Now in general unless you're using cash when you make a payment this payment is processed and is transferred
from one account to another using one or more financial institutions or banks.
The same goes when you go online and buy something even if you buy with PayPal or some other method.
Again there is usually one or more financial institution to process that payment.
So as you can see this is a centralized structure where one entity is managing payments.
And we're also interested in that entity to manage our security the security of our account and our
privacy.
Now no matter how well you trust this company or this bank as we seen before centralized structures
are just inherently not private.
The reason for this is because all of the information is stored in one single place.
So even if you trust this company and trust everything about it what about the employees that work at
this place.
What about hackers that manage to gain access to it.
What about other agencies that force this entity to have back doors or to give them access and the list
goes on and on and on.
Simply the idea of keeping everything in one place is not private.
The alternative to this is to use crypto currency which is not controlled or managed by a single entity.
So previously we had the money which is the cash which is stored in a bank or some financial institution
that manages that currency when it comes to crypto currency.
It eliminates the need to a middleman or to an entity that manages this currency Instead it relies on
decentralized peer to peer structure known as block chain.
Now to understand how this works let's have an example where David wants to send money to John to do
this.
The first thing David will do is he'll create a crypto wallet.
You can think of this similar to creating a PDP account.
So the wallet will be associated with two keys a private key and a public key.
And let's say David wants to transfer one coin to his friend John.
So he generates a message or a request similar to this right here.
And he'll sign this request with his private key which will generate a signature or a fingerprint.
So again this is very similar to when we used to sign messages with our private key with PDP.
And the reason why this is done to make sure that whoever inspects this message or this request will
note that this request to transfer one coin from David's account is actually generated by David because
David will never share his private key now once this is signed David it will also include his public
key so that it can be used to verify the signature again similar to what we spoke about in the encryption
section of this course the public key is mathematically related to the private key and therefore it
can be used to verify the signature without revealing information about the private key.
So when this message is inspected by anybody they can use the public key to verify the signature.
And if it checks out we'll know that this message was actually generated by David.
Therefore we can process the transfer of one coin from David to John.
So once this message is generated on David's and David will send this message to the crypto currency
network.
Now this network is basically a number of computers usually of high specs that keep a copy of all transactions
done using this crypto currency.
These computers are usually referred to as minors because they get paid coins for maintaining the ledger
or this record of transactions.
Now this record of transactions is known as a block chain.
So it's a public record that contains all transactions made with this crypto currency.
And each miner each computer on the cryptocurrency network contains a copy of all of these transactions.
So it contains a copy of the block chain.
So David's message is sent to the currency network.
It will get verified and if it checks out it will be added to the block chain.
So this message will be added as a new block to the existing lock chain stored by each one of these
computers or miners.
So right here.
I have a zoomed in diagram of the block chain.
So each one of the miners of the computers contains a copy of this and you can think of each one of
these blocks as a transaction that happened in the past.
The latest one being the one that David just generated in which he transferred a coin to John but the
others are just other transactions that have been done in the past.
So as you can see this is a decentralized structure.
It is not owned by anybody and not controlled by anybody.
Anyone can join this network and use their computer for mining so anyone can download a copy of this
block chain and start mining and start helping maintain this cryptocurrency network.
Now we can also see that this implementation is private because I'm using names in here so I'm saying
we're transferring one coin from David to John or here from Bob to Alice.
But in reality real names are not used.
Instead wallet addresses are used.
So the contents of the blocks even though they're public you'll see the content of it saying it's transferring
from a long address to another long address.
And as long as the users are using proper OPSEC keeping their real identity separate from their fake
identity connecting using the term network and using all of the tips and methods that we discussed to
stay private and as anonymous as possible these addresses will not link to their real identities.
With that being said the fact that the whole ledger or the whole block chain is public means that we
can read all of the transactions done using this crypto currency.
Therefore even though these addresses don't link to real identities we can analyze a specific address
and see all of the transactions it got involved in so we can see all of the money that left this address
and all of the money that entered this address therefore will even be able to calculate the current
balance in this specific account.
Now you can obviously just create multiple addresses to get around this.
There are also other methods to increase anonymity and privacy and make it hard to see where money is
going and where it's leaving from.
And you can simply just use a more private cryptocurrency like Monaro which we'll talk about later on
in the course.
For now I just wanted to give you a basic understanding on how crypto currencies work.
And this is pretty much how bitcoin works which is the most popular cryptocurrency.