But they, there's some key principles behind bitcoin for why it's going to be different. So do you want to run through what the key principles are for bitcoin and then if I've got any questions, I'll throw them at you. Shinobi.
- [08:10]
Shinobi
Yeah, you know, obviously I think that.
- [08:13]
Unknown
The core most important one is the predictability of supply and the inflation rate. You know, like a lot of people would put that as like, you know, 21 million coins. But honestly I don't think it matters whether Satoshi had picked 21 like he did, or 42, or had some set amount of coins that was made every block forever. Just as long as it was created and then set in stone that people could count on. This is predictably what's going to be happening in the future. And then base Their, their economic decisions around that because it's, you know, I, I don't think I need to go into the kind of chaos that uncertainty about things like that causes in the world economy.
- [09:08]
Peter McCormack
I covered that with Parker when we talked about what money is. One of the problems we have with fiat money, and I also saw this when I did my show about Argentina is when governments print money and it's unpredictable, the value of the money you hold drops. One of the things about Bitcoin is like you say it doesn't matter whether it had been 42 or 21 or 50 million. The fact that, you know it's 21 million, you know it will always be 21 million. Can make your decisions based on that.
- [09:35]
Unknown
Exactly. And then, you know, obviously after that is the promise of censorship, resistance, and kind of permissionless access. And I think those two things kind of go hand in hand. They're very tightly intertwined. And you know, I think the idea of censorship, it just, it's obviously, I.
- [09:58]
Shinobi
Wouldn'T say it's, it's really just kind.
- [10:01]
Unknown
Of like a censorship is bad. It's more just that, that kind of long term thinking ahead, you know, to kind of throw something out there, like the, the way the founding fathers of America thought about things, like they didn't get things perfect and they screwed things up, but they sat and they thought ahead, like what are the consequences to things? And when you have that, that central party in control of something as important as money, that is an immense amount of power over all other people. And you know, it's just time and time again through human history, when people get that power, they abuse it. And you know, the, the way that's kind of guaranteeing that it has that censorship resistance is the, the permissionless access that anybody can become a part of the network, that anybody with the capital can participate in processing transactions on the network. And if there's somebody out there willing to pay enough for it, there's hopefully somebody out there willing to process that transaction. And those two things kind of tightly intertwined, give that a neutral bedrock. We're kind of wrestling now with the political consequences in the world of the Internet and just how that, that neutral platform is just opening so many things up to the light that you would have never dreamed would just be openly discussed and acknowledged 10, 15 years ago. And you know, I think at the end of that is a very positive outcome. And bitcoin is the potential tool to bring that neutrality to money that we're starting to see take over and have real world consequences. When it comes to information.
- [12:06]
Peter McCormack
Yeah. So the relevance of that is, again, I'd never really thought too much about censorship, certainly financial censorship before Bitcoin. But that ability that anyone can just become part of the network and start sending transactions and creating transactions to anyone without any permission, without anyone censoring, was something that actually still took a bit of time to get my head around. Because, you know, I'm historically from a world whereby I have a. If I want to send somebody some money, certainly digitally, I have to get a bank account. To get the bank account, I have to fill in forms and get id, you know, and I might be rejected, you know, and that's something I have to go through. And, you know, and also I've had the experience of trying to send money to certain places in the world be very difficult. When I went out to Japan and did my interview with Mark Car Palace, I could not create an account to send money to the videographer that I worked with. One of the things about having something that is permissionless and, you know, and censorship resistant isn't just that anyone can join it and use it. It also removes a lot of the friction, you know, the speed to which you can join the network and start creating transactions, you know, that is reduced as well.
- [13:14]
Shinobi
Yeah, I mean, that.
- [13:15]
Unknown
That's absolutely a huge benefit from that. I mean, you know, just look at like, what BTC Pay is doing and how easy that is starting to make it to just flip a switch and be able to accept money as a business on the Internet. I mean, like, that's like, that's really a game changer when it comes to like, okay, supposedly, you know, automation is coming. That's a whole can of worms will just open and close right away. So here's a way for people to start looking to make money for themselves.
- [13:52]
Peter McCormack
And, you know, some people listen to this, might think, well, I don't actually need this right now. You know, I don't need a permissionless system and I don't need censorship resistance. You know, I'm perfectly happy with my bank account. You know, I can send money to my friends, I can get paid. You know, I can pay my bills. You know, I don't need that right now. But I think the lesson here is that there are plenty of people around the world who do need this. Just because, you know, you're, you know, maybe living in the US or Germany or the UK and you've got a fairly stable system that you don't essentially need it right now. But there are places in the world that do need it. And history has taught us that it might come to one of us at some point.
- [14:32]
Shinobi
Yeah, I mean, you know, people say we don't need it in the West. I mean, I disagree, like, okay, paying attention, at least in the United States.
- [14:43]
Unknown
And I'm willing to bet probably in places in Europe as well, it's already becoming kind of a precedent that if you are a well known figure of an unpopular political persuasion, you'll just have your bank accounts getting shut down with no reason given by financial institutions because your political persuasion is wrong thinking. And I think that's a trend that's definitely going to accelerate like that. That's not just gonna stop and be a fluke.
- [15:18]
Peter McCormack
And also, I actually saw a story in the news, I think it was yesterday or the day before, about a guy who'd been saving his whole life. He'd managed to save away about $87,000. He'd never actually put it in the bank because he didn't trust the banks because, you know, previous times when money had been seized, so he kept it all in cash. But his daughter was like, you know, because he was getting old, you need to get this in the bank account. So she took it and she took it on an internal flight where you don't have to declare how much. And the, I think it was the DEA seized the money.
- [15:50]
Shinobi
Oh, you think that's bad? I forget when this was.
- [15:55]
Unknown
I think it was a couple of years ago. There was a Romanian immigrant who was.
- [15:59]
Shinobi
He had his money in the bank.
- [16:01]
Unknown
And withdrew it in cash and had all the withdrawal receipts and was going.
- [16:07]
Shinobi
To his parents in Romania and considering.
- [16:09]
Unknown
Buying their house there from them.
- [16:12]
Shinobi
And he had not even gotten to.
- [16:15]
Unknown
The air because he took a one hop domestic flight to the airport that he was leaving internationally from and didn't have to declare anything until the international airport and his money was confiscated, even with all the legal documentation from the bank to prove that it was legal income.
- [16:32]
Peter McCormack
So I think one of the things we add here is that seizure is a, is also a possibility. You know, when your money is in a, you know, in the bank or you're trying to carry it and take it from potentially on an airline, there is the potential to be seized from you unless you say what it is, it's stolen. You know, when you have it in Bitcoin, you know, not only do you have a permissionless system and you know, censorship, resistance, you're in a place where people can't actually seize the money from you, they can't steal it from you. And That's a really important thing for people to get their head around. So what I would say, even if somebody's listening to this and even if they're thinking, look, I don't think I need this now. It's not for me right now. Just being aware of the potential, the potential consequences and, you know, just digging into the news a bit and seeing it, seeing that it is happening is at least you should be aware that there's a possibility.
- [17:20]
Shinobi
Yeah. And you know, I don't usually say things like this, but even if you don't think you need it, how many.
- [17:26]
Unknown
People around the world do you think do need it? Invest in that. That's a value you can capture.
- [17:35]
Peter McCormack
And that's also one of the reasons I buy and I hold bitcoin and I increase my holdings is because one of the reasons is speculation. And people talk about speculation more because you think the number is going to go up. But the reason I think the value of bitcoin will go up is traveling around the world, having been to El Salvador recently and Argentina and traveling different parts of the. I know there are places where it is more usable. And if it's going to be more usable in places like that, it's also worth me considering buying and holding, speculating on the possibilities globally. All right, so what else we can add into that is that if we stick into the key principles of bitcoin, one of the things that comes alongside the fact that it's a permissionless, censorship resistant protocol is that you then have irreversible transactions.
- [18:26]
Shinobi
Yeah, that is absolutely a requirement.
- [18:30]
Unknown
And that's kind of the whole reason that proof of work really comes into it. I'm going to kind of nitpick here and say that strictly technically speaking, nothing on bitcoin is completely irreversible. I forget the website. Maybe I can look it up and get it to you to put in the show notes afterwards. But Peter Woolley actually runs a site with a lot of statistics. And one of the statistics is how much time it would take for 100% of the current network hash rate to completely rewrite the entire chain from scratch. And whenever I look at it, it's generally somewhere around a year. But the idea is though, that you make it so expensive to go back and undo things in the past that it's just not economically worth it. As a miner, you'll make more money if you just keep mining on the next block and don't play shenanigans like that.
- [19:40]
Peter McCormack
Well, so we'll get into that. We're Going to talk about what proof of work is and how blocks are created and how hash rate works. But generally speaking, even though nothing is irreversible, generally speaking, we look at transactions on the bitcoin blockchain as generally immutable. It's a system we create that we trust that after a certain period of time that a transaction can't be reversed. So that's a couple of things that people have to consider. They're going to be used to bank accounts whereby, you know, if there's a transaction that's gone wrong or someone's stolen the money, they can usually phone up the bank and get it reversed. Or in the retail environment, you know, if they bought something and they don't want it and they, they want to return it or say it hasn't turned up, you know, they can get transactions reversed I think, I mean I had it once on ebay where I sold a phone and on the 180th day somebody said they'd never received it and obviously they had, but the transaction was reversed and they, I didn't get the phone back and they got their money back. So I lost in that scenario, you know, in the world of bitcoin, once you've made a transaction, pretty much it's gone. And that comes with consequences and things you have to consider, right?
- [20:53]
Shinobi
Yeah, but I mean it's kind of a tug of war and I mean honestly there's nothing really in the long.
- [20:59]
Unknown
Term to prevent people from building those kinds of things on top of bitcoin if they want them. I mean it would just be an opt in kind of sandbox. But it's, you know, there's the trade off of risk on the purchaser's side in that there's no take backs. But I mean there's also a lot of benefits from the merchant side. You know, like your, your problem with the phone couldn't have happened if that was done in bitcoin.
- [21:25]
Shinobi
All right, so there's three other things.
- [21:27]
Peter McCormack
Under the key principles. I think what we'll go with first out of these last three is let's go with the fact that this is essentially the system is pseudonymous now people. Originally, I mean when I first used bitcoin, you know, when I use it with a Silk Road, I thought it was anonymous, but that's, that's a myth. It's actually pseudo anonymous. Do you want to explain what that means to people?
- [21:48]
Shinobi
Yeah, so it's actually, this is actually.
- [21:51]
Unknown
A real simple thing to break down, I think.
- [21:53]
Shinobi
So anybody, everybody out there should be.
- [21:56]
Unknown
Familiar with Twitter and 4chan. So 4chan is actually anonymous for the most part. It's literally just a number that things get posted under. There's no consistent names or identities. You just post something and it's thrown up there and nobody can really see who's saying or doing what. Now Twitter is mostly pseudonymous. Like I have my identity, Shinobi on Twitter, and it's obviously not my real name, so you don't really know who I am, but you can still tie everything I'm doing to Shinobi. You don't know my real name and identity, but you know the entity that is Shinobi is doing all of these things that you see shinobi do.
- [22:48]
Peter McCormack
Yeah. And if you relay that into the world of Bitcoin, what people have to understand is the blockchain is open, anyone can see and anyone can follow any of the transactions. But if I was to create a wallet, you know, on an air gapped laptop, anonymously over a Tor browser, and then I was to meet somebody in the street and they'll send me some bitcoin to that address, you know, they can follow the transaction, but they don't know it's me. But at the time, perhaps when I would sign up with an exchange, you know, if I was to sign up at a Kraken or a Coinbase and give over my ID and then buy some Bitcoin, they could track that bitcoin to my id. And that difference is really important for people to understand.
- [23:29]
Shinobi
Yeah, I really think that that is.
- [23:32]
Unknown
The first thing that somebody coming into this space should consider before they buy Bitcoin is are you comfortable with your name forever being in a database somewhere as you bought Bitcoin? And if you are, you know, go use the nice easy on ramps out there, and if you're not, you know, go use the, the cash platform or the cash trading. And I mean, you know, if you're not comfortable with that trade off, it's. Things are probably going to get harder and harder for you as the years go on.
- [24:05]
Peter McCormack
All right, so the next one I want to talk about is fungibility. And this is still, for some people, a little bit hard to get their head around. But, you know, one of the key principles of Bitcoin is that it is that coins are fungible. Do you want to talk about that? And the complexities of it?
- [24:19]
Shinobi
Okay, so this is kind of a nuanced thing. So I mean, obviously this is kind.
- [24:26]
Unknown
Of a debate whether Bitcoin is fungible or not. Right now I would argue that it kind of is. So I guess I'll start with that first.
- [24:35]
Peter McCormack
Do you want to explain what fungibility is, though? Because some people wouldn't even have heard considered it.
- [24:39]
Shinobi
So, fungibility, it means one of two.
- [24:43]
Unknown
Things in the physical sense. It means that that something is identical to another unit of that something like two. Two pieces of gold. If you melt them down and recast them, they're indistinguishable. They're the exact same thing, or like two barrels of oil. And then there's the legal concept of fungibility with regards to money, which was actually set by a precedent in a. A court case in Scotland in the 1700s where a banknote was stolen and then found by the serial number later. And the judge essentially ruled that money is to be treated as if it were physically fungible, because the economy would fall apart if you could just pick out a note with a serial number and go, that was stolen from me. And take it from somebody, even though they did nothing wrong to acquire it. So, yeah, the argument that Bitcoin is fungible is essentially that when you're making a Bitcoin transaction, you're effectively destroying coins, the inputs of those transactions, and making new coins, the outputs and things like coin joins kind of obscure those connections and kind of make the point that there is no exact linkability between any certain coin every transaction is creating, and they're destroying and creating new coins, like casting gold or melting gold, and then kind of casting new gold bars from it. And so that's kind of the argument that right now it's fungible. And then the argument that it isn't fungible is that, you know, with these inputs and outputs in a transaction, there's no iron connection between where any specific coin is flowing, but you can still tell UTXOs apart and still have some kind of relationship identified between them. And so people argue it's not fungible because of that.
- [26:57]
Peter McCormack
I think that some of that might go over people's heads. And I think, certainly if you want to learn more, searching up CoinJoin and just spend a bit of time reading about that will probably help people understand that a bit more. Okay, so the last key principle, and this is a very, very important one, but if you're not a developer, it might not be something you've really heard too much about. You might have only heard you read about it online, but is open source, that the code and that Bitcoin is open source?
- [27:25]
Shinobi
Yeah. So I think this is obviously one of the most important things. And I mean the reason behind that is just, it's, it's money that ultimately.
- [27:38]
Unknown
Is the result of just software running on computers all over the world.
- [27:44]
Shinobi
And, you know, to, to not have.
- [27:48]
Unknown
That be open, to not have all the source code out in the open, all of the changes made to that source code, see who's making them, you know, how would you know what's actually going on? Like, there would be way more barriers and roadblocks to actually making sure that this software is doing what it's actually supposed to be doing, that it's following the, the rules of Bitcoin that everybody thinks it is.
- [28:17]
Shinobi
And, you know, it's like just, you.
- [28:20]
Unknown
Know, pick any random thing. If it's hidden from you out of sight and you're not able to view it, then how can you actually verify what's going on? Like the, the mechanic that you take your car to if you don't actually watch them fixing things? Like, do you know what they actually did while your car was at the garage? And I'm sure a lot of normal people in the world can, can appreciate the many mechanics out there that are not honest about what they do.
- [28:51]
Peter McCormack
And there's plenty of scenarios where we trust people. We trust the phone networks and the manufacturers of the phones, but we know our calls are being listened to and our emails are being scanned and searched. In the world of Bitcoin, what we're trying to get to is a place of, I didn't interview Nick Szabo and people should go and listen to that. But he's famous for saying trusted third parties are security holes. What we're trying to get to a point here is minimize trust. Right? As low trust as possible.
- [29:21]
Shinobi
Yeah, exactly. And like, you know, we can never.
- [29:25]
Unknown
I think, get to a point of perfect trustlessness. I mean, that, that would require everybody to know everything. But we can do orders of magnitude better than what we're doing today. I mean, today is literally just everything's behind a closed door, like the, the banks and what's going on there. It's behind a closed door. Just trust them. Us, like the government, what's going on, it's behind closed doors. Just trust us. Like, and I think a rational person would be hard pressed to deny that a lot of aspects of society are really destabilizing all over the place. And it's because everything's behind closed doors. Just trust us. And we should not trust those people.
- [30:12]
Peter McCormack
Yeah, and that's one of the things it's like with Bitcoin being open source. Anyone can contribute, anyone can Read the code, anyone can, can check and make sure nobody's putting in sneaky bits of code that do things in their favor, which is great. But you know, I'm not a techie, so I'm never going to review the code or check the code. So I put them, I put an amount of trust in the process or a trust in the people or trust in the key developers involved in the project. But that's okay because, you know, there's like a unit of trust over there amongst the developers themselves. And that's something like, you know, what you said, you can't have perfect trustlessness. So that's an example of where I put a little bit of trust.
- [30:50]
Shinobi
Yeah, but that trust, because all of.
- [30:53]
Unknown
This is open, is very modular. You say you're not a techie, you could learn to be. Or do you not have friends who are, who are closer to you more trusted than bitcoin developers? They could look at things and vouch for it. Just the fact that it's out in the open, like you have a choice now in where to place your trust and how much trust to place there instead of just there's that group in the closed room and you just have to trust them.
- [31:28]
Peter McCormack
Okay, so moving on from these principles, there's certain things that bitcoin has to deliver on to ensure these key principles are met. So we just covered trust and ensuring it's low. Trust, trust. Something people are going to hear a lot about is decentralization. And this is a term I think is often misused, sometimes I think used as a marketing term. And you know, people are going to hear about other altcoin projects and other crypto projects which talk about being decentralized. And something I've kind of attached myself to is the concept of directional decentralization. So there are projects that become more decentralized and there are projects that become more centralized over time. And something I've really come to appreciate and notice, and I would say it's only been over the last six months of, you know, maybe like a three years in bitcoin, is that I've noticed what's happening with Bitcoin is that when decisions are made, you know, on the future of the protocol or the future of mining, people are always considering the trade off for decentralization. Does this make bitcoin more decentralized? So we should probably talk about what decentralized means, why it's important, but also the myriad of things it relates to. Because there are a whole bunch of things that come under the decentralization whether it's development, whether it's nodes, whether it's mining. So do you want to talk about firstly what, what decentralization is, why it's important? And then let's talk about how, you know, Bitcoin is and people who are working on Bitcoin are trying to ensure that it's stays maximally decentralized.
- [33:01]
Shinobi
Well, yeah, I mean, like, obviously, you know, something that's centralized, it's a central thing you're dependent on.
- [33:08]
Unknown
And, you know, I think that the best example would be Netflix versus BitTorrent. If Netflix's server or their CDN that you're using goes down, you have no more Netflix. But if you're downloading, you know, TV shows or movies off BitTorrent, I mean, there are thousands of computers potentially across the world, all up uploading and downloading whatever you're trying to get. And all of them would have to fail for you to not be able to get that TV show.
- [33:40]
Shinobi
And to really take it to the.
- [33:42]
Unknown
Extreme, I mean, the entire Internet itself out of darpa, the research arm of the Pentagon in the United States, the idea was to have a decentralized communication system so the military could still coordinate if America was hit with nuclear weapons, to have the communication system set up so that a bunch of places getting bombed wouldn't take the entire communications system down. Like the messages could route around those damaged nodes. And so it's all about, you know, resilience to failure if it's done right. The more decentralized something is, the more robust it is against different types of failure. But the more centralized something is, if something fails there, it brings the whole thing down.
- [34:40]
Peter McCormack
And there's a couple of things in there. So decentralization is important, obviously, as you said, as an infrastructure. So for example, if bitcoin is maximally decentralized, a whole country can try and turn off Bitcoin or ban Bitcoin, and it doesn't close it down. There's an infrastructure side, but there's also a part in terms of influence, you know, the influence of individuals or small groups of people. The more centralized something something is, the more they can have influence. And I think a good example of that will be if someone's new coming in, they might have heard of something called Ethereum. They might be thinking, oh, is this another crypto project I can invest in? But I've always found as a somebody who isn't of the most technical, that I, as I observe it, it feels like something which is becoming more centralized and people there are small Groups of people or individuals who have influence over that.
- [35:32]
Shinobi
Yeah, absolutely. Centralization and decentralization are two ends of a spectrum, plain and simple like that.
- [35:40]
Unknown
That's not a binary or black and white thing. And nothing is guaranteed to stay in the same place on that spectrum.
- [35:48]
Shinobi
And yeah, like things like this is why I am such an avid supporter of Bitcoin, but just essentially nothing else in this space.
- [36:01]
Unknown
Because Bitcoin has demonstrated resistance to those centralized influences multiple times.
- [36:08]
Shinobi
Where Vitalik could literally snap his finger.
- [36:12]
Unknown
Tomorrow and spit out 15 syllable words that nobody understood and go we need to hard fork and everybody would just do it.
- [36:24]
Peter McCormack
I'm with you on that one as well. I've become much more hardened and over time it's funny, it's almost like my hardened state for Bitcoin is almost like the blockchain itself. It's like I'm getting more personal confirmations over time the deeper I go. But, but one of the things that I see all the time is that the decisions that are made. I've been to a few bit dev meetups, I've spent time with people. The trade offs are always there. And people will have heard in the last show talking about the fork wars, I used to think Shinobi 2 megabytes doesn't seem to be that big a deal, but actually it's a massive deal when you are considering the trade offs for decentralization. You know, if we look at want to have as many people running nodes as possible, that trade off to go to 2 megabytes would have certainly led to a number of nodes dropping off the network.
- [37:18]
Unknown
Oh yeah, definitely. And actually, you know, if we're referring to the New York agreement and all that, it really could have made them as big as 8 megabytes. When you take Segwit into account with a lot of multisig usage. And that according to a BitFury study from I think 2016, if I remember right, would have knocked like 90% of the nodes offline after like six months.
- [37:49]
Peter McCormack
So the next thing is a very interesting point about being hard to change. And that's something I observed in. So I rewatched your interview with John Carvalho and Vinnie Linger the other day. And like, even though Vinnie Lingham, you know, in our perspective was on the wrong side of history here, I actually felt that was a very. I'm really glad that interview happened because it was a very important thing to observe. But something stood out in that, that really stood out in that for me was when Vinnie was talking about the reason he signed the New York agreement. The reason he was keen for, you know, S2X and 2 megabytes, etc. Was because he wanted a compromise and he wanted his word to be his bond. And John and yourself gave some very good kind of retorts to that. And so what happened yesterday when I was in a discussion on Twitter about blocks and somebody said, it's really important that the community should find a compromise. If the community found a compromise, we would have avoided all these battles, you know, we would have moved the technology forward. But actually with something's hard to change, it's never going to be about compromises. It's really important that the changes are absolute necessity and that enough people, you know, want it to happen. It's a bit like when you think about, in terms of like politics and voting, you know, it's not usually in a lot of politics, they're usually, you know, I think, I don't know the exact numbers, but I know, for example, in the UK House of Commons, you have to have a certain percentage of the vote. It's not like if you get 51 versus 49 outside of referendums, you have to have a certain percentage. And bitcoin similar. Right. You have to have a very high super majority. Yeah, like a super majority for things to happen. So they have to be. Otherwise if you, if you, if it's too easy to make things change, you can end up screwing the system. Right.
- [39:43]
Shinobi
Yeah. And I mean, I think the. But if this all works and bitcoin succeeds, the natural conclusion is it will be impossible to get anybody to agree.
- [39:55]
Unknown
To change anything anymore. Unless the option is we change this or bitcoin breaks.
- [40:03]
Peter McCormack
Which is amazing really, because when you think about it again, I'll give my comparison to Ethereum. Ethereum is just this big, super complex crazy blockchain that can do so much in this essence. Bitcoin itself is actually very simple when you think about it. It is about being able to send money to somebody and that being confirmed. It's a very simple premise.
- [40:27]
Shinobi
Yeah, but it can do a lot of complex stuff. I mean, like, I think I'm going.
- [40:32]
Unknown
To kind of hold off until we get into like the next chunk of stuff. But I think, like the general analogy that I'm going to use to try and kind of walk through how bitcoin works is probably going to trigger a lot of people from the Ethereum space.
- [40:47]
Peter McCormack
Well, so be it. And you know, one thing I will throw into here, like, if anyone is listening to this, they should take any of my Comments with a pinch of salt because I'm like on a journey learning and you know, don't take anything I say is like golden. So a couple of minor points just to add on the end is like, and this goes back to kind of like the open source element, but anyone can contribute. And the last point I put is that it can't be turned off, you know, and it can't be turned off relates to decentralized. But I don't think we need to go into the details of that. So my question to you is why? Why are all these things so important?
- [41:26]
Shinobi
Well, I mean, we're really walking into.
- [41:30]
Unknown
A whole new phase of human history with how just omnipresent computers and computing technology is getting everywhere.
- [41:46]
Shinobi
And if we don't start changing how.
- [41:50]
Unknown
We build and architect all of those systems, if we just let them stay these centralized things with these central points of failure, then we are going to end up putting godlike control over our lives in the hands of a select group of people in charge.
- [42:11]
Peter McCormack
Well, that's.
- [42:13]
Unknown
That does not go well. Like we don't need to run that experiment again in human history to see the outcome. They will abuse it.
- [42:21]
Peter McCormack
Yeah. Okay, so we talked about low trust. We're going to talk about how the Bitcoin protocol works in a bit more detail. Just before we do that, I found when I was searching online, a very interesting page which talks about the origins of load trust. There are like five elements to it. One we've talked about, which is open source, the second a peer to peer network. The third is cryptography. Fourth, decentralization, which we've talked about. And the fifth is the verification, verification of rules. Do you want to just talk about the parts of that we haven't already discussed, which I think is going to be that it's a peer to peer network cryptography and the verification of rules.
- [42:59]
Shinobi
Yeah, so the peer to peer network is mostly just kind of the core.
- [43:06]
Unknown
Point of emulating the Internet's architecture itself for the same kind of reasons that the military wanted to be able to communicate between all its bases and troops if we were being bombed with nuclear weapons, to be able to function. You know, we want the base of a global money system to just continue functioning. Like whether some country is trying to mess with the miners in that country or playing games with the Internet to try to cut different parts of the network off from each other. And you know, no matter what is going on in the world, to disrupt big parts of the Bitcoin network, you know, like the Internet, we want the the overall whole network to keep functioning, even if large portions of it are damaged. Otherwise, you know, it's not really the type of thing that you can just expect to keep working with minimal control or oversight or involvement of all the types of power structures that we don't want involved in this.
- [44:26]
Peter McCormack
Do you want to talk about cryptography? Because this is the first time we're going to mention this.
- [44:30]
Unknown
Yeah. So I going to go down a bit of a rabbit hole here.
- [44:34]
Shinobi
So.
- [44:37]
Unknown
I'm going to try to keep it quick and simple though. But historically, cryptography was as simple as you construct some message and write it down, and then you have to put together a random sequence of something that is as long as that message and you modify the message with that. And then the person who you're sending it to has to have that exact same random something and know how to reverse that modification. And so it required the same kind of secret or that the same exact secret being shared between two people to encrypt something.
- [45:22]
Shinobi
And then this is something I don't.
- [45:25]
Unknown
Think is really well known.
- [45:28]
Shinobi
But the long and short of it.
- [45:30]
Unknown
Is John Nash, who a lot of people might know as the subject of A Beautiful Mind, the Russell Crowe movie. And in that movie they had the whole plot point where he was dropping mail to the US government in the box that nobody ever read. In reality, he was actually corresponding with the nsa and they actually have the letters he wrote published on NSA.gov. and one of the things he pointed.
- [46:01]
Shinobi
Out was that with very large prime.
- [46:04]
Unknown
Numbers, in the simplest terms, you can.
- [46:07]
Shinobi
Kind of just create these two numbers.
- [46:12]
Unknown
That have a relationship together as points on a graph with like a universal point in common, and then multiply data, pretty much take the data and take the public version of this number public, pair in this pair of keys and just multiply them, and then an equivalent reverse of that would get you the original data back.
- [46:41]
Shinobi
And there's a way that, using the.
- [46:45]
Unknown
Historical concept of the the two people having the same thing, where you can mathematically prove that as long as these.
- [46:55]
Shinobi
Are the only two people who know.
- [46:56]
Unknown
This secret, it's impossible mathematically for anybody else to read the message or break it. But with this type of multiplication trick, with these really large numbers, it's impossible to ever, ever prove that this is unbreakable. But in practice, it pretty much is. And so one of the letters that John Nash wrote to the NSA, that actually didn't happen, according to the movie, is pointing this out to the NSA and pretty much explaining like, this is going to completely revolutionize cryptography. And we need to get ahead of this, but for our enemies, get ahead of this. And that's kind of the earliest notion of that type of public private key asymmetric cryptography that I'm aware of. And the interesting thing with that is you can not only just encrypt data, but you can prove that a piece of data has been, you know, had this multiplication trick done by a specific private key in one of these key pairs. So you can prove that a specific key notarized a specific piece of data.
- [48:19]
Peter McCormack
But this is really important in a low trust environment such as Bitcoin. The cryptography enforces possession, right?
- [48:26]
Unknown
Exactly. That's the bedrock of this, being able to, to function as money.
- [48:34]
Peter McCormack
And so the last thing in this low trust environment is that there needs to be a set of rules and there needs to be a way of verifying these rules. And this is what the nodes do. And we're going to come on to that. So I won't go into detail now. So when I was trying to consider how Bitcoin works and there's multiple levels and we're going to run through that, I tried to separate who I think are the relevant parties in this. So I've put users of Bitcoin and there's two types. I mean, there's the users of Bitcoin who operate a node, but there's going to be users of Bitcoin who don't operate a node and they could just be people hodling or companies which accept Bitcoin. So I separated them out. There's the basic users of Bitcoin, there's these users of Bitcoin who operate a node. You've then got the miners and then got the developers. Do you think is that a fair way of categorizing the different groups within Bitcoin?
- [49:26]
Shinobi
I mean, I would say it's kind of simplistic, but I think it would.
- [49:31]
Unknown
Be very overloading to kind of try to make it any more complicated than that.
- [49:38]
Shinobi
All I would say is that you.
- [49:40]
Unknown
Can absolutely be in multiple categories there.
- [49:45]
Peter McCormack
Oh, of course, yeah, yeah, of course, yeah, without doubt. I mean, there are plenty of developers who have a node who made mine and, you know, also hold and accept Bitcoin. So now I know, I fully understand that. But the reason I did that is I wanted to map out the journey, you know, how Bitcoin works in terms of the starting point of someone deciding to create a transaction, how that transaction then goes through the network to be confirmed. And I try to, I think a Starting point, before we go into the details is do you want to talk people through what actually happens from the point of a transaction being created to the end point where it's confirmed on the blockchain?
- [50:23]
Shinobi
Yeah. Okay, so here's where I'll jump in.
- [50:27]
Unknown
With the triggering analogy.
- [50:29]
Shinobi
So the most basic thing you need.
- [50:32]
Unknown
To understand is a utxo, so an unspent transaction output.
- [50:38]
Shinobi
This is pretty much just a little.
- [50:41]
Unknown
Computer program in a really simple computer language that has an amount of Bitcoin that's connected to it. And you have to fulfill the right conditions of that program in order to destroy this program and then make a new one or new ones where you can divvy up that. That bitcoin between them. And so what a user does is they get a UTXO that they control, and a normal one is literally just going to have a public key or an address and go, give me a signature on this UTXO from the corresponding private key. So the user takes this UTXO and they make a transaction where they put this UTXO in as an input, and then they create a new output. So a potential future UTXO that this transaction is going to create. And they decide what program is going to be in this UTXO to say what you have to give to destroy this and do this again later. And then how much bitcoin is going to be locked in it. And you, you always have to take the kind of leftover money and make a UTXO that sends it back to yourself, or that just goes into a fee that miners can claim. And so they put this transaction together like this and then they sign it.
- [52:15]
Peter McCormack
One thing we should add in there, though, because if somebody's getting a bit confused right now thinking, God, this is going to be too complicated. A lot of the times when people are using and spending bitcoin in the environments they're doing it, most of this will be done for them in the background and no advances. Users like you might be selecting your UTXOs to do this manually, but for most people, their first few transactions, this will all just be done in the background. Is that fair?
- [52:40]
Shinobi
Oh, yeah, absolutely.
- [52:42]
Unknown
This is stuff that's just automated in the background in most software. I'm just trying to get this kind of.
- [52:51]
Shinobi
I've got kind of a way to.
- [52:53]
Unknown
Wrap this up at the end. I think I gel it nice. So you take your UTXO and make your transaction where that's an input with a new output, sign it, and then submit it to the bitcoin network. And then what happens here is it gets into the MEM pool of the nodes that you first send it to, and that's kind of where they store all the transactions that haven't got put in a block yet.
- [53:22]
Peter McCormack
That's you, me, anyone out there who's creating transactions, they all just kind of get grouped up together.
- [53:28]
Unknown
Everybody running a full node can have a mempool and just collect in and broadcast all the unconfirmed transactions. And so they check it to make sure that it's valid, that the signature is valid, that the UTXO that it's spending actually exists. And if it does, they broadcast it to all the nodes they're connected, and it floods all around the whole network with it being checked in the mempool as each node gets it, until it gets to a miner.
- [54:01]
Shinobi
And then a miner is pretty much.
- [54:05]
Unknown
Running a lot of specialized computer hardware, burning electricity and hashing all of the transactions it grabs out of its mempool in a block, and eventually it'll find a hash that meets the difficulty requirements. So it has so many leading zeros at the front of the hash for the block, and then it blasts that block out to all the nodes it's connected to. Then, kind of in the same way that a node did, with each individual transaction, it gets the block. It checks the proof of work on the block to make sure that's valid. And then if that's valid, it checks all the transactions inside it, and it makes sure that all the UTX exo program conditions were met properly, all the signatures are valid, all the other conditions are met, and if it's valid, it broadcasts that block, and then that's the newest block in the blockchain.
- [55:05]
Peter McCormack
Okay? So I'm going to try and make this even simpler for people who are listening for the first time, because I've got no doubt some people are going to go, what just happened there? So, in its simplest form, and we'll start with the blockchain, the blockchain is this sequential set of blocks which contain all the transactions. And what would happen is, as I, as a new user, when I create a transaction that goes into a basket of a whole bunch of transactions, and what's happening is these are being collected up for when the next block is ready. But the way blocks are created is that the miners themselves are competing to find the next block. And the reason they're competing is we have to have this thing, this proof of work. We have to have this way of making there be a price to create a block, a Cost to it, to give value to it. And as they all compete, whoever finds the next block, whoever solves the puzzle, they get to attach that block into the blockchain. And then all the miners start doing. And this is kind of like a cycle. Does my simplified version still work?
- [56:09]
Shinobi
And to kind of tie it up.
- [56:11]
Unknown
With the analogy, the way you can think about it is that UTXO and those transactions are little programs, and they submit them to this kind of virtual computer distributed all over the place, that loads that program in its ram. And then eventually the miners, the CPU of this computer, grab that program out of RAM and run it. And the results of it get stored in the hard drive, the blockchain. And so it's literally like a kind of virtual distributed global computer where anybody can come in and mine to be part of the cpu, anybody can come in and store the blockchain and validate it to make sure it's correct and be part of the hard drive. And anybody can collect and broadcast these transactions or programs around in the ram. And it's just like an abstract kind of global computer that just has only one process running. Who is transferring the bitcoin and from where to where.
- [57:28]
Peter McCormack
Why does it work this way, though, Shinobi? Because. Because it sounds like a very complicated way of making money work. If I want to create a transaction, why is it done in this way? Why has bitcoin been designed this way?
- [57:42]
Shinobi
Because it's just the way that it.
- [57:44]
Unknown
Has to be done if you don't want central parties in control.
- [57:50]
Shinobi
The current state of the balances of.
- [57:55]
Unknown
Everything, the UTXO side, like all the little programs that are valid right now that haven't been run, that's pretty much the entire state of things. And the only way that you can agree on changes in that is batch the programs that are run in a block, which changes the UTXO set.
- [58:17]
Shinobi
And in order to do that, somebody.
- [58:20]
Unknown
Has to do that change. Like, somebody has to initiate that change. So how do you actually handle that with software spread all over the place? Traditionally, it would be just put somebody in charge. But, you know, the whole concept of proof of work is when you kind of hash this data over and over again and have this, this target requirement where there has to be this many zeros at the start of that, that hash at the beginning, it kind of proves that you are actually burning electricity. You can't fake that. And so that kind of is a way where instead of having a set defined group of people or authority, you have this abstract authority that anybody can be a part of. Anybody can come and go from that. You can prove literally by burning energy. And that's all you need. You don't need a specific key or to prove you're a specific person, just prove you burned this energy. And that's how we can guarantee that, you know, this change happened. And this is the one that we agree on. And then the next change is built on that. And okay, we agree on that. And it kind of proves that each set of changes had a real world cost. And so somebody has to pay that cost again if they want to go back and change something.
- [59:52]
Shinobi
So it kind of, it solves two problems at once.
- [59:56]
Unknown
Not having the central party in control and not being able to set this up so that everybody agrees on what is the current state of everybody's balance.
- [60:10]
Peter McCormack
Yeah, so we can, what we can throw in there, like if people haven't understood it from, from what we've said so far. But the blockchain itself is just a ledger. It is a record of all the transactions that have ever happened. And everybody on the network can have a copy of that. So you can have a full copy of the blockchain, the ledger. I can, you know, and tens of thousands, you know, even hundreds of thousands, millions of people, if they wanted it around the world, everybody could have that. And the way Bitcoin is designed is that we all agree what goes into that. So, you know, if you don't agree and you try and cheat the system, then you, you can't get away with it. It's a way that we can all just work together to make sure that we agree that transactions are real, transactions are valid, and it's just a, I guess a game theorized plus, well, let's say game theory plus mathematics plus cryptography altogether to make sure we have a very honest network. Is that a fair, simple analogy explanation?
- [61:06]
Shinobi
Yeah, I mean, it's the same kind of thing as what we were talking about earlier with open source and just how the software is worked on, except it's the actual system itself running and.
- [61:20]
Unknown
Updating balances as people spend their bitcoin. Like the same kind of attitude about how is the system worked on, you know, applies to how does the system itself work. Everybody is checking everything, every balance update.
- [61:38]
Shinobi
Every change to the, the state of.
- [61:40]
Unknown
The, the blockchain and everybody's balances to make sure everybody's following the rules.
- [61:47]
Peter McCormack
So when we talk about rules, we really, we're talking about consensus and you know, somebody who's coming in anew and trying to learn about this when they search for consensus and they try and look up on it, they're going to come across potentially two different things. They're going to come across the consensus rules for bitcoin, but they're also going to hear about something called social consensus. Let's do the consensus rules first, because these are the rules by which bitcoin works. These are the rules which stop people cheating the system. So do you want to explain what the consensus rules are? You have to list every single one of them, but what they are, how they work and how they are built into the software.
- [62:25]
Shinobi
Yeah. So the first thing to say really.
- [62:30]
Unknown
Is consensus rules can only be applied to things in a block.
- [62:38]
Shinobi
Because the kind of problem with the.
- [62:42]
Unknown
Mempool is there's no guarantee that everybody's mempool pool is the same. Whereas with a block, the way that miners are batching everything and stamping the proof of work on it, that's kind of the way we can prove, like, there's only so many contenders for the next set of changes and guarantee everybody winds up on the same page. And so we can only apply those checks really in terms of enforcing things inside the block.
- [63:15]
Shinobi
And like a kind of a.
- [63:16]
Unknown
Just a quick few examples would be like, it's a, a consensus rule that a miner can only give themselves so many new bitcoin in every block except for the transaction fees. So, like, it was originally 50.
- [63:33]
Peter McCormack
Yeah, we haven't covered that. So let's just very quickly explain that there's a block reward.
- [63:39]
Shinobi
Yeah. So like every block, a miner is.
- [63:42]
Unknown
Allowed to give themselves so many bitcoin just out of thin air in the block for mining it. And that was originally 50 and then cut in half to 25. It's currently 12.5 and it's going to cut in half again soon. And that kind of just keeps cutting in half until we reach 21 million Bitcoin.
- [64:03]
Shinobi
But a consensus rule is when a.
- [64:05]
Unknown
Node gets a block, you know it's going to check here now, did the miner give itself more bitcoin than it's allowed to in the. The special coinbase transaction that miners can make in a block? Okay, they didn't. The block is good. If they gave themselves too much, then that node is just going to mark that block as invalid and ignore it. It's going to ban the node that sent them that block block and refuse to connect to them again. And then it's just going to wait for the next valid block. Like, as far as a node is concerned, that block broke a rule. So that's not a valid set of changes to everything. And like another example is this transaction with a UTXO as an input has to have a signature that matches the public key in this utxo. If there's any transaction in a block where the signature doesn't match that right public key like that, that block is invalid. All the nodes that get it will throw it out and ignore it. And it's kind of, you know, enforcing the, the whole rules of the, the system. Like you can't print money out of thin air against the rules everybody agreed to. You can't spend somebody else's money without, you know, proof, without that, that like here's the password or the equivalent of it to this, this money and that that's the whole way that you kind of keep this in check. Otherwise, I mean, it's just bits in a, in a hard drive. We can make it say whatever we want, right?
- [65:51]
Peter McCormack
Yeah. And somebody listened to this, they can immediately go after the show, they could go and download Bitcoin core onto their computer. They could sync the blockchain and they can become part of the network. They can start validating the rules. I mean, the one thing to say is they won't sit there themselves manually and doing it, but the software, the Bitcoin core software will do that for them.
- [66:12]
Shinobi
And it's, you know, personally that's, I think, I mean, you know, this is.
- [66:17]
Unknown
Going to sound kind of snobby, but, but I don't think you really are using Bitcoin if you aren't doing that. You're pretty much using a service that somebody else is running and just trusting them not to lie to you.
- [66:36]
Peter McCormack
Well, that's one of the things very early on, some people will probably buy their Bitcoin on an exchange and perhaps leave it there. And when they're using that exchange, then trusting the exchange, the next step, they might buy a hardware wallet and they might store their Bitcoin on a trezor or a ledger. But even at that point, they are trusting the node of the trezor or leisure. At the point where they become fully self sovereign is when they have their own node and they are verifying the rules themselves. That's what you're saying, right?
- [67:06]
Shinobi
Yeah, I think this would be a good point to kind of go through really how all that kind of works.
- [67:11]
Unknown
From a user, user's point of view.
- [67:13]
Shinobi
Okay, let's say that somebody sends you some Bitcoin and you, you download the.
- [67:20]
Unknown
Block that that transaction sending you Bitcoin was in.
- [67:24]
Shinobi
Okay, that whole Block looks valid.
- [67:28]
Unknown
Like there's, you know, the miner didn't.
- [67:30]
Shinobi
Give themselves too much money. All the, the signatures are right and they match properly.
- [67:36]
Unknown
But do you really know that that block is valid?
- [67:40]
Shinobi
Because another one of those rules is that utxo, that's an input in all of those transactions has to be valid.
- [67:51]
Unknown
It has to have never been spent before.
- [67:54]
Shinobi
And so how do you know that it wasn't spent before in one of the blocks before? So you have to go check the block before that, and then how do you know it didn't get spent before in the block before that?
- [68:07]
Unknown
And so you have to download the.
- [68:08]
Shinobi
Block before that and then the block before that. And ultimately, if you, if you sit and think about it, if you don't go download every block before that one, where you were sent money all the way back to the very first block where the first bitcoin was made, then you don't really know that, that UTXO.
- [68:29]
Unknown
Wasn'T spent before and you're not being scammed.
- [68:34]
Peter McCormack
So on the, the journey of becoming a bitcoiner, I think most people have to accept, and it's something I've, you know, a journey I've gone on. At some point you, you will want to download a node and validate the transactions. And, you know, you don't have to do this from day one, but I think you should have it in the back of your mind that this is going to be part of the journey that you're going to take with bitcoin.
- [68:55]
Shinobi
Yeah.
- [68:56]
Peter McCormack
I mean, people or you're trusting somebody else.
- [68:58]
Shinobi
Yeah. And I mean, you don't necessarily have to run out and do it right away or right now, but it's like, from, from the point of view of the whole system of bitcoin, it's absolutely.
- [69:09]
Unknown
Vital that even if you aren't running one now, that you are able to run one if you want to or need to. Because ultimately, if you can't run that node and check that whole chain and the whole history of everything, then you can't really use Bitcoin trustlessly. You're just trusting some guy with a database isn't lying to you.
- [69:38]
Peter McCormack
So would you say a fair summary of this bit we've just covered is that the nodes validate the network and the miners are paid to secure it?
- [69:49]
Shinobi
Yeah, the nodes are like the RAM.
- [69:53]
Unknown
And the hard drive and the miners are the processor that's actually running things.
- [69:59]
Peter McCormack
All right, so let's do a little bit of mining real quick.
- [70:03]
Unknown
The key point about that is what.
- [70:06]
Shinobi
Good is A processor if it doesn't.
- [70:09]
Unknown
Have any data or programs to process.
- [70:16]
Shinobi
Next up, I talked to Shinobi more about how bitcoin works. But before that I have a message from my amazing sponsors. So first up, it is the Mighty Kraken.
- [70:24]
Peter McCormack
The mighty Kraken.
- [70:25]
Shinobi
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- [72:39]
Peter McCormack
So let's talk a little bit about mining because people are going to hear about mining and they're going to be well, why are you mining? You know, isn't that just like people digging for gold in the ground? But the actual idea of mining is based on gold mining, right? It is based on there having to be work involved. So let's talk about what mining is in isolation to everything else. What the miners do and why they're so important.
- [73:03]
Shinobi
Okay, so pretty much, you know, like I said earlier, mining is kind of.
- [73:08]
Unknown
The way that you, you get everybody to, to agree that this is the current state of things.
- [73:15]
Shinobi
And so, you know, to get kind of technical, I mean the, the way that ordering a system like this used.
- [73:23]
Unknown
To work or the idea of how.
- [73:25]
Shinobi
It should work is you have everybody.
- [73:28]
Unknown
Out there, they would still have a node that could download and check everything and kind of do the validation, but you would have a specific set of people that were picked that would have like let's say a public private key pair who were in charge. And instead of mining you would just have these people take turn signing blocks and you would verify those signatures and see it was one of them and then check all the rules.
- [74:00]
Shinobi
But ultimately those specific group of people.
- [74:03]
Unknown
Could just stop signing or stop signing anything with something they didn't like in it. And so when you come back to the mining and the proof of work.
- [74:14]
Shinobi
I think to be clear here, I.
- [74:16]
Unknown
Should explain what a hash function is. So pretty much it's kind of a mathematical multiplication. I think I'm really overusing that. But that's really what a lot of the cryptography involved is. It's just algebra and multiplication.
- [74:38]
Shinobi
But you can take any amount of.
- [74:41]
Unknown
Data and put it through this hashing algorithm them and it will give you a piece of data of a certain length and what the bits and the.
- [74:53]
Shinobi
Characters in that data are, are a.
- [74:55]
Unknown
Result of what data you put in. So that that hash that you get out is like a fingerprint of the data that you put in. It's statistically almost impossible to find any other data that would give out the exact same fingerprint.
- [75:15]
Shinobi
And so pretty much what Miners do.
- [75:18]
Unknown
Is batch all of the transactions in a block and then hash that block.
- [75:26]
Shinobi
And there's a little, a little spot.
- [75:28]
Unknown
In the block, or a few spots actually, where they can just put in random numbers so that the fingerprint that comes out is different.
- [75:37]
Shinobi
And one of the consensus rules is.
- [75:40]
Unknown
Pretty much a block has to have a certain number of leading zeros. And this kind of adjusts itself. You know, maybe we can get into a little more later. And if you put in a block and you keep hashing, eventually you get a hash out for this block with the right number of zeros in front of it, and you can submit that out to the network and they can verify everything in the block, verify that hashing it with the right random number matches the hash with the correct amount of zeros, and everybody's happy. But the thing is, there mathematically, you don't ever know what hash is going to come out. When you put data through a hash function that you've never put in it it before, it's totally random. And so you can kind of model statistically, like, how long is it going to take if I just keep doing this over and over to get a hash with this many zeros in it?
- [76:45]
Shinobi
And so this whole kind of process.
- [76:48]
Unknown
Of doing these hashes over and over and over again, it proves that you had to have actually done those calculations over and over and over again around this many times. And that means you actually had to run a computer, which costs money and electricity. And now this means now to kind of go back to the whole the way things used to work with just a set of people in charge with keys, a valid hash with the right number of zeros is kind of like a signature from the right key, except that anybody can make it. You don't have to have that special private key to make it. And so you've now got the whole system set up where everybody can find a way to agree on what changes are being made to everything, but you don't have to rely on the set group of people. And it all just comes down to ultimately physics in that you can't fake doing this math. You actually have to burn energy to do it. And it's really kind of a brilliant little thing here where this system kind of just. It flows into just a natural part of the universe, and that's what makes it work.
- [78:13]
Peter McCormack
Yeah. So the way I used to think about the blockchain almost was like a skyscraper, and each block is like a floor, and all the miners are competing to build the next floor. That's and they're fighting and they're trying to find the solution. And once they've built the next floor, then they're fighting and competing to build the next floor. But as you build more floors onto this skyscraper, essentially the blocks, it would be very, very expensive to like. If you wanted to go back and rebuild a floor, say four, four floors ago, it'd be very difficult. The amount of work to go back and do that. It isn't productive. So there's no cost benefit to go back and rebuild those flaws. Do you understand my analogy?
- [78:55]
Shinobi
This kind of goes into another comparison.
- [78:59]
Unknown
With how things would have worked back in the old days with these identities and public keys and signatures. If those people with those keys decided they just wanted to go back and sign different things and then change things, they can just do that, like that.
- [79:18]
Shinobi
But with proof of work, you actually.
- [79:21]
Unknown
Have to go back and do all of those hashes all over again. And that costs real money and real electricity. You can't just do it like that.
- [79:32]
Peter McCormack
And we're not talking about small amounts of money here to do this, are we? I mean, to reorg the blockchain as a, which is essentially an attack on bitcoin, we're talking millions, tens of millions, even hundreds of millions of dollars to go and do this.
- [79:49]
Unknown
Yeah.
- [79:50]
Shinobi
And that number is only going to grow. And something in the really long term is eventually it's not even going to.
- [80:00]
Unknown
Just be like, how much money does it cost? It's going to be, do you even have enough electricity at your disposal to go back and change things? Are you a big enough miner to do that all by yourself or do you have to go expand or convince other people?
- [80:24]
Shinobi
And it's like in the long term.
- [80:26]
Unknown
If bitcoin is successful and we just keep having more miners come online, the more bitcoin is worth until that reaches an equilibrium. I mean, I think it's very realistic to see a situation where relatively it's really cheap in dollar terms to attack bitcoin. But to get the electricity, you're going to have to shut the power off to New York City. Are you going to be able to do that?
- [80:57]
Shinobi
I don't think so.
- [80:59]
Peter McCormack
Well, that's the beauty because, you know, somebody might be thinking, well, who's going to attack this? I mean, some greedy individual is not going to have the money or the power to possibly do that. There's no benefit to a miner with a lot of hash power doing this because by attacking the system themselves, they're actually destroying the value of the network. They're actually working on. So the only real threat here with the right kind of capital capital is state level, it's government level attack. But even this would be even really difficult for a state level attack on the system now as it grows.
- [81:37]
Shinobi
Yeah. And I mean that 10, 20 years down the line. Do you think that the population of New York State would be okay with.
- [81:46]
Unknown
It if the government just turned off all their electricity so they could attack Bitcoin? I think they might be very unhappy about that and do something about it.
- [81:56]
Peter McCormack
So one of the things we should add into this is that in the blockchain there is the potential for blocks to be solved at the same time and there is the possibility for branches to exist. Do you want to talk about what that is and what actually happens within the system when different branches exist?
- [82:14]
Shinobi
Yeah. And this is actually a really beautiful part of how this system works. And it just comes back to like tying in with the universe because ultimately it kind of just solves itself. Let's say two miners on opposite sides.
- [82:28]
Unknown
Of the world find a block at the same time and they shoot it.
- [82:33]
Shinobi
Out to the network. Different parts of the network are going to get, you know, one or the.
- [82:39]
Unknown
Other miners block and go.
- [82:41]
Shinobi
That's the, the block now. And then all of the miners move.
- [82:45]
Unknown
On to mining the next block.
- [82:47]
Shinobi
And so, you know, the, the way the hashing works, it's, it's random.
- [82:51]
Unknown
You don't know when you're going to get it. The, the valid header, you don't know who's going to get it.
- [82:56]
Shinobi
So whoever gets that, that next block, whichever of the, the two competing blocks for the last one it built on.
- [83:06]
Unknown
That'S the one that, that wins. That's the valid change.
- [83:09]
Shinobi
Because it kind of just works where whatever chain is longest or has the most proof of work on a technical level, actually on it. As long as it's valid, that's the one that all the nodes will consider.
- [83:26]
Unknown
The current state of things.
- [83:28]
Peter McCormack
So this is where we come to confirmation. So one of the things that you'll see early on when somebody starts doing their first transactions, if they go and look at the blockchain, they'll see the number of confirmations. And this is highly relevant at this point.
- [83:44]
Shinobi
So when a miner gets a block and starts mining on top of it, that next block that he made that he's hashing on, it actually has the hash of the previous block inside of it. So it kind of commits cryptographic to the block before it. And so the whole concept of confirmations is, you know, how Many blocks have.
- [84:11]
Unknown
Been built on top of the block that your transaction was in.
- [84:16]
Shinobi
Because every new block that gets built.
- [84:19]
Unknown
On top of it, that's another round.
- [84:22]
Shinobi
Of all the miners in the world.
- [84:24]
Unknown
Burning electricity, hashing, that has real dollar cost to undo. And each one on top is more cost, more expensive to undo it.
- [84:35]
Shinobi
And so you never get to a point where it's completely, literally impossible to go undo anything, but you can very quickly get to a point where it would be so expensive to do that for what somebody would get that it's.
- [84:52]
Unknown
It'S 99.9999999 never going to happen.
- [84:58]
Peter McCormack
Yeah. So the way I try to look at it is with regard to value, you know, for a very small transaction, say $10, you might trust one confirmation. But I tend to myself, I tend to operate at the level of six confirmations. Once I hit six confirmations, I trust it. And the reason I go with six, I mean, there's a lot of the services that I've used talk about six. But also I think there was one of the miners recently, recently or at some point, they sold four blocks in a row. But what the theory here is, we're saying, is what you're saying, and also somebody talks to it like Amber, is that the more blocks that are confirmed on top, the more Amber that is sinking over the blockchain and hardening it, and the less likely it is for your transaction to be able someone to go back and re engineer it. But tends to be, most people tend to think about six as a good starting point, right?
- [85:52]
Shinobi
Yeah, I mean, that's kind of just, you know, based on best practices and just looking at the costs. But there hasn't really been any reorgs or like kind of competing branches that kept going before one, one over the other, longer than a block or two, except for like one or two, like.
- [86:16]
Unknown
Kind of serious incidents in Bitcoin's history.
- [86:20]
Shinobi
So I think, you know, unless you're settling like tens or hundreds of millions.
- [86:26]
Unknown
Or billions of dollars, six confirmations should be good enough.
- [86:31]
Peter McCormack
All right, so before we finish out on this, another part of the blockchain is that we have something called forks. And there's two types, right? There's a soft fork and a hard fork. Let's explain what they are, what the difference is and why they're so important.
- [86:46]
Shinobi
Okay, so a hard fork is kind of. Well, first off, both types of forks, soft fork and a hard fork, are changes to the rules of Bitcoin. And the major difference between the two of them is what type of changes. So with a hard fork, in the simplest terms, what you're doing is you're adding a rule that makes something that previously was against the rules allowed now. So you're making something that was invalid before valid now. And you know, that's kind of looked at as a very dangerous thing for two reasons. One is the logistics of coordinating that, because once the change activates, at whatever time or whatever specific block number it's set to activate with a hard fork, there is an instant break in the chain.
- [87:56]
Unknown
And anything that's building with these new.
- [88:00]
Shinobi
Rules is not going to be valid to any bitcoin node out there that.
- [88:05]
Unknown
Didn'T update to the new rules.
- [88:07]
Shinobi
And when you're talking about a big global, decentralized system, there's really no way.
- [88:16]
Unknown
To guarantee that everybody's ready, everybody's even.
- [88:20]
Shinobi
Willing to upgrade or wants to upgrade.
- [88:22]
Unknown
In the first place. And if you.
- [88:25]
Shinobi
You kind of just break the network in half like that, and a lot of people didn't want that upgrade or weren't ready, that can cause a lot of financial chaos. And then the second kind of reason they're dangerous is you're making a hard, clean break like that with that risk of how difficult it is to coordinate. And it's kind of setting a precedent that you can change the system without worrying about whether everybody in the system.
- [89:08]
Unknown
Kind of agreed or opted into that change.
- [89:11]
Shinobi
And once you start doing that, that's kind of a slippery slope. It's like, if you do that once, what about the next time?
- [89:20]
Unknown
Like what.
- [89:21]
Shinobi
What about, I want to do this.
- [89:23]
Unknown
Thing now instead of what we did.
- [89:25]
Shinobi
It for last time. And there's just. I think there's a serious risk if that happens. And it's not clear that the, the kind of hard fork or branch, if.
- [89:38]
Unknown
It'S not a clean everybody goes with.
- [89:41]
Shinobi
It is a small minority that that could just start fragmenting a system like Bitcoin.
- [89:49]
Peter McCormack
And one of the consequences of this is also that people might not realize it can create two separate coins. So if both branches are then mined, essentially there's two coins exist in the system. What value do they have which is which? That's one of the scary outcomes, right?
- [90:07]
Shinobi
Yeah, I mean, it's. It happened the first time with bitcoin cash, and then it's happened more times than I can count since. But we've kind of been lucky every time it's happened. The people that hard forked were a small minority. It wasn't so much the system splitting.
- [90:31]
Unknown
As a small group of people going off and starting their own thing.
- [90:36]
Shinobi
But if it were to happen in a way where it wasn't so cleanly cut like that, maybe it's more split down the middle. That could get very disruptive and dangerous for bitcoin.
- [90:51]
Unknown
That would have a lot of negative consequences for it.
- [90:55]
Peter McCormack
Are you one of those people who believes that in some ways and hopes that there will never be a hard.
- [91:02]
Shinobi
Well, we're gonna.
- [91:04]
Peter McCormack
How is that possible?
- [91:06]
Shinobi
Eventually, but that's not for 100 years or so.
- [91:11]
Peter McCormack
Yeah. Is that that long term bug that we know that's in the. Or that, that kind of configuration that's in the system?
- [91:19]
Shinobi
It's the timestamp bug. So the, the kind of the, the data field in a bitcoin block where.
- [91:26]
Unknown
It marks, marks like the time and date and year and everything that that.
- [91:30]
Shinobi
Block was made at. It's only got enough space for so.
- [91:35]
Unknown
Many digits and in like 100 years it'll fill up all the way to 999-999-9999. Unless we hard fork and fix that, it will be against consensus rules for a bitcoin block to be made.
- [91:49]
Peter McCormack
After that, well, we'll let Peter Willis grandchild fix that one. It's not going to be for us, I think. Okay, so let's talk about soft forks then.
- [92:00]
Shinobi
Yeah. So a soft fork is pretty much taking something that used to be allowed and making it not allowed anymore. So you're making something that was valid invalid. And this is really nice because if it's done properly, everybody doesn't have to upgrade at once. So as long as we get the miners in the system or the super majority, or even just the majority, although.
- [92:35]
Unknown
It would be less safe that way.
- [92:37]
Shinobi
To update and enable the soft fork, then they just will not make blocks.
- [92:44]
Unknown
That break the rules the soft fork is implementing.
- [92:48]
Shinobi
And because the rule is kind of.
- [92:52]
Unknown
Getting tighter, like you're taking something that used to be okay and just not allowing it.
- [92:57]
Shinobi
Any upgraded node is going to see.
- [93:00]
Unknown
Those blocks and it'll be valid to them too, because it's not breaking any of the old rules. It's just not allowing something that used to be okay.
- [93:10]
Shinobi
And so it allows, you know, everybody to kind of take our time and make sure everybody's okay with what's being added or upgraded. And then everybody can just deploy it. Like the miners can upgrade first and.
- [93:27]
Unknown
Then everybody else can just kind of upgrade, you know, as they can.
- [93:32]
Shinobi
And it kind of gets to a point where at first you're kind of.
- [93:36]
Unknown
Depending on the miners to enforce this new rule and stop the chain from splitting like it could with a hard or like it would with a hard.
- [93:45]
Shinobi
Fork, because that's still possible with a soft fork for a new block to.
- [93:51]
Unknown
Be made that's breaking the new soft fork rule.
- [93:55]
Shinobi
So old nodes would think that's valid.
- [93:58]
Unknown
And the ones that have upgraded would go, no, that's wrong.
- [94:01]
Shinobi
So at first when you do this, you're counting on the miners to safeguard that. But as over time, everybody upgrades, you get to a point where now everybody's.
- [94:11]
Unknown
Just checking that new rule themselves.
- [94:13]
Shinobi
But it's a lot less disruptive because.
- [94:17]
Unknown
That, that split of the chain is only a possibility with a hard fork. It's an absolute guarantee.
- [94:24]
Shinobi
And, you know, there's. There's kind of a neat trick. You know, this is how Segwit was done with soft forks, is, you know, I kind of said earlier that UTXOs.
- [94:38]
Unknown
Kind of have like a little computer program in them that says what you have to do to spend the Bitcoin.
- [94:44]
Shinobi
It'S connected to, well, it's kind of.
- [94:48]
Unknown
Baked into the node and the whole.
- [94:51]
Shinobi
Protocol, like what that programming language is. And so, like, each little, like, primitive.
- [94:59]
Unknown
Thing you can do, you know, like check a signature or, you know, say, this coin can't be spent until after.
- [95:08]
Shinobi
Block 600,000 are each like a little subroutine in a whole program.
- [95:15]
Unknown
Like, you can take these little subroutines and build a whole program out of them.
- [95:20]
Shinobi
And there's kind of these special little slots for programs that aren't defined yet. And the kind of trick about that is if you use one of these before they're defined, it literally just says true. So no matter what you give the.
- [95:40]
Unknown
Program or the utxo, no matter what.
- [95:43]
Shinobi
It says passed true, it will just interpret that as everything checks out and.
- [95:50]
Unknown
It'S valid to the rules.
- [95:52]
Shinobi
And so you can add whole new.
- [95:55]
Unknown
Things you can build programs out of in these new slots.
- [96:00]
Shinobi
And old nodes will just go, oh, that's okay, and not check the rule.
- [96:05]
Unknown
And it'll. It'll keep all of the nodes on the same page, even though you are kind of technically adding something that wasn't possible before.
- [96:17]
Peter McCormack
So this is probably a good point to talk a little bit about development. And we won't go into too much detail. I've got an interview with Brian Bishop about how dev works in Bitcoin that I'll add in the show notes. But we talked about rules, and the rules come from updates to the software, and the software is changed by the developers. The bit I want to really talk about is these changes come from what is called a bip, right? A bitcoin improvement proposal.
- [96:41]
Shinobi
Yeah, yeah.
- [96:42]
Peter McCormack
So talk just very quickly, what is a bip? How do they work? Why are they so important to bitcoin?
- [96:49]
Shinobi
It's pretty much just like a formal way to propose changes. I mean, and not even necessarily changes. There's different types of BIPs. There's BIPs that are purely informational BIPs, there are BIPs for changing actual consensus rules, and then there's BIPs for things around bitcoin not related to consensus. It's pretty much the idea is you just kind of come with a BIP draft for your idea and just kind of put it out there.
- [97:22]
Unknown
And the idea is just talk about it.
- [97:25]
Shinobi
Like, talk to the other developers, other people in the community, see what they think about it and take their criticism, if any, and, you know, actually work on addressing it. And you kind of go through that, that initial process and if you're able to kind of defend this idea to the point where, you know, the criticism is responded to, it's holding up well. It might get to the point where the developer managing bit proposals right now loop to sheer, will assign you a BIP number and actually kind of like formalize it as an accepted bitcoin improvement proposal and then pretty much like to really kind of take it from that point. I mean, if it's an informational bip, I mean, it's, it's, it's there, you're done. If it's a BIP that doesn't really relate to the consensus rules, like the partially signed Bitcoin transaction, BIP170, I think, you know, just kind of a standard format to have transactions that aren't finished and signed yet so that all the.
- [98:33]
Unknown
Bitcoin wallets out there can collaborate easily on single transactions to keep everything compatible. You just need to go out there.
- [98:43]
Shinobi
And get people to actually implement it. Or if you are one of this, the crazy people who's actually pushing for consensus changes, you're in for a long, fun ride of convincing everybody why we.
- [99:00]
Unknown
Should make the change you're proposing, and then the long, fun road of ironing.
- [99:04]
Shinobi
Out all the problems, implementing it, checking for more problems, ironing all of those out, thinking about future, proofing it so.
- [99:15]
Unknown
That you don't, you know, make something.
- [99:18]
Shinobi
Somebody wants to do later more difficult, difficult, and all the fun that entails thereafter.
- [99:25]
Peter McCormack
But that's really important because that comes back to why I've become so hardened to bitcoin. You know, for somebody who did consider Alternative projects. I've become very hardened and it comes back to that conservatism around bitcoin and the point we talked about, making it hard to change, because we're talking about people's money here. We're talking about, about a global financial system, let's be honest, we don't want to fuck with people's money.
- [99:53]
Shinobi
And as time goes on, I think consensus changes are going to take longer and longer to really talk through and get attention, to implement and really convince people this is safe and solid to implement. And eventually I think we will get to a point where consensus bips at least will just be people talking about.
- [100:21]
Unknown
The future that will never come because you're not realistically coordinating that.
- [100:28]
Peter McCormack
So last thing on development. I used to have a web development business six, seven, eight years ago. One of the things that used to scare me shinobi was bugs. We would put a new site live or new changes live. And one of the rules is we would never do it on a Friday because you didn't want to ruin your weekend. But invariably there would always be bugs. But a bug on a website for a client is very different from a bug in bitcoin. And this is one of the reasons development is so slow and is so conservative, because bugs can be a very scary thing in the world of bitcoin.
- [101:02]
Shinobi
Yeah. I mean, if there's software, there's a possibility for bugs. I don't see that ever changing. It's human beings like it's human beings writing the software. People aren't perfect and things can happen. But, you know, I mean, it just is what it is. Like last year there was the inflation bug, where the bitcoin core software would have actually allowed you to take the same UTXO and include it in a transaction twice and effectively print Bitcoin out of thin air. And it was never actually exploited, but that bug was there for a while before it was noticed and eventually patched. But yeah, I mean, there can be bugs. That is absolutely a possibility.
- [101:54]
Peter McCormack
But this is why bitcoin is so important, why the kind of ideology behind it is so important. The attitude, attitudes of people. Because if you compare it to something like Ethereum, which had that attitude of move fast, break things, that is actually kind of a careless approach to software, which is also money because we've seen, say in Ethereum where, you know, tens and hundreds of millions have been lost and locked up due to bugs.
- [102:22]
Shinobi
Yeah. And I mean, that's something not too dissimilar from that has happened to Bitcoin. So Part of, part of how the.
- [102:36]
Unknown
Whole database of Bitcoin works when you're storing transactions and UTXOs is they're indexed kind of by the hash of the transaction that they were originally created in.
- [102:52]
Shinobi
And that there was an issue, couple.
- [102:55]
Unknown
Times actually where a miner was reusing the same address, so sending the coinbase reward to the same address and there was no fees. So it was the exact same amount and it actually deleted technically the previous mining reward because the amount was the same, the address was the same. So the transaction ID was exactly, exactly the same. And there can be only one thing in the database with the same id. And so when, when, you know, it was realized that it was possible for this to happen, they actually, everybody kind of includes the, the number height that the, the block is so like block 600,000 or whatever encoded in the Coinbase transaction to guarantee that even if you, you reuse an address or something, there's something different to make sure that it has a different transaction ID to be indexed under.
- [103:58]
Peter McCormack
All right, so listen, I've got a few questions to finish out on and thank you for this. This has been a monster of a show. But I've got a few questions to finish out on and you know, I will close out and explain to people that don't worry if you found this confusing. You know, if a lot of it's going over your head, this really is just a starting point to kind of give you an idea around how bitcoin works. But, but one of the ways you're going to learn more is interacting with bitcoin is by buying some, by moving some, by reading more. So people shouldn't be too worried if a lot of this is going over their heads. But just got a few questions to close out on. So the Bitcoin blockchain, each block is essentially one megabyte. I know with Segwit it has something called block weight which increases the block weight. But why 1 megabyte and why so much resistance to increase that?
- [104:47]
Shinobi
Well, honestly, just because Satoshi picked a number. Amazing. I know it's really that simple. And I mean, but it's a flag.
- [104:58]
Peter McCormack
Now for, you know, whilst it's just a number, it's a flag for all the design around that number and the trade offs have to be considered for changing that number.
- [105:08]
Shinobi
Well, I mean, I think ultimately it just kind of comes down to, you know, the decentralization is a spectrum that's a move in the wrong direction and a kind of anecdote from history to make that point. Is there were actually two limits that Satoshi put in place. He actually put a hard limit, the one megabyte limit that was a consensus rule. And then he put a soft limit, which was just like a default configuration for miners that wouldn't build a block.
- [105:42]
Unknown
Smaller than 250 kilobytes. I think it started at.
- [105:47]
Shinobi
And there was actually a long history for a couple years leading up to the first wave of the block wars where the miners kept ignoring developers and raising that soft limit until they just weren't enforcing any limit except the consensus rule rule. And it got to a point where mining pools started centralizing because it was taking longer to relay blocks.
- [106:16]
Unknown
So there was a lot of two blocks at the same time and somebody losing money going on.
- [106:22]
Shinobi
And so everybody just pointed at the.
- [106:24]
Unknown
Same mining pool to not have to deal with that.
- [106:27]
Shinobi
And at the end of it, Matt Carrello ended up essentially having to build kind of a centralized network within a.
- [106:37]
Unknown
Network of bitcoin nodes that just had.
- [106:40]
Shinobi
Way better connections between them and a little optimized software so that miners could hook up to that and relay blocks.
- [106:49]
Unknown
Faster in order to deal with that.
- [106:52]
Shinobi
So we kind of already did see actual material consequences in this ecosystem to.
- [107:00]
Unknown
Infrastructure centralizing a little bit.
- [107:02]
Shinobi
And it's like I feel like that kind of just not so much got written out of the history books, but it's like nobody ever talks about that or really thinks about that.
- [107:12]
Unknown
Like, we saw negative consequences. Like that wasn't the hypothetical. It happened and Matt had to effectively step in and solve it by building something arguably centralized.
- [107:26]
Peter McCormack
Very interesting. I didn't even know that. Okay, so block times are around 10 minutes. Why does the 10 minute exist? Why isn't it quicker? Why isn't it slower? And you know, how does it stay at approximately 10 minutes after all these years?
- [107:42]
Shinobi
Okay, so this is another just arbitrary thing. And I guess I'll deal with why it stays there first. This is the difficulty adjustment with mining. And this is actually the one thing that really made bitcoin work. This was the thing that glued all of the pieces together. Like I said earlier, there's a spot in the block where there's a timestamp.
- [108:09]
Unknown
Like what time, day, month, year, yada.
- [108:12]
Shinobi
Yada that that block was made at. And every 2016 blocks, it's kind of the network in every node looks back at those 2016 blocks and the change in time in between blocks. And so when you go back to how the hashing of mining works and you having to hash so many times on average to get so many Zeros in the hash. If, if you throw more computing power at the network, then blocks are going.
- [108:48]
Unknown
To happen quicker and quicker and quicker.
- [108:51]
Shinobi
Which would mean that money enters circulation faster and faster and faster. And so by having this period of blocks where you look at the time between blocks, and if it's getting shorter, the difficulty or the number of zeros a block has to have at the start of its hash to be valid goes up. You need more zeros. And if the time between blocks has been getting longer, then it goes down.
- [109:22]
Unknown
Because less computing power is hashing on the network.
- [109:28]
Shinobi
And so doing that kind of on average keeps it within that 10 minutes and also keeps the rate at which new money is being issued at about.
- [109:39]
Unknown
The same instead of just coming into.
- [109:42]
Shinobi
Issuance faster and faster and faster and faster. The reason to not make it faster comes down to keeping everybody on the same page. You know, with 10 minutes, that's a lot of time for a block when it's found to propagate across the whole world through the network, everybody to validate it, and then the miners to start working on the next one.
- [110:09]
Unknown
It's not that often that we have.
- [110:11]
Shinobi
Two blocks at the same time, but if you targeted a lower difficulty so that blocks happened more often, then you.
- [110:21]
Unknown
Would have more blocks happening at the.
- [110:23]
Shinobi
Same time, more often, and it would take longer for everybody to have some degree of confidence that this is the current state of things. And ultimately, at a, at a thermodynamic level, when it comes to physics, having blocks come faster with less difficulty doesn't actually change the security guarantee from a proof of work point of view. Like, it's still kind of averages out.
- [110:54]
Unknown
To the same amount of energy has to be spent to like go back and change the same period of time.
- [111:03]
Peter McCormack
Right. So the last thing to cover is there are fees on the network to send a transaction. There is a fee. And also at some times in the life cycle of Bitcoin, they've been particularly high, which is used as a, sometimes as an attack vector against Bitcoin. But you know, what drives the fee? What drives the fees that say, if I was going to send you some bitcoin, Bitcoin Shinobi, there's a fee I've got to pay. What's the economics behind that? How does it all work?
- [111:29]
Shinobi
Well, I mean, it's pretty much just a free market. I mean, to go back to the.
- [111:35]
Unknown
Analogy of Bitcoin as a computer, the consensus rule with the block size is kind of a limit on how many programs the processor can run at one Time. So like how many transactions a miner can process at a time. And so that being a scarce space, you know, people are going to want to pay more for it. If there's more people trying to use that scarce space. It's kind of like there's, there's one processor. Like abstractly, obviously there's miners all over the world. But you know, in the analogy abstractly, there's one processor and it can only run so many programs at a time. And so it's just the highest bidder, like we'll run the highest bidders programs first. And that's just how it is.
- [112:27]
Shinobi
And you know, it kind of sucks.
- [112:29]
Unknown
And yeah, you know, when we had high fees back in the bull market of 2017, that was a really annoying time to deal with. But it's just the reality of what it is.
- [112:42]
Shinobi
But what we can do is, you.
- [112:45]
Unknown
Know, take little tricks like find ways to make those programs more efficient so they take up less space in that processor cycle and they're cheaper to pay for or you know, just to touch.
- [113:00]
Shinobi
On it real quick.
- [113:01]
Unknown
Like things like Lightning Network.
- [113:03]
Shinobi
You know, I said that like Bitcoin.
- [113:05]
Unknown
Is like a computer with one process just tracking the global changes of bitcoin balance on the blockchain, while things like Lightning Channels are like, you can spin up a little sub process that the main processor doesn't have to worry about until you close it out. And so you can run the one program on the main processor and then spin it off into its own process that the main processor doesn't have to worry about until you want to close that program. And so there's a lot of technical ways that you can just really get way more efficient in how you use that processor and so hopefully allow more people to use it at once and keep the cost to use it down.
- [113:54]
Peter McCormack
All right, man. Well, listen, Lightning is going to be something I'm gonna, I'm gonna cover as well. I'm gonna do it towards the end of the beginner's guide because I think I just want people to get their head around the base chain and bitcoin itself first. But definitely something I'm going to cover. This has been great. Shinobi, an absolute monster. I think it'd be really helpful for people. I'm going to put a whole bunch of stuff in the show notes and as I said before, I don't think people should be scared. A lot might go over their head. You know, it's like, like most things in life, you know, you learn about driving a car by driving A car. You know, most things you learn by doing. So, you know, if somebody hasn't bought into bitcoin yet, I think the next step is just to start dipping their toes in. Maybe buy a few. You know, buy some. I was going to say a few bitcoin. Buy some bitcoin. Move it around, you know, start. Start digging a bit deeper. Listen to some other podcasts, you know, watch some videos. You know, the only way someone can learn is by, you know, really diving in. And, you know, this isn't something you. There's no point where you're fully learned. You know, we're all still learning, but it's just going to take time. And this, you know, you can spend months, even years. I mean, I'm three years in still learning. But it's. I think it's really important just to spend that time going down the rabbit hole and learning all these things.
- [115:03]
Shinobi
I mean, you got to put the time in if you want to understand something. I mean, it's. Nobody just becomes an expert in complicated things overnight.
- [115:13]
Unknown
It takes time.
- [115:14]
Peter McCormack
Yeah, well, listen, look, you've also got your own show and the various things you do. So if people want to follow your show when they want to go and have a listen or they want to follow you, where's the best place to find you?
- [115:24]
Shinobi
Well, I'm at briantrolls with a Z on Twitter and you can find the podcast I do with my friends Janine, Rick and Nopara from Wasabi Wallet at Block Digest on Twitter. And we also just started doing a kind of a written medium blog offshoot as well. And I guess, mind if I sneak a shill for something a little more financially motivated in here?
- [115:54]
Peter McCormack
Of course, man. Go ahead, dude. Like, you've given me your time. Please go.
- [115:58]
Shinobi
Me and Mr. Hodl also, we just took over a bitcoin swag shop last month. Bitcoinshirt Co. So if you guys out there dipping your toes in this space want some edgy bitcoin swag, go take a look.
- [116:16]
Peter McCormack
Brilliant. Well, look, Brian. This was Brian Trolls, Mr. Shinobi, Shinobius Monk. This has been absolutely fantastic. I am going to include our previous interview in there just to give a bit of context. I guess I was a little bit more open minded to other projects. I was kind of giving time to bitcoin cash and I didn't really fully understand the consequences. You gave me a hard time about it, which on reflection, I'm glad about. We went back and forth, we ended up doing a show, but I think what's happened, you Know, I would say over the. Maybe the last was about nine months ago, I think, you know, I now understand where you were coming from and I think you probably also understand a bit about where I'm coming was coming from as well. But I think that was kind of. It was kind of a funny show, but it was good and I think people might want to have a listen to that as well.
- [117:04]
Shinobi
Yeah, you know, I think you, you've grown a lot from that or from that point and, you know, I kind of. Yeah, I do see a lot more.
- [117:10]
Unknown
Where you were coming from, kind of. I think I.
- [117:14]
Shinobi
It's a little harsher than I should have been. But, you know, just, just keep at it, man. You know, one of these days when you, when you get that node up and running, everybody will stop busting your balls about it.
- [117:26]
Peter McCormack
Dude. I'm running four nodes now. I'm running for. I've got a nodal, I've got a casa, I've got bitcoin core and I've got knots running. So I've actually got four nodes running. But you know, the way I talk about it is more of a journey and it's all timed in into this beginner's guide. So there is a method to my madness. But listen, hopefully I'll see you soon. Appreciate your time coming on today. This. I didn't realize we'd go for this long, but I think it's a monster show and. Yeah, thanks for coming on, man.
- [117:52]
Shinobi
Yeah, I appreciate it. I hope I wasn't too all over the place for everybody.
- [117:56]
Peter McCormack
No, I think it was pretty good, so. All right, man, take care.
- [118:00]
Unknown
Thanks again.
- [118:03]
Shinobi
Okay, so what did you think of that one? Pretty good, huh? Pretty. Pretty good.
- [118:07]
Peter McCormack
I think it was a massive episode.
- [118:09]
Shinobi
I think Shinobi crushed it and I massively appreciate him coming on to do this. Now long term listeners will know that I am not the most technical and I've always tried to keep my conversations around bitcoin accessible to everyone. So in preparing for this one, I became aware about how much more I think I now understand about the protocol. There were gaps in my knowledge. You know, I did have to go into Google and look up some bits. I did have to speak to some people, but I mapped out the protocol in advance and I sent it over to Shinobi as a structure for the interview. And I realized I am personally starting to understand it at a deeper level and I'm starting to see how the jigsaw pieces fit together now. I'm never going to be the most technical there will always be people better than me. But I think I'm proving to myself and to others that look, even if you're not one of those, even if you struggle with this, over time you can learn more about how it works. And by learning more about how it works, you actually get more conviction about the protocol. Now, Shinobi was a great help and he and I do have some history. He was tough on me a few times, like others have been for not being focused enough on understanding certain aspects of Bitcoin. And on my SoundCloud there is an old interview we did talking about this. But a year on from this I would say now we are friends and, you know, industry colleagues. I think we understand each other a bit better. Which is another great thing, by the way, about bitcoin. There are people out there who will help you with your understanding if you just reach out to them. And I do want to get Shinobi on again. You know, he was great here helping with the Beginner's Guide, but I do want to have a more philosophical interview with him about how Bitcoin works and the future of Bitcoin. Another great thing about understanding how the protocol works at deeper level is it will help you understand why Bitcoin is far superior to other protocols, allowing you to focus your time and investments. For example, why bitcoin's proof of work is better than proof of stake, which Ethereum is meant to be introducing. Or why BSV is an absolute shit show of a centralized scam and why bcash. Well, why it isn't bitcoin. So while Shinobi did an awesome job at breaking down these technical aspects, the Bitcoin protocol isn't simple. And I'm sure parts of this would have sounded confusing for some of the beginners.
- [120:02]
Peter McCormack
Maybe even if you've been around for.
- [120:04]
Shinobi
A while, you still might have found some of it confusing. But this is aimed at being a starting point. If you want to dive deeper into any points we covered, then I've added some cool resources into the show notes. Anyway, thanks for listening. If you do have any feedback, you can get in touch. My email address is hello or what bitcoindid.com and on Friday, my next episode in the Bitcoin Beginner's Guide, I'll be covering Bitcoin's monetary policy with Dan Held. Also, if you do want to support the show, there's a whole bunch of stuff you can do. If you enjoy listening to this. You enjoying all my shows or my Bitcoin Beginner's Guide head over to my website. It's what, bitcoindid.com click on the Support section. There's a whole bunch of stuff you can do. Anyway, I hope you have a great week and I look forward to seeing you soon.
- [120:40]
It.