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Basics of Bitcoin - What it is and how it works

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Basics of Bitcoin -What it is and how it works Bitcoin is a digital currency that sends money over the internet. Just like with euros or dollars, goods and services can be paid with bitcoin. Instead of a bank, transactions run over a network of computers, the bitcoin network. But why should I use bitcoin? My bank works just fine! The traditional payment system works over a bank we have to trust. Banks control exchange rates and store sensitive data. Also, they charge high fees for transactions or services. Bitcoin was created to avoid the middleman. And how does bitcoin work? Like in a bank, a register with all transactions is kept. All the users of the bitcoin network, check and validate the transactions in a distributed register. To do so, everyone has a copy of the register, and since it is public, instead of names, anonymous bitcoin addresses are used. But who keeps track of the register? And how is it checked? The register is split into individual blocks. Each block contains validated transactions of approximately the past 10 minutes. The complete register consists of a long and growing chain of blocks and is thus called the blockchain. Through the block system, every user can easily check, if their copy of the the register is up to date and valid. To send money, the sender has to prove to the network, that there are enough bitcoins in the account. The register is unchangeable and serves as proof to all bitcoin users. And how are bitcoins created? And where do I get them? The process "mining" generates new coins. In analogy to gold, bitcoins can only be found and not produced. To be a miner, special software is used that looks for the solution to a difficult mathematical problem that involves the block. Many miners work together in groups, and when they find a solution that uncovers bitcoins, they split the amount found. The solution is the proof that all transactions in a block are approved, a kind of digital seal that is distributed to all other users so they can look at the transactions. The miners sell their bitcoins for traditional currency through many web sites where anyone can purchase bitcoins for use. And how do I manage my bitcoins? Similar to online banking, bitcoins are managed by a digital wallet. The wallet software can be downloaded for free, or you can register with one of the many wallet providers. Even if the name suggests it, a wallet doesn’t contain actual bitcoins. Instead, it manages all the bitcoin addresses linked to one user. The real bitcoins are recorded in the public register together with the owner’s address. The address is used as an account number, to receive bitcoins. To remain anonymous, for every transfer a new address can be used. The address is based on encryption technology technology with a public and private key pair. Simply said, the public key is the bitcoin address to receive bitcoins and the private key works as a pin or a digital signature. Based on that it is possible to spread the public key, whereby the private key must always be kept secret. Only with the private key, can you access your bitcoins. That means, if the private key is lost, the access to the linked coins is gone forever. Ok. But how do I send bitcoins? Let's assume Alice wants to send Bob 1 bitcoin. She logs into her wallet and makes sure she has the address of Bob. Now, she signs the transfer with her private key and sends it to the network. The software of the network users checks if the signature is really from Alice, and if she truly has 1 bitcoin. If yes, the transfer is forwarded. After a while, a miner creates a new block and adds Alice's transaction to the blockchain. For the service, the miner might get some tiny transaction fee. Some fractions of a bitcoin are named after the creator of bitcoin, a satoshi. If a transaction is listed in the blockchain, it cannot be undone. Now Bob can spend his bitcoins. Bitcoin has no geographical limits and can be used anywhere on the globe. It allows a worldwide transfer in just a few minutes for low transaction costs. However, bitcoin has also negative sides. The continuously unstable course of bitcoin shows that it is still at the beginning of its development. And since it is not necessary to know the merchant’s identity, transactions with illegal have been made. Even though more and more commercial online shops, cafes, bars and stores start to accept bitcoins, the main retailers still don`t. Could bitcoin or another digital currency define our future? What do you think?

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Duration: 5 minutes and 47 seconds
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Language: English
License: Dotsub - Standard License
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Posted by: nojobu on Jan 26, 2017

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