What is the Arduino bootloader and do I need it if I am making my own Arduino?
This is a bootloader. Or should I say an ATMega with the bootloader pre-installed. Basically the bootloader is a small piece of code that lets you run Arduino code without any external hardware. So you could put the chip into an existing project without an entire Arduino board. Here is a more in-depth description right from the Arduino website.
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Microcontrollers are usually programmed through a programmer. This is a piece of hardware you'll have to make or build.... Unless.... you have a program in your microcontroller that allows installing new firmware without such an external programmer. This piece of software is called a bootloader. If you're building your own Arduino, you probably want to buy a processor with the preflashed bootloader.