Understanding Vatican City

In this seven-minute video, C. G. P. Grey explains what's up with Vatican City -- where it came from, how it works, and why it's fundamentally a rather confusing setup. The more I thought about it before I saw this video, the more I realized: I didn't know much about Vatican City. Just that it's this tiny place where the Pope hangs out, and it's a sovereign nation somehow. But specifically why is it a nation at all? How did it come into being? Are there Vatican City natives? Well, Grey is here to answer.
Among the interesting trivia: Vatican City has a king; it is the world's only elected, non-hereditary, absolute monarchy; the Holy See is legally a person (and/or corporation); the Holy See grants passports; and no one is born a citizen of Vatican City. What?! Watch and learn: