Video Of The Week: Bitcoin Under The Hood

Bitcoin was in the news this week and once again the association wasn’t all that positive. As I have said publicly, privately, and on this blog numerous times, I think so much of the discussion of Bitcoin misses the big point, which is that at its core, Bitcoin is a technology, protocol, and platform for entrepreneurial innovation.

Bitcoin is simply a transactional commerce layer for the global Internet. And once you wrap your head around that, the opportunities for innovation on top of Bitcoin turns out to be enormous.

But how does it work? Well, its not simple to understand. I think this video does a good job of explaining it.

#hacking finance

Comments (Archived):

  1. jason wright

    bitcoin in the eye of the beholder has beauty, and it is a thing of beauty.

  2. William Mougayar

    You said something at the NYC Big Data interview that was key,- that Bitcoin has to chance to become the native payment infrastructure of the Internet, like the financial operating system of the Web. I believe that. It can be bolted within.And I agree that we need to start seeing Bitcoin Apps on top of the Bitcoin infrastructure. But there is a big focus on Bitcoin middleware now, and that’s normal, because the natural evolution goes along the 3 pieces sequentially: 1) Infrastructure goes first typically, then 2) it’s followed by Middleware, and finally 3) innovation around applications will emerge.

    1. fredwilson

      I agree that it will take time to build all the stuff that needs to be built to make BTC mainstream

    1. William Mougayar

      The Bitcoin brothers.

  3. jason wright

    at 3:30;”the math behind this is fairly complex” – the master of understatement, but i feel it would raise a smile from the NSA math team, although not being paid may wipe that smile away, which is what can happen when choosing to play on the wrong team. karma.

  4. takingpitches

    Give it a couple of weeks and we’ll learn that the NSA has hacked bitcoin along with everything else!!!

    1. JLM

      .I can assure you beyond any possible doubt that both the NSA and DEA are in hilt deep.I would not be surprised to learn that the DEA has infiltrated some bitcoin companies by posing as employees.One of the things that has not yet come out in L’affaire Snowden is that the NSA, et al, has for years been infiltrating domestic and foreign technology companies to spy from the inside.Remember your surprise when you learned that the Digital Illuminati had been actively collaborating with the NSA by providing information, direct leaks and gaps in the architecture?Study what ATT has done with the NSA — literally connecting them to their servers. Bitcoin data is much like telecom data inasmuch as it provides subscribers/owners, account balances and transactions.Think about it for a second — why would they not be doing this? How could they not be doing this?JLM.

      1. LE

        I would not be surprised to learn that the DEA has infiltrated some bitcoin companies by posing as employees.Reminds me of the time that I was at a trade show in the early 90’s in order to gather intel on a competitors product that they hadn’t released yet.The product marketing manager (who worked for Steve Blank) told me he couldn’t discuss anything about the product or acknowledge it.So I just told him that I was going to need 100 of the product (was around 15k each) and would just buy from their competitor but wanted to consider them. (I had a badge printed up with a fake name instead of my exhibitor badge). At that point he had no problem telling me what I wanted to know which I carried back to the mother ship which also had a booth at the show.Of course I didn’t just walk up and do this. I started by talking about other things and appearing to be legit in every way. Might have taken 10 to 20 minutes to set it up. All this is fun.Along these lines I’ve gone back and forth mentally on trying to see if there is a scenario that I can put together that Dennis Rodman is actually overseas under the auspices of some intelligence agency with his North Korea vacations. Remember part of doing this is the “con” or confidence building so if someone is looking for the obvious clues of why that couldn’t possibly be the case then they aren’t thinking hard enough about how all these type of thing work. Just because a citizen is not creative enough to think of an angle doesn’t mean that someone else can’t.

  5. jason wright

    near the end the narrator makes several qualified statements about the possible vulnerabilities of the architecture. he doesn’t sound entirely convinced about the math based robustness of the system. a determined brute force attack, the kind only a GOV could muster, could compromise the system. the bitcoin wars…

    1. LE

      I don’t even have to watch the video (although I might) to know that this could be compromised. Whoever who designed bitcoin is quite capable but they are not the room filled with engineers who brought back Apollo 13 or anything.

    2. Druce

      Whoever thinks perfect security to see, Thinks what ne’er was, nor is, nor e’er shall be.

    3. fredwilson

      we will need to see those attacks and what happens when they come

  6. kidmercury

    the big point behind bitcoin has nothing to do with technology and everything to do with political/monetary economics. bitcoin is an alternate money supply — simple as that. all the payment stuff that the valley crowd gets excited by is applicable only if it is a viable money supply.there are numerous requirements to what constitutes a viable money supply, but the most difficult and important one is a stable store of value. bitcoin will fail here, as will almost everything else we’ve seen, because only a central bank (i.e. a government-controlled money supply) can ensure price stability — not the anarchist utopia that bitcoin implies. until a viable digital money supply is developed, the programmable currency stuff is irrelevant. moreover, how a viable digital money supply is developed and managed will significantly impact how the transactional API develops.

    1. William Mougayar

      It’s a new beast: it’s a Currency, it’s a Commodity and it’s a Security- all together.I would add it’s an uncontrollable beast. Uncontrollable by one entity.Most governments are two-bit ponies: they either like to control or regulate. They rarely know how to lubricate.

      1. Vineeth Kariappa

        It is not a currency, the value is based on the $.

      2. LE

        I would add it’s an uncontrollable beast. Uncontrollable by one entity.By my thinking, I prefer the evil that you know to the evil that you don’t. [2]An analogy was back during the cold war when we knew the enemy and that enemy was also conveniently the “barn boss” [1] who would keep the other enemies in line. This just happened recently with Syria and Putin. See it actually is good that Putin is around and such a dick. He’s like the “good cholesterol” that actually had a benefit. He can keep the other animals in line. [3][1] Reference to Shawn Penn in “Bad Boys” in the 80’s.[2] Current situation is also relevant with the impasse in congress. Was much better in the days of smoke filled rooms and deal making. Now we have these loose canons (evil you don’t) that are messing things up. Similar to terrorists where you don’t know who they are and where they will strike.[3] Even if he extracts a pound of flesh he still has value. Better to whack up the world with him then have to deal with a million needles.

    2. baba12

      How does Bitcoin compare to the centuries old hawala system of payments and transactions. s

      1. kidmercury

        i don’t know much about hawala but i like it better because it seems more based on trust and community than on math/algorithm.

        1. ZekeV

          bitcoin is a useful technology, i am a big fan, but it can’t replace the role of trust in human relations

      2. ZekeV

        hawala is based on trust. bitcoin facilitates trust-less transactions. hawala has of course evolved over millenia and in my view is preferable in some respects to more “modern” (ie, centralized and gov’t-reliant) forms of commercial clearing. i expect that over the next decade, many people will re-discover the benefits of decentralized finance, just as we have rediscovered local food. decentralized, freely evolving, emergent systems are almost always better over the long run. more ecological, by which i mean, naturally adapting to change and benefiting from it.

        1. kidmercury


    3. Nick Tomaino

      i think its extremely premature to analyze bitcoin as a replacement for existing monetary systems. like most disruptive technologies, it will serve new users and poorly served users long before ever competing directly with fiat currencies. The citizens of countries like Argentina, Cyprus, and India have lost some trust in their governments and have opted to store some of their wealth in a math based currency that does not depend on a biased, centralized organization. Perhaps bitcoin will never be as stable a store as value as the dollar, but it doesn’t have to be.I think government intervention, technical risk, and perhaps competing currencies are good reasons to be bearish, but the money supply argument is not a good reason right now.

      1. kidmercury

        The amount of capital bitcoin can absorb, I.e. the size is its economy, is ultimately a function of how effectively it can serve as a store of value. The more it wishes to grow, the more or must enable savings, the foundation of any real economy.

        1. Nick Tomaino

          i agree, the magnitude of bitcoins success depends on how effectively it can store value and how stable it is relative to the most stable currencies in the world. My point is it can still be a massive success without being as stable as dollars, yen, pounds, etc., so “failing” as you describe it could still be a massive success.

    4. Matt A. Myers

      As I’ve seen Max Keiser say, a single Bitcoin needs to reach the value of $100,000 so then daily $100-$200 fluctuations aren’t a big enough impact on most transaction sizes.I worry about the gaming possibilities of Bitcoin.

    5. Dave Pinsen

      The more acute problem is that the government doesn’t like the cash-like aspects of it (anonymity, difficult to tax or trace, etc.). Which raises an interesting question: as the security state continues to expand, how long will the government tolerate cash itself?Sounds crazy, but think about it: electronic devices than can process payments are ubiquitous, and cash has nearly all the downsides (from the government’s perspective) as Bitcoin.

      1. kidmercury

        kooks have long maintained that we are moving towards a cashless society, and that government will have the ability to turn off one’s ability to buy or sell as a result. fundamentalist christian kooks (a large sub-sect of kooks, which i am not a part of, though familiar given their predominance in kook circles) cite revelations 13:17 as a passage that predicts the emergence of a cashless society.

    6. jason wright

      “Dedicated to solving poverty by re-building the world’s money supply.”does bitcoin have a role to play in this?

      1. kidmercury

        Bitxoin validates the concept that the world is ready for a digital currency, but the approach is wrong. So it is like Napster or AltaVista. Right idea, bit didny quite get the approach right. We are getting closer to ones that will do it correctly, though.

    7. Richard

      Bitcoin may bring true Purchasing Power Parity by reducing transaction costs.

    8. fredwilson

      i don’t see it that way. i see it as a platform to build stuff on. you could build a competitor to ticketmaster on Bitcoin, you could build a new way to record legal contract in the blockchain, etc, etc.thinking about BTC only in money terms misses how powerful this for all kinds o of transactions

      1. kidmercury

        Bitcoin may be a platform, but if it is a platform without a clear purpose, it will lose to other platforms that do have a clear use you example a platform for legal contracts will be beyyet for contrscts than bitcoin is.If bitcoin is a monetary platform, ehich is ehat almost everyone sees it as, than it will have the store of value issue. Otherwise, square and all the other paymebt stuff, like google wallet, are much better psoitioned.

        1. fredwilson

          what i am saying is bitcoin is a tech platform to build other platforms on the legal platform could be built using the bitcoin protocol and block chain

          1. kidmercury

            sure, my point is you can say that about any platform. any platform can do anything. you could build some type of encryption app on twitter and build something on top of that and then something else on top of that and so on and so on. and so i believe a platform specifically designed for a goal will better achieve that goal than platform that is not designed for that goal. platforms without a clear focus have the same problems that entrepreneurs without focus do.

      2. David Haber

        What fascinates me most about bitcoin is the fact that you can transfer money freely and anonymously anywhere in the world. I think you’ve written this before (in a post re: Dwolla), but it’s ridiculous that money is still the only type of information that is still taxed as a physical good.What I have yet to properly understand is whether Bitcoin ‘the currency’ has to succeed for it to become a successful platform to transfer money. I really don’t care if Bitcoin becomes accepted at my local coffeeshop. But what I really want is a way to transfer dollars or Euros to friends in foreign countries without friction.Are these things mutually exclusive? Or am I thinking about it the wrong way?

  7. baba12

    Bitcoins are environmentally not very clean. The mining operations consumes a lot of electricity, a majority of which is generated by coal fired plants.More importantly as time goes by and people start to realize the need to reduce their carbon foot prints or else the species may not survive, it will lead to retooling the way we account and value things we produce and consume. The hope being that we get to being a society that does more with less and reduce the consumption of resources that contributes to the climate change that eventually will challenge the humans species ability to survive.Will we do the right thing? Doubt we will until it is too late.

    1. Cam MacRae

      Not only is it not clean, but by design negates increased computational efficiency with a difficultly parameter that is an exponential function of time (insert verifier stability disclaimer here). Bitcoin is dirty, and it will stay dirty for as long as we send CO2 and soot up smoke stacks.

      1. kidmercury

        you hurt my head with that first sentence. that’s okay though. i trust you had good intentions.

        1. Cam MacRae


    2. Druce

      serves no purpose to turn energy that can do useful work, into an arbitrary bitcoin value, except to limit the number of bitcoins. would have been nice if they had been able to cap the number of bitcoins when a certain difficulty level was reached, which would have indicated market acceptance since people were willing to devote that much CPU power to it.

    3. JLM

      .The environmental considerations of bitcoin mining cannot be fully appreciated without taking a careful look at the impact on the land based snail darter habitat implications.When the snail darter evolved from solely a water based beastie to living on the land and finding refuge in bitcoin containing geological formations no effort was made to safeguard these habitats because the notion of bitcoin mining was in its infancy.Now the chickens have come home to roost.There is nothing more heart rending than watching the big machines tear into the habitat and seeing the snail darters fleeing literally for their lives. The cruelty that this engenders is beyond belief.Count me as one who will never use bitcoin for this reason alone though I must admit that the plentiful supply of snail darter sushi has in many ways balanced this otherwise rape of the environment.Sushi, bitcoin — maybe I am hasty in condemning it but it feels environmentally wrong.JLM.

  8. Druce

    I’ve upgraded Bitcoin from digital pet rock/beanie baby.If the payments system keeps getting politicized by people not letting you pay people they don’t like, such as Wikileaks, Pirate Bay, Iran… then people are going to find a way around it, like Bitcoin.The people who think it’s some kind of technological advance over the existing monetary system for all its flaws are kind of clueless though.

    1. LE

      then people are going to find a way around it, like Bitcoin.Which is a small group of people.

  9. Tracey Jackson

    How do you avoid the steps between drug dealer and smack pick up?

    1. fredwilson

      i don’t think you can

  10. LE

    I think so much of the discussion of Bitcoin misses the big point, which is that at its core, Bitcoin is a technology, protocol, and platform for entrepreneurial innovation.That’s the job of public relations. And marketing. It’s not up to the “discussion” to read minds and to figure it out. It’s up to the “wanter of something” to make it easy for the target.Bitcoin is simply a transactional commerce layer for the global Internet.Normals (who are the people that the media writes for) don’t know what that means. I don’t even know what that means. As Arnold would say “consumer english please”.I’ll skip stating the obvious which is that the masses don’t care what goes on under the hood. They want to know what something will do for them or why they should care about bitcoin.The closest thing (unfortunately) to bitcoin that I can think of is barter credits. The only way to sell a business on barter credits (to get them to join the exchange) was to tell them a) you will do more business (get credits) and b) you can use those credits to buy x,y and z which you currently pay cash for. Otherwise why should they give it any attention. And even then bartering is a small niche because it doesn’t work well with goods with tight margins it works with things that are either high margin or perishable (hotels, restaurant, consulting).So the question is why should any individual care about bitcoin if they currently have this thing called money and credit cards which seems to work well for them?

    1. Nick Tomaino

      For the average US consumer, the fact is that there is not yet a clear use case that makes bitcoin relevant (other than being owned as an attractive speculative investment).For the average US merchant, however, there are compelling reasons to care right now: lower transaction fees, no chargebacks, and more effective international monetization. Merchants are starting to recognize this, and as more and more merchants accept, more and more consumers will adopt. I believe the merchant adoption is going to drive consumer adoption in the US.Internationally, particularly in countries with volatile currencies and unstable governments, bitcoin has a clear use case for individuals right now. Remittances and avoiding wire fees for international transactions are other compelling reasons for international users to adopt right now.

      1. LE

        Merchants are starting to recognize this, and as more and more merchants accept, more and more consumers will adopt.The third leg is: A way for the merchant to get value out of the bitcoin.This requires either:a) a place that they can spend bitcoins orb) a way to convert bitcoins into cash that they can spend anywhere.In the case of “a” just like “barter credits” I’m not convinced that those that accept the bitcoins (b to b) will not alter pricing to take advantage of the increased demand from people with bitcoins (that happens with barter credits which I am quite familiar with) [1].In the case of “b” there will be a cost to convert the bitcoins into cash.[1] We and many others used to give less competitive pricing to anyone spending barter credits because we knew we had them locked in “by the balls”. And when we had to spend the barter credits we were restricted similar to frequent flyer miles. Devil is in the details with this stuff. No question in my mind the same type of thing will happen with bitcoin because it’s human and business nature.

        1. Drew Meyers

          “a) a place that they can spend bitcoins or”Maybe their online vendors/partners will accept it?

          1. LE

            Problem is (in addition to the inevitable pricing differential from those who are early adopter merchants as I mentioned) there are significant barriers to accepting bitcoins in existing payment systems (y2k-esq).So we are not talking about fax machine adoption (which could happen concurrent with other methods of communication) or cell phone adoption, or email adoption. Or putting another “share” badge on a website or opening a twitter account or setting up a facebook page. Those were all fairly easy with much less friction. And actually little downside. Re-read that.And once again this is really like an economy in the sense that you can’t just accept an unlimited amount of bitcoins which eat away at your inventory unless you have a place to spend all of those bitcoins (so the dynamic of chicken and egg exists as well). Otherwise if you don’t have a place to spend them you will start to modulate by playing with pricing or restricting acceptance.Here is a concrete example using, once again, barter credits.A restaurant accepts barter credits. But they won’t take the credits on Saturday night because then they will have an in balance of barter credits vs. cash. (Or will an airline on a good route or a hotel although sure why not fill empty seats/rooms?) And since you can’t spend the barter credits everywhere how are you going to pay for the chicken you bought if the (chicken and egg) vendor doesn’t accept them?Once again these are real world devil in the details things. It’s easy for an investor to cast a broad stroke and think it will all work out. (And not knowing the future of course anything is possible.)By the way not everyone even accepts the discover card and that’s a simple checkbox.

          2. Nick Tomaino

            Can you be more specific about the “barriers” you are referring to?

          3. LE

            Existing accounting systems for small business are not setup to accept anything that isn’t a) cash b) credit card c) accounts receivable. Additionally existing website e commerce is not setup for anything but the above either. The systems aren’t designed to “scale” to new forms of payment since that doesn’t happen. They aren’t even designed to scale to new credit cards either. (By “not” I mean “in general”).Right now small business accepts what they accept. If you say “I will pay you with a chicken” they will say “what do I put “chicken” under how do I account for that? Also A/P systems as well.Kind of in a way like we generally think that if a couple is married there is a “husband” and a “wife” in other words the spouse is not the same sex. Little y2k gotchas in programs and processes. Have you ever owned, sold to or worked in a small business? I had a case once where there was a $10 floor on credit card charges and someone made a purchase for .25. So the employee rang it up as $10 and gave them back $9.75 in cash from the register! Because they thought it wouldn’t “work” they didn’t understand why it was being done. Try to think of every stupid thing an employee will do with something like this.Anytime you add a product or process to a small operation there is training and education if it doesn’t fit neatly into their brain from something they have done in the past. And with this we are talking about $$ – not putting the fax paper in wrong.

      2. Jim Peterson

        good points. What merchants “want” will not drive this, though. Consumers will have to want to play.

        1. Nick Tomaino

          Agreed. Think it will be international consumers driving it for the foreseeable future

    2. William Mougayar

      You raise a valid point. Is there a Bitcoin association of sorts which is responsible for marketing, education, regulation, etc…a representative voice for its interests?Maybe we need that, especially in the early stages. This reminds me of the birth of CommerceNet in 1994 whose sole purpose was to promote the proliferation of e-commerce, facilitate standards, fight regulation, provide education, showcase implementations, etc.. I was quite involved with CommerceNet back then and became the chairman of CommerceNet Canada. CommerceNet even incubated some new technologies based on the markup language XML.

      1. LE

        Is there a Bitcoin association of sorts which is responsible for marketing, education, regulation, etc…a representative voice for its interests?No. (Was going to say “I don’t think there is” but that didn’t seem strong enough).But it doesn’t necessarily have to be an association. And that might not be the best approach.The Koch brothers further their interests in all sorts of ways. Cato institute as an obvious example.Getting different companies together to pay, meet and decide can be quite difficult (and it’s not going to work for this). Using money on the other hand (in creative ways) to influence the discussion is definitely possible. And actually if you spend your own money to shape the discussion you don’t have to get other people to agree with something which might be in your best interest but not theirs. Besides with this you are not fighting a well known enemy. (Like government regulation at least not yet). In that case it might pay to form an association.Then of course if you do try to form some group you will have the lawyers whining about collusion and antitrust and what you can do.I remember in the early 00’s being on conference calls with the registrar group (that was active for a few years and was formed out of ICANN). Every now and then someone would blurt out “we can’t talk about that because that would be collusion!”. I mean for real? We can’t even talk about things? Like the government is going to build a case around a phone call? [1][1] Last week on HN there was references to “libel per se” and how someone could bring an action against someone for saying certain things. As if people are going to hire an attorney and make a federal case against some nobody on the internet with no (known) assets because under some rule of law a case might be justified.

        1. William Mougayar

          I asked because I saw a lot of good came out of CommerceNet back then. It’s early days for Bitcoin, so it might benefit from a neutral body with a voice.

        1. William Mougayar

          Perhaps. But I didn’t see Fred or USV in it, and it appears to be light on material and what they are actually doing.

          1. fredwilson

            i am a donor to the bitcoin foundationi gave them something like 150 BTC a year or so ago when they got started

          2. William Mougayar

            ah, good to know. Are they the pre-eminent neutral voice on BTC? I couldn’t find your name when I scanned the list of members/supporters, that’s why I wondered.

    3. fredwilson

      good critique

  11. george

    Like most new technologies, it’s not perfect in it’s first generation. I think the 24 hour verification process is a major turnoff, there is too much admin work. It’s up to the early adopters to help streamline these protocols.

  12. pointsnfigures

    what caught my ear was the fact that the community makes and delivers the value. Very Coaseian in the concept. It’s a transparent marketplace. Needs some structure around it to lessen volatility. We should start a futures market with a dollar peg, and then cross-currency pegs. That will allow transactions in bitcoin to be hedged, and lessen the risk of holding bitcoins.

  13. Aaron Klein

    That’s always how it is when you’re skating to where the puck is going. None of the existing players on the field understand why you’re all the way over THERE.I love when big entrenched players in our field belittle our product as a “little niche solution for a tiny percentage of client service.”You never want them to see you coming, even when you’re hiding in plain sight.

    1. Matt A. Myers

      They don’t understand the value you can bring to quality of product or respect what the little player is willing to do in order to make gains.And here I am continuing to comment, yet I told myself I would stop as it’s not serving me right now to talk about the game. Guess it’ll take time to break habit.

      1. Aaron Klein

        There is a time to learn and a time to implement what you’ve learned. But keep those cycles tight. πŸ™‚

        1. LE

          Agree. I love learning (obviously) but I also recognize that it can be a good rationalization for not “doing”. That’s one of the problems with the “horn of plenty” that we have. (Was less of a problem in the olden days.)

          1. Aaron Klein

            Indeed. Well put.

  14. jason wright

    the video is a bit (pun) of a tech mind fuck.wanted: entrepreneurs to fix that, with platforms and services that are a playful joy to use.i guess where at the beginning of the model t ford stage but looking for a tesla.

  15. sigmaalgebra

    It’s good to see some applied math!Makes me want to return to my old lines ofattack trying to find an algorithm that showsP = NP.Naw: That’s a really hard problem, and mystartup is much easier!

  16. Henry Glover

    It seems that most of the revenue is being made around the exchange and tranaction of bitcoin. Does anyone see an opportunity for bitcoin wallets to earn interest by lending bitcoins. I feel like that will also encourage more businesses to be built around bitcoin.

  17. Semil Shah

    While researching this, I found three (3) types of Bitcoin-related companies: (1) Exchanges, which help process Bitcoins into and out of other currencies; (2) Adjacent companies, which indirectly process Bitcoins through goods/services; and (3) Commerce, like an eBay or Silk Road.

    1. pointsnfigures

      no actual risk management. There is an opportunity there.

    2. fredwilson

      i want to see a fourth type, a company that is building a new way to solve an existing problem with bitcoin. the contracts capability in the BTC protocol would make a great platform to change the way legal contracts are signed, recorded, and complied with, for example

  18. Tom Labus

    Dave Eggers…Some roasting.

  19. nthampy

    Bitcoin 101 | | Summary of basic Bitcoin info I @ninan99