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Bitcoin - Overview

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Bitcoin is a new virtual currency system
that's been gathering a lot of attention recently
I thought I would do a series of videos where I,
where we dive into the innards of Bitcoin & explain
how it works in detail
& my plan for this first video in this series,
is descibe some of those mechanics at a high level
& what I'll do in subsequent videos is
dive a bit deeper into all the underlying aspects that I've touched upon
within this 1st video
& my hope is that by the end of this video series, you'll know
not only what a Bitcoin is, but you also understand the mechanics of how
of how transactions are initiated, you'll see how
verification occurs in those transactions, & you'll also learn
what it means for someone to really engage in a process known as Bitcoin mining
that maybe a term that you've heard, if you've had any interest in Bitcoin recently
I do wanna point out also, that the Bitcoin scheme is fairly involved, it requires
some time to really cover all the relevant details, and
to me the best way to really wrap your head around a scheme like Bitcoin is to
to really suspend belief for a bit & get exposed
to all these relevant details
now definitely you have a lot of questions along the way
but my hope is that by the end of this video series
all the relevant stones will have been overturned & your questions will have been properly answered
but it might take some time to get there
okay, & partly that's because I try to describe things in a way that's sensible, & that might
involve leaving some details out
until I can explain enough
pieces of the scheme & then adding those details in as I go along
so that you're not inundated by too many
minor points & nuances along the way
but you get a view of the overall system as I go through things
so with that, let me go ahead & just dive right in, & first of all I do want to point out that Bitcoin
has been described, really, a decentralized
currency, because there's no real central bank or entity
that's involved in generating / transacting Bitcoins
& in fact what happens in the context of Bitcoin, is that all the transactions really
require what's known as peer-to-peer network, a network of just individual hosts
that essentially, collectively agree on different aspects of how the protocol
is implemented & used
okay, Bitcoin itself is also referred to sometimes as a crypto currency
& by crypto currency, I mean that, we use a lot of cryptographic techniques
in order to facilitate / to really enable
Bitcoin transactions to take place
And I'll do separate videos on some of these techniques
but just take it at face value right now that it's decentralized & it's a type of crypto currency
now I also wanna point out that the term Bitcoin itself can, in fact be
a bit confusing, & in many ways, Bitcoin transactions don't really
resemble traditional coin transactions so much as they represent entries in some type of a global ledger
& by that I mean, let's say you have
a transaction taking place, let's say the transaction is taking place within
among 2 parties, we'll call them Alice & Bob
which are traditional names that are used in many cryptographic protocols to describe the parties involved
& imagine that Alice wants to transfer / assign
a certain number of Bitcoins she possesses over to Bob, okay
& you can think of this transaction really, as an entry
in a ledger, of some sort
okay, & I also wanna point out before proceeding that even though I
used terms like Alice & Bob
what it really means in the context of Bitcoin is, it's not the actual identities
in the physical sense, but really that
Alice & Bob's identities in the Bitcoin system, & these identities are just
in actual implementation, are just collections of numbers
that do not have to be tied
with Alice & Bob's real world identities
so in that capacity, you can think of Bitcoin identities, really, as effectively being pseudonyms
rather than real names
And the idea is that Bitcoin then becomes more of a pseudo anonymous protocol, where
people are addressed by their pseudonyms & that provides some level of privacy
to users who wanna transact using the Bitcoin system
now in a transaction between Alice & Bob, what Alice will basically do is
specify a few different numbers
she has to specify how many Bitcoins she wants to allocate to Bob.
Let's say Alice started off with 50 Bitcoins of her own
She might decide she wants to give, let's say 30 of these Bitcoins over to Bob
& let's say she wants to have some number of Bitcoins returned back to her
Alice has to specify
how much changes she's gonna get
So in this case, let's say her change is gonna be 18 Bitcoins for herself
& the remaining 2 Bitcoins are going to be
a transaction fee
& we'll talk about what a transaction fee means
a little later, & I think I'll also dive into future videos
but it's basically an incentive for
other nodes in the Bitcoin network to help Alice
in, essentially, validating some of the details of this transaction for Bob
now Alice will take these transaction details & apply
what's known as a digital signature
to this transaction details. A digital signature is basically the
mathematical analog of traditional signatures. It, really, binds
Alice's identity to the details
of this transaction.
And by Alice's identity, again, I mean her identity within the Bitcoin system
And this binding is really done in a cryptographically strong way
Now the details of this transaction, once it takes place
are going to be broadcasted out. Alice's is gonna take these transaction details & effectively just broadcast them out
to all the nodes
in the peer-to-peer network
that represent Bitcoin nodes
Now Bob, when he receives information
about this transaction, he receives it over the peer-to-peer network,
he'll probably check (?) some part of the transaction, for example,
he might check, that the numbers were ??? correctly. That Alice, let's say started out with fifty
Bitcoins, & she's not trying (?) to transfer more than 50 Bitcoins to him & so on & so forth
he's gonna have some mathematical ???, because of some of the cryptography involved
that, some of these claims are accurate, that Alice
let's Alice has the Bitcoins that she claims to possess
& that she expressed interest to
assign those Bitcoins to him
but what he won't know yet, is whether Alice has, really,
tried to transfer those same Bitcoins to anyone else
over the course of time, or maybe just prior to that point
And the way we handle that situation, & by the way I should point out that,
this concept of Alice trying to let's say spend
coins twice, in the context of digital cash
& electronic currency systems
this concept is known as
as "double spending", & it's something you have to worry about
when you have virtual currencies, because it's very easy for someone to just copy
the numbers that represent this transaction & try to
use them elsewhere
And the way we basically handle & reduce the risk of double spending
is through a specific set of nodes
in this peer-to-peer network
who are known as Bitcoin miners
okay, so you might have heard of this term, Bitcoin miners, & the Bitcoin miners are basically
specific individuals / specific nodes within this peer-to-peer network
what they basically do is they take
all the transactions they see &
remember they're listening (?) to all these transactions, not just Alice & Bob's, but other transactions that are taking place
& they take those transactions & ultimately they will take those transactions & compile them
into what's known as a "transaction block"
okay, so it's basically a recording of all the
the previously unrecorded transactions
so if you think of a single transaction, let's say, as a ledger item
you could think of a transaction block, as representing, let's say, entire page in a ledger book
& these Bitcoin miners will also include in this block
in addition to all these unrecorded transactions, they will also include in this block
a special transaction that's meant just for themselves, to basically reward themselves
for the effort of doing this mining
now transaction block will also contain an encoding of the previous transaction block
okay, so there's gonna be some level of ???
& then Bitcoin miners will also include a specially crafted sequence of numbers
associated with this transaction, & these sequence of numbers
is known as a "proof of work"
??? called a proof of work because it's something that's really hard to generate
something that requires a lot of effort.
To do that kind of makes it hard for just anybody to get involved with Bitcoin mining willy nilly
but it requires that they really exhibit / exert some computational efforts
basically in exchange for getting this extra reward of payment
& also in exchange for getting this transaction fee they're gonna be (?) promised by Alice
to engage in this sort of work
And I'll talk about what a proof of work protocols are in a separate video in more detail
Now, because each transaction block contains information about
previous transaction,
really what you end up having is not just
a single block, you ultimately have what you can think of as a chain
of transactions. And you can call this a "transaction block chain"
And the idea is that as soon as a Bitcoin miner
is able to construct a transaction block chain containing all these unrecorded transactions & these proof of works
it will broadcast the details
of that chain out to all the nodes
all the peers on that peer-to-peer network for Bitcoin
And then once
the newly broadcasted chain gets verified / meets certain properties, the nodes on the network
are just gonna go ahead & start using it. And the nodes are (?) appending new transaction blocks
to that chain
they're gonna take anything (?) that hasn't yet been processed & start
incorporate it into the transaction chain that was
broadcasted out by the node who came up with the proof of work correctly
now this transaction block chain, really,
what we're gonna be doing in the context of Bitcoin is
the nodes are only going to consider
the transaction block chain that reflects the greatest amount of work
??? contents
And again, there is this proof of work that I mention that
is used to kind of
determine / identify what the
what work goes (?) involved in coming up with this transaction block chain
& the one that's the longest is going to be considered sacrosant within the Bitcoin system
And future miners are supposed to only work off the chain that has the most work put into it
Now what's remarkable here
is that this whole process is decentralized. There's no bank or no
centrally trusted entity that was actually involved in the transaction
so hopefully this first video gives you a bit of description, a flavor if you will,
for the high level mechanics of the Bitcoin system
there are a lot of stones I have left unturned & what I'll do in subsequent videos is
start covering those details & I'm sure you have a lot of questions. But hopefully the
the future videos will help answer some of those questions for you