Blockchain is definitely a buzzword these days, but many people are still confused about why it's important or what it really is But you don't need a computer science degree to understand it, so today let's just get to the bottom of it, once and for all

In order for us to get a good grasp of these concepts, let's start with a clean slate, try and forget everything you've heard about blockchains, empty your cup In order to understand the implications of this technology for the society, you don't need to know what "blocks" are, how and why they're "chained" and who mines them or even what mining is (If you want to learn about the nitty-gritty technical details of it, watch this awesome video from 3blue1brown) Let's define some terms first Bitcoin is a system of digital cash

Blockchain is just one of the technologies that make Bitcoin work It's a distributed database (or "ledger"), that's simultaneously hosted by at least a few computers (or nodes) that aren't controlled by a single party For example, the Bitcoin blockchain is supported by approximately 12,000 nodes these days Actually, Bitcoin is a great example of a blockchain-based system It has an additional benefit of actually working (I've heard it's important!)

And it’s fulfilling its promises without fail for 9 years now Let's take a closer look at it As I said before, Bitcoin is a system of electronig cash But how is it different from other such systems? Why do we need yet another application for money transfers if we have PayPal, Venmo, ACH, bank transfers and all that stuff works just fine, right? Well, let's see how you can give your friend, say, ten bucks First of all, you can give them $10 in cash

As simple as it is, this transaction has a few important properties: First, it's anonymous – it's very hard to track back that transaction to you or your friend There was no transaction fee – you give $10, they get $10 The transaction “cleared” right away – when they got $10 into their hands There was no censorship – anyone, anytime, anywhere can use cash Sounds like a great approach so far, but there are two major drawbacks I can think about You have to be present in the same location at the same time in order to make that transaction happen And if you would like to transfer a large sum of money, you'll have to deal with non-negligible logistical issues What about a bank transfer? Well, now you need to set up a bank account, so your identity is heavily scrutinized The transaction fee for an international transfer can be extremely high Ok, you've agreed to this craziness, but now the bank says your friend will only receive the money next week, because next day is a bank holiday and an international transfer usually takes a few business days to clear By the way, before you send the transfer, make sure your friend can receive the money, because the banks have the power to decide with whom you can or can not transact, that is they act as a gatekeeper Let’s look at Venmo and PayPal Those are connected to your bank account, and they will have all the shortcomings that the bank transfer system has Moreover, all these electronic money transfer systems are controlled by some third party and that's what the mysterious creator of Bitcoin, Satoshi Nakamoto, had a problem with But why? A third party can be hacked It turns out that storing a lot of sensitive information in one place (like information about your money, youre identity, etc

) is a really bad idea because that place becomes a honeypot for hackers There is no company out there that can protect their information, not the governments, not the NSA Here's a quick history of hacks that happened in the past few years There is a great article that expands on this idea, it’s called "Trusted Third Parties are Security Holes" (link in the description It was written by Nick Szabo, the guy that had invented BitGold, a precursor of Bitcoin, back in 2000

If you haven't yet discovered his blog, you should read it A third party may cause a system-wide disruption There have been many times when a problem with a centralized system caused major outages of different services, like banking systems, payment gateways, airline software, etc But the most important issue with centralized design is the abuse of power that we delegate to them The most devastating example of this is the global financial crisis of 2008 The infamous collusion between and amongst banks and credit agencies (and other companies) caused trillions of dollars to evaporate from the global economy, leaving millions of people broke, unemployed and homeless

All this was possible due to the centralizatoin of an insane amount of money and power in the hands of a few organizations So on January 3, 2009, a person (or a group of people), under the name of Satoshi Nakamoto, mined the first Bitcoin block There is no doubt that Bitcoin was motivated by what was happening in the economy at the time Satoshi Nakamoto wrote: "The root problem with conventional currencies is all the trust that's required to make them work The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that 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" The genesis block of Bitcoin blockchain contained this message Through a clever combination of distributed computing, cryptogtaphy and game theory, Satoshi Nakamoto designed the Bitcoin software in such a way that we don't need a trusted third party to send money to each other anymore It is indeed a digital analog of cash Here's how it works What we call Bitcoin today is a network of several thousand computers around the world that contribute their computation power and storage to it

The owners of these computers don't do it for free, they get rewarded by the network and its users, but let's talk about it some other time All those computers (or nodes, or miners) are independently veryfying and recording all the transactions on the network So when 1, 10, or even a 1000 nodes go down, the network it's still functional, as it is More importantly, no one single node is in charge, everyone is equal! And when one of the nodes is not playing by the rules, it's simply excluded from participating in the economy and loses the ability to be paid by the network Does it sound familiar to you? That's how Internet works as well, that's why Blockchain is sometimes called the new Internet

So, how does Bitcoin perform according to our matrix? Well, it's not perfect! Bitcoin transactions are almost anonymous and if you exercise a certain degree of caution, you will be safe There is a transaction fee and today it's quite high, almost forty dollars The transaction usually clears within 10 minutes, but you may need to way longer Dnyone, anytime, anywhere can use Bitcoin (as long as they have access to a computer with internet) As you see, there are two issues with Bitcoin today: scalability, that is transaction throughput and transaction fees, and privacy Both problems are being worked on by a very vibrant community of computer scientists, engineers and entrepreneurs, and we will solve them very soon The slowness and the pseudonimity of cryptocurrencies today are just the trade-offs that we have to deal with in order to eliminate problems that are related to centralized designs Eg

if you own your Bitcoins (that is, you don't store it on an exchange, which is just another trusted third party), no one can seize it, no one can lend it out without your explicit consent, they are truly yours! So the main idea behind Bitcon (and the technology it's based on: blockchain) is that it's a system with no central point of control and, therefore, no central point of failure, and that's what makes it valuable Blocks, chains, miners, algorithms used in this system are just tools to achieve that goal Now you know why Bitcoin was created and why it becomes more and more valuable This idea is very simple, but at this point you probably have more questions than answers But fear not, in the next video we will talk about all these issues in more details

We will talk about privacy and scalability of the blockchains, about what it really means to own a bitcoin, we will talk about Ethereum, smart contracts and private blockchains as well, that’s a hot topic So, stay tuned and see you next time