But what I wanted to do in
this video is talk about what a bitcoin is in
more general terms and 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, a conduit,
by which two parties can transact over the internet. I call these parties
Alice and Bob. And let's say Alice
for whatever reason wants to give money to
Bob over the internet. And this may be because
she owes Bob money, or maybe Bob is a
merchant and Alice is buying something from Bob. Or maybe Bob is
a not-for-profit, and Alice is making
a donation to Bob. So there could 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 payments, then Alice can go ahead and
send Bob some value in bitcoins. And really, a
bitcoin transaction between Alice and 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. They make it hard for someone
to really defraud the system or to conduct some type of
nefarious action on the system. And 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 in either case, either
the client or the service is going to generate
these numbers for Alice. And on 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 and 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 real money and
so on and so forth. Now, one of the first
questions you might have-- and I kind of alluded
to this earlier-- is why would Bob even
want to accept bitcoins in the first place? After all, a bitcoin is
just a bunch of numbers. What intrinsic value
would it conceivably have? And it turns out,
quite surprisingly, that bitcoins actually
have real-world value. There are more and more
merchants popping up each day who accept
bitcoins for transactions. There are also
bitcoin exchanges, places where you
can go and exchange bitcoins for more
mainstream currencies. And some of exchanges include--
the major one is one called Mt. Gox. And at Mt. Gox you could exchange a bitcoin
for a euro or yen or dollar and so on and so forth. Now the current
price of a bitcoin, the current value of a bitcoin
in US dollars as of this video, is approximately US$100. per bitcoin. That number is fluctuating. This is a new
currency, and there's going to be some fluctuation. But as people understand
the currency better, the hope is that 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 in
the value of what you can procure
with that bitcoin. It's just like you would
for a dollar, a euro or yen. The faith that you have
in that currency's value is how you value that currency. Now another question
you might have is why do people even
bother with bitcoins in the first place. Aren't there other
more standard ways? Why couldn't Alice
and Bob use Paypal? Why couldn't they use a credit
card number to transact? Why couldn't Alice just sent
Bob an electronic check? Why not use one of these
other approaches that are more well understood,
that are more mainstream, that are more established? Why on earth would you possibly
want to mess with a good thing? So it turns out that there are
a few properties of bitcoins that are worth noting. For starters, there's privacy. It turns out that 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 just going to be a
sequence of numbers. And that sequence of
numbers is effectively going to function like
a pseudonym for Alice. And that sequence of
numbers has nothing to do with your
real-world identity. Nobody needs to know this
is Alice transacting. All they need to worry
about is their pseudonym within the system. And this is kind of
but not quite like what you would get if you bought
something using cash. In that capacity, when you
buy something using cash, then you don't have to provide
any details or proof regarding who you are in the real world. And that's different
from, let's say, using a credit
card, where you have to provide your name and your
billing address and so on. Or let's say providing an
electronic check, where you need to tie that
electronic check, typically your bank
account details. Now, I do want to
also mention here that sometimes when you have a
cash list or a transaction that uses cash, there is
now the possibility that people might try to
use these transactions for malicious purposes to buy
illicit goods and services. That definitely is
a risk that occurs when you provide
anonymity and privacy. But there are certainly
legitimate reasons why somebody might want to
conduct a transaction privately and not have the whole world
know what they're transacting. Another property of
bitcoin is that it's open. Literally anyone
can get involved. Literally anyone who was
an internet connection can make a bitcoin transaction. And all you need to do to
get started is, as I alluded to earlier, is download
this special bitcoin client. And 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 has 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 and whether she can
give that money to Bob. The actual software
underneath will take care of all the
underlying mechanics of making that transaction work. Now, this is different. When you think about
a traditional currency like a dollar, if I want to
transact something online, typically I need a bank
account, I need a credit card, and so on and so forth. Then we often take it for
granted that there are people out there who may
not have access to a credit card, who may
not have a bank account. For example, in the United
States alone it turns out-- and I just looked this up--
the number of households without a bank
account, I read it, is somewhere north of about 8%. It's pretty high. There are 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. And by the way, there
are people using bitcoin all over the world. And literally it doesn't matter
where you are in the world, as long as you have an
internet connection, you can start
transacting bitcoins. Now, another property of
bitcoin that's worth mentioning is that it's decentralized. There's no bank or
centralized entity that can really control what's
happening in the bitcoin ecosystem. It's all done in this
kind of ad hoc fashion. And what that means is that
when you do a transact-- or when Alice transacts
with Bob over the internet, that transaction doesn't have
to go through a third party. There's no bank that gets in
the way of that transaction. And that can have
certain benefits as well. For example, that means that
no one entity can directly control the money
supply of bitcoins. That also means that no one
entity can see your assets. Or for that matter,
no one entity can reverse a transaction,
which is definitely desirable for certain merchants. Some merchants might
not be able to conduct business online because
of fraud concerns. And if you have a system where
the transactions cannot be charged back easily, then from
the merchant's perspective, they may be able to inhibit
fraud and thereby that might enable their business
entirely online. Now I want to point out
that this last property of decentralization
definitely causes concern among some people or not
in bitcoin after all. When you think about it, a
central authority like a bank does perform an
important function in the context of a
traditional currency. For example, banks might
validate currencies. They might validate
transactions against fraud. Now, in bitcoin, this
validation is basically done in a decentralized
way by the other parties, the other nodes, in
the bitcoin network. Now, the goal of the remaining
videos in this series is to walk through the
underlying mechanics of bitcoin transactions and 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. So I suspect that
at this point, you may have a ton of
questions about bitcoin, and that's entirely
to be expected. Bitcoin is a very
complex protocol. It has many moving parts. And I think it's
critical when you're trying to understand
something as complex and wrap your head around
something as sophisticated as bitcoin, it's important to
get exposed to all the parts first so that you
can ultimately get a flavor for how
they fit together. And hopefully the other
videos in this series will help you to understand
these different parts and along the way address
many of the questions that you might have.