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Bitcoin - What is it?

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what I'm gonna do in this video is talk about what
a Bitcoin is in more general term & what
differentiating characteristics they have compared
to other approaches
so for starters, Bitcoin is just an electronic
payment system
by electronic payment system, I mean it's just a vehicle of conduit by which
2 parties can transact
over the internet
I'll call these parties Alice & Bob
& let's say Alice, for whatever reason,
wants to give money to Bob
over the internet
this maybe because she owes Bob money,
or maybe Bob is a merchant & Alice is buying something from Bob
or maybe Bob is
a not-for-profit & Alice makes a donation to Bob
so there can be many reasons why Alice is trying to pay Bob
over the internet
in some capacity
now if Bob is willing to accept
Bitcoins, which are a form of electronic payment
then Alice can go ahead & send Bob
some value in Bitcoins, & really,
a Bitcoin transaction between Alice & Bob
amounts to a specially constructed
sequence of numbers, that Alice will basically send over to Bob
and, this will be done entirely over the internet
these numbers will have certain mathematical properties
that make it hard for some to really defraud the system, or to
conduct some type of nefarious action on the system
& the way that Alice is actually going to conduct this transaction in practice is,
either by, installing a special piece of software, which we call a Bitcoin client,
or she can
work with a third party service, that can handle these mechanics for her
but either case (either the client / the service) is gonna generate these numbers for Alice
& the flip side, Bob will also typically either have a piece of software installed
or he'll use a third party service
that will take these numbers & allow him to do something else with those numbers, for example
Bob can, in turn, buy something on his own with those numbers, or he can trade those numbers in for
for real money & so on & so forth
alright
now 1 of the 1st questions you might have
& I kind of alluded this earlier
is: "Why would Bob even want to accept Bitcoin in the 1st place?"
after all, a Bitcoin is just a bunch of numbers.
What intrinsic value would it conceivably have?
& it turns out
quite surprisingly
Bitcoins actually have real world value, there are
more & more merchants popping up each day who accept Bitcoin for transactions
& there are also, Bitcoin exchanges, places where you can go & exchange
Bitcoin for more mainstream currencies
some of these exchanges include
the major one is called "Mt. Gox"
& in Mt. Gox, you can exchange your Bitcoin for Euro, Yen, Dollar, & so on & so forth
now the current price, the current value of Bitcoin in US Dollar as of this video is
approximately $100 per Bitcoin
that number is fluctuating, this is a new currency
& there's gonna be some fluctuations, but as people understand the currency better
the hope is that fluctuation will decrease
but I think ultimately, the thing to keep in mind is that
the value of a Bitcoin is going to be derived from the faith that you have
& the value of what you can procure with that Bitcoin. It's just like
you would for a Dollar, Euro, or Yen. The faith that you have
in that currency's value is how you value that currency
now another you might have is: "Why do people even bother with Bitcoin in the 1st place?"
I mean, aren't there other more standards ways?
Why couldn't Alice & Bob use Paypal?
Why couldn't they use a credit card number to transact?
Why couldn't Alice just send Bob an electronic check?
Why not use one of these other approaches that are more well understood, more mainstream,
that are more established. Why would you possibly want to mess with a good thing?
So it turns out there are a few properties of Bitcoin that are worth noting, for starters,
there's privacy
it turns out, within the Bitcoin ecosystem, within the Bitcoin network
people can transact without divulging who they are in the real world
from the perspective of Bitcoin, Alice's identity is gonna be a sequence of numbers
& that sequence of numbers, is effectively gonna function
like a pseudonym for Alice
& that sequence of numbers has nothing to do with her real world identity
nobody knows this is Alice transacting
all they need to worry about is the pseudonym within the system
& this is kind of, but not quite, like what you'd get if you bought something using cash
when you buy something using cash,
then you don't have to provide any details / proof regarding who you're in the real world
& that's different from let's say,
using a credit card, where
you have to provide your name, billing address, & so on
or let's say providing an electronic check
where you need to tie that electronic check typically to your bank account details
okay, now I do wanna also mention here that
sometimes when you have a
cash ??? or transaction that uses cash
there is now the possibility that people might try to use this transaction for
malicious purposes to buy illicit goods & services
that definitely is a risk that occurs when you provide anonimity & privacy
but there are certainly legitimate reasons why somebody might
wanna conduct a transaction privately & not have the whole world
know what they're transacting
another property of Bitcoin is that it's open
literally, anyone can get involved
anyone who has Internet connection can make a Bitcoin transaction
& all you need to do to get started, is download this special Bitcoin client
& the Bitcoin client, or for that matter, you can use
a service like Mt. Gox, which will effectively do the same work as a client for you
but the short of it is that,
anyone who has a Bitcoin client or who owns an account with an exchange like Mt. Gox,
can engage in Bitcoin transactions
that transaction, the details of it, the mechanics of it, will be transparent to the user
all the user has to worry about
All Alice needs to worry about is how much money she has
& whether she can get that money to Bob
the actual software underneath will take all the underlying mechanics of making that transaction work
now this is different when you think about traditional currency, like a Dollar
if I wanna transact something online
typically I need a bank account, credit card
& so on & so forth
we often take it for granted, but there are people out there who may not have access to credit card, bank account, for example
in United States alone, it turns out (I just looked this up)
the number of households without a bank account
is somewhere north of 8%. It's pretty high, a lot of people out there who wouldn't be able to conduct
a traditional internet transaction
but who can conduct a transaction using Bitcoin
by they way, there are people using Bitcoin all over the world, literally
it doesn't matter where you are
in the world, as long as you have internet connection, you can start transacting Bitcoins
Now another property of Bitcoin worth mentioning is that it's decentralized
there's no bank / centralized entity that can really control
what's happening in the Bitcoin ecosystem, it's all done in this kind of ad-hoc fashion
& what that means is that,
when you do a transaction, when Alice transacts with Bob over the internet,
that transaction is ??? with third party. There's no
there's no bank that gets in the way of that transaction
& that can have certain benefits as well, for example, that means
no one entity can directly control the money supply of Bitcoin & so on
that also means that no one entity can
let's say, seize your assets, for that matter
no one entity can reverse a transaction
which is definitely desirable for some merchants
Some merchants might not be able to conduct business online, because of fraud concerns
& if you have a system where the transactions can't be charged back easily,
then, from the merchant's perspective,
they may be able to inhibit fraud & thereby,
that might enable their business entirely online
now I wanna point out this last property of decentralization
definitely causes concerns among some people about Bitcoin.
After all, when you think about it, a central authority like a bank
does a perform an important function in the context of traditional currency, for example,
banks might validate currency, they might
validate transactions against fraud
now in Bitcoin, this validation is basically done in a decentralized way
by the other party, the other nodes in the Bitcoin network
another goal of the remaining videos in this series, is to walk through the underlying mechanics
of Bitcoin transactions &
really how they're validated, even though the system is decentralized
and there are some pretty amazing techniques that are used
to make all this work
I suspect at this point, you may have tons of questions about Bitcoin, & that's entirely to be expected
Bitcoin is a very complex protocol, it has many moving parts
& I think it's pretty cool, when you can understand something this complex
& wrap your head around some thing as sophisticated as Bitcoin
it's important to get exposed to all the parts first
so that you can ultimately, get a flavor of how they fit together
& hopefully the other videos in this series,
will help you to understand, these different parts
& along the way, address many other questions that you might have