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What is Blockchain? Blockchain Technology Explained Simply - YouTube
Channel: 99Bitcoins
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What is Blockchain technology?
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Is it âthe next big thingâ?
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Are you missing out
on a once in a lifetime opportunity
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when some startup wants you to invest
in thier blockchain based venture?
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Well stick around,
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in this episode
of Crypto Whiteboard Tuesday
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weâll answer these questions and more.
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Hi, Iâm Nate Martin
from 99Bitcoins.com
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and welcome
to Crypto Whiteboard Tuesday
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where we take
complex cryptocurrency topics,
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break them down and translate them
into plain English.
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Before we begin,
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donât forget to subscribe to the channel
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and click the bell
so youâll immediately get notified
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when a new video comes out.
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Todayâs topic is the Blockchain
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and the exciting world
of blockchain technology.
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Hopefully by the end of this video
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youâll understand exactly
what blockchain technology is
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and why itâs really hard
to seperate it from Bitcoin.
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Before we understand
how Blockchain technology works,
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we need to understand what problems
it was designed to solve,
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so letâs take a step back
and let me ask you a question...
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How do we tell if something
is fake or real in todayâs world?
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For example,
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a dollar bill, a driverâs license
or a vote in the election.
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How do we determine
whether itâs valid or not?
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The answer?
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We keep a record of it.
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For example,
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each dollar bill has a serial number
that is recorded by the bank.
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Your driverâs license number
is recorded by the DMV
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and voting records are used to track
who voted and who didnât,
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so the same person
wonât be able to vote twice.
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Whenever you want to verify
that a document is legit,
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you just look it up
with the relevant authority.
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We even have Notaries,
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people who are licensed
by the government
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to act as witnesses to attest and record
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the validity of pieces of information
or identities.
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Youâll notice thereâs one thing
that all of these mechanisms
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have in common -
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they are all centralized,
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which means thereâs a central authority,
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whether itâs a bank, state office,
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or person that has the power to issue
and validate information.
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These central authorities
have a lot of power,
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and as you know
power may sometimes corrupt.
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So what happens
if one of these authorities
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wants to change the facts
or even maybe change history a little bit?
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This my sound far fetched,
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but even our world history
is just a record kept by historians
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in a centralized manner.
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The phrase
âHistory is written by the victorsâ
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tells us that facts
can sometimes be distorted
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by those in power.
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If you donât think thatâs possible,
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hereâs a real life example.
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Today, most money is just a record
of who owes what to whom.
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Due to the subprime crisis in 2008,
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almost a thousand companies in the US
received over 630 billion dollars
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that never existed before.
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Other companies had debts
completely removed.
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Some would argue this bailout
was justified,
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but you canât deny that someone
decided to change the records
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of how much money
was owned and owed.
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This is why Bitcoin was born.
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It was the first form of money
that removes the need
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for a central authority.
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Its records are kept by everyone,
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not just by central banks.
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And when everyone is keeping track
and verifying the facts,
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well, that means that you can no longer
change the ledger of transactions
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whenever something doesnât add up
or because itâs more convenient.
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You actually have to start being accountable.
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But money isnât the only place
where decentralization can play a role.
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Do you remember those
big encyclopedia books
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we used to rely on when it came to research?
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Encyclopedia Britannica employed
a hundred full time editors
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and over 4,000 contributors
to publish what we considered to be
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the authority on knowledge.
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Just imagine the power
the editors of these books had
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in deciding what was worth mentioning,
condemning, condoning or ignoring.
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Well, the last volume
of encyclopedia Britannica
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was published in 2010.
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Today,
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information is much more decentralized
with over 130 thousand active editors
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that maintain different Wikipedia pages.
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The risk of any of them
âgoing rogueâ unnoticed
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is much smaller
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since each edit is public
and can be verified by anyone.
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Decentralization reduces the risk
for corruption, fraud and manipulation.
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Blockchain technology
is a new and innovative way
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to implement decentralization.
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In a nutshell,
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Blockchain technology is a solution
for the problem of centralization.
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Itâs a system for keeping records
by everybody,
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without any need for a central authority -
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a decentralized way
of maintaining a ledger
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that is practically impossible to falsify.
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I mean, when so many eyes
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are watching and verifying everything
thatâs being done,
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itâs really hard
to break the rules unnoticed.
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You might be wondering
why is it called Blockchain?
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Well, imagine weâre maintaining
a shared ledger
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with many pages of records.
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Each page begins with a sort of summary
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of the page before it.
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If you change
a part of the previous page,
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youâll also have to change
the summary on the current page.
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So the pages are actually linked,
or chained together.
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In technological terms,
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pages are called blocks.
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And since each block is linked
to the data of the previous block,
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we have a chain of blocks,
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or a blockchain.
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Many people think
that Satoshi Nakamoto,
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the mysterious inventor of Bitcoin,
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created Blockchain technology.
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Technically he only created the first
real life implementation of it -
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Bitcoin.
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In fact, that word blockchain
is never even mentioned
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in Satoshiâs original whitepaper.
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The closest he comes
to saying Blockchain is
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âchain of blocksâ.
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Now that you know
what blockchain technology is,
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we still have two major questions
to answer -
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how does it actually work,
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and is blockchain
going to change our future?
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Letâs start with the first question.
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Another way to ask this question
would be -
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how do I create a system
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that allows the creation, verification
and updating of records by everybody?
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Well, there are four elements
a blockchain needs
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to actually have a life of its own.
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The first thing required
to support a blockchain
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is a peer-to-peer network -
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A network of computers,
also known as nodes,
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that are equally privileged.
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Itâs open to anyone and everyone.
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This is basically what we already
have today with the Internet.
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We need this network
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so that we will be able to communicate
and share with each other remotely.
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The second ingredient is cryptography.
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Cryptography is the art
of secure communication
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in a hostile environment.
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It allows me to verify messages
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and prove the authenticity
of my own messages,
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even when malicious players
are around.
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We need cryptography
because of the first element.
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Remember,
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I said anyone can participate
in this network -
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including bad actors.
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Itâs great that I can communicate,
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but I also need to make sure
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my communication comes through
unaltered.
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The third element
is a consensus algorithm.
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You can switch the technical word
âalgorithmâ
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with the word âruleâ.
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This means we need to agree
about rules on how we add a new page,
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also known as a block,
to our records.
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There are many types
of consensus rules,
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in Bitcoinâs case
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we use a consensus algorithm
known as Proof of Work.
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This algorithm states that
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in order for someone to earn the right
to add a new page to our ledger
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they need to find a solution
to a math problem,
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which requires computational power
to solve.
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Computers around the network
run calculations to solve the math problem
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and in doing so,
consume a lot of energy.
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In other words they do a lot of work.
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Thatâs why when one of them
finds the number
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that solves the problem
and displays it to the network,
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theyâre basically displaying
a âproof of workâ.
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Think of it as the nodeâs way of saying:
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âHey, I spent quite a bit of energy here
in solving this problem first,
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so Iâm entitled to write the next pageâ.
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As I mentioned before,
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there are other consensus algorithms
that donât require so much energy,
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this is just the algorithm type
that the Bitcoin blockchain employs.
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There are pros and cons
to different algorithms,
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but in order to run a decentralized ledger
youâll need to choose one,
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otherwise it will be really hard
to reach a consensus
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with so many people in the network.
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Finally, our last element
is punishment and reward.
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This element is actually derived
from game theory
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and it makes sure that
it will be in peopleâs best interest
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to always follow the rules.
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So far,
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weâve set up a network
that has a way to communicate securely,
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and follows a set of rules
for reaching consensus.
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Now weâll glue these elements together
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by giving a reward to people
that help us maintain our records
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and add new pages.
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This reward is a token, or coin,
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that is awarded each time
a consensus has been reached
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and a new block is added to our chain.
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On the other hand,
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bad actors who try to trick
or manipulate the system
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will end up losing the money
they spent on computational power
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or their coins can be taken away
from them.
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In the end,
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the important thing to remember is that
the punishment and reward system
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works on psychological behaviour.
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It turns the rules of the system
from something you need to follow
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into something youâll want to follow,
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since it will be in your best interest
to do so.
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This was just
a very high level explanation
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of what a blockchain consists of.
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If you want to dig a little deeper
into this process,
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check out our video on Bitcoin mining,
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part of our 7 day crash course
on Bitcoin.
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So there you have it,
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the four elements for creating
blockchain technology -
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a peer to peer network, cryptography,
a consensus algorithm
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and punishment and reward.
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However, there is a fifth element,
that canât really be synthesized...
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market adoption.
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I mean, we can have
a group of five people
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sharing a ledger
with a consensus algorithm
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but it doesnât really make it
decentralized,
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since not enough people
are a part of the system.
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Moreover, if thereâs no adoption,
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thereâs not really any value to our coin
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and the fourth element of punishment
and reward
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isnât very effective.
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Only once you achieve critical mass
in the number of users,
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does a blockchain become
truly decentralized
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and therefore immutable.
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And at that point,
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the coin of that blockchain
usually begins to appreciate in value.
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Itâs hard to say what triggers
mass scale market adoption.
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In Bitcoinâs case
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things actually started
through use on the dark web,
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where people used Bitcoin
to pay for drugs and other illegal stuff.
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But since then,
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more people have begun to research
Bitcoin and blockchain,
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and have seen the benefits they offer;
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either in practice,
or as an investment.
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So there you have it,
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the five elements of a truly open,
public, decentralized blockchain.
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Up until today
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there are only a handful of blockchains
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that have over 1,000
truly independent participants,
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and as such can be considered
as decentralized -
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Bitcoin, Ethereum and Monero
to name a few.
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If youâre thinking that it sounds
like a lot of hard work
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to put a blockchain in motion,
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youâre absolutely right.
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But this is where Ethereum comes in.
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Ethereum is a Do It Yourself blockchain
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where all of these five elements
are already in motion.
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All you need to do is build
the right solution on top of it.
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But thatâs a whole different
whiteboard episode
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you can check out later on.
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Now letâs move on to another term
you may have heard -
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a private, or closed blockchain.
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This term refers to companies
that screen and limit the players
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who can participate in their blockchain.
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Itâs a bit like how the Internet,
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which is open to everybody and anybody,
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is different from an Intranet -
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an internal network
of company computers.
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While I assume some companies
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will find value
in running private blockchains
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to improve their internal processes,
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itâs far from anything exciting
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inasmuch as it has nothing to do with
decentralization.
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To emphasize this a bit more
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letâs compare open, public blockchains
to closed, private ones.
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A public blockchain is open to everybody,
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itâs transnational and borderless.
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Itâs censorship resistant,
and it doesnât require any 3rd party.
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Itâs also neutral -
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thereâs no such thing as a âgoodâ,
âbadâ, âillegalâ or âlegalâ transaction,
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thereâs only a âvalidâ or âinvalidâ one.
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A private blockchain on the other hand,
is limited to authorized participants only,
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and it's governed by a handful of entities.
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In the words of Andreas Antonopoulos,
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in most cases of private blockchains
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you donât really need a blockchain,
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you can just share a spreadsheet
between the participants.
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The whole idea of blockchain
was to decentralize a process
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through the general public,
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and thatâs exactly the opposite
of what a private blockchain does.
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The features of a public blockchain,
on the other hand,
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create enormous benefits.
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Thereâs no single point of failure.
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The records are immutable,
also known as tamper proof.
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And finally,
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itâs censorship resistant
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so you canât really remove a record
or stop it from getting published -
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as long as it follows the consensus rules.
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Before we end todayâs lesson
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we still have
one major question to answer -
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Is blockchain technology
the next big thing?
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I assume you may have heard
of different startups
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that are using blockchain technology
to solve some sort of a problem.
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In most cases
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when I hear of such a company
I ask two questions:
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First, are they using a public
or private blockchain?
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Since if they're not using
a public blockchain
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thereâs not really anything
very disruptive here.
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Second, do they even need a blockchain?
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If you remember
in the beginning of this lesson,
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we talked about the dangers
of centralization.
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But these dangers are only meaningful
if thereâs a lot at stake.
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For example,
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the queue to the pharmacy is managed
in a centralized manner
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but I donât really care
since thereâs not a lot at stake
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and itâs actually more efficient that way.
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Blockchain technology
is very good at decentralizing,
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but itâs also very inefficient,
slow and energy consuming.
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For example,
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Bitcoinâs network
takes 10 minutes on average
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to confirm a transaction.
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Not the ideal waiting time
for buying a cup of coffee at a 7-11.
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The only reason
to choose Blockchain technology
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as your solution is if your problem
is actually centralization.
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If you donât need to decentralize
something,
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you probably donât need to use
blockchain technology
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and are better off
with some centralized solution.
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In fact it will probably work better.
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To sum it up,
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Blockchain technology
is truly disruptive,
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but at the moment
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only a handful of use cases
really require it.
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So the real question is this:
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at the current moment,
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is our world ready for more complex
blockchain implementation
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than what Bitcoin already offers?
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In the early 2000s,
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there were a lot of Amazons,
Googles and Facebooks
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that never caught on
for the changes they presented...
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Today,
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many of these blockchain startups
face the same fate.
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Thatâs it for todayâs episode
of Crypto Whiteboard Tuesday.
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Hopefully by now you understand
what Blockchain technology is -
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an open, censorship resistant method
for managing records by everybody,
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hence making them
practically impossible to falsify.
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Itâs a solution to the problems centralization presents.
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I also hope that whenever you hear
the term âblockchain technologyâ
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in the future
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youâll know to take it with a grain of salt
and ask the right questions.
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You may still have some questions.
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If so,
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just leave them
in the comment section below.
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And if youâre watching this video
on YouTube,
[848]
and enjoy what youâve seen,
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donât forget to hit the like button.
[851]
Then make sure to subscribe
to the channel
[853]
and click that bell so youâll be notified
as soon as we post new episodes.
[858]
Thanks for joining me
here at the Whiteboard.
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For 99bitcoins.com,
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Iâm Nate Martin,
and Iâll see you⊠in a bit.
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