WEBVTT

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Voiceover: Bitcoin is a
new virtual currency system

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that's been gathering a
lot of attention recently,

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and I thought I would
do a series of videos

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where I really dive into
the innards of bitcoin

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and explain how it works in detail,

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and my plan for this
first video in this series

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is to describe some of those mechanics

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at a high level.

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And then what I'll do in subsequent videos

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is dive a bit deeper into
all of the underlying aspects

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that I have touched upon
within this first video.

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And my hope is that by the
end of this video series,

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you'll know not only what a bitcoin is,

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but you'll also understand the mechanics

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of how transactions are initiated.

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You'll see how verification occurs

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for those transactions,

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and you'll also learn
what it means for someone

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to really engage in a process

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known as "bitcoin mining",

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and that may be a term that you've heard

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if you've had any interest
in bitcoin recently.

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I do want to point out, also,

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that the bitcoin scheme
is fairly involved.

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It requires some time to really cover

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all of the relevant details,

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and to me the best way
to really wrap your head

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around a scheme like bitcoin

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is to really suspend belief for a bit

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and get exposed to all of
these relevant details.

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Now, undoubtedly, you'll
have a lot of questions

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along the way,

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but my hope is that by the
end of this video series,

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all of the relevant stones
will have been overturned

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and your questions will have been

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appropriately answered,

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but it might take some time to get there,

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and in part, that's because
I'll try to describe things

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in a way that's sensible

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and that might involve
leaving some details out

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until I can explain enough
pieces of the scheme

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and then add in those
details in as I go along

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so that you're not inundated

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with too many minor points and nuances

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along the way,

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but you get a feel for the overall system

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as I go through things.

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With that, let me go ahead
and just dive right in.

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First of all, I do want to point out

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that bitcoin has been described, really,

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as a decentralized currency

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because there's no real
central bank or entity

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that's involved in generating
or transacting bitcoins,

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and, in fact, what happens
in the content of a bitcoin

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is all the transactions really require

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what's known as a peer-to-peer network,

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a network of just individual
hosts that essentially

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collectively agree on different aspects

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of how the protocol is
implemented and used.

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Bitcoin itself is also
referred to sometimes

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as a cryptocurrency,

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and by a cryptocurrency,

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I mean that we use a lot
of cryptographic techniques

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in order to facilitate or to really enable

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bitcoin transactions to take place,

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and I'll do separate videos

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on some of these techniques,

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but just take it at face value right now,

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that it's decentralized

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and is a type of cryptocurrency.

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I also want to point out that
the term "bitcoin" itself

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can in fact be a bit confusing,

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and in many ways, bitcoin transactions

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don't really resemble
traditional coin transactions

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so much as they represent really entries

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in some type of a global ledger,

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and by that, I mean let's say you have

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a transaction taking place,

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and let's say the
transaction is taking place

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within, or among two parties,

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and we'll call them Alice and Bob,

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which are traditional names that are used

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in many cryptographic protocols

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to describe the parties involved,

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and imagine that Alice wants to transfer,

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or really wants to assign,

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a certain number of
bitcoins that she possesses

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over to Bob,

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and you can think of
this transaction, really,

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as an entry in a ledger of some sort,

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and I also want to point
out before proceeding

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that even though I've used terms

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like Alice and Bob,

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what I really mean in
the context of bitcoin

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is not the actual identities
in the physical sense,

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but really that Alice
and Bob are identities

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in the bitcoin system,

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and these identities are just,

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in actual implementation,

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are just collections of numbers

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that do not have to be tied

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with Alice and Bob's
real-world identities.

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In that capacity, you can
think of bitcoin at any,

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it really is effectively being,

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of being pseudonyms,

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rather than real names,

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and the idea is that
bitcoin really becomes more

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of a pseudonymous protocol,

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where people are addressed
by their pseudonyms,

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and that provides some level of privacy

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to users that want to transact

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using the bitcoin system.

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Now, in a transaction
between Alice and Bob,

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what Alice will basically do

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is specify a few different numbers.

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She has to specify how many bitcoins

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she wants to allocate to Bob.

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Let's say Alice started off
with 50 bitcoins of her own.

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She might decide that she wants to give,

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let's say, 30 of these
bitcoins over to Bob,

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and let's say she wants to have

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some number of bitcoins
returned back to her,

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so you have to specify,

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or Alice has to specify, rather,

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how much change she's going to get,

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so in this case, let's say
her change is going to be

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18 bitcoins for herself,

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and then the remaining 2
bitcoins are going to be

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a transaction fee,

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and we'll talk about what
a transaction fee means

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a little later,

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and I think I'll also dive
into it in future videos,

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but it's basically an
incentive for other nodes

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in the bitcoin network to help Alice

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in essentially validating
some of the details

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of this transaction for Bob.

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Now, Alice will take
these transaction details

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and apply what's known
as a digital signature

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to these transaction details,

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and a digital signature is basically

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the mathematical analog of
a traditional signature.

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It really binds Alice's
identity to the details

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of this transaction.

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And by Alice's identity, again,

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I mean her identity
within the bitcoin system,

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and this binding is really done

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in a cryptographically strong way.

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Now, the details of this transaction

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once it takes place,

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are going to be broadcast out,

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so Alice is going to take
these transaction details

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and effectively just broadcast them out

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to all the nodes in the
peer-to-peer network

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that represent bitcoin nodes.

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Now, Bob, when he receives information

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about this transaction,

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he receives it over the
peer-to-peer network.

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He'll probably sandy check

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some part of the transaction.

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For example, he might
check that the numbers

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work out correctly,

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that Alice, let's say,
started off with 50 bitcoins

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and is not trying to transfer

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more than 50 bitcoins to
him, and so on and so forth.

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He's going to have some
mathematical assurance

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because of some of the
cryptography involved

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that some of these claims are accurate,

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that Alice, let's say, has the bitcoins

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that she's claimed to possess,

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and that she's expressed an interest

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to assign those bitcoins to him,

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but what he won't know yet is whether

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Alice has really tried to
transfer those same bitcoins

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to anyone else over the course of time

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or maybe just prior to that point.

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the way that we handle that situation,

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and by the way, I should point out

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that this concept of Alice
trying to, let's say,

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spend coins twice,

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in the context of digital cash

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and electronic currency systems,

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this concept is known as double spending,

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and it's something you have to worry about

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when you have virtual currencies

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because it's very easy
for someone to just copy

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the numbers that
represent this transaction

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and try to use them elsewhere.

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The way we basically handle

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and reduce the risk of double spending

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is through a specific set of nodes

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in this peer-to-peer network

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who are known as bitcoin miners.

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You might have heard
this term bitcoin miners,

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and the bitcoin miners are basically

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specific individuals,

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specific nodes within
this peer-to-peer network,

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and what they basically do is they take

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all of the transactions that they see,

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and remember,

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they're listening to all
of these transactions,

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and not just Alice and Bob's,

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but other transactions
that are taking place,

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and they'll take those transactions,

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and ultimately, they will
take those transactions

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and will compile them

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into what's known as a transaction block.

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So it's basically a recording

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of all the previously
unrecorded transactions.

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If you think of a single transaction

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let's say, as a ledger item,

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you could think of a transaction block

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as representing, let's say, an entire page

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in a ledger book.

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These bitcoin miners will
also include in this block,

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in addition to all these
unrecorded transactions,

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they will also include in this block

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a special transaction that's
meant just for themselves

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to basically reward
themselves for the effort

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of doing this mining.

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Now, a transaction block will also contain

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an encoding of the
previous transaction block,

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so there's going to be
some level of continuity,

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and then bitcoin miners will also include

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a specially-crafted sequence of numbers

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associated with these transactions,

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and this sequence of numbers is known

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as a proof of work,

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and it's called a proof of work

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because it's sometihng that's
really hard to generate,

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something that requires
a lot of effort to do,

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and that kind of makes
it hard for just anybody

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to get involved with
bitcoin mining willy-nilly,

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but it requires that they
really exhibit or exert

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some computational effort,

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basically in exchange for
getting this extra reward

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of a payment,

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and also in exchange for getting

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this transaction fee that
they're going to be promised

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by Alice to engage in this sort of work.

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I'll talk about what
proof-of-work protocols are

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in a separate video in more detail.

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Now, because each transaction block

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contains information about
previous transactions,

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really what you end up having

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is not just a single block.

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You ultimately have what
you can think of as a chain

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of transactions,

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and you can call this a
transaction block chain.

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The idea is as soon as a bitcoin miner

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is able to construct a
transaction block chain

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containing all these
unrecorded transactions,

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and this proof of work,

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it'll broadcast the
details of that chain out

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to all of the nodes, all of the peers

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on that peer-to-peer network for bitcoin.

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And then once the newly-broadcast chain

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gets kind of verified and
meets the right properties,

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the nodes on the network

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are just going to go
ahead and start using it,

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and they're going to start appending

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new transaction blocks to that chain.

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They're going to take anything

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that hasn't yet been processed

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and start incorporating it
into the transaction chain

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that was broadcast out by the node

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who came up with the
proof of work correctly.

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Now, this transaction block chain,

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really what we're going to be doing

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in the context of bitcoin

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is the nodes are only going to consider

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the transaction block chain that reflects

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the greatest amount of work
to generate its contents,

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and again, there's this proof
of work that I mentioned

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that is used to kind of determine

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or identify what the,
what work was involved

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in coming up with the
transaction block chain.

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The one that's the longest
is going to be considered

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sacrosanct within the bitcoin system.

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Future miners are supposed to only work

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off the chain that has
the most work put into it.

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Now, what's remarkable here

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is that the whole
process is decentralized.

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There is no bank or no
centrally-trusted entity

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that was actually involved
in the transaction.

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Hopefully this first video gave you

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a bit of description,
a flavor, if you will,

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for the high-level mechanics
of the bitcoin system.

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There are a lot of stones
I have left unturned,

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and what I'll do in subsequent videos

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is start covering those details,

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and I'm sure you have a lot of questions,

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and hopefully the future videos

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will help answer some of
those questions for you.