Video - Bitcoin 101 - Understanding Bitcoin pt. 1 of 3 - A Beginners Guide With Help from Wikipedia
Wikipedia's a great place to start when you want to learn about anything. Trouble is bitcoin is so novel, that most people get even more confused when they read the Wikipedia page. With terms like double spending, decentralized computing and cryptocurrency, it often feels like one might need a PhD just to read wikipedia. Our humble goal is to help you get through the first paragraph and get a full grasp of these terms. So, sit back, relax, in due time host James D'Angelo will help you understand this amazing new currency like a Bitcoin insider.
Hello! This is James D'Angelo. And welcome to the Bitcoin 101 blackboard series. Believe it or not we're going to do two massive videos just discussing one paragraph on Wikipedia, the first paragraph that talks about Bitcoin. It's really deep stuff. In fact, some of these ideas require a PhD to fully understand. So stick with us. Here's part one beginning right now.
Hello! This is James D'Angelo. And welcome to the Bitcoin 101 blackboard series. If you're like me one of the first encounters that you had with Bitcoin brought you immediately to the Wikipedia page. And again, if you're like me you ran into a whole mess of confusion. In fact, trying to understand Bitcoin right at the beginning is so confusing that it leaves a lot of people pretty cold. So what we're going to try and do is we're going to take a look at this first page where lots and lots of people are coming.
The Bitcoin page is one of the most viewed pages on Wikipedia certainly in the last month. It's always in the top ten. And we're going to try and make this legible because even though it's beautifully written it's not light reading. So what we're going to do is try and run through the first paragraph and add color to the areas that are just a little bit confusing to a beginner. So here's our Bitcoin page, Bitcoin. And one thing that you'll notice is that it doesn't have one of those Wikipedia locks on it. And this is important. It means one, that the subject at least on Wiki hasn't been made so controversial. They'll put a lock on Obama or George Bush or some political idea. Makes it harder to edit. But having no lock here means that you could still go in and do quite a bit of work on this and in fact, the Wikipedia page changes frequently and it seems to be changing for the better. So let's dive in.
Bitcoin, which is the name and that alone is important. The name, we've done a whole video on the name and how the name itself can be a little bit confusing. It was probably named after BitTorrent. Because much of the idea of the original founder came from these BitTorrent, a way to decentralized. And we'll talk all about that. But for most people the name Bitcoin sounds a little bit too commercial and they think that someone owns, in fact, I get a lot of emails from people thinking that I own it. No one owns it. So even though it sounds like companies that have major ownership like Walmart or Facebook, Bitcoin is not owned by anybody.
So let's move on. Bitcoin is an open source. Open source, peer-to-peer payment network. Well, open source is very important. What this means is that it has sort of a constitution or sort of a Bible, a set of rules that are published online and in fact, what everyone uses on their computer is that exact code. Now one of the great things about it being open source is that anyone can vet it. So you can read the code and determine if this is secure, if this is something you want to get involved in. Now for most people including me and I've programmed, reading that codes a little bit like reading Dante in the original Italian. And I speak Italian but reading Dante is very, very difficult. So open source does allow for the rest of the world to understand it.
Unfortunately, for the average user it's not a lot of help. Sort of like this Wikipedia paragraph which isn't a lot of help though it's beautifully written it needs explanation. So open source is kind of like the Constitution. So you have the running program right there online for anyone to read. And another nice thing about it being open source is that people can suggest changes. They can suggest upgrades and these changes occasionally happen. So there's new releases all the time.
Right now, I think, we're on version 0.86. So some would call that a beta. Even though it's been out there in the wild and working for a long time rather well the developers are obviously very conservative and they don't want to hype it up by saying it's Version 10. So we're on version 0.86. So one change that they're working on right now which I think is rather beautiful is that instead of these crazy kind of Bitcoin address names starting with a one and having number of characters, FGS76LP for 32 characters, right. Instead of having these kind of nonsensical addresses the thinking of attaching the ability to pay to even a website. So if you've got a store, small store and you've got Dave's Furniture, if you're www.davesfurniture.
Well, won't it be great if on your phone instead of seeing some crazy alphanumerical address like that some sort of asky weirdness you were paying directly to something that gave you a little more trust. Well, it says Dave's Furniture on there. That feels a little bit better especially for people who are used to paying that way that's going to make a lot more sense. Another thing that's very interesting about this open source and how the open source propagates through the Bitcoin network is that it acts a little bit like a democracy. So even though the main developer say Gavin Andresen wants to make a change he's not assured of making that change. He puts it out there, if all the miners, all the computers that are operating and using the software decide not to use it. Well, then his change gets rejected. So it's got a very democratic sort of nature and indeed you're looking at the majority of votes. And in this case in the Bitcoin world if you're using the software you are voting so you get a very high voter turnout. So open source is a big deal. This is again the ability to read the software anywhere. It's open and the source is the code, the software. So let's move on, change colors a little bit. So the next kind of stumbling block here is peer-to-peer. And it makes sense.
Peer-to-peer means I'm a person and they're a person and I'm interacting with just that person. Well, that doesn't seem that confusing but when you're dealing with digital technology we find that most things that we're doing isn't peer-to-peer. So if I put my YouTube video up and I want to show it well, sometimes it might get rejected by YouTube so that you can't see it. I'm not just sending you a video I have to deal with this third party that's going to tell me whether or not I can show this video and in fact YouTube rejects lots of videos based lots of reasons. Same with eBay. If I sell you this product you may have some sort of dispute about it. I may disagree with what you're saying and that is decided by this third party. That is not peer-to-peer. So peer-to-peer is when I deal with you one-to-one.
And in fact the US dollar is peer-to-peer. If I pay you with dollars. Unless we decide to go to a court which you can do even with Bitcoin, if I pay you with dollars that transaction is negotiated only by you and me. So Alice gives Bob $4. There's no computer software, no anything that's judging. eBay doesn't judge that transaction. So US dollars are peer-to-peer. So peer-to-peer is one-to-one and this is a big deal because this is very, very hard to do in the digital domain. So you can do with dollars very well. But in the digital domain we're used to having some company controlling our actions.
So Microsoft controls Hotmail. Google controls YouTube. Facebook controls what and how we send and they toss a bunch of rules on us. Peer-to-peer is just strictly amoral. It doesn't care what you do, how you do it. So it's very important to know that peer-to-peer is amoral. If I give you US dollars for a mountain of cocaine, well, the dollars don't care. But if I start doing bank transfers to someone who's notorious for selling cocaine, well, the bank will care and they might shut down my transaction. So a peer-to-peer is also amoral. Amoral turns out is actually a fairly good quality of a currency. And people enjoy that because it means you can't attach any sort of religion to it or any sort of other system and that's why you'll see Bitcoin being adopted by Catholics and Muslims and Buddhists and other religions equally.
Because it's amoral. It becomes also neutral. So peer-to-peer is one-to-one. I pay you, you pay someone else. No one provides any sort of interference with those actions as long as you have the money. The only thing the network does is check if you have the amount to spend. If you have it you can sent it. That's the only verification they do and of course that's a very good verification. It's very hard obviously to hand someone US dollars from your pocket if you have none in your pocket. So that's the only thing the network will check you for. Well, that gets us to this thing, the payment network.
Now when a lot of people talk about Bitcoin they talk about it having no intrinsic value. What's the intrinsic value of one Bitcoin? Well, if there's no network the intrinsic value of one Bitcoin is zero and will always be zero. It's because the true intrinsic value of Bitcoin is this network.
And this network is millions of computers networked together to oversee these transactions and all they're doing is checking if people have enough money. So all these computers together are overseeing and logging these transactions. So this network is this amoral, beast, it's a monster. This is a beast but it's also a payment network and this is key actually because payment in this sense normally means one person's handing another person an amount of money and that's registered and recorded on this ledger for all time. But there's a lot more sophistication built into this idea of this payment network. You can do things where you can time stamp money so when my son turns 21 he receives this money.
That's all of a sudden becomes much more interesting when you can program money. And much of the value of this network is it's the first truly programmable money. And this means you can do things like escrows without signing contracts. You can just decide them between yourselves, you can press go and that money is suddenly in an escrow where two of three people have to sign for that money to be released. So this idea of escrow is old but it's going to see a whole new life in this digital domain. And we're getting to digital right now. So Bitcoin is an open source. Anyone can read it. Peer-to-peer, I give the money to one other person, no one interacts with that as long as the money payment network, right, this enormous massive computer infrastructure that prevents people from gaming the system because it's so big and digital currency. So let's move that down here. So one thing that's important to know is Bitcoin is not the first successful digital currency.
That title went to E-gold which started in the late 1990's. I think 1996. A guy named Douglas Jackson programmed a way to transfer a value that was equivalent to gold. So he was actually holding gold, sticking it in a safe deposit box when you bought into E-gold. And as his business grew obviously he grew out of his safe deposit box and the currency did blow up. And the interesting thing about E-gold is many of the lessons and there were a lot of tough lesson learned by Douglas Jackson who has been walking around his house with sort of a transmitter on his ankle because he's been under house arrest. He's had his vaults seized.
The Federal government has been on top of him now for years. A lot of these lessons went into the design of Bitcoin. So E-gold was the first digital currency. But what is a digital currency? And we talk about this a lot in other videos but digital gives it some major advantages right. And one reason why E-gold was so great is that suddenly you could send the value of gold instantly using the Internet. So digital is very light and if you've noticed most currencies get lighter and lighter. The US dollar is much easier to carry than gold. Gold was a great store value because it had a lot of value in a small amount so it meant you didn't have to carry your eggs or you peaches to market. You carry gold coins.
Digital is clearly a lot lighter than gold and it's a lot lighter than dollars and especially if you're crossing a border digital is very handy because you don't have anything on you and it travels very fast. And digital has a number of other advantages. You got accounting built in and all that stuff so digital is a great thing and it's worthy to note that there's another $700 billion digital currency out there and that is Airline Miles. So frequent flyer programs, they're not sending you dollar bills that they print up that are vouchers for airline flights. they're just playing with your credit card and your credit card names and it's digital.
So Airline Miles are also a famous digital currency. And Airline Miles, frequent flyer miles, have been around since 1972 and I'm sure as technologies increase they've improved the ways they transfer and store their miles digitally. So we're not even halfway through the first sentence. Bitcoin is an open-source, peer-to-peer payment network and digital currency. Now a lot of this stuff that you're going to see on this Wikipedia page is kind of, well, it's a little annoying. Because if you go and look at the US dollar for example, they're not going to tell you it's an analogue currency.
But Bitcoin is kind of bending over backwards to tell you who they are because they're the newcomer. The dollar doesn't have to tell you they're an analogue currency. That's all we know. So Bitcoins got to let you know perhaps that it's a digital currency. Facebook doesn't tell you that they're closed source. And they're trying to get more open all the time but Facebook is closed source. You're not allowed to get all the code that Facebook has. You don't get all the code that Google has. There secret formulas for searching. They're hiding their code. Digital currency, the US dollar is an analogue currency, traditional, peer-to-peer. They're not telling you the dollars is a peer-to peer thing. But it is. And eBay doesn't say we're not a peer-to-peer. So a lot of what you see on this is just because Bitcoin is new and people don't know fully well how to describe it and the poor New York Times is going to take ten years till they actually write an article that makes sense about it. And perhaps when we reach that level sort of understanding and comfort with these ideas we might get a lock up there. But let's keep moving.
Bitcoin was introduced in the 2009.
The only thing really notable about that is that's pretty recent. For a currency that's now worth up around $10 billion. It's been up to over you know eagled $13 and $14 billion dollars of total market capitalization, well, 2009 strikes me as pretty recent. And it was introduced by a pseudonymous developer. Most people run into this word pseudonymous and go what is that? Well, it's really just means anonymous except the anonymous guy gave himself a name. So the developer who we don't know who he is and in fact I'd say most of the guesses don't even seem to be that close. Here's a question mark on his face. Here's our developer. Well, he called himself on these forums Satoshi Nakamoto.
Now, why is he anonymous might be a more interesting question. And it probably has a lot to do with Douglas Jackson over here at E-gold who had been arrested and harassed so much it probably has to do with other people who develop currencies. Liberty Reserve and Liberty dollars, who have all come under major Federal scrutiny and even been arrested. So the reason why he's pseudonymous, he gave himself this fake name and he's really just anonymous it is manifold. But one thing that's interesting about this character is it's likely this character either has the most amounts of Bitcoins in the entire system. So he's likely to be one of the world's first trillionaires or perhaps he's just protecting his idea and like many of the early adopters just let his Bitcoins, he threw him away.
So it's possible that it's thrown away what could eventually be a trillion dollars worth of value just to protect his idea. I think it's admirable. So we don't know much, we assume that Satoshi Nakamoto was working from England. There's a lot of sort of English mannerisms. He wasn't the world's best programmer, fully understood cryptography, really understood economics but he was a great writer. And a great writer in the English language and he wrote a lot. So we have lots of his extant emails and blog postings and forum postings. And his writings is very succinct, very clean, beautiful writer so likely a native English speaker.
And that's why many people think maybe he's from England, has to do a lot with the times he was writing and where he registered certain domain name, etcetera. So we've gotten through the first sentence and we're going to have to move a little quicker but Bitcoin is open-source, peer-to-peer payment network and digital currency introduced in 2009 by a pseudonymous developer Satoshi Nakamoto. Bitcoin has been called a cryptocurrency. Hey! Cryptocurrency. This is probably the term I take most offence to on here because calling it a cryptocurrency would be sort of akin to calling Facebook a crypto photo sharing server or calling your email as crypto mail. Because everything, everything, any company that's working on the internet right now is using cryptography and they're likely using the same methods of cryptography that Bitcoin is using. Bitcoin doesn't use a lot of cryptography. They use hashing algorithms so they use the SHA-256. I think there's a little taste of RIPEMD after the SHA-256. But the main thing they're doing is using elliptic curve technology for digital signatures. And this is all highfalutin stuff but this stuff was not invented by Satoshi Nakamoto. In fact, almost all of this stuff is around 20 years old or more.
So this is old stuff and all these websites are using it. So saying it's a cryptocurrency I think is just about the most misleading thing in the world because if it's online right now it's using cryptography. And the cryptography it's using is standard stuff. It's difficult stuff to understand. Just understanding the RSA and how that works and how they use public key infrastructure is difficult and we're going to cover that in video but what's important here is to realize that Bitcoin is getting tagged as a cryptocurrency when none of these other sites, right, you know, Gmail isn't called crypto mail and it has a lot to do with the fact that we're still just grasping to understand Bitcoin and so we're almost making the whole thing much more confusing than it needs to be. If you sign on, if you have a password somewhere you're using cryptography.
So passwords these days will equal cryptography. Probably didn't in the past because they were just storing your passwords on their central hard drive but no company in their right mind would do that now. And Bitcoin doesn't do that. The interesting thing about the particular curve, elliptic curve that they use and they use the Satoshi choses SECP256K1. This particular curve is interesting because the most common form of this is the R1. And when Satoshi was programming Snowden hadn't released all this crazy information about the NSA. But Snowden released information since Bitcoins been out saying that the R1 had some back door problems. The NSA was aware or it programmed in some sort of backdoor way to actually steal the information that was encrypted using the SECP256 R1.
Satoshi chose the more secure but less used K1 and that's K stands for the developer, one of the original ideas is this guy named Kelblitz. So this is a beginning flavor of the cryptography that's used but this cryptography is used all over the Internet. There is enormous amounts of cryptography going on in your email. And the interesting thing about Bitcoin actually, one other interesting thing in terms of cryptography is that it's actually cryptography light. In fact, all your transactions are not encrypted so it doesn't use a lot of encryption. Whereas if the bank is sending messages back and forth you better believe me that's encrypted entirely. So it's actually got less encryption and cryptography than most bank protocols. Bitcoin has been called a cryptocurrency. This is in the second sentence.
So you're reading this trying to understand Bitcoin, you run into this and you go, I don't know what I'm doing. I can't get involved. It's so scary. This one day will fortunately be way down the Wikipedia page as we begin to understand Bitcoin more. It's valid. It's true. It's great and this paragraph is written well but you can understand why it would knock people back. Bitcoin has been called a cryptocurrency because it uses cryptography to secure funds. And all I can say is yeah, it better be using cryptography to secure my funds because the Internet doesn't have bricks and security guards and armed guards sitting around it. The internet is open so you need cryptography. It's the only way you're going to secure funds on the Internet. Transactions, transfer Bitcoins, the unit of currency between Bitcoin addresses derived from cryptographic public keys. Well, we've talked a little bit about this. This is your public key up here. And what people do is they can send money to any public key. So maybe we bring up a new page and take a quick look at this.
So let's just talk really quickly about public keys or addresses. So this is our donation address. So if you want to send a Bitcoin or one one-millionth of a Bitcoin to World Bitcoin Network, you would use this address right here. So this is our public key or our address and this is a receive only code. So you can send money to it but you can in no way send money from it. And this is important. A lot of people generate their public key and they don't know whether to give it out. And one way you can tell that this is a public key or public address is that it starts with a 1. Your private key will usually start with a 5 and your public address can start with a 3 or a 1 but it's not going to start with a 5. And this address you can give to anybody. Now the interesting thing about this is that Bitcoin uses public key cryptography to generate this address so.
What it does is it actually comes up with your private key which is much more ugly. So it comes up with a private key that looks like this. And you can see it starts with a 5 and this is a valid private key. This private key is what you should keep to your lonesome. If you give out the private key someone will be able to take all the funds that have ever been sent to your public key and these two do not relate. I grabbed just a random private key for this demonstration and from this private key you can generate the public key. And this is where the cryptography comes in. So what they do to get the public key is they run this number into elliptic curve cryptography. Then they do a SHA-256 hash on it. Then they do another hash on it and then they do some checksum. So if you mistype this address as you're sending it to someone, say you replace this S with any other character.
Say you replace it with a W, it will say invalid Bitcoin address. So you don't have to be afraid. This cryptography and the way they set up these address is actually it protects you. It's supposed to make your life a little bit easier. You won't see like big I and little I's or O's and zeros in the typical address. Because they're actually trying to make it so that you can read it and not make all these mistakes. So don't be afraid as you're using these addresses that maybe you didn't put on the last character. If you knock that off you'll get invalid address. This again, this public key is generated using math. So you use math to get from here to here. And this is great because it means that if you have this this is all you need to check your address, use your money, send your funds. But again the biggest problem with Bitcoin is security.
Most people had no idea how much security they're really going to have to apply and that's why this last line in Wikipedia is written here is that you have to be very, very careful of your private keys in a way that you've never been careful of your passwords before. We're going to do this whole video series about Bitcoin security and it's all going to have to do with protecting your private keys and storing them in such way, paper wallets, cold storage that you don't end up losing all your money. Lots and lots of people have lost money in Bitcoin because they have been careless or they don't know what they're doing with their private keys so be careful. So I know this is a little bit of a tangent but it's an important one.
Transactions transfer Bitcoins unit of currency between Bitcoin addresses, this guy right here derive from cryptographic public keys. This is the public key. This is the private key. They are linked by math. To spend the funds associated with this address, so people have sent me tips and if I wanted to spend them a user must broadcast a payment message digitally signed with the associated private key. So in order for me to spend money from my 'LaDue' address, which is my nickname because those letters just happen to come up in it. I have to have the private key. So I have to have something that looks like this that starts with a 5 and if I have it or it's in my wallet somewhere I can just simply open my wallet Coinbase, whatever and go send money to a different public address. So I can send it to a charity. I can send it to my friends. I can do whatever I want with it. So to spend the funds associated with this public key a user must broadcast a payment message. So because it's a digital currency obviously you're going to have to do it when you're online in some way using your phone you will say send.
So when I go to Veggie Galaxy here in Boston I pull up my phone I go it beep! beep! and press broadcast. Of course, broadcast just means what you think it sends it to the network, sends it to their computer and they receive their money. Again, this terminology just a little misleading. It's the same technology that you might use if you're sending them a tweet. So you tweet them a payment message. We're not using tweets but it's similar. A digitally signed with the associated private key. So this private key is tossed into a math equation that suggests that you actually have ownership of that private key. And we're going to go into this fully with a whole video or two on the elliptic curve cryptography that's used and all the beautiful things of that technology.
So we're about halfway through and we've been blabbing for a while so we're going to stop there and we'll call this part 1. And what we're going to do is we're going to have part 2 and we're going to finish off the second part of this paragraph and this is very, very important stuff. So don't miss part two because we're going to talk about decentralize networks. We're going to talk about this proof of work or proof of luck or proof of massive computing system. We're going to talk about the craziness of the ability to double spend and why Bitcoin was so genius.
In fact, if I had to one sentence to this first paragraph I would go, it was a genius invention that solved this age-old problem of double spending that you could do in the digital world and it really was. So Satoshi Nakamoto will forever be revered for basically providing the light bulb to digital currencies. The big bing! Moment. This double spending was an enormous problem. No one could figure out how to get around it. People have been wanting to do digital currencies basically since people started computers and he figured it out. And so it's a genius invention. And this really should be up higher than saying cryptocurrency and all this mumbo-jumbo.
The operators of these computers are known as miners. Now mining trips everybody out who's new to Bitcoin. We're going to cover that. And we talked about almost all these topics in other videos but our goal is to get you through this first paragraph and maybe even just touch upon some of the little things that are in here that are important and we're going to do this in the second part. This whole idea of 21 million coins all that stuff, very, very important stuff. So we'll see you in part 2.
Remember to like, comment, subscribe, do whatever it is you do. Get yourself some tiny amounts of Bitcoin so you can understand all this stuff better than a Wiki page will ever do. Check you out in the next video.