A Visual Tech Guide Brandon Schreiner Understand How Bitcoin Works 

How does Bitcoin work? Blockchain Hash functions Public Data “Linked Timestamping” The Blockchain Proof-of-Work Transactions Public Key Technology Digital Signatures What is Bitcoin? Data anchors Why Bitcoin? Distributed Ledger (Accounting) vs. Gold vs. Money Into the Future… 30 min 15 min 5 min Why Bitcoin? 

About me US Army Officer, Program Management Mechanical Engineer McCombs School of Business, UT Austin 

Unforgeable Blockchain What are Hash functions? 1995: Public “Linked Timestamping” Hash + Public + Linked = Blockchain Proof-of-Work 

Hash functions Random output Any size data fixed length output Large output area Repeatable Small changes to data…. Unique identifier = protects data + = 

Random output Flip a coin six times in a row Flip #1 #2 #3 #4 #5 #6 

Flip #1 #2 #3 #4 T H T H T H T H T H T H T H T H T H T H T H T H T H T H T H T = 0 H = 1 #5 #6 Example: 010010 H T 000000 000001 000010 000011 000100 000101 000110 000111 001000 001001 001010 001011 001100 001101 001110 001111 010000 010001 010010 010011 010100 010101 010110 010111 011000 011001 011010 011011 011100 011101 011110 011111 100000 100001 100010 100011 100100 100101 100110 100111 101000 101001 101010 101011 101100 101101 101110 101111 110000 110001 110010 110011 110100 110101 110110 110111 111000 111001 111010 111011 111100 111101 111110 111111 Process creates a random output (random) 

“All output digits … very involved functions of all the input digits” – Horst Feistel, 1973 

Hash functions Random output Any size data fixed length output Large output area Repeatable Small changes to data…. Unique identifier = protects data 

Fixed length output Hash function Hash function process 101100101010110011001011100101 101001110010101100110011001010 110010101100101011001100101110 010110100111001010110011001100 101011001010110010101100110010 111001011010011100101011001100 110010101100101011001010110011 001011100101101001110010101100 110011001010110010101100101011 001100101110010110100111001010 110011001100101011001010110010 101100110010111001011010011100 101011001100110010101100101011 001010110011001011100101101001 110010101100110011001010110010 101100101011001100101110010110 100111001010110011001100101011 001010110010100110010111001011 0100111001010110011001100… … … 010110001010110010101100101011 001100101110010110100111001010 110011001100101011001010110010 101100110010111001011010011100 101011001100110010101100101011 001010110011001011100101101001 110010101100110011001010110010 101100101011001100101110010110 100111001010110011100110010001 0100010111000011010 Any size Any type Input Data Example SHA-256 output: 0010110011110000000110011010101111 0010010010001010011111000110000101 1000110100100110100011101111010101 1011000001000000011010011111111110 0010010001110100110000000010001101 0100100101110100100111111101011010 0000011101100010100101110111111111 100010110000111100 2CF019ABC9229F185 8D268EF56C101A7FE 2474C023525D27F5A 0762977FE2C3C NOT PREDICTABLE fixed-length output (SHA-256 = 256 bits) 

Hash functions Random output Any size data fixed length output Large output area Repeatable Small changes to data…. Unique identifier = protects data 

Large output area 2²⁵⁶ vs. a water bottle? Hash function ALL DATA IN THE WORLD 

Hash functions Random output Any size data fixed length output Large output area Repeatable Small changes to data…. Unique identifier = protects data 

Large output area 2²⁵⁶ vs. a water bottle? Hash function Repeatable ALL DATA IN THE WORLD Repeatable Process! -------- Random 

Cannot go backwards Hash function Repeatable 2CF019ABC9229F185 8D268EF56C101A7FE 2474C023525D27F5A 0762977FE2C3C 2²⁵⁶ = computationally infeasible Given: ALL DATA IN THE WORLD -------- Random Guess and check 

Hash functions Randomness Any size data fixed length output Large output area Small changes to data…. Unique identifier = protects data 

Small changes to data One bit difference 1 101100101010110011001011100101 101001110010101100110011001010 110010101100101011001100101110 010110100111001010110011001100 101011001010110010101100110010 111001011010011100101011001100 110010101100101011001010110011 001011100101101001110010101100 110011001010110010101100101011 001100101110010110100111001010 110011001100101011001010110010 101100110010111001011010011100 101011001100110010101100101011 0010101100110010 101100101010110011001011100101 101001110010101100110011001010 110010101100101011001100101110 010110100111001010110011001100 101011001010110010101100110010 111001011010011100101011001100 110010101100101011001010110011 001011100101101001110010101100 110011001010110010101100101011 001100101110010110100111001010 110011001100101011001010110010 101100110010111001011010011100 101011001100110010101100101011 0010101100110011 2 Data 1 Data 2 “Avalanche effect” 2CF019ABC9229F185 8D268EF56C101A7FE 2474C023525D27F5A 0762977FE2C3C 3F84EA22B05AD24AD B7F3B412EA381F40FF 07F9260A1843C9B0A 5893ACADCAC6 Random Random 

Hash functions Randomness Any size data fixed length output Large output area Small changes to data…. Unique identifier = protects data 

10110010101011001100101110 01011010011100101011001100 11001010110010101100101011 00110010111001011010011100 10101100110011001010110010 10110010101100110010111001 01101001110010101100110011 00101100001010110010101100 11001011100101101 10110010101011001100101110 01011010011100101011001100 11001010110010101100101011 00110010111001011010011100 10101100110011001010110010 10110010101100110010111001 01101001110010101100110011 00101011001010110010101100 11001011100101101 1.Same data always produces same hash output (repeatable) 2.Outputs are not predictable 3.Small changes to data creates entirely different output = PROTECTS DATA Data 1 Data 2 Unique identifier Impossible: Two different data sets hash to same result 2²⁵⁶ Digital Fingerprint 

Unforgeable Blockchain What are Hash functions? 1995: Public “Linked Timestamping” Hash + Public + Linked = Blockchain Proof-of-Work 

Public data Stuart Haber, Surety LLC Started in 1995 Hash ID SHA-256 Hash function Input Data Intellectual property Research data Financial records Evidentiary needs, etc. Surety, LLC Cu 

Microfiche Bound volumes Print ~2 million copies (In the 1990s) SHA-256 Hash function Repeatable Power of Decentralized Data 1. Easy to VERIFY 2. Impossible to Forge -attempt to alter- (date, scope, etc.) Judge, customer, etc. “Trust anchor” 

Public Linked Timestamping (Data & Timing) No one can alter data without detection Hash ~2 million copies Hash ~2 million copies Hash ~2 million copies Hash ~2 million copies 1 2 3 4 1 2 3 “… it will be unable to issue incorrect time-stamps even if it tries to.” -Haber Like a clock: guaranteed chronological order “… temporal constraints in both directions...” -Haber 

Unforgeable Blockchain What are Hash functions? 1995: Public “Linked Timestamping” Hash + Public + Linked = Blockchain Proof-of-Work 

Public + Hash + Linked = Bitcoin Blockchain SHA-256 Hash SHA-256 Hash SHA-256 Hash SHA-256 Hash 

Public + Hash + Linked = Bitcoin Blockchain network storage Block 0 (Genesis Block) >20,000 nodes Decentralized and -active- protection 

Public + Hash + Linked = Bitcoin Blockchain network storage Block 0 (Genesis Block) >20,000 nodes Decentralized and -active- protection 1 2 3 Unique and -unforgeable – hash outputs 

Public + Hash + Linked = Bitcoin Blockchain network storage Block 0 (Genesis Block) >20,000 nodes Decentralized and -active- protection 1 2 3 Unique and -unforgeable – hash outputs 930,000 pending 

Unforgeable Blockchain What are Hash functions? 1995: Public “Linked Timestamping” Hash + Public + Linked = Blockchain Proof-of-Work 

The path of a transaction (PoW 1 of 4) Transaction data 00000…0000000 (leading zeros) mempool network storage Block 0 (Genesis Block) >20,000 nodes 1 2 3 930,000 pending Transaction data Transaction data Transaction data Transaction data Transaction data SHA-256 Hash 

Proof of Work (Adam Back, 1997) (2 of 4) 00000…0000000 (leading zeros) SHA-256 Hash 000000 000001 000010 000011 000100 000101 000110 000111 001000 001001 001010 001011 001100 001101 001110 001111 010000 010001 010010 010011 010100 010101 010110 010111 011000 011001 011010 011011 011100 011101 011110 011111 100000 100001 100010 100011 100100 100101 100110 100111 101000 101001 101010 101011 101100 101101 101110 101111 110000 110001 110010 110011 110100 110101 110110 110111 111000 111001 111010 111011 111100 111101 111110 111111 1.Hash all data 2.Check result: enough leading zeros? 3. NO YES 1.Change one bit 2.Repeat “the … cost function is based on finding partial hash collisions…” -Back Hash outputs with leading zeros prove work (resources and time) Random PoW Process 

Central Bitcoin Concept (3 of 4) SHA-256 Hash 1.Hash all data 2.Check result: enough leading zeros? 3. NO YES 1.Change one bit 2.Repeat 00000…0000000 (leading zeros) 0000…0000 Transaction data Transaction data Transaction data Transaction data Coinbase Transaction Public Key Hash (Previous block) Bitcoin All nodes: Check hash result for leading zeros Zeros adjusted every two weeks – 10 min target 21 million limit Enforce other rules Valid block? add to blockchain Broadcast to network block reward paid to miners cut in half every 210,000 blocks goes away after 32 “halvings” Transaction data Transaction data 50 Bitcoin (2009-2012) = 10.5m 25 Bitcoin (2012-2016) = 5.25m 12.5 Bitcoin (2016-2020) = 2.625m 6.25 Bitcoin (2020-2024) = 1.313m 3.125 Bitcoin (2024 ) = 0.656m … 0.00000001 ( ~2140) = 0.0021 Total Issued: 21 million Where new bitcoin comes from 

Number of blocks Time between blocks (data from 100 blocks) 600s 1200s 1800s >2400s <30s 300s ~10 min Average PoW: SECURITY Cost of foul play vs. waiting 6 blocks 00000…0000000 (leading zeros) Proof of Work (4 of 4) 

Block 0 (Genesis Block) >20,000 nodes Decentralized and -active- protection 1 2 3 Unique and -unforgeable – hash outputs 930,000 pending Proof of Work Unforgeable blockchain 

Transactions Public Key Technology: Private Key Public Keys Digital Signatures sign blockchain data What is Bitcoin? Data anchors 

Public Key Technology The problem with shared keys The solution: public keys Private key public key pairs Small example Basis of bitcoin ownership 

The Problem Public domain Attack the hill Caesar Shift cipher (~80BC) Shared Secret Key: Shift by 3 Shared Secret Key: Shift by 3 Dwwdfn wkh kloo Attack the hill Caesar Mark Antony 

The Problem (Historically) World War One: Courrier pouch US Diplomatic Couriers (China, 1973) Hand-cuffs 

The Problem Shared Secret Key Shared Secret Key The Internet: Recurring face- to-face key exchanges = Impossible 

The Solution Private key (A) Shared Secret Key: Alice Bob Private key (B) Public key (A) Public domain Public key (B) Public key (A) Public key (B) Secret key (AB) Math Shared Secret Key: Secret key (AB) Math Key pair 

Public Key Technology The problem with shared keys The solution: public keys Private key public key pairs Small example Basis of bitcoin ownership 

Key Pairs Private key (A) Public key (A) Math Relationships Security Prime numbers Modular arithmetic (“cycle math” or “clock math”) Multiplication Math operations over Elliptical Curve equations Algorithm One-way function (nonreversible) Large 256-bit values No data to display Example: Counter example: two-way reversible function 

Small Example Private key Shared Secret Key Alice Bob Shared Secret Key P = (5,1) (base generator, b) Private key Prime number Starting Point, b: Operation occurs over an Elliptical Curve 

0011111110000100111010100010001010 1100000101101011010010010010101101 1011011111110011101101000001001011 1010100011100000011111010000001111 1111000001111111100100100110000010 1000011000010000111100100110110000 1010010110001001001110101100101011 011100101011000110 1110110101000010110011011011110011 1101000100011110000000001011001011 0110101011010100110000100010011100 1001111111011011000100101100001001 1110111010100101001101101001011111 0100011011010110000011011111000110 1010010100101011111011111110110110 101111001000000011 Private key Public Key Math Relationships Security Algorithm “Computationally infeasible” Randomly generated (like a coin flip) 

Public Key Technology The problem with shared keys The solution: public keys Private key public key pairs Small example Basis of bitcoin ownership 

Bitcoin “locked” to a public key 0000…0000 Coinbase Public Key (Hash) Bitcoin Alice creates & broadcast a new transaction Transaction ID “Pointer” Digital signature Amount Locking instructions Public Key Public Key (Hash) Bob Alice Alice Bob Private key (A) Private key (B) “unlock” “lock” 

Transactions Public Key Technology: Private Key Public Keys Digital Signatures sign blockchain data What is Bitcoin? Data anchors 

What is a signature? 0000…0000 Coinbase Public Key (Hash) Bitcoin new transaction Transaction ID “Pointer” Digital signature Amount Locking instructions Public Key Public Key (Hash) Bob Alice Private key (A) John Hancock 1737 - 1793 July 4ᵗʰ, 1776: United States Declaration of Independence Signature Data Signature: Verifies identity of signer Authenticity of signer Evidence of signer’s involvement Proof of signer’s commitment to data/action Anyone can verify: Signature = John Hancock? Unique Hard to forge Link 

Digital Signature 0000…0000 Coinbase Public Key (Hash) Bitcoin new transaction Transaction ID “Pointer” Digital signature Amount Locking instructions Public Key Public Key (Hash) Bob Alice Private key (A) Alice I, Alice, hereby give this amount of bitcoin ( ) to Bob’s Public address ( ). Proof that I own this bitcoin can be found here: Signed: Data Digital Signature (r , s) Public Key (Y) Transaction ID “Pointer” Amount Public Key (Hash) Instructions to the bitcoin network 

Digital Signature 0000…0000 Coinbase Public Key (Hash) Bitcoin new transaction Transaction ID “Pointer” Digital signature Amount Locking instructions Public Key Public Key (Hash) Bob Alice Private key (A) All nodes check: Signature = Alice’s? Alice I, Alice, hereby give this amount of bitcoin ( ) to Bob’s Public address ( ). Proof that I own this bitcoin can be found here: Signed: Data Digital Signature (r , s) Public Key (Y) Transaction ID “Pointer” Amount Public Key (Hash) mempool Verify: 1.Alice has bitcoin at this blockchain address? 2.Signature: Equation r Equation s Y = ? If YES, Add transaction to mempool (Private Key A) 

Digital Signature 0000…0000 Coinbase Public Key (Hash) Bitcoin Alice 0000…0000 Private key (A) Bob Private key (B) 

Transactions Public Key Technology: Private Key Public Keys Digital Signatures sign blockchain data What is Bitcoin? Data anchors 

Digital Signature 0000…0000 Coinbase Public Key (Hash) Bitcoin Alice 0000…0000 Private key (A) Bob Private key (B) Hold? Or no? 

0000…0000 Coinbase Public Key (Hash) Bitcoin Alice 0000…0000 Private key (A) Bob Private key (B) 0000…0000 0000…0000 Charlie Private key (C) Hold? Or no? 

0000…0000 Coinbase Public Key (Hash) Bitcoin Alice 0000…0000 Private key (A) Bob Private key (B) 0000…0000 0000…0000 Charlie Private key (C) Bitcoin originates here, Nodes enforce Signatures = traceable ownership Unforgeable blockchain data Amount Public Key (Hash) Unspent Transaction Output (UTXO) Unforgeable ownership 

Transactions Public Key Technology: Private Key Public Keys Digital Signatures sign blockchain data What is Bitcoin? Data anchors 

0000…0000 Amount (Alice) 0000…0000 0000…0000 0000…0000 Alice Bob Amount (Bob) Small, free, instant transactions Layer 2 (Example: Lightning network) x x x x x x x x Main Chain (Decentralized) 

Why Bitcoin? Distributed Ledger (Accounting) vs. Gold vs. Money The Future of Bitcoin 

Review summary 5.0 2 reviews “Great place, easy access, super clean, the staff that work there are great!” “I really appreciate the excellent service and would highly … Review summary 5.0 5 reviews “Great place, easy access, super clean, the staff that work there are great!” “I really appreciate the excellent service and would highly … Review summary 4.2 1,471 reviews “Great place, easy access, super clean, the staff that work there are great!” “I really appreciate the excellent service and would highly … Distributed Ledger 

2 participants Customer Bank Customer account ledger Distributed Ledger 

2 participants Customer Bank Customer account ledger 5 participants Customer Bank Independent third party Customer account ledger Distributed Ledger “less trust” 

25,000 participants (nodes) World-wide (jurisdictions) Unreachable (for collusion) No single authority “You design for an environment where participants might not trust each other, yet the protocol ensures collective honesty.” -Haber Distributed Ledger “trustless” 

Why Bitcoin? Distributed Ledger (Accounting) vs. Gold vs. Money The Future of Bitcoin 

“Yet they differ in who or what maintains that ledger” -Lynn Alden Gold supply: Limited to 1-2% per year Government money (“fiat”) time time Supply (quantity) Supply (quantity) 

reward: none 1 satoshi 2 satoshis 5 satoshis Each node validates (enforces): All new blocks (with reward) Total size of block All transactions And more… Coinbase Transaction block reward paid to miners cut in half every 210,000 blocks goes away after 32 “halvings” 50 Bitcoin (2009-2012) = 10.5m 25 Bitcoin (2012-2016) = 5.25m 12.5 Bitcoin (2016-2020) = 2.625m 6.25 Bitcoin (2020-2024) = 1.313m 3.125 Bitcoin (2024 ) = 0.656m … 0.00000001 ( ~2140) = 0.0021 Total Issued: 21 million 21 million 

Why Bitcoin? Distributed Ledger (Accounting) vs. Gold vs. Money The Future of Bitcoin 

Properties of money: (vs. barter) Holds value over time, durable Acceptable (recognizable, can be verified) Divisible Portable World (Government) Money Historical examples Austere conditions (prison, war) Dutch Guilder French Franc British Pound US Dollar 17-18ᵗʰ century Napoleonic era Industrial / WWI Bretton Woods Ramen, cigarettes Rai stones Seashells, glass beads, buck skins Cattle, wheat, salt Gold and silver (bimetallism) Precious metals Gold Silver Nickel Copper S/F: ~75 ~15 ~3 ~1 Gold and paper receipts 

Properties of money: Holds value over time, durable Acceptable (recognizable, can be verified) Divisible Portable World (Government) Money Historical examples Austere conditions (prison, war) Dutch Guilder French Franc British Pound US Dollar 17-18ᵗʰ century Napoleonic era Industrial / WWI Bretton Woods Ramen, cigarettes Rai stones Seashells, glass beads, buck skins Cattle, wheat, salt Gold and silver (bimetallism) Gold and paper receipts Bob Transaction ID “Pointer” Digital signature Amount Locking instructions Public Key Public Key (Hash) Private key (B) UTXO UTXO UTXO UTXO UTXO UTXO UTXO UTXO UTXO UTXO Unspent Transaction Output (UTXO) 10 dimes 4 quarters 1 dollar UTXO UTXO UTXO UTXO 0.25000000 BTC 1 BTC 

Why Bitcoin? Distributed Ledger (Accounting) vs. Gold vs. Money The Future of Bitcoin 

2009 Satoshi Nakamoto Rules Block size 10 min difficulty Proof-of-work 21 million cap 2021 Taproot TBD: QR P2SH 2012 2017 Segwit 2015 Time- locks 1,000 nodes 10,000 nodes 20,000 nodes Upgrades (soft fork): Bitcoin Cash BCH Larger block size Hard fork Litecoin LTC (a copy and paste) 2.5 min blocks PoW variant 84 million cap ETH USDT XRP BNB Fork Wars Users join voluntarily Rules enforced by decentralized power; no central authority Cannot repeat bitcoin’s decentralization Network effects (QWERTY keyboard) 

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