Video - Bitcoin 101 - How to Make a Digital Currency Part 1 - A Beginners Guide to the Thoughts of Satoshi

What is Bitcoin? Many find Bitcoin difficult to understand. These high-school-level videos provide an introduction to bitcoin by looking at the historical problems of creating currencies (both traditional and digital currencies). This video could prove useful for a classroom activity or for anyone struggling to understand the basics of bitcoin.


Hello!  This is James D'Angelo.  Welcome to the Bitcoin 101 blackboard series.  Today we're going to look at how to make a currency.  It turns out that making currencies is opaque to most people because they've never done it.  You don't even have a high school or junior high school or preschool project which involves you making a currency.  This is partly because in the last 100 years we've mostly just had the dollar around and the assumptions based with that means well, that's pretty much the way it's always going to be.  

Starting in 2008 with Bitcoin, we've seen a revolution and because of Bitcoin numerous people now are making their own currency.  You have all kinds of Bitcoin knockoffs Litecoin, Freicoin, Infinitecoin, WorldCoin, BBQcoin.  People are creating their currencies and mostly what they're doing is they're taking Bitcoins protocol, adjusting some factors and launching their currency into the world.  Some of these are doing.  You know, okay as a few million dollars.  Litecoin is up to like $60 million worth of total value.  Bitcoin is exploding.  It's the big daddy of them all.  It's got a total market capitalization right now of over $5 billion and that changes. 

Every day the perception, the perceived value of a currency goes up or down but it's clearly on the upswing.  And as Bitcoin grows it starts to underline this question of what a currency is.  And to understand something it's really important if you try making your own.  You're not going to really understand yogurt unless you make your own yogurt.  You take the milk you add the bacteria.  You let it sit and you see it do it's thing.  If you make your own beer you really begin to understand the processes. 

So what we're going to do is go through the ideas and actually the real struggle involved with releasing a currency that people decide to use.  So what's important is to rewind and realize that Bitcoin is an invention.  It's actually a collection of inventions and selection of technological inventions to create a currency.  So there was lots of thought going into this, PhD thesis papers,.  Graduate programs.  Real currencies being released.  So Satoshi Nakamoto, the anonymous creator of Bitcoin based a lot of his work on a thing called hashcash.  But there was so much else going on.  And we're going to do a whole video on the life and times of Satoshi Nakamoto in 2008.  And you'll see with all the things that he was struggling with.  What we're going to do is look at just the problems that he had with creating a currency. 

The first thing we need to ask ourselves as we embark on this journey is what is a currency.  What is this thing?  Well, it turns out that a currency can be anything.  So this pen I'm using to draw on my Wacom tablet could be a currency.  Your dirty sucks could be a currency.  And there's one big test to find out if something is a currency.  Do other people accept it in exchange?  If you're able to take your dirty socks go down to the local coffee shop and they hand you a coffee for your dirty socks, well, then your dirty socks have become a currency.  

Now at this point it's a weak currency because only one person on earth has accepted your dirty socks in exchange.  If they turn around and go wow!  I've always wanted to buy this song and they take your dirty socks and are able to buy an mp3 it's becoming a stronger currency.  So now there's two people.  So you can see that the dollar is a very, very strong currency and your dirty socks are a very, very weak one.  So there's certain properties that your dirty socks might need outside of not smelling so bad to become a good currency.  And those properties are well, it has to be portable. 

Some currencies in the past weren't so portable.  Huge rocks with circles in it, not super portable.  But as we improve the style and development of our currencies they get smaller.  Even the French had these huge banknotes and they got small and small until they could fit in your wallet.  I remember being in France and having one of the Franks stick way outside of my wallet.  The Euro now fits very nice in your wallet and it's getting smaller and smaller all the time.  So portability is a big issue.  

In the old days of barter, you were exhausted from bringing your cows to market to buy something.  It was laborious to go all the way to town see if you could exchange them for something then return with them if you couldn't figure something out.  It's much easier to carry cash or even send your son with a little bit of cash.  And so portability is a big issue.  Durable.  Durable is important.  Now paper doesn't seem that durable but they work very hard to make your dollars pretty tough.  So inside your actual US dollars is not much paper.  It's about 75% cotton and 25% linen.  If you run it through the wash it just looks cleaner.  So it actually is fairly durable.  And you can tear it and do that and you can actually burn it and get rid of it but it lasts pretty long.  You don't get the feeling that if you put your dollars in a box you're going to come back the next day and see them starting to mold or something like that.  There's some work gone into that.  

Recognizable.  Your currency needs to be able to be distinguished from something else.  So if you're using leaves for your currency or something that looks like leaves well, if I can't tell the difference between your currency and something else that's an issue, pretty obvious.  Fungible.  This is this word that's actually become pretty heated lately as some new ideas and understandings a Bitcoin have hit and Bitcoin has this history built into each coin that is starting to separate the idea of fungibility.  And that's a hot discussion right now.  Fungibility is that every bit of your currency feels and acts just like the other.  So if you have one US dollar and you have another US dollar someone won't look at both of them and take one over the other.  

Of course, if it's torn or messed up yes, but fair working US dollar, you don't go to the store and they go well, we don't like your US dollar we like his US dollar.  They have to be perfectly fungible to be a very, very good currency.  So fungibility is a big topic right now with Bitcoin.  You're going to see a lot on that.  And then they have to be somewhat scarce.  So if you could just find US dollars on the street that actually lowers the quality of the currency.  You'll be really excited but if everybody's finding US dollars on the street then US dollars don't maintain their value.

One thing that's very interesting is that all these features are shared by one element on the periodic table and that's gold.  Silver does a pretty good job as well but gold does this great.  Gold because it is very, very shares is coveted.  And it's always been coveted for its beauty but it became to be more and more coveted.  So its coveted more than what its beauty is because it has a number of other features that work well for currency.  It's fungible.  Now gold isn't perfectly fungible, you have different qualities of gold and unfortunately you now have much more counterfeiting of tungsten into gold but for the most part when you have a gold coin that gold coin because it weighs a certain amount is equivalent to another gold coin with the same weight.  Fungibility isn't perfect in gold either.  Recognizable. 

Pippi Longstocking could bite into a little gold coin and tell you it was gold.  More and more people would have trouble recognizing goal because we're using it less on a day-to-day basis.  But gold has a very, very heavy mobile density.  So just weighing gold and getting the volume allows you to recognize.  It's also very shiny it's yellow, it's beautiful, it's recognizable and gold is durable.  You're not going to see it decay on you anytime soon.  It's an element but it doesn't rust.  It doesn't mix very well with other elements.  It's great for your tooth because no matter what you eat it's not going to start decaying and mixing with the other things you're eating.  So cold remains gold for a long time and gold is portable. 

Gold was actually the Bitcoin of its generation.  And gold had a very long generation but the fact that you didn't need to bring your cows to market you could bring a gold coin or even smaller little gold pieces and get the similar value that you would have for your cows.  Turned out to be a major reason why people adopted gold as a currency.  It was very, very portable.  These days it's running into some troubles with portability and we talked about that in another video.  But gold didn't just become a currency because someone decided it was a currency it actually had a lot of these features built in and these are features that you need to build in if you're going to build your own currency.  So if you're going to make a currency that you want to compete with modern currencies well, you need to solve these five issues for sure.  And usually to unseat a very entrenched competitor the US dollar or any other currency you have to make a major improvement over the status quo.  

Satoshi Nakamoto wasn't the first to realize that digital offers many, many advantages over analog in almost every field, music, photography, travel agencies.  So if someone could make a currency that was digital, entirely digital.  Remember you will never hold a Bitcoin well, then you might have some major changes that make people consider switching.  If you just print up your own dollars it look pretty good and they're colorful and all that.  Most people are not going to switch because the perception, right.  Do your socks have value?  Well, the US dollar has value.  It's got a very strong perception.  Is so strong so your dollars people are unlikely to take.  So if you're going to create your own currency you better offer some major, major advantages.  

Digital does offer some major advantages that are worthy of note.  One is it's programmable.  You can't take your little gold coin and type in release your value to my son when he turns 21.  You can do that with Bitcoin.  Release the value if given certain conditions.  Release the value if mom also signs off on it.  There's a number of things about programming your currency that are going to change the way the world works and this might be the biggest advantage that most people really aren't aware of or speaking of right now.  And this is a huge chance.  Well, digital if you can create a digital currency it weighs nothing.  Now for some people that's annoying.  I like to feel my coins rattling in my pocket.  And it's nice to feel that big lump.  But digital offers a number of major seismic improvements over analog.  You can send it immediately.  So keep in mind that Western Union who transfers money to other countries doesn't send money.  They hold money, there you give them cash.  They hold that, then they tell the other Western Union store to take cash out of their vault and hand it to you.  That's not the same.  So both those stations have to hold cash in reserved.  

With Bitcoin you can sit down with your phone and send actual cash.  It's an amazing abstraction thinking about it in 2013.  But the person on the other end will receive the cash, the actual and so you don't need a Western Union with big vault, safe, security, thick windows.  You just need a cell phone and your cousin gets the cash right away and can spend it as soon as it's available on the phone.  So weighing nothing is amazing because of partly this programmability and the ability you can send actual cash and the fact that you can send it at the speed of light or as someone once commented the internet works at one-third the speed of light.  And if you make it digital you might be able to make it non-counterfeitable.  

In fact, when digital there's a couple of possibilities that people are looking at and if you can't make it non-counterfeit able well, you're in trouble.  But if you can solve this, right.  And this was the big question that Satoshi and others were looking at in 2008.  Well, then you could save an enormous expense to any currency.  The US government spends, I don't know, billions a year just trying to prevent counterfeiting or track down people who are counterfeiting.  So creating a paper currency you not only have to pay for all the printing and it costs 10 cents per US dollar bill to print.  But there's also a major expense of preventing the counterfeiting of the currency.  There's a lot of expense of your currency.  So maintaining currency is very expensive.  A digital currency might not need that same amount of maintenance.

So these are huge seismic changes that were offered to someone like Satoshi Nakamoto as he was sitting down to create his first currency.  So now let's look and move back to 2008 and understand the exact problems that many, many programmers were faced with and many PhD students were faced with.  There were lots of papers on these topics and some of them even apply to you if you are creating a regular and a law currency.  If you were printing your dollar bills you're going to run into some of these problems but they all came into major focus with digital.  So these are the problems.  So let's look at them.  The first one is minting the coins.  So what is minting the coins.  Well, you have the US government mint.  

Well, someone's got to actually print the money and put it in the system.  When the US dollar was formed they had to somehow put the money into the system.  Well, government has a really nice advantage because they hire so many people that they can start to pay everybody with their currency and there seems to be sort of a fairness of that as they're starting to introduce it.  They can also require you and that's what legal tender means, they require you to pay your taxes in US dollars.  So it's a fiat currency.  But if you're starting up and you're making your own currency you run into this real problem of how do you get the first money out there and how are people sure that you're not printing more of it yourself.  That's an enormous issue. 

If you're printing the money and you want people to use it everyone's going to think that you're printing more for yourself.  Well, here Satoshi Nakamoto had one huge advantage.  He had the ability to make the rules of how Bitcoin works or his digital currency open-source.  And open-source is a program, a computer code that is published online so that everyone in the world can read through the code.  Now just because something is open-source doesn't mean that everyone can read it.  Because you really need to be a programmer to read it.

What it does do is allows for thousands or maybe even millions of people to read it because they are able to read open-source code.  So he published how Bitcoin works, how it's going to be produced, how the coins are going to be released, open-source.  And then he had a release date.  So in January of 2009, his program began to run and it's been running since then.  And that is the Bitcoin protocol that we're working with.  Satoshi no longer can mess with it or touch it and the code is online.  You can look at it and you can see thousands and thousands of responses and concerns and how we program certain things but it's all there and anyone can read it.  

When he started it running in January 2009, he would give out 50 Bitcoins every 10 minutes to people who were getting involved with mining.  And we're going to talk about that in a minute.  But the key thing is anyone could get involved with mining.  So all you had to do is download his code and hit run.  And then now your computer might make that 50 Bitcoins every 10 minutes.  You entered into a lottery.  So every 10 minutes someone would get Bitcoins.  If your computer was running you stood that chance and if you were there early on, you were running all day you are going to get some Bitcoins because there were so few people on the system.  As more and more people joined into the Bitcoin mining process it became harder for you to get it but you would still see every address where those 50 Bitcoins was tracked.  

This is very important because people really want to see that the currency has a clean release.  And we'll talk about this as we talk about the transaction blockchain but it's important to know that a dirty release of a currency has a couple factors in it.  One that the person who releases the currency, say I'm printing James D'Angelo dollars in my backyard.  I'm storing some that no one knows about.  So I have more of those dollars than even the rest of the people have.  That would be a dirty release.  If some way that I was making sure that I was giving it out randomly and believably to everybody that's a clean release.  And for all the people who are looking at this open-source and reading on the blockchain Bitcoin actually has received a stamp of approval.  It was a clean release.  

That's not to say Satoshi Nakamoto didn't do some of the early mining.  He did.  He made lots of Bitcoins after his clean release.  So no one else was grabbing him.  He needed to maintain the system.  He was taking them.  What he has done with them we don't know because he hasn't spent any of them but he could end up being the world's first trillionaire if he still got them all. 

So he developed the system he is going to get paid in a way that Bill Gates never knew if he's maintaining his coins.  But the key here is to realize that he had a clean release.  His minting has been approved and it is open-source and you can follow it and all the coins are going out in a way that people consider fair-ish.  Clearly if you haven't been mining or you didn't hear about Bitcoin you come out from a two-year safari and everyone else has all the Bitcoins you're not going to have as much as them.  So people who got in early will likely have more of these free Bitcoins that are being released than people come later.  It's just the way it works but that doesn't mean it's not a clean release and Bitcoin as far as anyone can tell is a clean release.  

And so the minting is trusted and approved and this is a big deal.  So he was able to solve this very, very difficult problem of minting by using open-source and having a transaction blockchain which shows where every coin goes in history.  Next problem, double spending.  Nobody who is working on currencies in 2008 wasn't aware of the double spending problem.  And this is the big problem.  So many people had developed some really beautiful digital currencies and great philosophy but they couldn't solve this issue with double spending.  

We're going to stop here for now.  We're about halfway through.  Please look for part two of how to make your own digital currency.  Please like, comment, subscribe, send a hug, do whatever it takes.  We'll check you out at the next video.

Written by James DeAngelo on November 18, 2013.