Video - Bitcoin 101 - What is Bitcoin?

This is the definitive introduction to Bitcoin. Without diving too deep into the code, James brings you to understand why Bitcoin works and why it has such power.

This video is the result of a talk we did at Harvard University in April 2014 for Bitcoin beginners. Many of them mentioned that this talk helped them to finally understood the basic idea and we hope it works for you too. Even better, it is a story, covering the failures and difficulties of creating a digital currency, so for non-techies it is more accesible as well.

TRANSCRIPT

Hello. This is James D’Angelo and welcome to the Bitcoin 101 blackboard series. On July 5th, 2010, Satoshi Nakamoto, the anonymous inventor of Bitcoin wrote, "Sorry to be a wet blanket. But, writing a description of Bitcoin for general audiences is bloody hard. There is nothing to relate it to." And its truth, anyone who studies Bitcoin runs into the same problem trying to explain Bitcoin to an absolute beginner so they reach some sort of epiphany. And there is no question that I have struggled with the same problem. And it wasn't until I got a call, a couple of weeks ago from Harvard to do a talk about what is Bitcoin that I really had to stare this problem in its face.

So I came up with these slides and I came up with this talk that I am going to try and do right now. So this is going to be a story. It is a parable and it is called “How the Constraints of Digital Define Bitcoin.” And it is a parable because we do not know all the facts. Satoshi Nakamoto is, we will talk about, is anonymous so we do not know exactly what he was thinking when he was designing Bitcoin. But fortunately, he has written enough and we will use some of his quotes in the story then we get an idea of the processes he was going through. So let us move forward. In 2008, our story begins and it was not just coincidence that Bitcoin as an idea, was born in 2008 amid the turmoil of the financial crisis.

In these years, it was pretty easy to notice that the average person was more concerned about the idea of money than normal. And Bitcoin address similar ideas. So people were talking about the Fed a lot in those years. There were lots of discussions about money creation, monetary control, and quantitative easing. Of course, there were those who thought the bailouts were acceptable and the Fed was acting appropriately with the stimulus package and all that and there were those who did not. So a lot of chaos, mistrust and anger ensued and it was directed at these big financial institutions, banks, insurance companies like AIG or the Fed. All these organizations that wielded enormous financial powers. But our story does not deal with those two groups. It deals with a much smaller group of programmers, individuals who thought that software was the way to address the problems they perceived with money. And our story focuses on one person in particular and that person is Satoshi Nakamoto who as we mentioned is anonymous but he uses a male Japanese pseudonym.

So we will just honor his request and call him a he. He could be a female; could be a group of people; could be merchants. We do not know who they are. But we do have some of the writings. So whoever did this was posting and blogging and updating Bitcoin. They wrote on white paper and they signed it with Satoshi Nakamoto and in some of those writings from their account, they wrote this. "The Central Bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of this trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve." And he wrote that in February of 2009 just a month after launching Bitcoin. But what becomes evident from this is that he is an excellent writer. He has got an intimate idea of the history of finance and cryptography and he believes that inside software there is a solution to the financial crisis.

His particular solutions is devilishly simple. He wants to turn ones and zeros into money. And this is not like your credit card or online banking where those ones and zeros or those numbers represent money held by the bank or some other institution. This is actually, turning ones and zeros into money such that if you hold those ones and zeros or you hold that long stringing numbers, you are actually holding that money and this had never been done before. But, what is important to realize is that this dream was not new. So 20 to 30 years ago, IBM and others were very involved in trying to develop digital currencies. Milton Friedman, the noble laureate in economics also does a big televised interview where he was talking about the powers that would be possible if you could create a digital currency. And he talked about softening borders and possibly even eroding the nation state. And still, there were others.

So people had written New York Time's bestsellers that focused on digital currencies and the provocative changes it might bring into our society. But the most famous group when it comes to development of digital currencies is the cypherpunks. So they are not the cyberpunks. And this was a group that started in San Francisco. Guys that were just meeting up that eventually became one of the first mailing list in history.

So in the early 90's, it was a collection of really powerful programmers from Apple, Microsoft, the government all getting together. Some of them are anonymous, some of them using their real names talking about using cryptography to change the way the world works. So they believe that inside the digital domain, inside cryptography, they could side step the problems of money created by politics, banks and special interests. And they had been thinking about this since the 80's. And this is from their own manifest that reads, "Cypherpunks advocates the widespread use of cryptography as a route to social and political change." And one of their main focuses was digital currencies. And so it is important to realize that there is enormous advantages of taking your currency and turning it into something that is digital and most of these are fairly obvious. Now, you can send your currency very fast and so the velocity of money increases into a maximum. The currency itself weighs nothing, so storage and transport is minimal. It is programmable, so depending on how complex the programming algorithm is in the digital currency, it can actually, make decisions based on external factors. It is very internet ready.

Right, current cash is not very good with the internet. It is international obviously it provides easy accounting because it already digital and already typed in. It is cheap to issue. Governments spend billions of dollars printing and minting and protecting a currency and they also spend billions of dollars fighting counterfeits. And then there are of course, probably other things that I did not think of right here. But there was a big problem. So going digital, turning money into digital was proving really elusive to all these genius cypherpunks. They were having a hard time going digital and it is important to understand the very qualities of digital that were making this difficult. And the biggest problem was that digital is great at recording things and then once you recorded it, it is even better at making perfect copies.

So you can make perfect copies of music, perfect copies of video tapes, photos and data and you could make perfect copies of messages. So transactions, digital tokens, etcetera and this is really important because the first idea that almost anyone would have if they are going to try and create a digital currency is that they are going to try to make some form of digital token something that cannot be copied that I can pass around and I can prove uniqueness. Well that is really difficult, with digital domain. Anything that IBM and these others were trying to develop to make these digital tokens was quickly being copied by hackers. So this perfect ability to copy was thwarting digital currencies. This is pretty clear perfect copies make bad money. So if counterfeits are indistinguishable from the Real McCoy, you do not have the monetary system. If you can run off US Dollars from a Xerox copier then you do not have financial institutions at all. Here is a little poster the US Government is spending money trying to alert the public to the problems of counterfeit money.

So as the ideas improve, as it got farther away from digital tokens, they run into still another problem and this problem might even be more famous it is called the “double spending problem.” And the double spending problem has to do with the fact that networks are noisy and so any transactions of your digital currency that you are going to spit out across the network are not going to arrive as soon as you send it. There is going to be a delay time between sending it and when it arrives. This could be one second or even up to even minutes but it is usually around 15 seconds. But what can happen is that in this time, a clever hacker or whatever, can resend the same transaction, using the same value to numerous other people. And so this idea of double spending really could have been called the infinite spending problem and as more and more experts started to think about the difficulty of creating these digital tokens or this infinite spending problem. They started to think that creating digital currencies might just be impossible. And so all this excitement towards digital currencies started to die off. But in 2008, with the financial crisis and all these concerns about money, new fires were being rekindled in the imagination of some of these programmers. And Satoshi Nakamoto working in 2008 was one of them.

Again, he was inflamed and frustrated by the current monetary system and he was having real difficulties with the double spending problem and these digital tokens and he started to look elsewhere for inspiration. So he studied this new software that had come out in 2001 called BitTorrent which by some estimates in 2008 when Satoshi was working was responsible for approximately 15% of all internet traffic. There are some estimates that say that BitTorrent was responsible for up to 80% of all internet traffic. And BitTorrent was famous partly because it replaced this even more famous company called Napster. And if you say Napster to a programmer it is as famous as if you are saying the Trojan Horse. Launched in 1999, shut down in. 2001. Napster's failure became an important case study for hackers and a turning point in the design of modern software systems. And this is because when someone mentions “Napster” to a programmer they immediately think “centralized” and they think centralized in the worst of all ways. Centralized, meaning bad and centralized meaning not robust.

So for those who are not familiar with Napster, they were a file sharing site where you could download copies of Michael Jackson's, ‘Billie Jean’ or you could download Jurassic Park the film but they kept all these files in one set of hard drives in one server in one place. So they were ultimately centralized. What happen is, they probably got some sort of court injunction but I like to picture it as the FBI went in and when the FBI went in they walked over to these hard drives and the server and they unplugged them and Napster was done. With one plug, they had shut down the entire system. And so literally the same year that it was shut down, the code for BitTorrent was released and it has been running ever since without being shut down. And it's coup de grace, its solution to the centralized problem was to flip the problem of storage on its head.

Instead of central servers, the BitTorrent algorithm chopped all the media files up in to tiny pieces and scrambled them on users' computers everywhere. So Billy Jean and Jurassic Park were put all over the place, multiple copies everywhere. So when someone went to download it, they queried many computers that would bring it all together. Now, it is important to realize that BitTorrent is not even fully decentralized but it is a much more decentralized system than Napster and it is the seismic change in software that moves from Napster which was not robust to BitTorrent which cannot be shut down by authorities. And the rule of software right now is to never centralize again. Much as you kind of consider the hunters of old as being really proud because they shut this big massive centralized biology which was an elephant, right? Which is now kind of so pathetic and sad that if you see someone who has hunted an elephant, you actually feel bad for the elephant and you feel how antiquated these hunters are, that they could be proud that they shot an elephant.

It is so easy to find an elephant, you can do it with your infrared camera. You can find it with helicopters from the sky. If you really want to impress people as a hunter and sort of this new idea of decentralization, you might have to go around mosquitoes or bacteria or viruses. Things that take the same amount of biology and spread it out in copy at like crazy everywhere. Very similar thing that has happened in biology is now happening to software. And so we get back to our story. Satoshi was working in 2008 who was read about the success of BitTorrent at the death of Napster. He was determined to apply this idea of BitTorrent to banks. He wanted to find out what was the centralized part of banks. What was it? Money is not the centralized part. That is spread out like mosquitoes everywhere. It is copied and moved all over the place. He decided that if he could find that centralized part of the bank, he might be able to create a digital currency. And in a moment of genius, he decided to start to look at the ledger. And it is pretty interesting.

If you walk in to almost any big bank with a gun and you say, "Clean out the vaults or let me access your ledger," they probably be more likely to let you clean out their vaults. Because the ledger is where banks control money. So especially if they are big federal banks, the ability to access that ledger and add zeros or erase accounts is much, much, much more dangerous than stealing everything in the vault. And so Satoshi in 2008 decided to focus exclusively on the ledger. And the question started rolling, Satoshi thought, "What if I could turn a bank inside out? Instead of one central party controlling the ledger," because banks control those ledgers with everything they have got, "What if every user were recruited to maintain a constantly updated copy?" And so the ledger is the thing that he is going to break up into dust and spread it out just like BitTorrent did with Billie Jean and Jurassic Park.

Well, he had some immediate problems. First of all, public ledgers just are not so great. Here we see a kid who has got some access to the ATM and he is shooting different numbers into the ledger and he is getting a lot of cash out. Bank ledgers, turns out, are the ultimate tragedy of the commons. When such a high incentive to gain the system, there is always been only one result in history, Centralization. And if you are an American, that is the Federal Reserve. But as we spoke about earlier, centralizing leads to major mistrust and that leads to anger. But Satoshi was old enough and experienced enough to recall that he had some technology at his disposal. And so to create his decentralized ledgers Satoshi paired two main technologies. One is called the “Proof of Work” and one is called “Elliptic Curve digital signatures.” The interesting thing about this is, is none of these technologies were brand new.

So nothing that he used was more recent than 2001 and these two technologies combined solved the two problems of digital. One was the double spending problem and the other was unique access to ledger, actually having unique ability to do something digitally. So what is really beautiful about this is Satoshi had taken the real weaknesses of digital, this copying problem and he turned it into a massive strength by focusing exclusively on the ledger. The strength of digital was perfect copies, "Okay" he said, “so copy the ledger, everywhere, instantly.” In turn, he made the uniqueness the flaw. Any ledgers with even one comma not agreeing with the masses would be discarded leaving fraudsters powerless. He had made Bitcoin by not fighting the problems of digital, but by accepting the fact that digital is great at copying and if you can copy the ledger perfectly and everywhere, people cannot fraud the system.

Any individual fraudster with a different ledger basically giving themselves extra money will get immediately noticed and tossed out of the system. And so what is really ironic about this is that Satoshi's master stroke, his real moment of genius was to eliminate cash to make his currency. There is no cash in Bitcoin. It is only access to specific ledger units. And so the decentralized consensus of millions is replacing the centralized decision of the few by reinventing how currencies can be built. And what is really, really powerful about this is that the blockchain becomes a new form of public good. We used to the idea of public good either being sponsored by the government national parks or sponsored by a private company which makes parks or amphitheaters or whatever. But we do not have anything which is protected and controlled by absolutely nothing at all just code running in computers everywhere. And if you shut down ten thousand computers, it does not matter.

The system keeps humming along. So we end up with something that is truly unique. It is not ‘state’ or ‘government’, it is not ‘private’ or ‘individual,’ it is an ‘other.’ A truly public system. So if you are driving up the public road and if you are driving up the private road, well, out here we have got Bitcoin. Bitcoin, for the first time in history you will be driving up this new thing that we do not even have a name for it. Perhaps all we can say right now is it is a blockchain. And this blockchain, this ability to control value with no third party, no banks, no government, nothing but consensus over seeing Bitcoin and this leads to what people have referred to as fuel.

Bitcoin is value that can be moved around. It can use to inspire new technologies for permissionless innovation. You do not need to ask to use the blockchain. It sits there. It waits for you. You can use it or not use it. You play by the rules of the code and everything will go smoothly. You do not play by the rules of code, and you would not be able to access it at all. And there are no fees for employing the technology. This code is open source. You can copy it. You can make your own and people have made their own coins left, right and center. Bitcoin does put in a fee structure to prevent people from spamming the system. Sending millions of ridiculously small transactions to shut down the network. So it does have a fee structure there. But there is no oversight on the transactions.

So anyone can send value to anyone without any party in the middle. And we will not get in to all of this in this video but this permissionless innovation can lead to things like creating code that makes contracts, mesh networks, notaries, voting, government and myriad other things which we will be talking about in all our videos. Okay, if you stop right here you should have a pretty good idea now about what this decentralized ledger is all about and how the constraints of digital for Satoshi to decentralize the ledger and eliminate money entirely. But, in order to get a better idea of Bitcoin, we have got a few more slides left and we are going to kind of walk through those and talk about some of these special ideas in Bitcoin. And so I am just going to jump through the rest of these slides just letting you know some of the advantages and power of this. Because the ledger is everywhere, everyone sees every transaction. You end up with the option for the first time in all of history to create a product or company that works with full transparency which will be great for charities, great for many companies and even possible great for eliminating corruption in governments.

Now, a lot of people get upset also because gangsters or mobsters or money launderers have been using Bitcoin. Well, it turns out that that's actually good measure of a currency because if a currency is actual deciding who can send what to whom, then it has some sort of morality base. Any one on earth can give US Dollars to anyone else on earth, without anyone else interfering. US Dollars and Bitcoin are very similar. If I could not give it to certain people, well then there is a control issue and that type of currency will not work. So the best currencies on earth, US Dollars, Euros, Yen, Yuan, whatever, diamonds and gold can be given to anyone and anyone can use it and so gangsters use all of those. But, keep in mind that Bitcoin is not a very strong currency right now.

A strong currency is one that is accepted by more people. So the strongest currency on earth right now is US Dollars followed pretty close by the Euro, lots of strong currencies out there. But, if you are trying to use Bitcoin in your daily transactions you will find that it is not very strong. Lot of people are not accepting it. But it is a baby, right? It is only 5 years old. And really as a currency, it is about 4 or 3 years old because almost no one in those first 2 years was doing any sort of transactions at all. And it got some issues. It is still being developed. It is software remember, so it's easy to steal. It's got a volatility issue that is a real problem for many applications and well it could be hacked and it could disappear tomorrow. It is just a real possibility. But, if it does get hacked, and if something does happen, it is likely that software programmers are going to notice the problem and try to fix this idea. This idea has been invented. It is not going away anytime soon.

Now, there are probably a number of people watched this video and do not get Bitcoin yet. It takes a while, but this video is my best attempt to getting you to understand a little bit about the idea of not using money and giving everyone a copy of the ledger, replacing money with ledgers. But, as Satoshi said, "If you don't believe me or you don't get it, I don't have time to try to convince you, sorry." That is Satoshi in 2010 about a year or a couple of months after he launched Bitcoin. And so one of the coolest things about Bitcoin, is it is really helping us understand what is money and we have to start thinking about this real dramatic possibility that perhaps cash, like gold or dollars, has always just been a placeholder in history until we could finally decentralize the ledger. Give the ledger to everyone. Really eliminate this massive tragedy of commons.

All these questions that we start to hear about money, does it need to have intrinsic value? Is having actual mass being made of molecules a positive or negative for a currency? We are not sure, but it is really clear that Bitcoin is asking those questions in a provocative way. It is making us rethink and possibly finally understand this whole concept of money. Okay, so that is it. I hope that this parable really does help you begin to understand Bitcoin. It is a very, very important technology and it really needs to be considered as simply that, as a brand new type of technology for dealing with value, wealth, limitations, all without any third party at all. No government, no private institution, we have never seen anything like that before.

So please remember to comment, like, subscribe, do whatever it is you do and we will catch you the next video.