Subtitles section Play video Print subtitles The following content is provided under a Creative Commons license. Your support will help MIT OpenCourseWare continue to offer high quality educational resources for free. To make a donation or to view additional materials from hundreds of MIT courses, visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: I just want to say how touched I am that you are all still here. I really-- you know, there's a lot of shopping opportunities in the MIT courses. And that you have come back and not shaken loose after reading Satoshi Nakamoto's peer-to-peer Bitcoin paper, or maybe you just came back to see whether I was going to crash and burn describing it. But what we're going to try to do in the next three classes, just to frame it, is really give you some of the technical underpinnings of blockchain technology through the lens of Bitcoin. Bitcoin is just the first use case of blockchain technology. So if I often say Bitcoin this or Bitcoin that, it's really largely-- not entirely-- largely applicable to blockchain technology. My feeling is I'm only about eight or nine months ahead of all of you. I may have spent my whole professional life around finance and public service, and I can talk a lot about markets and about public policy, but MIT has given me the gift of thinking about blockchain technology. And I'm trying to return that gift a little bit for you all. And I have a few computer scientists in the room that are going to bail me out if I don't get this right. Sabrina, and then, oh, I see Alin is putting up his-- do you all know Alin? He's actually a PhD student at MIT, computer science. So somebody gets to that part of their life-- AUDIENCE: Terrible life choice. GARY GENSLER: Yeah, yeah. What was that? AUDIENCE: Terrible life choice. GARY GENSLER: Terrible life choice. Yeah. But he's going to bail us all out. But the reason that I think it's relevant not to just belabor it, is I really believe the only way that any of us can get to ground truths is to know a little bit about how the inner workings of this technology are. You're not going to have to do an algorithm or actually do a hash function, but to know underneath it. And then you can step away and say I no longer need to know how the carburetor on the car works, but I know what a carburetor is. Or, you know, whatever analogy you want. So with that little bit, as opposed to sort of all of that Socratic cold calling that I did last class, because money, Fiat currency is something at the core, and ledgers is at the core of a Sloan student's either education or background, this a little less of the core. If today's and the next couple of lectures, if you can work with me then I want you to interrupt me anytime you've got a question. I'm not going to do much cold calling. I don't want you to relax too much. I still want you to do the readings the next three classes. But just raise your hand, stop me, say, well, but what is that all about. And that just sort of we can work a little bit different on these next classes. So, as I'm always going to be doing, consistency. What are the study questions? So really, what are the design features? What are the key design features of this new technology, blockchain. And I put a few on the syllabus. And we're going to go through all this today and next week. Cryptography, append-only, timestamps blocks, distributed consensus algorithms, and networking. I list four. Later in this lecture, you'll see 8 or 10 that-- I guess it's 10 that we're going to really dig dig into. Can I just get a sense of the class and this is not for Talita or Sabrina to write down notes about participation. Is it a decent assumption, did most or all of you at least read Nakamoto's paper? All right. Good. All right, great. Just a sense, how many of you felt you got at least half of it, maybe less than 2/3, but at least half of it? All right, pretty good. When I first read it, I was right with you. So it's all right. Alin you got more than half of it, right? AUDIENCE: I read it five years ago, so. GARY GENSLER: You read it five years ago. Yeah, yeah, yeah. Yeah, life choices, talk about it. All right. And you're taking this class. Good, good. So we'll go through each of those. And then more specifically, we're going to peel back the cryptography. The two main cryptographic algorithms, or these words that you'll hear sometimes, cryptographic primitives-- Alin, what is a cryptographic primitive? AUDIENCE: Oh, it's a wild beasts. There are so many of them. GARY GENSLER: Yeah, but what's the two words together mean? AUDIENCE: Well, that's I'm saying. It could be anything. It could be a hash function, could be encryption function, could be a very powerful computation scheme, it could be a data outsourcing scheme, could be a data access privacy access. GARY GENSLER: But it's anything that basically protects the communication in the presence of adversaries. AUDIENCE: Well it's also something that you can use to prove that computation was done correctly on trusted servers. It's not just communication, it's also computation. GARY GENSLER: So communications and computation that needs to be protected or verified, have some form of cryptographic algorithm, which happens to be called a cryptographic primitive. The two main ones-- and there's a third one we'll talk about later in the semester-- but the two main ones, hash functions, just as a working knowledge of blockchain is worthy to know, and we're going to get-- everybody's going to get there. We're going to all get there to where you have some sense of what a hash function is. And then this whole concept of digital signatures, which relates to asymmetric cryptography. Those two are very fundamental to blockchain technology. Later in the semester, we'll talk a little bit about zero knowledge proofs, but they're not as fundamental to the first application. And so that's why they're kind of-- and they help make things verifiable and immutable. And that's the business side, the market side. Why does it matter? Otherwise, like, who cares what's in the carburetor if it doesn't matter? And then how does this all relate to the double spend problem? I can cold call on this. Isabella, do you remember what the double spending problem was from? AUDIENCE: It was when they would use the same coin, I guess, and they would use it multiple places and other digital wallets [INAUDIBLE].. GARY GENSLER: All right. So in essence, a double spend is when you have a piece of information and you use it twice. And we happen to call this piece of information "money," but you use it twice. You can send an email to two people and that's OK. I mean, it's a little embarrassing if you're sending it to one friend telling them you're available for dinner and the other friend thought you told them you weren't available. But you can still send it to two places. But in the system of money, it's a critical thing that you don't use it twice. The readings, was the demo helpful? I mean, we're going to do a lot more on that. I watched that demo last November, December. That was one of the first things I watched. From an MIT student. I don't know if you knew Bosworth. And I found it very helpful, so I'm glad. And I see it's actually that demo is on a Stanford blockchain course as well, so the West Coast, one of our competitors is using an MIT product. And so we're going to just do a slight review of what we did in class 2. And then we're going to talk about the key design features, hash functions, as I mentioned, what is an append-only log, block headers and Merkle trees, and asymmetric cryptography and digital signatures. Crazy. We're going to cover all five of those today. And then you're going to tell me how we did. Oh, Bitcoin addresses, which is just a small thing. Six, actually. So last time, for those of you that weren't with us, we talked about money. And again, money is just a social construct, or an economic consensus mechanism. We're going to talk a lot about consensus next Tuesday when we talk about the consensus protocol on Bitcoin. But remember, money itself is just a consensus. There was a question on Tuesday, I think Alin actually had asked this question about well, what does it mean to be a liability in the central bank? Why is money, what does that actually mean? And I said it just means that somebody else will accept it. It's a social consensus because it's not that they're going to give you anything else. It's just that you can get a bank deposit, you can pay your taxes, you can use it at Starbucks, if in fact, you've already gotten a cup of coffee. If you remember, it's only legal tender for a debt. And so forth. Fiat money is just in that long line. But it's had its challenges and instabilities. It doesn't mean it's going to go away. I'm not a Bitcoin maximalist who thinks that Fiat currencies are going to go away. But Fiat currencies have their instabilities, particularly around weak monetary policy. In essence, when you debase a currency and allow a lot of it to be issued, or usually around unstable fiscal policy. So either the government is spending a lot, the King is off to foreign wars, and the Bank of England was actually set up in the late 17th century in essence to control the currency when the King was-- of England, I think-- was in wars with France, if I can recall. A lot of banks, central banks, were set up right about when a sovereign was off debasing a currency and spending too much at war. Ledgers, we talked about ledgers, how critical ledgers are. In essence, ledgers are a way to keep records. And those records could either be transaction records or balance records. We'll see that Bitcoin is set up as a transaction ledger system. Later we're going to be talking about other blockchain technologies that are set up as balance ledgers. So one should not just think immutability that there's only one way to do this. But transactions and ledgers are at the core of Bitcoin. And central banking is of course, built on ledgers. The master ledger of the central bank, and then the commercial banks have sort of the sub-ledgers. And then you can think sometimes your digital wallet, maybe Starbucks has yet a third tier ledger. We obviously live in an electronic age already. We know this. There's been many efforts, they've all died until Bitcoin to crack that riddle that we talked about, peer-to-peer money without a central authority. And later in the semester when we talk about what are the use cases, that's going to be the core thing.