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

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I'm a senior lecturer here at MIT Sloan

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I'm also an advisor over at the MIT

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Media Lab and I've spent a lifetime

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around the world of finance and money

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and public policy and I've been at MIT

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this last eight months and we're gonna

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learn a lot together about blockchain

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and money we're gonna have a little bit

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of fun here and see what we're gonna do

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so we're talking about blockchain and

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money that's where we are by the way I

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do cold call I do call on use if you

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want to leave now I understand because I

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want to have an interaction a little bit

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about it so my first question for the

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class for everyone whether registered or

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not how many of you have ever owned a

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cryptocurrency wait wait let's see the

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yacht's it seems like it's about 45% of

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you or so all right Livan you want to

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keep your hand up long and how many of

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you have ever worked on any blockchain

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related projects in an entrepreneurial

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setting or corporate setting anywhere

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all right good

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so a better third in the room good all

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right so you all know probably more than

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I do

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but I'm gonna give it a shot I'm gonna

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always start every week with what are

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the study questions for the week how

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many of you actually got the syllabus

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this is not gonna be graded assignment I

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just have to have a sense of who's who

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actually got this syllabus so good many

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of you and how many of you actually did

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the two readings it's not graded I just

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got

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gage the class oh thank you thank you

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right those grades down by the way no no

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all right so the two main questions for

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this week's lecture really is what is

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blockchain and why might it be a

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catalyst and I emphasize the word

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might it be a catalyst for change in the

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world of finance we could talk about a

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lot about things outside of the world of

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finance and blockchain may indeed have a

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lot of applications outside of Finance

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but I've chosen to try to just narrow

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the scope a bit so this semester is

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really about blockchain and money or

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blockchain and finance and secondly you

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will see index cards on every one of

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these round tables one assignment by the

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end of the class you could do it now or

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later I would like each of you to

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anonymously write on the court what you

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want to achieve in this semester it

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could be anything from this class from

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learning about blockchain from making

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money on Bitcoin from I don't care if

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you tell me it's meeting your future

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spouse I just like what do you want to

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achieve in this class I can't help you

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on the third but I will try to help you

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hone the things I can help you ID and

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Sabrina and Toledo will collect them

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later and next Tuesday will tell you the

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results what is it that you want to

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achieve in this class and then we'll see

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at the end of the semester if we've done

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that so that's just a way to help guide

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me help you so that's that's what we're

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trying to do and so what were the two

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readings one was a little thing I did

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and one was a thing I did with some of

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my colleagues and Tom since I know you

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would you take out of the readings

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did you have a good summer did you raise

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your head did you own Bitcoin know who

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in the class read the readings and took

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something different than Tom he said

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there was potential and your first name

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okay how many agreed with the line this

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is a vote

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they're just two or three how many grids

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with Tom there's more and how many of

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you're too shy on the first day to put

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your hands up most so I'm going to start

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and go back the internet how do I sort

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of I've come about this and sort of

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thought about well what is the WAP chain

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what is it really about well the

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internet started many decades ago before

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most of you were born

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but 1974 I mean there's some

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predecessors even from the late 60s the

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ethernet which is really how two

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computers communicate and then you had

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tcp/ip which was really the Internet

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Protocol of multiple computers compute

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that talking to each other and then

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later on in 1990 how do we move forward

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does anybody know what HTTP is we're at

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MIT your first name would be helpful

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Erik Erik it's a protocol for

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communicate with content web content

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hypertext Transfer Protocol eek anybody

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know who's associated with tcp/ip

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it was a company initiated by MIT I

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don't know if it was a company in Sochi

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over there mighty but Vince Cerf may

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have had some association with it mighty

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so these are the first three layers and

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then there were companies

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commercialization 3com and cisco and of

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course amazon it's still around today

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but there was something else going on

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how do we commercialize the internet

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does anybody know what this scene is

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from good thought good thought first

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pizza sold by Bitcoin but no all right

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movie hackers the net do you know have

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you ever seen the movie it's not a good

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movie so this is the opening scene of

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the net and yes that's Sandra Bullock

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and the years 1995

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it's a cyber thriller you know a

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president's involved the Defense

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Department's involved and so forth but

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actually Pizza Hut is associated with

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the very first sale online sale anywhere

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in the world they started something

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called pizza night this was the screen

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by the way if you wanted to go on you

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could order your pizza and and but there

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was one problem does anybody know what

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the problem with was Pizza net I mean

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maybe there were multiple problems no

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Ilana I've caught on you you couldn't

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pay online nobody figured out how to

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move money online you had to pay when

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you showed up with the pizza so now I'm

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going to talk a little bit about

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cryptography we're going to spend a lot

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of time on cryptography it's crypto

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currencies and the like what's your name

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Gigi Gigi Gigi what's cryptography

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cryptic all right now you got it you got

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to start there anybody want to help GE

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out does anybody want to help you yeah

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tell me your first name we're gonna ask

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we're gonna figure out how to have

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everybody have name plates by next week

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but we will work with Ryan and do it

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that way so it's how do you encrypt

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something so it's not detectable by

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others or in essence it's communications

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in the presence of adversaries you have

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an adversary who wants the communication

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you want to communicate and not let your

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adversaries know that communication and

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this is this is true for ancient times

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so in ancient times there was something

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called the cypher and this was a way

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that you take a piece of leather or

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Peetha cloth and have a lot of letters

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and both sides

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you'd encrypt and decrypt because there

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were different measurements of the

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cylinder has anybody seen the movie

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imitation games all right

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the Enigma machine now it the movie was

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wonderful because it said Turin cracked

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it and he did help crack it in an

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automated way but actually the Polish

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government had cracked it in the 1930s

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before they fell to the Germans but and

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and touring built on all of that and

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cracked it further and then in the 1970s

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and this was here at MIT to some extent

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there's private key public key

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cryptography which I'm not going to dive

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into today but it's it's the heart of

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Bitcoin and blockchain it's at the heart

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of the Internet but it's about the key

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thing is communications in the presence

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of adversaries how do you keep a secret

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when everybody wants in and get that

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information

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and there's a long history and mi t--'s

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at the center of a lot of that a lot of

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early cryptography failed on the

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Internet in the early 90s and late 80s

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David cha and others tried to do things

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and we're not going to debate these

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today but you'll have one reading I

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think it's either next week which will

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give you that history and it's

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worthwhile knowing about the history of

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failure but cryptography is the reason

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why the internet works today does

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anybody want to tell me what SSL and TLS

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is do we have any computer scientists

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remember your first name encryption

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using symmetric keys which is public key

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cryptography

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right so it basically uses asymmetric

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cryptography which we're going to talk

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about two lectures from now but it

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secures the whole Internet so all of a

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sudden you could deliver the pizza and

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get a passcode and I have to tell you I

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never knew how this worked before I was

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at MIT so PayPal came along in 1998 I

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mentioned this a whole bunch of other

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digital currencies then failed but some

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of these people who will read later like

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will read Nick Sabo's piece on smart

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contracts later Adam back who created

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hash cash some of these innovations were

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what Satoshi Nakamoto later used some

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innovations which were really helpful

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and worked where a leap a and M paisa

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does anybody know what M pace is in

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essence they found out in Kenya this was

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ten twelve years ago that people were

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trading mobile minutes they were

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unbanked but they had cellular phone

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and they were trading their minutes as a

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form of currency and Safaricom realized

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that and said way we could help people

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be part of the digital economy even if

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they're unbanked and in Africa today 1/2

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of the adult population according to

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world bag figures is still unbanked but

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half of that half has mobile phones and

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pace has 20 million customers in Kenya

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right now so it's a it's a form of money

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that's kind of swapping mobile minutes

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but the riddle remained how do you move

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money on the internet where in essence

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how do you move value peer-to-peer

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without a centralized intermediary and

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that's the core of blockchain technology

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so who solved the riddle and they're

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ready to tell me who solved the riddle

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who solved this riddle now have you you

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you're wearing a t-shirt that says

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Quentin Tarantino so I think Quentin

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Tarantino should solve over it all

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what's that what's your name so a

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peer-to-peer cash this is the actual doc

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top of an email that was sent out on

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Halloween 2008 by Satoshi Nakamoto we

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don't actually know who's Satoshi

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Nakamoto is but it's a study question a

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few lectures from now to ask you to tell

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me who you think Satoshi Nakamoto is so

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I won't ask that now and he started with

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a very simple sentence in his email I've

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been working on a new electronic cash

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system that fully peer-to-peer with no

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trusted third party it's kind of a

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modest statement and so the question is

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is this another internet layer we're

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gonna explore that this whole semester I

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don't I don't really have the answer I

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don't think the best minds at MIT could

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really yet tell you

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there are some who are maximalist and

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say yes it will be and there are others

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who will say no no no and in this course

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we're gonna we're gonna review the

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minimalist and the maximalist we're not

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we're not kind of try to Center it in

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one place but that's the key key kind of

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question so what is a blockchain we're

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gonna do this in a lot of lectures but

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I'm gonna try to do it in this short

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version so it's time-stamped append logs

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meaning you can add a little bit of

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information to this and it's

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time-stamped so these are these blocks

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being added Satoshi did not invent

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blockchain there's way earlier does

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anybody want to guess what what it was

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you're gonna have a reading about this

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later but early 1990s what's that Midori

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Stuart Haber Stuart Haysbert worked for

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Bell Labs right so one of your

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assignments it's not gonna be a gray to

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decide which it's gonna be a fun

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assignment could any of you I'm gonna

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say by next Thursday just have some fun

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find the longest and timewise longest

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running blockchain it's not Bitcoin and

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it's been running since the mid 90s and

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your clue is the New York Times and

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we'll discuss it next Thursday but this

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time stamped block block block block of

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data creates a database an auditable

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database and we'll talk about Ledger's

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particularly next week but we'll talk

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about Ledger's all throughout this

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course and how it changes the world of

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Finance

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now it's secured by cryptography because

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cryptography remembers communications

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and making sure adversaries can't pick

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you off we're gonna learn about hash

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functions and hash functions that are a

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really important part of cryptography

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and initially for databases and how to

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search and store information and

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database

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but in this circumstances hash functions

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were the way to not only append the next

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block to the prior blocks but really

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importantly to compress data to make it

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more manipulatable and to verify it and

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as I've written here tamper resistance

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and the integrity digital signatures

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which has to do the public key private

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key cryptography there is no

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prerequisite of this course you do not

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have had to have taken computer science

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cryptography algorithms if I could learn

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a little bit about hash functions and

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asymmetric cryptography these are the

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two key important sides and will we have

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enough computer scientists in this room

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that can sort us out if I say the wrong

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thing right mid doors hopefully and then

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consensus so there's a really important

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part of blockchain is how do you decide

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who appends that next block because when

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I went back here

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there's block or block each of these

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blocks somebody has to decide who

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appends who gets to pick the next block

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and that's what's called consensus

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protocol and there's why debates about

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consensus protocol and will talk a lot

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about consensus protocol but in essence

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it addresses something a term called the

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cost of trust and we'll talk about

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Byzantine generals problems which is

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another reading the Byzantine generals

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problem was laid out as a sort of

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mathematical game theory issue some

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thirty as years ago that's what Satoshi

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Nakamoto solved was this last part that

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the Byzantine generals problem pizza for

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bitcoins a year and a half after Satoshi

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Nakamoto laid out blockchain Bitcoin

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somebody sends an email and you'll get

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these slides but this is the real live

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email I'll pay you 10,000 bitcoins for a

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couple of pizzas I I just want some

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pizzas the guy who sent this

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he says I like onions peppers sausage

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mushrooms Lazlo

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now catch the date this is May 18th and

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he's offering 10,000 bitcoins of 2010

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but the key line is what I'm aiming for

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is getting food deliver in exchange for

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bitcoins nobody had used bitcoins as a

20:08

medium of exchange 16 months into its

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existence nobody had used it to buy

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something and Laszlo is a computer

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scientist in Florida was just kind of

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interested and he put this out on an

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email list three days later he still

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doesn't have his two pizzas so nobody

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wants to buy me a pizza is the Bitcoin

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amount I'm offering too low another day

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goes by he gets his pizzas and he post

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pictures so here's a picture of his

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child reaching for those Papa John's

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pizzas anybody know what those 10,000

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bitcoins were worth back in back then

20:52

Chicago anybody want to say back then

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what's that $41 and last I was saying

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two pizzas are probably worth 25 to 30

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because there's a whole email thread he

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kept saying why won't anybody get me my

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pizzas you could make money on this

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today or earlier late yet last night 66

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million dollars

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yeah so it's a cute story may 22nd every

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year is called pizza day or Bitcoin

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pizza day or something so so what is

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block taint technology these are my

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words but they're sort of picked from

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the literature and so forth it

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verifiably moves data on a decentralized

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network and the economics of blockchain

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technology are really around that

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verification and the economics of

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verification and the economics of

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networking and in many ways blockchain

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adds certain costs to the verification

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through this consensus protocol that

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we'll be studying but it lowers some

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other costs of verification because

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you're not relying on a centralized

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Authority so it's really a trade-off of

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cost of verification I don't think it's

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I'm not a purist that says it's better

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or worse but it's it's a trade-off of

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costs of verification through

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decentralized networks the data can be

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value like Bitcoin was a money system

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where the data can be actually computer

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code and we'll learn a lot about smart

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contracts and you could have the data

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being verified computer code and

22:39

algorithms my world finance this

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directly goes to the plumbing of Finance

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because finance is fundamentally about

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moving money and risk through a network

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and that network is the seven billion

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people that live on this world it's

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moving money and risk and you've all

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taken finance courses or many of you

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have and it's the intermediating of

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money and risk throughout our economy

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but there's a whole host of challenges

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and over the course of this semester

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we'll talk about this challenges

23:17

technical commercial and public policy

23:19

hurdles will they be solved will they

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not be solved but it could be a catalyst

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but we're not sure yet

23:30

for change in the world of money and

23:32

Finance so does anybody want to tell me

23:35

the role of money in society and tell me

23:43

your first name come on Tomas between

23:50

people all right medium of exchange got

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that one somebody give me a second

23:59

yellow shirt savings all right so that

24:05

would be a store of value yeah

24:06

third I'm sorry the gentleman here Wow

24:12

all right there we go there we go so

24:17

we're gonna spend some time next Tuesday

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talking more about money and the role of

24:21

money in the history of money which i

24:24

think is sort of lays a foundational

24:26

piece of this what about the role of

24:29

Finance I've already sort of said a few

24:31

things about that but and I'm sorry I

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don't know your name but I'm right here

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the woman yeah role of Finance sorry I'm

24:45

not going to tell any financial finance

24:47

professor what your answer is to raise

24:51

money so keep going I'm gonna anybody

24:57

else want it can connect savers and

25:00

borrowers connect savers and bars so

25:03

connecting is sort of moving money

25:05

moving valuations so that's the pieces

25:12

of it sort of moving making valuations I

25:15

use the words moving allocating and

25:17

pricing pricing is the valuations of

25:20

money well let's not forget it's also

25:24

about risk when you buy insurance

25:26

that's a transference of risk when you

25:29

buy an equity stock that's a

25:30

transference of risk if you enter into a

25:34

complex credit default swap it's a

25:36

transference of risk so finance is not

25:39

just the movement of money it's the

25:41

movement of risk as well throughout the

25:46

economy and I always think finance I

25:50

always I've thought this when I was at

25:53

Goldman Sachs for 18 years that finance

25:55

sits at the neck of an hourglass and

25:58

it's why it collects so much economic

26:01

rents from society because when you sit

26:04

at the neck of an hourglass and billions

26:07

literally trillions of grains of sand go

26:10

by if you collect some of those grains

26:14

of sand you get uber wealth and that's

26:20

those are for other classes but finance

26:22

can collect a lot of economic rents the

26:26

financial sector though has a bunch of

26:27

challenges we'll have one lecture later

26:29

in the semester about some of those

26:31

challenges and we have a reading I think

26:33

sheila bair wrote something recently

26:35

that I asked you all to read later in

26:36

the semester but we'll talk about the

26:38

financial crisis and some of the

26:40

problems but it's had a lot of crises

26:42

fiat currencies have a lot of what

26:44

instabilities of course we have

26:47

centralized intermediaries as I laid out

26:51

and we'll talk about collect a lot of

26:52

economic rents so there's there's

26:55

opportunity blockchain has real

26:57

opportunity to kind of come under this

27:00

world of Finance and maybe do some

27:02

things better central banking also have

27:05

a bunch of legacy payment systems and

27:07

there's legacy payment systems or slowly

27:10

adapting but it's slow and why did Ally

27:15

pay do so well in China is part of the

27:18

story because there were so many

27:19

unbanked just like m-pesa in Kenya but

27:22

here in the US we still pay 2 and a half

27:25

to 3 percent for our interchange charges

27:28

for Visa MasterCard and the like and a

27:32

lot of clearing and settlement still has

27:34

a lot of counterparty risk and one that

27:37

I care deeply about Financial Inclusion

27:39

there's still 1 point 7 billion people

27:41

in this world who are unbanked and so we

27:45

don't think of it as much in the

27:46

developed countries

27:47

but it's certainly true in many products

27:51

even here in the US and these are to me

27:55

the opportunities finance is 7 and a

27:58

half percent of the US economy that's

28:00

one and a half trillion dollars of

28:01

revenues so any of you that are thinking

28:04

about entrepreneurial opportunities the

28:08

payment system just here in the US is a

28:10

half a percent to one percent of our

28:11

economy that's 100 to 200 billion

28:14

dollars or revenues

28:15

I think these is about 18 billion just

28:18

you know but if you you know when you

28:20

add up the whole payment system that's a

28:22

hundred to two hundred billion dollars

28:24

in payment revenues so that's kind of

28:26

the opportunity can blockchain

28:28

technology come in it's got problems

28:30

it's slow its its performance issues

28:34

but can it compete with that here are

28:37

some of the problems the financial

28:39

sector would say with blockchain

28:41

these are real live things that we're

28:43

going to study later in the semester

28:44

they say it doesn't have the performance

28:47

scalability a modern payment system you

28:50

need to be able to move about a hundred

28:52

thousand payments a second a modern

28:54

securities clearing the the Depository

28:57

Trust Corporation the Securities and

29:00

Exchange Commission says you do about

29:03

thirty thousand transactions a second

29:05

but we need you to scale and your

29:06

computers and everything have to be

29:08

resilient to a hundred thousand

29:09

transactions a second Bitcoin you can do

29:14

about seven transactions a second visa

29:17

currently depends on the the second does

29:21

anywhere from twenty two seventy

29:22

thousand a second yeah so it's just a

29:25

sense of scalability and performance we

29:28

might get there it might be three to

29:30

seven years away I'm optimistic but

29:33

there's still a bunch of performance and

29:35

scalability issues privacy and security

29:38

blockchains by their nature or public so

29:42

they're not fully censorship resistant

29:44

but there's a lot of innovation about

29:46

making them more private but then that

29:49

makes the public sector a little nervous

29:53

interoperability they don't necessarily

29:55

work yet with other legacy systems or

29:59

with each other the internet one of the

30:01

great innovations of the internet it

30:03

became interoperable that all of these

30:07

different websites could kind of speak

30:08

with each other governance is a very big

30:12

issue we'll talk about and one of the

30:15

things about governance is it's hard to

30:17

update the software of a blockchain

30:21

because if you create a decentralized

30:23

where no one's in control no one can

30:26

collect economic rents you also don't

30:28

have sort of somebody with the ability

30:32

to necessarily update the software and

30:35

we'll talk later about how Bitcoin

30:37

updates its software and what Bitcoin

30:39

core developers are and so forth but

30:43

Facebook you do know one thing though

30:46

there there a company that collects a

30:48

lot of profits and economic rents off of

30:51

their two billion members they know how

30:55

to update their software it's it's a

30:59

governance issue that's a real life

31:02

challenge and that's why the financial

31:05

sector says I'm not sure this works this

31:07

is ready yet for me and then thus what

31:10

are the commercial use cases and what

31:12

are the public policy issues so right

31:15

now the financial sector favors

31:17

permission blockchains versus permission

31:19

list this is going to be about four

31:22

weeks from now we'll kind of go through

31:24

these two differences but I want to just

31:26

frame this briefly permission

31:29

blockchains have a noun group of people

31:31

who actually participate the half of you

31:36

that said you've owned Bitcoin you know

31:38

it to be something where anybody can

31:40

update the ledger permission blockchains

31:43

you can't do that in essence you pick

31:47

the three or twenty the Australian Stock

31:49

Exchange is updating their clearing and

31:51

settling they announced they're doing a

31:53

blockchain project they're doing it with

31:55

digital assets and they're using the

31:59

hyper ledger blockchain which is an IBM

32:02

software open source software but the

32:06

Australian Stock Exchange is going to

32:07

put it on three computers which is

32:10

called three nodes that they control all

32:12

three of them

32:14

the Depository Trust Corporation is

32:17

looking at blockchain inspired solutions

32:19

for some of their data warehouses but

32:22

they too are gonna control the nodes I'm

32:25

just giving it that's permission

32:27

blockchains there's nothing wrong with

32:28

that that's just how they are the

32:30

they're looking at this permissionless

32:33

block chains are like Bitcoin unknown

32:35

participants securities based on

32:36

incentives a crypto currency and crypto

32:40

economics crypto finance is about two

32:44

hundred billion but it you know you have

32:45

to update these slides daily two days

32:47

ago it was two hundred and thirty

32:49

billion and this little pie chart is a

32:55

little over half as Bitcoin the next

32:58

slice is something called if the

33:00

and then ripple and down the line we're

33:02

not going to spend a lot of time in this

33:04

this semester if you if your goal is to

33:07

how can you profit and trade a trade

33:10

Bitcoin and day trade ether god bless go

33:13

prosper you could stay in the class

33:16

I just won't give you much advice on it

33:18

you know this is not a crypto investing

33:22

centered class but I'm okay if that's

33:26

what you're doing does anybody know what

33:29

the worldwide capital market size is

33:32

anybody want to guess you know this is

33:35

200 billion what's it look like I've

33:38

already said it's modest hundreds of

33:42

trillions global equity about 80

33:44

trillion global bond and debt markets

33:48

250 trillion so it's still quite modest

33:54

compared to that broad breadth of

33:56

capital formation and gold

34:01

if bitcoins digital gold what's the

34:04

value of gold all the gold that's ever

34:07

been 7 trillion so just give you sense

34:14

of scale so there's also something

34:17

that's interesting about this space is

34:19

that it's out sized public attention

34:22

even as evidenced by the hundred of you

34:25

in this room versus the size it is real

34:30

relative to the capital markets today

34:32

you know there's a bunch of public

34:35

policy issues we'll have a lecture I'm a

34:37

former regulator I ran the Commodity

34:39

Futures Trading Commission so but this

34:42

course is not about regulation though we

34:44

have to always come back to regulation

34:46

we always have to infuse what we're

34:49

doing with the regulation but let me

34:52

just give you a little framework and

34:53

then you'll have to be bored and a

34:56

handful of weeks and read I gave some

34:58

congressional testimony on it yes it

35:00

will be required reading sorry but it's

35:04

guarding against illicit activity a lot

35:07

of Bitcoin and crypto currencies started

35:11

out in the cyber

35:13

Punk sort of movement and and

35:16

libertarian movement so forth and it is

35:19

true you can use this for illicit

35:21

activity absolutely but I would say

35:24

crime is not new just the mechanisms and

35:27

means are new and and so the criminals

35:31

yes will use this and have used it for a

35:34

listed activity financial stability

35:36

central bankers around the globe sort of

35:39

will this shape finance well it's only

35:42

two hundred billion the financial

35:44

markets are three hundred trillion plus

35:46

not yet is generally what they're saying

35:49

but for some countries it's a way to get

35:52

around capital controls and so for those

35:54

countries worried about capital controls

35:56

it's a very real and live set of issues

35:59

and then protecting the investing public

36:02

and when we do this in a few weeks I'll

36:05

go through each of these the investor

36:07

protection issues and yes the sec how we

36:10

test and and the like for those who wish

36:14

to do their own initial coin off right

36:16

now

36:17

give some you know broad sense of what

36:21

the sec is trying to accomplish but it's

36:24

a moving target so this is a very

36:26

interesting as opposed to many of your

36:27

sloan classes or your c cell classes or

36:30

media lab classes this is a very

36:33

unsettled area of public policy so it

36:36

makes it interesting and and and and if

36:39

you all go off and form companies you

36:41

will actually be helping sort of set the

36:43

the the edge of that public policy of

36:46

debate I had always say just remember

36:49

poet Riley the duck test this is a poet

36:52

Indiana poets those that aren't from the

36:54

US might not know the duck test but

36:56

basically if it quacks like a duck and

36:58

walks like a duck it's a duck so

37:00

whenever you're thinking about public

37:01

policy folks like myself who once was a

37:05

regulator we think in the duck test and

37:09

then we secondarily think about the

37:12

actual words in the congressional act

37:16

you know where's the common sense and if

37:18

it quacks and walks like a duck it's

37:21

probably a security or it's probably

37:24

this or that

37:26

the incumbents like this Linus in the

37:29

corner are eyeing this space because

37:32

there's a lot of volatility and Wall

37:34

Street makes money on volatility

37:36

volatility is the friend of Wall Street

37:38

it might not be the friend of investors

37:40

but it's a friend of Wall Street they

37:42

also like the trading volumes and the

37:44

spreads coinbase the largest crypto

37:48

exchange here in the US has 20 million

37:50

accounts they might not all be active

37:53

but that's the size of Fidelity's

37:55

membership or account list and twice de

37:57

Shaw and Robin Hood how many of you have

38:01

ever used Robin Hood is a trading app

38:03

Wow half of you so you know free trading

38:07

right 5 million members for those who

38:11

don't know you can download Robin Hood

38:13

and you can trade stocks for free

38:16

no Commission and if anybody's

38:20

interested show up and I'll do office

38:22

hours when the hell Robin Hood

38:23

commercializes they commercialize your

38:26

your order flow and they make money

38:29

without charging your commissions but

38:32

it's a sort of wonderful app Millennials

38:34

love it 5 million members already so you

38:38

better believe de Shah and the

38:40

incumbents are worried about things like

38:41

that the startups are also more willing

38:44

to beg for forgiveness from regulators

38:46

they're willing to sort of take risks

38:48

and beg for forgiveness whereas

38:50

incumbents tend to have to ask for

38:53

permission so there's an unlevel field

38:55

that always it's a asymmetric business

39:00

set of risk about regulatory risk not

39:03

always I'm not like crying for JP Morgan

39:07

I mean the big incumbents have also they

39:11

have their advantages and coinbase is

39:14

becoming an incumbent rather than just a

39:16

you know startup in a sense and we'll

39:20

talk during the semester about some of

39:22

the incumbents where we're probably

39:25

going to get Jeff sprecher here in

39:27

mid-november he's going to talk to you

39:28

about what IntercontinentalExchange in

39:30

the New York Stock Exchange is doing

39:31

with Starbucks and Microsoft and the

39:33

like the financial sector use cases I'm

39:36

not going to go through these but this

39:37

is the second half of the course is

39:39

going to go through

39:40

each of these and we'll do one to two

39:42

sessions on each payment system central

39:44

bank digital currency secondary market

39:47

trading the venture capital and initial

39:51

coin offering space we'll do two a

39:53

course on that and move through so what

39:57

are we gonna do in this whole course

39:59

basically our goal is to learn the

40:02

fundamentals

40:03

it's about roughly the first half of the

40:05

course pivot to two sessions on the

40:08

economics we're gonna be talking about

40:10

the economics throughout the whole

40:11

course but I want to I want to really

40:13

just focus drill down on the economics

40:16

of 1/2 of the discussions and then riff

40:20

through the financial space for the

40:22

second yeah that's our journey together

40:26

to me it's for anybody who wants to gain

40:29

critical reasoning skills this is not

40:31

just kind of a hey this is going to

40:35

change the world and revolutionize

40:36

everything class and so I basically

40:41

think of an old Defense Department term

40:44

called ground truths it's when the

40:46

general doesn't really know what's going

40:48

on but needs to figure it out and needs

40:50

to talk to that you know that that

40:53

corporal on the ground who's got dirt

40:55

you know all over woman and it's been

40:58

shot up and says here's the real ground

41:00

truth we're gonna try to talk about

41:02

ground truth in this in this in this

41:04

class and separate the mere assertion

41:07

from the hype and some of your readings

41:09

will be some real Bitcoin and blockchain

41:13

minimalist from Nouriel Roubini that

41:16

uses words I'm not supposed to repeat on

41:19

a recording about this stuff to Paul

41:22

Krugman who and and Joe Stiglitz and

41:25

other Nobel laureates who say no it's

41:28

not gonna work or Warren Buffett to to

41:31

maximalists we're gonna we're gonna try

41:33

to cover both sides Larry Lessig is

41:37

honoring me because he's in the back of

41:38

the class who's an enormous Lee esteemed

41:42

professor from Harvard I didn't know

41:45

Larry was gonna be here and I did the

41:47

slide before but in 1999 I think you

41:49

wrote this book Larry is that right

41:54

code and other laws of cyberspace I put

41:56

you in though but I think it's

41:58

worthwhile to think about Larry's four

42:01

bits here and I don't know Larry if you

42:04

want to say anything but I'm gonna try

42:06

to infuse this course in just how you

42:08

think about this the tech we're at MIT

42:11

the technology and we're gonna get you a

42:14

lot of technology if you want more than

42:15

I can give you is is is a former finance

42:19

sort of type my whole life there's gonna

42:23

be a bunch of computer science people in

42:25

the class we're gonna hook and you up

42:28

together with the folks from the Media

42:30

Lab and see Sal and and try to connect

42:33

you to the technology side if you want

42:35

to swim deeper in that pond but the

42:38

technology really really matters and

42:41

that's why we are going to go through

42:43

hash functions and go through asymmetric

42:45

cryptography and so forth from a

42:48

business perspective markets matter why

42:52

is it that incumbents or startups or are

42:55

not doing this and that why is it ten

42:57

years in and nobody's got an

42:59

enterprise-wide solution yet to payments

43:02

that use block J the law matters the

43:05

public policy side matters and the forth

43:09

of Larry's layout social norms that's a

43:14

little harder for me to teach that's not

43:16

what this class is about but it is also

43:18

a flex all this it's not just the

43:20

technology the markets and the law so

43:23

it's not just a three-legged store it's

43:25

kind of a four legged stool how'd I do

43:26

Larry

43:29

I really didn't know Harry is gonna be

43:31

here so but I wanted to give you a

43:34

framework for how your faculty member

43:38

thinks and will be on this journey

43:41

together range of perspectives we're not

43:45

gonna be a Bitcoin minimalist or

43:46

maximalist I'm probably to be self

43:50

disclosed here a little bit center

43:53

minimalist on Bitcoin smart contract

43:58

minimalist max list I'm probably pretty

44:00

Center Larry's probably a little bit

44:03

center maximalist I'm guessing so you're

44:14

still you're still center or Center

44:16

minimalist what smart contracts and then

44:22

blockchain maximalist or minimalist I'd

44:25

say a few weeks ago I was kind of Center

44:28

maximalist and I'm sort of skidding back

44:30

to the middle permissioned blockchain

44:36

I'm a little bit more you know and

44:39

there's some in here Allah is one of

44:41

your Sloan cohort that you might know

44:45

six months ago when we met was working

44:47

on a permissionless system and now

44:51

you're working on a permission system

44:53

you have a startup yeah cuz like you've

44:56

bounced up into the market realities is

44:59

and we're gonna talk a lot in this

45:01

course about critical thinking about

45:03

when do you really need the advantage of

45:06

a decentralized peer-to-peer system

45:08

where the costs of trusts are such that

45:13

that's the right way to go but I am one

45:17

who thinks that there's also so much

45:18

economic rents in the financial system

45:21

that's that one and a half trillion

45:23

dollars of revenues or seven and a half

45:24

percent of our economy or just two

45:27

hundred billion in the payment systems

45:28

for instance that there may be times

45:30

that you don't really need a

45:32

decentralized system but it just might

45:35

be your opportunity to tuck in

45:37

underneath all of those economic rents

45:40

and all those revenues now in

45:43

Vince will react you poke an incumbent

45:47

commercially pokum I mean and they're

45:50

gonna react and that's why I think

45:51

blockchain may well be a catalyst for

45:54

change even if incumbents then adopt a

45:57

lot of that inside the requirements of

46:01

the course class participation is a hard

46:03

thing to judge is a faculty member when

46:05

I have this many people so but I always

46:08

think class participation matters we

46:12

made it 30% it which if you have any

46:18

advice on this a next semester

46:21

30% to to individual write-ups one in

46:24

the first half which is up to I think

46:25

lecture 10 which is basically the

46:28

blockchain fundamentals you pick a topic

46:31

I don't care which one

46:32

but it's you'll get you'll get a much

46:34

better grade if it's about critical

46:36

reasoning if it's really taking whatever

46:39

those sets of writings are and and and

46:43

and and not just repeating that which is

46:46

in the readings but really going the

46:49

next step in saying here's what's going

46:51

on and this is a business goal you don't

46:54

have to you know convince me that you

46:57

know something about computer science

46:59

it's like critical reasoning about the

47:02

economic opportunities the strengths the

47:05

weaknesses the opportunities the threats

47:07

that old business school sort of saying

47:08

of swaths with regard to that week's

47:12

whether it's about hash functions early

47:14

on cryptography or you sort of wait

47:17

during the foundational period to

47:19

permission versus permissionless you

47:22

pick but to please hand it in before

47:25

that classes lecture because I might

47:28

during the lecture say who wrote today

47:29

do you want to tell us what you think

47:31

and it might help spur the class

47:33

participation and then a second write-up

47:36

in the second half when we're riffing

47:38

through the use cases again critical

47:42

reasoning and then lastly the usual

47:46

approach of teams of up to four no I

47:50

don't want teams of five

47:52

to handle that right now three or four

47:55

just and and and somewhere in the second

47:59

half of this semester we'll talk about

48:01

more the content and there's a couple of

48:04

you in here that worked with me last

48:06

semester and a smaller group you know I

48:10

want you to do well so I'm gonna sort of

48:12

give you a sense of like what do we want

48:14

to do but it's basically the idea is

48:16

you're an entrepreneur or you're an

48:18

incumbent and what sort of use case or

48:22

you're gonna pick and and and whether

48:24

it's permissioned or permissionless sort

48:27

of make a proposal do a use case use

48:30

your critical reasoning around this new

48:32

technology somewhere in the broad world

48:35

of finance

48:37

I mean you know and I'm glad that define

48:39

finance really broad you know you'll

48:42

pick so that's that's kind of a peace

48:46

act one or the fundamentals I won't go

48:50

through each of the pieces but you know

48:52

that's in the syllabus of course Act two

48:56

is the pivot of the economics and Act

49:00

three our financial sector use cases and

49:06

hopefully throughout law will have a lot

49:08

of fun so the study questions for next

49:11

Tuesday real quick what are the roles

49:15

and characteristics of money so I really

49:17

want to sort of dig behind money money

49:19

is but a social construct or a social

49:22

convention medium of exchange store

49:27

value unit of account there's some

49:30

readings about the debate whether money

49:33

first came from the border system or a

49:37

really good set of anthropologist and

49:40

and and and archaeologists and

49:42

everything say no it actually came as a

49:44

ledger system and no one knows for sure

49:46

at ten and fifteen thousand years ago

49:48

whether money came from the out of the

49:50

border system or more as a unit of

49:53

account keeping account of credits and

49:55

ledger but I'd say when you read through

49:58

some of those readings you start to

49:59

think well this is just a societal

50:01

construct and so that I will get behind

50:05

that what is

50:06

fiat currency fiat currency which is an

50:08

invention really only over the last few

50:10

hundred years and we take for granted

50:11

Dale but how does that fit into that

50:14

whole history and importantly how to

50:16

Ledger's accounting Ledger's I know

50:20

boring stuff but it's probably why we

50:23

came out of the dark ages so about five

50:25

or six hundred years ago with double

50:27

entry bookkeeping sorry hi I like

50:31

Ledger's we'll talk a little bit about

50:35

Ledger's and how that fits into money

50:37

and securities and so forth and then

50:41

layering in how Bitcoin fits on top of

50:44

that history next Tuesday is not deeply

50:47

about Bitcoin it's just a little dollop

50:49

on that there'll be five or six readings

50:53

one of them is a three-minute video the

50:56

third one it's fun watch it's just a

50:58

funny little video on what money is

51:02

there's no need to read nakamoto's full

51:05

paper when I said the email I mean just

51:07

the cover email it's one paragraph my

51:11

goal in the readings each week was not

51:12

an each session was by and Lord to try

51:15

to keep less than 50 pages you'd say

51:18

you're gonna look sometimes you go it

51:19

looks like it's more and maybe it is I

51:21

figure you're all gonna figure out for

51:24

yourself how to sort through the depth

51:27

of your knowledge but I will predict

51:29

that some of you may be as much as a

51:31

quarter or a third of you are gonna go

51:33

down a rabbit hole one day and you're

51:35

gonna be doing blockchain for the next

51:37

48 hours and you won't know where the

51:40

time went because it is an addiction at

51:43

some point that some of you will get

51:45

because this is curious notion I'm not

51:49

predicting that infirmity for all of you

51:51

I'm just saying some of you will have

51:53

that happen to you so occasionally I

51:55

have readings just white a lot it's

51:57

happen to you let me just conclude and

52:02

then take any other questions and light

52:03

up their blockchain I think does provide

52:07

a peer-to-peer alternative I think that

52:09

I hope Larry I'll be able to convince it

52:12

does provide and that peer-to-peer

52:15

alternative addresses cost of trust it

52:18

doesn't mean it's the only way to

52:19

address

52:19

cost the trust but addresses cost a

52:21

trust the financial sector does have

52:25

challenges not just that it has

52:27

seven-and-a-half percent of our economy

52:29

in the US and similar ratios around the

52:32

globe but resilience how it survives

52:36

shocks the financial crisis and things

52:39

like that are real and inclusion one

52:43

point seven billion people unbanked but

52:45

then if you look at other products who

52:48

has access to credit cards and mortgages

52:50

and the like and then fiat currencies

52:53

Ken Rogoff and others have written a lot

52:56

about the instabilities that come that

52:58

fiat currencies and we'll talk about

53:00

some of the history why central bank's

53:02

exist and how they they came about next

53:07

key point is we already live in an

53:09

electronic age Satoshi Nakamoto and

53:11

Bitcoin didn't create electronic cash

53:15

electronic cash I mean Sandra Bullock

53:19

couldn't pay electronically that was

53:22

1995 they did a sort of berated movie

53:26

about it all but by today you pay your

53:30

tuition online those of you who work get

53:34

paid online you pay your auto loans

53:37

online most of our lives are electronic

53:43

cash not a hundred percent but in some

53:46

countries like Sweden it's getting very

53:49

close to a hundred percent we'll learn

53:53

together and discover that monies but a

53:56

social and economic consensus blockchain

54:02

technology along the crypto finance

54:03

might be a catalyst for change and

54:05

they're much masquerades as fact but

54:10

it's only mere assertion we're gonna try

54:12

to sort through you know that those

54:15

differences that doesn't mean that all

54:17

of you are gonna walk out agreeing with

54:19

Paul Krugman a Nobel laureate or Nouriel

54:22

Roubini that this is just a bunch of

54:25

nonsense some of you might by the way

54:29

but but I think you'll come out with

54:31

real critical

54:33

thinking skills and I hope that some of

54:35

you will say I figured out actually

54:37

where there's a real opportunity in the

54:40

world of finance to use blockchain

54:42

technology and make it a better

54:45

financial sector democratizing finance

54:49

or somehow providing a service at a

54:52

lower cost of better service throughout

54:55

I hope throughout that we'll learn

54:58

together and we'll have a bit of fun

55:00

along the way

55:00

that's kind of my thoughts questions we

55:04

have exactly what 18 minutes there you

55:10

go but we can cut it short - I don't

55:12

care there we go did you tell me your

55:16

name and we're gonna do placards Ryan's

55:18

gonna work to figure out you do placards

55:20

cuz it's I wonder how our team's form

55:30

traditionally anybody it's slow and can

55:33

speak to this too but students do it

55:35

their own so that the faculty doesn't

55:38

sort of try to insert themselves to help

55:40

you but we tend towards the latter half

55:43

and say well who's formed up in groups

55:46

and when you know if it's a smaller

55:49

group it's like well anybody has not yet

55:50

formed in a team why don't you move to

55:52

the left hand side of the room and just

55:54

get together but we could do that

55:55

electronically - and you know whether

55:58

talita and Sabrina who you know good

56:01

help Internet

56:02

basically have a social network to help

56:05

form the teams because this is a big

56:08

group you're right but that's

56:09

traditionally people those students do

56:11

it on their own

56:13

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