This video serves as a bitcoin history lesson.
- We've spent some time exploring the important foundational components of Blockchain. To get a real sense of what blockchain technology is and how it works requires us to explore its origin story. It all begins with the cryptocurrency Bitcoin. In my Blockchain Basics course, we introduce Bitcoin and its relationship to Blockchain but we didn't go deep on exactly how it works. That's what we'll do now. How did Bitcoin come about? The first notion of Bitcoin was a paper published in November 2008 on a cryptography mailing list.
The paper authored by Satoshi Nakamoto was titled A Peer-to-Peer Electronic Cash System. As of 2017 we still don't know who Satoshi is. It may even be a pseudonym for a group of people. It is believed that the paper and its proposal was a response to the financial crisis of the late 2000s, exceptionally bad loan practices, dubious financial schemes, and a brittle banking system created enormous havoc across national economies.
Confidence was shattered. Bitcoin offered the opportunity to have a trustless monetary system and one in which banks and other financial intermediaries became unnecessary. After all, the status quo had failed so many and it was believed an alternative would be welcomed. The term trustless can seem a little confusing because it suggests that we can't trust it. Let me explain. The existing financial markets rely heavily on a system of trust.
For example, you deposit money in a bank and you expect and trust the bank to manage it for you. That reliance on trust has inherent risk. We saw that loud and clear in the late 2000s during the Great Recession banking crisis. Therefore, if we build a system that does not rely on trust, which we'll call trustless, then we can reduce the risk. Instead the system should function on a set of unalterable digital rules.
In January 2009, only a few months after the paper was published, a first release of the proposed Bitcoin open source software appeared. Instead of software owned by someone, being open source allowed anyone to inspect, modify and enhance the software. From day one the software enabled a creation of a completely digital currency absent of any intermediaries or governing authority and with no physical coins or notes.
Fundamentally it enabled anyone to send and receive money directly with anyone else. This notion is profoundly disruptive because it counters every contemporary concept we have of how money works. For one thing, how can a digital unit created from nothing possibly have value. For something to have value as payment, typically it must be scarce and it must be accepted by others for payment. Gold, silver, diamonds, and oil for example all derive their value from being both scarce and expensive to mine.
Most modern money originally derived value from being underpinned by the price of gold. In the 20th century with popular currencies well established such as the dollar and pound, and for other reasons beyond the scope of this course, the gold connection was abandoned and they became fiat currencies. Those enforced and supported by governments. A digital currency cannot be born as a fiat currency because there is no supporting organization.
It must be initially underpinned by some scarce resource. That scarce resource for Bitcoin is the process of running a hash algorithm to arrive at a predetermined data output as discussed previously. This requires increasing amount of processing power and electricity. After that the currency can be freely exchanged and its value can fluctuate based on supply and demand just like regular currencies. In the next video, we'll discuss in more detail how Bitcoin is created and managed.
- Blockchain basics
- Public and private keys
- How blockchain enables bitcoin
- Blockchain and the electrical grid
- Blockchain and identity management
- Risks of blockchain