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  • 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.