Does YouTube show ads in the embedded player? Wouldn't it be easy to make an extension where you can click a button in YouTube when an ad pops up, and it moves

Does YouTube show ads in the embedded player? Wouldn't it be easy to make an extension where you can click a button in YouTube when an ad pops up, and it moves the video into an embedded player on a localhost domain? (Or even the extension's local chrome-extension:// domain) I guess YouTube could always block that domain from embedding videos, but if the extension allowed the user to set a custom domain from /etc/hosts, I'm not sure Google could stop it unless they forbid embedding on hosts that resolve to loopback address.