Bitcoin: The security of transaction block chains Video transcript But what I wanted to do in this video is talk about what a bitcoin is in more general terms and what differentiating characteristics they have compared to other approaches. So for starters, bitcoin is just an electronic payment system.
By electronic payment system, I mean it's just a vehicle, a conduit, by which two parties can transact over the internet.
I call these parties Alice and Bob. And let's say Alice for whatever reason wants to give money to Bob over the internet. And this may be because she owes Bob money, or maybe Bob is a merchant and Alice is buying something from Bob. Or maybe Bob is a not-for-profit, and Alice is making a donation to Bob. So there could be many reasons why Alice is trying to pay Bob over the internet in some capacity. Now, if Bob is willing to accept bitcoins, which are a form of electronic payments, then Alice can go ahead and send Bob some value in bitcoins.
And really, a bitcoin transaction between Alice and Bob amounts to a specially constructed sequence of numbers that Alice will basically send over to Bob. And this will be done entirely over the internet. These numbers will have certain mathematical properties. They make it hard for someone to really defraud the system or to conduct some type of nefarious action on the system. And the way that Alice is actually going to conduct this transaction in practice is either by installing a special piece of software, which we call a bitcoin client, or she can work with a third-party service that can handle these mechanics for her.
But in either case, either the client or the service is going to generate these numbers for Alice.
And on the flip side, Bob will also typically either have a piece of software installed or he'll use a third-party service that will take these numbers and allow him to do something else with those numbers. For example, Bob can in turn buy something on his own with those numbers, or he can trade those numbers in for real money and so on and so forth.
Bitcoin: The security of transaction block chains Video transcript Voiceover: Bitcoin is a new virtual currency system that's been gathering a lot of attention recently, and I thought I would do a series of videos where I really dive into the innards of bitcoin and explain how it works in detail, and my plan for this first video in this series is to describe some of those mechanics at a high level. And then what I'll do in subsequent videos is dive a bit deeper into all of the underlying aspects that I have touched upon within this first video. And my hope is that by the end of this video series, you'll know not only what a bitcoin is, but you'll also understand the mechanics of how transactions are initiated. You'll see how verification occurs for those transactions, and you'll also learn what it means for someone to really engage in a process known as "bitcoin mining", and that may be a term that you've heard if you've had any interest in bitcoin recently.
Now, one of the first questions you might have-- and I kind of alluded to this earlier-- is why would Bob even want to accept bitcoins in the first place? After all, a bitcoin is just a bunch of numbers.
What intrinsic value would it video how bitcoins work have? And it turns out, quite surprisingly, that bitcoins actually have real-world value. There are more and more merchants popping up each day who accept video how bitcoins work for transactions. There are also bitcoin exchanges, places where you can go and exchange bitcoins for more mainstream currencies.
And some of exchanges include-- the major one is one called Mt. And at Mt.
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Gox you could video how bitcoins work a bitcoin for a euro or yen or dollar and so on and so forth. That number is fluctuating.
This is a new currency, and there's going to be some fluctuation. But as people understand the currency better, the hope is that that fluctuation will decrease. But I think ultimately, the thing to keep in mind is that the value of a bitcoin is going to be derived from the faith that you have in the value of what you can procure with that bitcoin. It's just like you would for a dollar, a euro or yen. The faith that you have in that currency's value is how you value that currency.
Now another question you might have is why do people even bother with bitcoins in the first place. Aren't there other more standard ways?
Why couldn't Alice and Bob use Paypal? Why couldn't they use a credit card number to transact?
How does Bitcoin work?
Why couldn't Alice just sent Bob an electronic check? Why not use one of these other approaches that are more well understood, that are more mainstream, that are more established? Why on earth would you possibly want to mess with a good thing? So it turns out that there are a few properties of bitcoins that are worth noting.
For starters, there's privacy.
It turns out that within the bitcoin ecosystem, within the bitcoin network, people can transact without divulging who they are in the real world. From the perspective of bitcoin, Alice's identity is just going to be a sequence of numbers. And that sequence of numbers is effectively going to function like a pseudonym for Alice. And that sequence of numbers has nothing to do with your real-world identity. Nobody needs to know this is Alice transacting. All they need to worry about is their pseudonym within the system.
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And this is kind of but not quite like what you would get if you bought something using cash. In that capacity, when you buy something using cash, then you don't have to provide any details or proof regarding who you are in the real world.
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And that's different make money via smartphone, let's say, using a credit card, where you have to provide your name and your billing address and so on. Or let's say providing an electronic check, where you need to tie that electronic check, typically your bank account details. Now, I do want to also mention here that sometimes when you have a cash list or a transaction that uses cash, there is now the possibility that people might try to use these transactions for malicious purposes to buy illicit goods and services.
That definitely is a risk that occurs when you provide anonymity and privacy.
Bitcoin: What is it?
But there are certainly legitimate reasons why somebody might want to conduct a transaction privately and not have the whole world know what they're transacting. Another property of bitcoin is that it's open. Literally anyone can get involved. Literally anyone who was an internet connection can make a bitcoin transaction.