> Video is not a single stream, but many smaller chunks daisy chained after each other. Reason for this is that you can then change i.e. quality of video and it will seamlessly change - because it will start daisy chaining higher quality chunks and show them in the player.

Don't think this is correct, if you're on a slower connection you will see it takes a while when changing stream quality, the video "seamlessly" changes because it's still playing the current quality stream while the new quality stream loads. It would make no sense to send more than one quality at the same time because it would incur higher bandwidth costs and they care a LOT about bandwidth costs. I'm a premium user and even though I have higher quality enabled by default they STILL downgrade and not showing the highest quality possible unless I force it on specific videos.

> So what you are describing is already happening, ads are added directly into video stream, problem is that ads need to have access to API, because you don't want to show an ad for menstruation pad to a guy so you also need to know which user is watching and that's what cookies and the whole login is for, so you are effectively hitting a design limitation of the system.

They can do the tracking by user all the same, as long as the user is logged in they know what ads to show on the server already. This is already a problem when the user is using youtube without an account in an incognito window so if the client hacks the tracking side just show them default ads for their region. This is already a solved problem