In this paper, we propose a scheme, called the "algebraic watchdog" for wireless network coding, in which nodes can detect malicious behaviors probabilistically, police their downstream neighbors locally using overheard messages, and, thus, provide a secure global "self-checking network". Unlike traditional Byzantine detection protocols which are receiver-based, this protocol gives the senders an active role in checking the node downstream. This work is inspired by Marti et. al.'s watchdog-pathrater, which attempts to detect and mitigate the effects of routing misbehavior. As the first building block of a such system, we focus on a two-hop network. We present a graphical model to understand the inference process nodes execute to police their downstream neighbors; as well as to compute, analyze, and approximate the probabilities of misdetection and false detection. In addition, we present an algebraic analysis of the performance using an hypothesis testing framework, that provides exact formulae for probabilities of false detection and misdetection.