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  • 1. Introduction for 15.S12 Blockchain and Money, Fall 2018

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    Watch at: 00:00 / 00:00:20the following content is provided undera Creative Commons license your supportwill help MIT OpenCourseWare continue tooffer high quality educational resourcesfor freeto make a donation or to view additionalmaterials from hundreds of MIT coursesvisit MIT opencourseware at ocw.mit.eduWatch at: 00:20 / 00:40welcome welcome if you have a desire tolearn a little bit about blockchain andits intersection with the world offinance and money and you're looking for15 . s 12 you're in the right place ifyou're here to not do that and just hangWatch at: 00:40 / 01:00out and have a good time I guess youstill hopefully are in the right placebecause we're gonna have a good timethis semester my name is Gary GenslerI'm a senior lecturer here at MIT SloanI'm also an advisor over at the MITMedia Lab and I've spent a lifetimearound the world of finance and moneyWatch at: 01:00 / 01:20and public policy and I've been at MITthis last eight months and we're gonnalearn a lot together about blockchainand money we're gonna have a little bitof fun here and see what we're gonna doso we're talking about blockchain andmoney that's where we are by the way IWatch at: 01:20 / 01:40do cold call I do call on use if youwant to leave now I understand because Iwant to have an interaction a little bitabout it so my first question for theclass for everyone whether registered ornot how many of you have ever owned acryptocurrency wait wait let's see theWatch at: 01:40 / 02:00yacht's it seems like it's about 45% ofyou or so all right Livan you want tokeep your hand up long and how many ofyou have ever worked on any blockchainrelated projects in an entrepreneurialWatch at: 02:00 / 02:20setting or corporate setting anywhereall right goodso a better third in the room good allright so you all know probably more thanI dobut I'm gonna give it a shot I'm gonnaalways start every week with what arethe study questions for the week howWatch at: 02:20 / 02:40many of you actually got the syllabusthis is not gonna be graded assignment Ijust have to have a sense of who's whoactually got this syllabus so good manyof you and how many of you actually didthe two readings it's not graded I justgotgage the class oh thank you thank youright those grades down by the way no noWatch at: 02:40 / 03:00all right so the two main questions forthis week's lecture really is what isblockchain and why might it be acatalyst and I emphasize the wordmight it be a catalyst for change in theworld of finance we could talk about alot about things outside of the world offinance and blockchain may indeed have alot of applications outside of FinanceWatch at: 03:00 / 03:20but I've chosen to try to just narrowthe scope a bit so this semester isreally about blockchain and money orblockchain and finance and secondly youwill see index cards on every one ofthese round tables one assignment by theend of the class you could do it now orWatch at: 03:20 / 03:40later I would like each of you toanonymously write on the court what youwant to achieve in this semester itcould be anything from this class fromlearning about blockchain from makingmoney on Bitcoin from I don't care ifyou tell me it's meeting your futurespouse I just like what do you want toWatch at: 03:40 / 04:00achieve in this class I can't help youon the third but I will try to help youhone the things I can help you ID andSabrina and Toledo will collect themlater and next Tuesday will tell you theresults what is it that you want toachieve in this class and then we'll seeat the end of the semester if we've donethat so that's just a way to help guideWatch at: 04:00 / 04:20me help you so that's that's what we'retrying to do and so what were the tworeadings one was a little thing I didand one was a thing I did with some ofmy colleagues and Tom since I know youwould you take out of the readingsWatch at: 04:20 / 04:40did you have a good summer did you raiseyour head did you own Bitcoin know whoin the class read the readings and tooksomething different than Tom he saidWatch at: 04:40 / 05:00there was potential and your first nameokay how many agreed with the line thisWatch at: 05:00 / 05:20is a votethey're just two or three how many gridswith Tom there's more and how many ofyou're too shy on the first day to putyour hands up most so I'm going to startand go back the internet how do I sortWatch at: 05:20 / 05:40of I've come about this and sort ofthought about well what is the WAP chainwhat is it really about well theinternet started many decades ago beforemost of you were bornbut 1974 I mean there's somepredecessors even from the late 60s theethernet which is really how twocomputers communicate and then you hadWatch at: 05:40 / 06:00tcp/ip which was really the InternetProtocol of multiple computers computethat talking to each other and thenlater on in 1990 how do we move forwarddoes anybody know what HTTP is we're atMIT your first name would be helpfulWatch at: 06:00 / 06:20Erik Erik it's a protocol forcommunicate with content web contenthypertext Transfer Protocol eek anybodyWatch at: 06:20 / 06:40know who's associated with tcp/ipit was a company initiated by MIT IWatch at: 06:40 / 07:00don't know if it was a company in Sochiover there mighty but Vince Cerf mayhave had some association with it mightyso these are the first three layers andthen there were companiescommercialization 3com and cisco and ofcourse amazon it's still around todayWatch at: 07:00 / 07:20but there was something else going onhow do we commercialize the internetdoes anybody know what this scene isfrom good thought good thought firstpizza sold by Bitcoin but no all rightWatch at: 07:20 / 07:40movie hackers the net do you know haveyou ever seen the movie it's not a goodmovie so this is the opening scene ofthe net and yes that's Sandra Bullockand the years 1995it's a cyber thriller you know aWatch at: 07:40 / 08:00president's involved the DefenseDepartment's involved and so forth butactually Pizza Hut is associated withthe very first sale online sale anywherein the world they started somethingcalled pizza night this was the screenby the way if you wanted to go on youWatch at: 08:00 / 08:20could order your pizza and and but therewas one problem does anybody know whatthe problem with was Pizza net I meanmaybe there were multiple problems noIlana I've caught on you you couldn'tpay online nobody figured out how tomove money online you had to pay whenWatch at: 08:20 / 08:40you showed up with the pizza so now I'mgoing to talk a little bit aboutcryptography we're going to spend a lotof time on cryptography it's cryptocurrencies and the like what's your nameGigi Gigi Gigi what's cryptographyWatch at: 08:40 / 09:00cryptic all right now you got it you gotto start there anybody want to help GEout does anybody want to help you yeahtell me your first name we're gonna askwe're gonna figure out how to haveeverybody have name plates by next weekbut we will work with Ryan and do itWatch at: 09:00 / 09:20that way so it's how do you encryptsomething so it's not detectable byothers or in essence it's communicationsWatch at: 09:20 / 09:40in the presence of adversaries you havean adversary who wants the communicationyou want to communicate and not let youradversaries know that communication andthis is this is true for ancient timesso in ancient times there was somethingWatch at: 09:40 / 10:00called the cypher and this was a waythat you take a piece of leather orPeetha cloth and have a lot of lettersand both sidesyou'd encrypt and decrypt because therewere different measurements of thecylinder has anybody seen the movieimitation games all rightWatch at: 10:00 / 10:20the Enigma machine now it the movie waswonderful because it said Turin crackedit and he did help crack it in anautomated way but actually the Polishgovernment had cracked it in the 1930sbefore they fell to the Germans but andand touring built on all of that andWatch at: 10:20 / 10:40cracked it further and then in the 1970sand this was here at MIT to some extentthere's private key public keycryptography which I'm not going to diveinto today but it's it's the heart ofBitcoin and blockchain it's at the heartof the Internet but it's about the keyWatch at: 10:40 / 11:00thing is communications in the presenceof adversaries how do you keep a secretwhen everybody wants in and get thatinformationand there's a long history and mi t--'sat the center of a lot of that a lot ofearly cryptography failed on theWatch at: 11:00 / 11:20Internet in the early 90s and late 80sDavid cha and others tried to do thingsand we're not going to debate thesetoday but you'll have one reading Ithink it's either next week which willgive you that history and it'sworthwhile knowing about the history offailure but cryptography is the reasonWatch at: 11:20 / 11:40why the internet works today doesanybody want to tell me what SSL and TLSis do we have any computer scientistsremember your first name encryptionusing symmetric keys which is public keyWatch at: 11:40 / 12:00cryptographyright so it basically uses asymmetriccryptography which we're going to talkabout two lectures from now but itsecures the whole Internet so all of aWatch at: 12:00 / 12:20sudden you could deliver the pizza andget a passcode and I have to tell you Inever knew how this worked before I wasat MIT so PayPal came along in 1998 Imentioned this a whole bunch of otherdigital currencies then failed but someWatch at: 12:20 / 12:40of these people who will read later likewill read Nick Sabo's piece on smartcontracts later Adam back who createdhash cash some of these innovations werewhat Satoshi Nakamoto later used someinnovations which were really helpfulWatch at: 12:40 / 13:00and worked where a leap a and M paisadoes anybody know what M pace is inessence they found out in Kenya this wasten twelve years ago that people wereWatch at: 13:00 / 13:20trading mobile minutes they wereunbanked but they had cellular phoneand they were trading their minutes as aform of currency and Safaricom realizedthat and said way we could help peoplebe part of the digital economy even ifthey're unbanked and in Africa today 1/2Watch at: 13:20 / 13:40of the adult population according toworld bag figures is still unbanked buthalf of that half has mobile phones andpace has 20 million customers in Kenyaright now so it's a it's a form of moneythat's kind of swapping mobile minutesWatch at: 13:40 / 14:00but the riddle remained how do you movemoney on the internet where in essencehow do you move value peer-to-peerwithout a centralized intermediary andthat's the core of blockchain technologyso who solved the riddle and they'reWatch at: 14:00 / 14:20ready to tell me who solved the riddlewho solved this riddle now have you youyou're wearing a t-shirt that saysQuentin Tarantino so I think QuentinTarantino should solve over it allwhat's that what's your name so aWatch at: 14:20 / 14:40peer-to-peer cash this is the actual doctop of an email that was sent out onHalloween 2008 by Satoshi Nakamoto wedon't actually know who's SatoshiNakamoto is but it's a study question aWatch at: 14:40 / 15:00few lectures from now to ask you to tellme who you think Satoshi Nakamoto is soI won't ask that now and he started witha very simple sentence in his email I'vebeen working on a new electronic cashsystem that fully peer-to-peer with notrusted third party it's kind of aWatch at: 15:00 / 15:20modest statement and so the question isis this another internet layer we'regonna explore that this whole semester Idon't I don't really have the answer Idon't think the best minds at MIT couldreally yet tell youthere are some who are maximalist andWatch at: 15:20 / 15:40say yes it will be and there are otherswho will say no no no and in this coursewe're gonna we're gonna review theminimalist and the maximalist we're notwe're not kind of try to Center it inone place but that's the key key kind ofquestion so what is a blockchain we'reWatch at: 15:40 / 16:00gonna do this in a lot of lectures butI'm gonna try to do it in this shortversion so it's time-stamped append logsmeaning you can add a little bit ofinformation to this and it'stime-stamped so these are these blocksbeing added Satoshi did not inventWatch at: 16:00 / 16:19blockchain there's way earlier doesanybody want to guess what what it wasyou're gonna have a reading about thislater but early 1990s what's that MidoriStuart Haber Stuart Haysbert worked forWatch at: 16:19 / 16:40Bell Labs right so one of yourassignments it's not gonna be a gray todecide which it's gonna be a funassignment could any of you I'm gonnasay by next Thursday just have some funfind the longest and timewise longestrunning blockchain it's not Bitcoin andWatch at: 16:40 / 17:00it's been running since the mid 90s andyour clue is the New York Times andwe'll discuss it next Thursday but thistime stamped block block block block ofWatch at: 17:00 / 17:20data creates a database an auditabledatabase and we'll talk about Ledger'sparticularly next week but we'll talkabout Ledger's all throughout thiscourse and how it changes the world ofFinancenow it's secured by cryptography becausecryptography remembers communicationsand making sure adversaries can't pickWatch at: 17:20 / 17:40you off we're gonna learn about hashfunctions and hash functions that are areally important part of cryptographyand initially for databases and how tosearch and store information anddatabasebut in this circumstances hash functionswere the way to not only append the nextWatch at: 17:40 / 18:00block to the prior blocks but reallyimportantly to compress data to make itmore manipulatable and to verify it andas I've written here tamper resistanceand the integrity digital signatureswhich has to do the public key privatekey cryptography there is noWatch at: 18:00 / 18:20prerequisite of this course you do nothave had to have taken computer sciencecryptography algorithms if I could learna little bit about hash functions andasymmetric cryptography these are thetwo key important sides and will we haveWatch at: 18:20 / 18:40enough computer scientists in this roomthat can sort us out if I say the wrongthing right mid doors hopefully and thenconsensus so there's a really importantpart of blockchain is how do you decidewho appends that next block because whenI went back hereWatch at: 18:40 / 19:00there's block or block each of theseblocks somebody has to decide whoappends who gets to pick the next blockand that's what's called consensusprotocol and there's why debates aboutconsensus protocol and will talk a lotabout consensus protocol but in essenceit addresses something a term called thecost of trust and we'll talk aboutWatch at: 19:00 / 19:20Byzantine generals problems which isanother reading the Byzantine generalsproblem was laid out as a sort ofmathematical game theory issue somethirty as years ago that's what SatoshiNakamoto solved was this last part thatthe Byzantine generals problem pizza forWatch at: 19:20 / 19:40bitcoins a year and a half after SatoshiNakamoto laid out blockchain Bitcoinsomebody sends an email and you'll getthese slides but this is the real liveemail I'll pay you 10,000 bitcoins for aWatch at: 19:40 / 20:00couple of pizzas I I just want somepizzas the guy who sent thishe says I like onions peppers sausagemushrooms Lazlonow catch the date this is May 18th andhe's offering 10,000 bitcoins of 2010but the key line is what I'm aiming forWatch at: 20:00 / 20:20is getting food deliver in exchange forbitcoins nobody had used bitcoins as amedium of exchange 16 months into itsexistence nobody had used it to buysomething and Laszlo is a computerscientist in Florida was just kind ofinterested and he put this out on anWatch at: 20:20 / 20:40email list three days later he stilldoesn't have his two pizzas so nobodywants to buy me a pizza is the Bitcoinamount I'm offering too low another daygoes by he gets his pizzas and he postpictures so here's a picture of hisWatch at: 20:40 / 21:00child reaching for those Papa John'spizzas anybody know what those 10,000bitcoins were worth back in back thenChicago anybody want to say back thenwhat's that $41 and last I was sayingWatch at: 21:00 / 21:20two pizzas are probably worth 25 to 30because there's a whole email thread hekept saying why won't anybody get me mypizzas you could make money on thistoday or earlier late yet last night 66million dollarsWatch at: 21:20 / 21:40yeah so it's a cute story may 22nd everyyear is called pizza day or Bitcoinpizza day or something so so what isblock taint technology these are mywords but they're sort of picked fromthe literature and so forth itverifiably moves data on a decentralizedWatch at: 21:40 / 22:00network and the economics of blockchaintechnology are really around thatverification and the economics ofverification and the economics ofnetworking and in many ways blockchainadds certain costs to the verificationWatch at: 22:00 / 22:20through this consensus protocol thatwe'll be studying but it lowers someother costs of verification becauseyou're not relying on a centralizedAuthority so it's really a trade-off ofcost of verification I don't think it'sI'm not a purist that says it's betteror worse but it's it's a trade-off ofcosts of verification throughWatch at: 22:20 / 22:40decentralized networks the data can bevalue like Bitcoin was a money systemwhere the data can be actually computercode and we'll learn a lot about smartcontracts and you could have the databeing verified computer code andalgorithms my world finance thisWatch at: 22:40 / 23:00directly goes to the plumbing of Financebecause finance is fundamentally aboutmoving money and risk through a networkand that network is the seven billionpeople that live on this world it'smoving money and risk and you've allWatch at: 23:00 / 23:20taken finance courses or many of youhave and it's the intermediating ofmoney and risk throughout our economybut there's a whole host of challengesand over the course of this semesterwe'll talk about this challengestechnical commercial and public policyhurdles will they be solved will theyWatch at: 23:20 / 23:40not be solved but it could be a catalystbut we're not sure yetfor change in the world of money andFinance so does anybody want to tell methe role of money in society and tell meWatch at: 23:40 / 24:00your first name come on Tomas betweenpeople all right medium of exchange gotthat one somebody give me a secondyellow shirt savings all right so thatWatch at: 24:00 / 24:20would be a store of value yeahthird I'm sorry the gentleman here Wowall right there we go there we go sowe're gonna spend some time next Tuesdaytalking more about money and the role ofWatch at: 24:20 / 24:40money in the history of money which ithink is sort of lays a foundationalpiece of this what about the role ofFinance I've already sort of said a fewthings about that but and I'm sorry Idon't know your name but I'm right herethe woman yeah role of Finance sorry I'mWatch at: 24:40 / 25:00not going to tell any financial financeprofessor what your answer is to raisemoney so keep going I'm gonna anybodyelse want it can connect savers andWatch at: 25:00 / 25:20borrowers connect savers and bars soconnecting is sort of moving moneymoving valuations so that's the piecesof it sort of moving making valuations Iuse the words moving allocating andpricing pricing is the valuations ofWatch at: 25:20 / 25:40money well let's not forget it's alsoabout risk when you buy insurancethat's a transference of risk when youbuy an equity stock that's atransference of risk if you enter into acomplex credit default swap it's atransference of risk so finance is notjust the movement of money it's theWatch at: 25:40 / 26:00movement of risk as well throughout theeconomy and I always think finance Ialways I've thought this when I was atGoldman Sachs for 18 years that financesits at the neck of an hourglass andit's why it collects so much economicWatch at: 26:00 / 26:20rents from society because when you sitat the neck of an hourglass and billionsliterally trillions of grains of sand goby if you collect some of those grainsof sand you get uber wealth and that'sWatch at: 26:20 / 26:40those are for other classes but financecan collect a lot of economic rents thefinancial sector though has a bunch ofchallenges we'll have one lecture laterin the semester about some of thosechallenges and we have a reading I thinksheila bair wrote something recentlythat I asked you all to read later inthe semester but we'll talk about thefinancial crisis and some of theWatch at: 26:40 / 27:00problems but it's had a lot of crisesfiat currencies have a lot of whatinstabilities of course we havecentralized intermediaries as I laid outand we'll talk about collect a lot ofeconomic rents so there's there'sopportunity blockchain has realopportunity to kind of come under thisWatch at: 27:00 / 27:20world of Finance and maybe do somethings better central banking also havea bunch of legacy payment systems andthere's legacy payment systems or slowlyadapting but it's slow and why did Allypay do so well in China is part of thestory because there were so manyunbanked just like m-pesa in Kenya butWatch at: 27:20 / 27:40here in the US we still pay 2 and a halfto 3 percent for our interchange chargesfor Visa MasterCard and the like and alot of clearing and settlement still hasa lot of counterparty risk and one thatI care deeply about Financial Inclusionthere's still 1 point 7 billion peopleWatch at: 27:40 / 28:00in this world who are unbanked and so wedon't think of it as much in thedeveloped countriesbut it's certainly true in many productseven here in the US and these are to methe opportunities finance is 7 and ahalf percent of the US economy that'sWatch at: 28:00 / 28:20one and a half trillion dollars ofrevenues so any of you that are thinkingabout entrepreneurial opportunities thepayment system just here in the US is ahalf a percent to one percent of oureconomy that's 100 to 200 billiondollars or revenuesI think these is about 18 billion justyou know but if you you know when youWatch at: 28:20 / 28:40add up the whole payment system that's ahundred to two hundred billion dollarsin payment revenues so that's kind ofthe opportunity can blockchaintechnology come in it's got problemsit's slow its its performance issuesbut can it compete with that here aresome of the problems the financialsector would say with blockchainWatch at: 28:40 / 29:00these are real live things that we'regoing to study later in the semesterthey say it doesn't have the performancescalability a modern payment system youneed to be able to move about a hundredthousand payments a second a modernsecurities clearing the the DepositoryTrust Corporation the Securities andWatch at: 29:00 / 29:20Exchange Commission says you do aboutthirty thousand transactions a secondbut we need you to scale and yourcomputers and everything have to beresilient to a hundred thousandtransactions a second Bitcoin you can doabout seven transactions a second visacurrently depends on the the second doesWatch at: 29:20 / 29:40anywhere from twenty two seventythousand a second yeah so it's just asense of scalability and performance wemight get there it might be three toseven years away I'm optimistic butthere's still a bunch of performance andscalability issues privacy and securityblockchains by their nature or public soWatch at: 29:40 / 30:00they're not fully censorship resistantbut there's a lot of innovation aboutmaking them more private but then thatmakes the public sector a little nervousinteroperability they don't necessarilywork yet with other legacy systems orwith each other the internet one of theWatch at: 30:00 / 30:20great innovations of the internet itbecame interoperable that all of thesedifferent websites could kind of speakwith each other governance is a very bigissue we'll talk about and one of thethings about governance is it's hard toupdate the software of a blockchainWatch at: 30:20 / 30:40because if you create a decentralizedwhere no one's in control no one cancollect economic rents you also don'thave sort of somebody with the abilityto necessarily update the software andwe'll talk later about how Bitcoinupdates its software and what Bitcoincore developers are and so forth butWatch at: 30:40 / 31:00Facebook you do know one thing thoughthere there a company that collects alot of profits and economic rents off oftheir two billion members they know howto update their software it's it's agovernance issue that's a real lifeWatch at: 31:00 / 31:20challenge and that's why the financialsector says I'm not sure this works thisis ready yet for me and then thus whatare the commercial use cases and whatare the public policy issues so rightnow the financial sector favorspermission blockchains versus permissionlist this is going to be about fourWatch at: 31:20 / 31:40weeks from now we'll kind of go throughthese two differences but I want to justframe this briefly permissionblockchains have a noun group of peoplewho actually participate the half of youthat said you've owned Bitcoin you knowit to be something where anybody canWatch at: 31:40 / 32:00update the ledger permission blockchainsyou can't do that in essence you pickthe three or twenty the Australian StockExchange is updating their clearing andsettling they announced they're doing ablockchain project they're doing it withdigital assets and they're using thehyper ledger blockchain which is an IBMWatch at: 32:00 / 32:20software open source software but theAustralian Stock Exchange is going toput it on three computers which iscalled three nodes that they control allthree of themthe Depository Trust Corporation islooking at blockchain inspired solutionsfor some of their data warehouses butWatch at: 32:20 / 32:39they too are gonna control the nodes I'mjust giving it that's permissionblockchains there's nothing wrong withthat that's just how they are thethey're looking at this permissionlessblock chains are like Bitcoin unknownparticipants securities based onincentives a crypto currency and cryptoWatch at: 32:39 / 33:00economics crypto finance is about twohundred billion but it you know you haveto update these slides daily two daysago it was two hundred and thirtybillion and this little pie chart is alittle over half as Bitcoin the nextslice is something called if theWatch at: 33:00 / 33:20and then ripple and down the line we'renot going to spend a lot of time in thisthis semester if you if your goal is tohow can you profit and trade a tradeBitcoin and day trade ether god bless goprosper you could stay in the classI just won't give you much advice on ityou know this is not a crypto investingWatch at: 33:20 / 33:39centered class but I'm okay if that'swhat you're doing does anybody know whatthe worldwide capital market size isanybody want to guess you know this is200 billion what's it look like I'vealready said it's modest hundreds ofWatch at: 33:39 / 34:00trillions global equity about 80trillion global bond and debt markets250 trillion so it's still quite modestcompared to that broad breadth ofcapital formation and goldWatch at: 34:00 / 34:20if bitcoins digital gold what's thevalue of gold all the gold that's everbeen 7 trillion so just give you senseof scale so there's also somethingthat's interesting about this space isthat it's out sized public attentionWatch at: 34:20 / 34:40even as evidenced by the hundred of youin this room versus the size it is realrelative to the capital markets todayyou know there's a bunch of publicpolicy issues we'll have a lecture I'm aformer regulator I ran the CommodityFutures Trading Commission so but thisWatch at: 34:40 / 35:00course is not about regulation though wehave to always come back to regulationwe always have to infuse what we'redoing with the regulation but let mejust give you a little framework andthen you'll have to be bored and ahandful of weeks and read I gave somecongressional testimony on it yes itWatch at: 35:00 / 35:20will be required reading sorry but it'sguarding against illicit activity a lotof Bitcoin and crypto currencies startedout in the cyberPunk sort of movement and andlibertarian movement so forth and it istrue you can use this for illicitWatch at: 35:20 / 35:40activity absolutely but I would saycrime is not new just the mechanisms andmeans are new and and so the criminalsyes will use this and have used it for alisted activity financial stabilitycentral bankers around the globe sort ofwill this shape finance well it's onlyWatch at: 35:40 / 36:00two hundred billion the financialmarkets are three hundred trillion plusnot yet is generally what they're sayingbut for some countries it's a way to getaround capital controls and so for thosecountries worried about capital controlsit's a very real and live set of issuesand then protecting the investing publicWatch at: 36:00 / 36:20and when we do this in a few weeks I'llgo through each of these the investorprotection issues and yes the sec how wetest and and the like for those who wishto do their own initial coin off rightnowgive some you know broad sense of whatWatch at: 36:20 / 36:40the sec is trying to accomplish but it'sa moving target so this is a veryinteresting as opposed to many of yoursloan classes or your c cell classes ormedia lab classes this is a veryunsettled area of public policy so itmakes it interesting and and and and ifyou all go off and form companies youWatch at: 36:40 / 37:00will actually be helping sort of set thethe the edge of that public policy ofdebate I had always say just rememberpoet Riley the duck test this is a poetIndiana poets those that aren't from theUS might not know the duck test butbasically if it quacks like a duck andwalks like a duck it's a duck soWatch at: 37:00 / 37:20whenever you're thinking about publicpolicy folks like myself who once was aregulator we think in the duck test andthen we secondarily think about theactual words in the congressional actyou know where's the common sense and ifit quacks and walks like a duck it'sWatch at: 37:20 / 37:40probably a security or it's probablythis or thatthe incumbents like this Linus in thecorner are eyeing this space becausethere's a lot of volatility and WallStreet makes money on volatilityvolatility is the friend of Wall Streetit might not be the friend of investorsWatch at: 37:40 / 38:00but it's a friend of Wall Street theyalso like the trading volumes and thespreads coinbase the largest cryptoexchange here in the US has 20 millionaccounts they might not all be activebut that's the size of Fidelity'smembership or account list and twice deShaw and Robin Hood how many of you haveWatch at: 38:00 / 38:20ever used Robin Hood is a trading appWow half of you so you know free tradingright 5 million members for those whodon't know you can download Robin Hoodand you can trade stocks for freeno Commission and if anybody'sWatch at: 38:20 / 38:40interested show up and I'll do officehours when the hell Robin Hoodcommercializes they commercialize youryour order flow and they make moneywithout charging your commissions butit's a sort of wonderful app Millennialslove it 5 million members already so youbetter believe de Shah and theWatch at: 38:40 / 39:00incumbents are worried about things likethat the startups are also more willingto beg for forgiveness from regulatorsthey're willing to sort of take risksand beg for forgiveness whereasincumbents tend to have to ask forpermission so there's an unlevel fieldthat always it's a asymmetric businessWatch at: 39:00 / 39:20set of risk about regulatory risk notalways I'm not like crying for JP MorganI mean the big incumbents have also theyhave their advantages and coinbase isbecoming an incumbent rather than just ayou know startup in a sense and we'llWatch at: 39:20 / 39:40talk during the semester about some ofthe incumbents where we're probablygoing to get Jeff sprecher here inmid-november he's going to talk to youabout what IntercontinentalExchange inthe New York Stock Exchange is doingwith Starbucks and Microsoft and thelike the financial sector use cases I'mnot going to go through these but thisis the second half of the course isgoing to go throughWatch at: 39:40 / 40:00each of these and we'll do one to twosessions on each payment system centralbank digital currency secondary markettrading the venture capital and initialcoin offering space we'll do two acourse on that and move through so whatare we gonna do in this whole coursebasically our goal is to learn theWatch at: 40:00 / 40:20fundamentalsit's about roughly the first half of thecourse pivot to two sessions on theeconomics we're gonna be talking aboutthe economics throughout the wholecourse but I want to I want to reallyjust focus drill down on the economicsof 1/2 of the discussions and then riffWatch at: 40:20 / 40:40through the financial space for thesecond yeah that's our journey togetherto me it's for anybody who wants to gaincritical reasoning skills this is notjust kind of a hey this is going tochange the world and revolutionizeeverything class and so I basicallyWatch at: 40:40 / 41:00think of an old Defense Department termcalled ground truths it's when thegeneral doesn't really know what's goingon but needs to figure it out and needsto talk to that you know that thatcorporal on the ground who's got dirtyou know all over woman and it's beenshot up and says here's the real groundWatch at: 41:00 / 41:20truth we're gonna try to talk aboutground truth in this in this in thisclass and separate the mere assertionfrom the hype and some of your readingswill be some real Bitcoin and blockchainminimalist from Nouriel Roubini thatuses words I'm not supposed to repeat ona recording about this stuff to PaulWatch at: 41:20 / 41:40Krugman who and and Joe Stiglitz andother Nobel laureates who say no it'snot gonna work or Warren Buffett to tomaximalists we're gonna we're gonna tryto cover both sides Larry Lessig ishonoring me because he's in the back ofthe class who's an enormous Lee esteemedWatch at: 41:40 / 42:00professor from Harvard I didn't knowLarry was gonna be here and I did theslide before but in 1999 I think youwrote this book Larry is that rightcode and other laws of cyberspace I putyou in though but I think it'sworthwhile to think about Larry's fourWatch at: 42:00 / 42:20bits here and I don't know Larry if youwant to say anything but I'm gonna tryto infuse this course in just how youthink about this the tech we're at MITthe technology and we're gonna get you alot of technology if you want more thanI can give you is is is a former financesort of type my whole life there's gonnaWatch at: 42:20 / 42:40be a bunch of computer science people inthe class we're gonna hook and you uptogether with the folks from the MediaLab and see Sal and and try to connectyou to the technology side if you wantto swim deeper in that pond but thetechnology really really matters andWatch at: 42:40 / 43:00that's why we are going to go throughhash functions and go through asymmetriccryptography and so forth from abusiness perspective markets matter whyis it that incumbents or startups or arenot doing this and that why is it tenyears in and nobody's got anenterprise-wide solution yet to paymentsWatch at: 43:00 / 43:20that use block J the law matters thepublic policy side matters and the forthof Larry's layout social norms that's alittle harder for me to teach that's notwhat this class is about but it is alsoa flex all this it's not just theWatch at: 43:20 / 43:40technology the markets and the law soit's not just a three-legged store it'skind of a four legged stool how'd I doLarryI really didn't know Harry is gonna behere so but I wanted to give you aframework for how your faculty memberthinks and will be on this journeyWatch at: 43:40 / 44:00together range of perspectives we're notgonna be a Bitcoin minimalist ormaximalist I'm probably to be selfdisclosed here a little bit centerminimalist on Bitcoin smart contractminimalist max list I'm probably prettyWatch at: 44:00 / 44:20Center Larry's probably a little bitcenter maximalist I'm guessing so you'restill you're still center or Centerminimalist what smart contracts and thenWatch at: 44:20 / 44:40blockchain maximalist or minimalist I'dsay a few weeks ago I was kind of Centermaximalist and I'm sort of skidding backto the middle permissioned blockchainI'm a little bit more you know andthere's some in here Allah is one ofWatch at: 44:40 / 45:00your Sloan cohort that you might knowsix months ago when we met was workingon a permissionless system and nowyou're working on a permission systemyou have a startup yeah cuz like you'vebounced up into the market realities isand we're gonna talk a lot in thisWatch at: 45:00 / 45:20course about critical thinking aboutwhen do you really need the advantage ofa decentralized peer-to-peer systemwhere the costs of trusts are such thatthat's the right way to go but I am onewho thinks that there's also so mucheconomic rents in the financial systemWatch at: 45:20 / 45:40that's that one and a half trilliondollars of revenues or seven and a halfpercent of our economy or just twohundred billion in the payment systemsfor instance that there may be timesthat you don't really need adecentralized system but it just mightbe your opportunity to tuck inunderneath all of those economic rentsWatch at: 45:40 / 46:00and all those revenues now inVince will react you poke an incumbentcommercially pokum I mean and they'regonna react and that's why I thinkblockchain may well be a catalyst forchange even if incumbents then adopt alot of that inside the requirements ofWatch at: 46:00 / 46:20the course class participation is a hardthing to judge is a faculty member whenI have this many people so but I alwaysthink class participation matters wemade it 30% it which if you have anyadvice on this a next semesterWatch at: 46:20 / 46:4030% to to individual write-ups one inthe first half which is up to I thinklecture 10 which is basically theblockchain fundamentals you pick a topicI don't care which onebut it's you'll get you'll get a muchbetter grade if it's about criticalreasoning if it's really taking whateverthose sets of writings are and and andWatch at: 46:40 / 47:00and and not just repeating that which isin the readings but really going thenext step in saying here's what's goingon and this is a business goal you don'thave to you know convince me that youknow something about computer scienceit's like critical reasoning about theWatch at: 47:00 / 47:20economic opportunities the strengths theweaknesses the opportunities the threatsthat old business school sort of sayingof swaths with regard to that week'swhether it's about hash functions earlyon cryptography or you sort of waitduring the foundational period topermission versus permissionless youWatch at: 47:20 / 47:40pick but to please hand it in beforethat classes lecture because I mightduring the lecture say who wrote todaydo you want to tell us what you thinkand it might help spur the classparticipation and then a second write-upin the second half when we're riffingthrough the use cases again criticalWatch at: 47:40 / 48:00reasoning and then lastly the usualapproach of teams of up to four no Idon't want teams of fiveto handle that right now three or fourjust and and and somewhere in the secondhalf of this semester we'll talk aboutWatch at: 48:00 / 48:20more the content and there's a couple ofyou in here that worked with me lastsemester and a smaller group you know Iwant you to do well so I'm gonna sort ofgive you a sense of like what do we wantto do but it's basically the idea isyou're an entrepreneur or you're anincumbent and what sort of use case orWatch at: 48:20 / 48:40you're gonna pick and and and whetherit's permissioned or permissionless sortof make a proposal do a use case useyour critical reasoning around this newtechnology somewhere in the broad worldof financeI mean you know and I'm glad that definefinance really broad you know you'llWatch at: 48:40 / 49:00pick so that's that's kind of a peaceact one or the fundamentals I won't gothrough each of the pieces but you knowthat's in the syllabus of course Act twois the pivot of the economics and ActWatch at: 49:00 / 49:20three our financial sector use cases andhopefully throughout law will have a lotof fun so the study questions for nextTuesday real quick what are the rolesand characteristics of money so I reallywant to sort of dig behind money moneyis but a social construct or a socialWatch at: 49:20 / 49:40convention medium of exchange storevalue unit of account there's somereadings about the debate whether moneyfirst came from the border system or areally good set of anthropologist andWatch at: 49:40 / 50:00and and and archaeologists andeverything say no it actually came as aledger system and no one knows for sureat ten and fifteen thousand years agowhether money came from the out of theborder system or more as a unit ofaccount keeping account of credits andledger but I'd say when you read throughsome of those readings you start tothink well this is just a societalWatch at: 50:00 / 50:20construct and so that I will get behindthat what isfiat currency fiat currency which is aninvention really only over the last fewhundred years and we take for grantedDale but how does that fit into thatwhole history and importantly how toLedger's accounting Ledger's I knowWatch at: 50:20 / 50:40boring stuff but it's probably why wecame out of the dark ages so about fiveor six hundred years ago with doubleentry bookkeeping sorry hi I likeLedger's we'll talk a little bit aboutLedger's and how that fits into moneyand securities and so forth and thenWatch at: 50:40 / 51:00layering in how Bitcoin fits on top ofthat history next Tuesday is not deeplyabout Bitcoin it's just a little dollopon that there'll be five or six readingsone of them is a three-minute video thethird one it's fun watch it's just afunny little video on what money isWatch at: 51:00 / 51:20there's no need to read nakamoto's fullpaper when I said the email I mean justthe cover email it's one paragraph mygoal in the readings each week was notan each session was by and Lord to tryto keep less than 50 pages you'd sayyou're gonna look sometimes you go itlooks like it's more and maybe it is IWatch at: 51:20 / 51:40figure you're all gonna figure out foryourself how to sort through the depthof your knowledge but I will predictthat some of you may be as much as aquarter or a third of you are gonna godown a rabbit hole one day and you'regonna be doing blockchain for the next48 hours and you won't know where theWatch at: 51:40 / 52:00time went because it is an addiction atsome point that some of you will getbecause this is curious notion I'm notpredicting that infirmity for all of youI'm just saying some of you will havethat happen to you so occasionally Ihave readings just white a lot it'shappen to you let me just conclude andWatch at: 52:00 / 52:20then take any other questions and lightup their blockchain I think does providea peer-to-peer alternative I think thatI hope Larry I'll be able to convince itdoes provide and that peer-to-peeralternative addresses cost of trust itdoesn't mean it's the only way toaddresscost the trust but addresses cost aWatch at: 52:20 / 52:40trust the financial sector does havechallenges not just that it hasseven-and-a-half percent of our economyin the US and similar ratios around theglobe but resilience how it survivesshocks the financial crisis and thingslike that are real and inclusion oneWatch at: 52:40 / 53:00point seven billion people unbanked butthen if you look at other products whohas access to credit cards and mortgagesand the like and then fiat currenciesKen Rogoff and others have written a lotabout the instabilities that come thatfiat currencies and we'll talk aboutWatch at: 53:00 / 53:20some of the history why central bank'sexist and how they they came about nextkey point is we already live in anelectronic age Satoshi Nakamoto andBitcoin didn't create electronic cashelectronic cash I mean Sandra Bullockcouldn't pay electronically that wasWatch at: 53:20 / 53:401995 they did a sort of berated movieabout it all but by today you pay yourtuition online those of you who work getpaid online you pay your auto loansonline most of our lives are electronicWatch at: 53:40 / 54:00cash not a hundred percent but in somecountries like Sweden it's getting veryclose to a hundred percent we'll learntogether and discover that monies but asocial and economic consensus blockchainWatch at: 54:00 / 54:20technology along the crypto financemight be a catalyst for change andthey're much masquerades as fact butit's only mere assertion we're gonna tryto sort through you know that thosedifferences that doesn't mean that allof you are gonna walk out agreeing withPaul Krugman a Nobel laureate or NourielWatch at: 54:20 / 54:40Roubini that this is just a bunch ofnonsense some of you might by the waybut but I think you'll come out withreal criticalthinking skills and I hope that some ofyou will say I figured out actuallywhere there's a real opportunity in theWatch at: 54:40 / 55:00world of finance to use blockchaintechnology and make it a betterfinancial sector democratizing financeor somehow providing a service at alower cost of better service throughoutI hope throughout that we'll learntogether and we'll have a bit of funWatch at: 55:00 / 55:20along the waythat's kind of my thoughts questions wehave exactly what 18 minutes there yougo but we can cut it short - I don'tcare there we go did you tell me yourname and we're gonna do placards Ryan'sgonna work to figure out you do placardsWatch at: 55:20 / 55:40cuz it's I wonder how our team's formtraditionally anybody it's slow and canspeak to this too but students do ittheir own so that the faculty doesn'tsort of try to insert themselves to helpWatch at: 55:40 / 56:00you but we tend towards the latter halfand say well who's formed up in groupsand when you know if it's a smallergroup it's like well anybody has not yetformed in a team why don't you move tothe left hand side of the room and justget together but we could do thatelectronically - and you know whethertalita and Sabrina who you know goodWatch at: 56:00 / 56:20help Internetbasically have a social network to helpform the teams because this is a biggroup you're right but that'straditionally people those students doit on their ownother questions is anybody gonna go outand sell their Bitcoin now Larry whatWatch at: 56:20 / 56:40why are you hereno no let to the whole feel and you'reWatch at: 56:40 / 57:00incredibly informed about the financeside so I want to see the combination ofthose and whether at the end I amconvinced there's a there there as we'vespoken because I could radically changethe cost of trust around the worldbenefit the developing nationsubstantially but I think there's a lotWatch at: 57:00 / 57:20of questions I still have I thank youfor coming in any week you could be hereany day we benefit and I hope it'sreally this is meant to be aconversation I'm not that far ahead ofyou Simon Johnson approached me lastOctober and said what do you think aboutcoming up to MIT and and Tom knows thisWatch at: 57:20 / 57:40story and and and we were sitting downfor lunch in DC and it was a good timein my life my three girls I have threedaughters and I'm a single dad and theywere two were in grad school and one ourundergrad it was a good time in my lifeI said why not you know come up here andWatch at: 57:40 / 58:00get engaged in this digital currencyinitiative over at the Media Lab andI've spent a life I was 18 years ago midsax on the investment banking sidehelping people buy and sell companiescalled mergers and acquisitions and thenI went to the trading side fixed incomeand went off to Asia and did a bunch ofI ran the fixed incoming currency andWatch at: 58:00 / 58:20swap trading in Asia and then my lastjob was the co Finance Officer so wewere about a quarter of a trilliondollar balance sheet at that time gogoldman sachs this is we were so privatewhich meant if we lost money we werepersonally I was a general partner waskaput that's a technical word and but weWatch at: 58:20 / 58:40had we had 700 legal entities and onethousand people who could commit thecapital of the firm those are people wegenerally call traders but you know is afascinating period of time I then wenton toWatch at: 58:40 / 59:00public service because Bob Rubin knewthat I'd be a soft touch - it's aservicehe was the Treasury secretary I was aformer partner at Goldman Sachs and Iwent off to the US Treasury as aassistant secretary and undersecretaryin the late 90s a little different timesthan we have now for many reasons but wewere paying down the debt we wereWatch at: 59:00 / 59:20dealing with the Asian debt crisislong-term capital management thatRussian debt crisis is it was sort of afascinating period of time I worked on abill with John McCain I didn't get toknow Senator McCain that well but it wasjust remarkable to work with even for ashort period of time called ie signatureWatch at: 59:20 / 59:40it was a bill that basically said youcan sign everything electronically andhe was the chair of the Senate CommerceCommittee at the time I was a wonderfullittle yes sometimes in government youcan work on small things I worked on theredesign of the currency and I couldtell you stories about why it looks theway it does and how you can redesignpaper currency and for a future lectureWatch at: 59:40 / 01:00:00I'll tell you the one design featurethat I it's still in the currency andyou can visually say it's because andwhen I asked for it the fella thatrather Bureau of Engraving said why andI said because it looks better and I'mthe guy that's approving it and maybecould we get it done can we work thisout and and it did look better and heWatch at: 01:00:00 / 01:00:20loved it he was worried about thepolitical risk of doing it it was abetter design he just was I said I'llcover you politically let's do it butthen I worked with Paul sarbanes andwhat became sore Baines Oxley I was hissenior advisor I worked and kickedaround some political campaigns we lostWatch at: 01:00:20 / 01:00:40two of them that would be the o8 Hillarycampaign and the 16 Hillary campaign Iwas her chief financial officer I was ina way the senior advisor doing economicpolicy and outreach and hand-holding andand and then in the middle of those twoWatch at: 01:00:40 / 01:01:00campaigns I ran something called theCommodity Futures Trading Commissionwhich was post-crisis what do we do thisis a real public policy shortcomingand and I looked at as an opportunity toas I said democratize finance a bit andlower risk and so we tried to bringtransparency to a three or four hundredWatch at: 01:01:00 / 01:01:20trillion dollar market caught swapswhich are just contracts fortransference of risk and in their formof a derivative that that wereunregulated and we were trying to bringtransparency to that and lower riskthrough central clearing so that's sortof my professional life and as I said IWatch at: 01:01:20 / 01:01:40got three daughters and they they'rewell situated so when Simon said come onup I said great and I love MIT it's justterrific and and you you all are greatunless there's other questions I'm gonnalet you go early I[Applause]Watch at: 01:01:40 / 01:02:00you