WEBVTT 00:00:00.410 --> 00:00:05.120 the following content is provided under 00:00:02.540 --> 00:00:07.339 a Creative Commons license your support 00:00:05.120 --> 00:00:09.199 will help MIT OpenCourseWare continue to 00:00:07.339 --> 00:00:10.279 offer high quality educational resources 00:00:09.199 --> 00:00:12.469 for free 00:00:10.279 --> 00:00:14.509 to make a donation or to view additional 00:00:12.470 --> 00:00:20.710 materials from hundreds of MIT courses 00:00:14.509 --> 00:00:20.710 visit MIT opencourseware at ocw.mit.edu 00:00:21.989 --> 00:00:28.809 welcome welcome if you have a desire to 00:00:26.949 --> 00:00:30.250 learn a little bit about blockchain and 00:00:28.809 --> 00:00:32.920 its intersection with the world of 00:00:30.250 --> 00:00:37.630 finance and money and you're looking for 00:00:32.920 --> 00:00:40.539 15 . s 12 you're in the right place if 00:00:37.630 --> 00:00:43.150 you're here to not do that and just hang 00:00:40.539 --> 00:00:44.948 out and have a good time I guess you 00:00:43.149 --> 00:00:46.089 still hopefully are in the right place 00:00:44.948 --> 00:00:48.878 because we're gonna have a good time 00:00:46.090 --> 00:00:52.420 this semester my name is Gary Gensler 00:00:48.878 --> 00:00:55.149 I'm a senior lecturer here at MIT Sloan 00:00:52.420 --> 00:00:58.088 I'm also an advisor over at the MIT 00:00:55.149 --> 00:01:01.329 Media Lab and I've spent a lifetime 00:00:58.088 --> 00:01:05.319 around the world of finance and money 00:01:01.329 --> 00:01:08.379 and public policy and I've been at MIT 00:01:05.319 --> 00:01:10.419 this last eight months and we're gonna 00:01:08.379 --> 00:01:13.539 learn a lot together about blockchain 00:01:10.420 --> 00:01:14.859 and money we're gonna have a little bit 00:01:13.540 --> 00:01:16.810 of fun here and see what we're gonna do 00:01:14.859 --> 00:01:20.590 so we're talking about blockchain and 00:01:16.810 --> 00:01:24.368 money that's where we are by the way I 00:01:20.590 --> 00:01:28.150 do cold call I do call on use if you 00:01:24.368 --> 00:01:31.239 want to leave now I understand because I 00:01:28.150 --> 00:01:32.770 want to have an interaction a little bit 00:01:31.239 --> 00:01:34.959 about it so my first question for the 00:01:32.769 --> 00:01:37.000 class for everyone whether registered or 00:01:34.959 --> 00:01:41.500 not how many of you have ever owned a 00:01:37.000 --> 00:01:45.129 cryptocurrency wait wait let's see the 00:01:41.500 --> 00:01:50.829 yacht's it seems like it's about 45% of 00:01:45.129 --> 00:01:57.250 you or so all right Livan you want to 00:01:50.829 --> 00:01:59.469 keep your hand up long and how many of 00:01:57.250 --> 00:02:01.599 you have ever worked on any blockchain 00:01:59.469 --> 00:02:04.560 related projects in an entrepreneurial 00:02:01.599 --> 00:02:06.219 setting or corporate setting anywhere 00:02:04.560 --> 00:02:11.348 all right good 00:02:06.219 --> 00:02:13.900 so a better third in the room good all 00:02:11.348 --> 00:02:14.469 right so you all know probably more than 00:02:13.900 --> 00:02:18.158 I do 00:02:14.469 --> 00:02:19.598 but I'm gonna give it a shot I'm gonna 00:02:18.158 --> 00:02:22.269 always start every week with what are 00:02:19.598 --> 00:02:23.859 the study questions for the week how 00:02:22.269 --> 00:02:25.750 many of you actually got the syllabus 00:02:23.860 --> 00:02:27.280 this is not gonna be graded assignment I 00:02:25.750 --> 00:02:29.620 just have to have a sense of who's who 00:02:27.280 --> 00:02:32.139 actually got this syllabus so good many 00:02:29.620 --> 00:02:34.389 of you and how many of you actually did 00:02:32.139 --> 00:02:34.600 the two readings it's not graded I just 00:02:34.389 --> 00:02:37.840 got 00:02:34.599 --> 00:02:40.389 gage the class oh thank you thank you 00:02:37.840 --> 00:02:43.180 right those grades down by the way no no 00:02:40.389 --> 00:02:46.569 all right so the two main questions for 00:02:43.180 --> 00:02:48.219 this week's lecture really is what is 00:02:46.569 --> 00:02:50.379 blockchain and why might it be a 00:02:48.219 --> 00:02:52.900 catalyst and I emphasize the word 00:02:50.379 --> 00:02:54.579 might it be a catalyst for change in the 00:02:52.900 --> 00:02:56.710 world of finance we could talk about a 00:02:54.580 --> 00:02:59.680 lot about things outside of the world of 00:02:56.710 --> 00:03:01.420 finance and blockchain may indeed have a 00:02:59.680 --> 00:03:04.360 lot of applications outside of Finance 00:03:01.419 --> 00:03:06.669 but I've chosen to try to just narrow 00:03:04.360 --> 00:03:09.160 the scope a bit so this semester is 00:03:06.669 --> 00:03:12.699 really about blockchain and money or 00:03:09.159 --> 00:03:15.129 blockchain and finance and secondly you 00:03:12.699 --> 00:03:18.310 will see index cards on every one of 00:03:15.129 --> 00:03:21.519 these round tables one assignment by the 00:03:18.310 --> 00:03:23.039 end of the class you could do it now or 00:03:21.520 --> 00:03:26.380 later I would like each of you to 00:03:23.039 --> 00:03:29.650 anonymously write on the court what you 00:03:26.379 --> 00:03:31.870 want to achieve in this semester it 00:03:29.650 --> 00:03:33.610 could be anything from this class from 00:03:31.870 --> 00:03:36.009 learning about blockchain from making 00:03:33.610 --> 00:03:37.690 money on Bitcoin from I don't care if 00:03:36.009 --> 00:03:40.299 you tell me it's meeting your future 00:03:37.689 --> 00:03:43.240 spouse I just like what do you want to 00:03:40.300 --> 00:03:46.150 achieve in this class I can't help you 00:03:43.240 --> 00:03:48.600 on the third but I will try to help you 00:03:46.150 --> 00:03:51.129 hone the things I can help you ID and 00:03:48.599 --> 00:03:53.349 Sabrina and Toledo will collect them 00:03:51.129 --> 00:03:55.449 later and next Tuesday will tell you the 00:03:53.349 --> 00:03:58.539 results what is it that you want to 00:03:55.449 --> 00:03:59.919 achieve in this class and then we'll see 00:03:58.539 --> 00:04:03.549 at the end of the semester if we've done 00:03:59.919 --> 00:04:08.289 that so that's just a way to help guide 00:04:03.550 --> 00:04:10.780 me help you so that's that's what we're 00:04:08.289 --> 00:04:13.019 trying to do and so what were the two 00:04:10.780 --> 00:04:15.939 readings one was a little thing I did 00:04:13.020 --> 00:04:19.239 and one was a thing I did with some of 00:04:15.939 --> 00:04:22.649 my colleagues and Tom since I know you 00:04:19.238 --> 00:04:22.649 would you take out of the readings 00:04:29.360 --> 00:04:37.530 did you have a good summer did you raise 00:04:32.730 --> 00:04:39.360 your head did you own Bitcoin know who 00:04:37.529 --> 00:04:41.789 in the class read the readings and took 00:04:39.360 --> 00:04:45.590 something different than Tom he said 00:04:41.790 --> 00:04:45.590 there was potential and your first name 00:04:58.399 --> 00:05:05.669 okay how many agreed with the line this 00:05:04.680 --> 00:05:07.470 is a vote 00:05:05.670 --> 00:05:11.850 they're just two or three how many grids 00:05:07.470 --> 00:05:13.590 with Tom there's more and how many of 00:05:11.850 --> 00:05:17.730 you're too shy on the first day to put 00:05:13.589 --> 00:05:20.310 your hands up most so I'm going to start 00:05:17.730 --> 00:05:21.930 and go back the internet how do I sort 00:05:20.310 --> 00:05:23.730 of I've come about this and sort of 00:05:21.930 --> 00:05:25.019 thought about well what is the WAP chain 00:05:23.730 --> 00:05:28.140 what is it really about well the 00:05:25.019 --> 00:05:29.579 internet started many decades ago before 00:05:28.139 --> 00:05:32.789 most of you were born 00:05:29.579 --> 00:05:35.399 but 1974 I mean there's some 00:05:32.790 --> 00:05:37.050 predecessors even from the late 60s the 00:05:35.399 --> 00:05:40.459 ethernet which is really how two 00:05:37.050 --> 00:05:43.530 computers communicate and then you had 00:05:40.459 --> 00:05:47.399 tcp/ip which was really the Internet 00:05:43.529 --> 00:05:52.949 Protocol of multiple computers compute 00:05:47.399 --> 00:05:56.489 that talking to each other and then 00:05:52.949 --> 00:05:59.250 later on in 1990 how do we move forward 00:05:56.490 --> 00:06:01.949 does anybody know what HTTP is we're at 00:05:59.250 --> 00:06:05.120 MIT your first name would be helpful 00:06:01.949 --> 00:06:09.779 Erik Erik it's a protocol for 00:06:05.120 --> 00:06:25.649 communicate with content web content 00:06:09.779 --> 00:06:29.359 hypertext Transfer Protocol eek anybody 00:06:25.649 --> 00:06:29.359 know who's associated with tcp/ip 00:06:32.079 --> 00:06:44.050 it was a company initiated by MIT I 00:06:41.949 --> 00:06:47.740 don't know if it was a company in Sochi 00:06:44.050 --> 00:06:51.300 over there mighty but Vince Cerf may 00:06:47.740 --> 00:06:54.098 have had some association with it mighty 00:06:51.300 --> 00:06:54.960 so these are the first three layers and 00:06:54.098 --> 00:06:57.848 then there were companies 00:06:54.959 --> 00:07:00.029 commercialization 3com and cisco and of 00:06:57.848 --> 00:07:02.560 course amazon it's still around today 00:07:00.029 --> 00:07:04.658 but there was something else going on 00:07:02.560 --> 00:07:06.038 how do we commercialize the internet 00:07:04.658 --> 00:07:15.908 does anybody know what this scene is 00:07:06.038 --> 00:07:22.899 from good thought good thought first 00:07:15.908 --> 00:07:27.430 pizza sold by Bitcoin but no all right 00:07:22.899 --> 00:07:28.779 movie hackers the net do you know have 00:07:27.430 --> 00:07:33.250 you ever seen the movie it's not a good 00:07:28.779 --> 00:07:35.948 movie so this is the opening scene of 00:07:33.250 --> 00:07:39.189 the net and yes that's Sandra Bullock 00:07:35.949 --> 00:07:43.718 and the years 1995 00:07:39.189 --> 00:07:45.490 it's a cyber thriller you know a 00:07:43.718 --> 00:07:48.098 president's involved the Defense 00:07:45.490 --> 00:07:50.680 Department's involved and so forth but 00:07:48.098 --> 00:07:55.478 actually Pizza Hut is associated with 00:07:50.680 --> 00:07:57.158 the very first sale online sale anywhere 00:07:55.478 --> 00:07:59.649 in the world they started something 00:07:57.158 --> 00:08:01.930 called pizza night this was the screen 00:07:59.649 --> 00:08:06.038 by the way if you wanted to go on you 00:08:01.930 --> 00:08:07.629 could order your pizza and and but there 00:08:06.038 --> 00:08:10.089 was one problem does anybody know what 00:08:07.629 --> 00:08:13.418 the problem with was Pizza net I mean 00:08:10.089 --> 00:08:16.989 maybe there were multiple problems no 00:08:13.418 --> 00:08:18.968 Ilana I've caught on you you couldn't 00:08:16.990 --> 00:08:21.550 pay online nobody figured out how to 00:08:18.968 --> 00:08:24.908 move money online you had to pay when 00:08:21.550 --> 00:08:25.810 you showed up with the pizza so now I'm 00:08:24.908 --> 00:08:27.579 going to talk a little bit about 00:08:25.810 --> 00:08:29.649 cryptography we're going to spend a lot 00:08:27.579 --> 00:08:34.588 of time on cryptography it's crypto 00:08:29.649 --> 00:08:40.228 currencies and the like what's your name 00:08:34.589 --> 00:08:40.229 Gigi Gigi Gigi what's cryptography 00:08:44.578 --> 00:08:49.359 cryptic all right now you got it you got 00:08:46.899 --> 00:08:52.409 to start there anybody want to help GE 00:08:49.360 --> 00:08:54.759 out does anybody want to help you yeah 00:08:52.409 --> 00:08:56.289 tell me your first name we're gonna ask 00:08:54.759 --> 00:08:58.480 we're gonna figure out how to have 00:08:56.289 --> 00:09:00.429 everybody have name plates by next week 00:08:58.480 --> 00:09:17.199 but we will work with Ryan and do it 00:09:00.429 --> 00:09:19.448 that way so it's how do you encrypt 00:09:17.198 --> 00:09:22.838 something so it's not detectable by 00:09:19.448 --> 00:09:26.859 others or in essence it's communications 00:09:22.839 --> 00:09:29.320 in the presence of adversaries you have 00:09:26.860 --> 00:09:31.839 an adversary who wants the communication 00:09:29.320 --> 00:09:34.060 you want to communicate and not let your 00:09:31.839 --> 00:09:37.709 adversaries know that communication and 00:09:34.059 --> 00:09:40.359 this is this is true for ancient times 00:09:37.708 --> 00:09:42.698 so in ancient times there was something 00:09:40.360 --> 00:09:43.990 called the cypher and this was a way 00:09:42.698 --> 00:09:46.179 that you take a piece of leather or 00:09:43.990 --> 00:09:49.980 Peetha cloth and have a lot of letters 00:09:46.179 --> 00:09:52.838 and both sides 00:09:49.980 --> 00:09:55.060 you'd encrypt and decrypt because there 00:09:52.839 --> 00:09:58.769 were different measurements of the 00:09:55.059 --> 00:10:02.679 cylinder has anybody seen the movie 00:09:58.769 --> 00:10:06.970 imitation games all right 00:10:02.679 --> 00:10:08.888 the Enigma machine now it the movie was 00:10:06.970 --> 00:10:11.110 wonderful because it said Turin cracked 00:10:08.889 --> 00:10:13.120 it and he did help crack it in an 00:10:11.110 --> 00:10:16.139 automated way but actually the Polish 00:10:13.120 --> 00:10:19.539 government had cracked it in the 1930s 00:10:16.139 --> 00:10:21.970 before they fell to the Germans but and 00:10:19.539 --> 00:10:25.659 and touring built on all of that and 00:10:21.970 --> 00:10:28.839 cracked it further and then in the 1970s 00:10:25.659 --> 00:10:30.969 and this was here at MIT to some extent 00:10:28.839 --> 00:10:33.040 there's private key public key 00:10:30.970 --> 00:10:36.430 cryptography which I'm not going to dive 00:10:33.039 --> 00:10:39.399 into today but it's it's the heart of 00:10:36.429 --> 00:10:43.659 Bitcoin and blockchain it's at the heart 00:10:39.399 --> 00:10:45.879 of the Internet but it's about the key 00:10:43.659 --> 00:10:48.539 thing is communications in the presence 00:10:45.879 --> 00:10:50.948 of adversaries how do you keep a secret 00:10:48.539 --> 00:10:51.610 when everybody wants in and get that 00:10:50.948 --> 00:10:55.779 information 00:10:51.610 --> 00:10:59.080 and there's a long history and mi t--'s 00:10:55.779 --> 00:11:02.110 at the center of a lot of that a lot of 00:10:59.080 --> 00:11:04.660 early cryptography failed on the 00:11:02.110 --> 00:11:06.850 Internet in the early 90s and late 80s 00:11:04.659 --> 00:11:07.959 David cha and others tried to do things 00:11:06.850 --> 00:11:10.090 and we're not going to debate these 00:11:07.960 --> 00:11:13.240 today but you'll have one reading I 00:11:10.090 --> 00:11:15.100 think it's either next week which will 00:11:13.240 --> 00:11:16.899 give you that history and it's 00:11:15.100 --> 00:11:21.250 worthwhile knowing about the history of 00:11:16.899 --> 00:11:22.929 failure but cryptography is the reason 00:11:21.250 --> 00:11:26.039 why the internet works today does 00:11:22.929 --> 00:11:29.679 anybody want to tell me what SSL and TLS 00:11:26.039 --> 00:11:39.339 is do we have any computer scientists 00:11:29.679 --> 00:11:42.329 remember your first name encryption 00:11:39.340 --> 00:11:45.000 using symmetric keys which is public key 00:11:42.330 --> 00:11:49.389 cryptography 00:11:45.000 --> 00:11:51.070 right so it basically uses asymmetric 00:11:49.389 --> 00:11:54.909 cryptography which we're going to talk 00:11:51.070 --> 00:12:00.310 about two lectures from now but it 00:11:54.909 --> 00:12:02.350 secures the whole Internet so all of a 00:12:00.309 --> 00:12:05.139 sudden you could deliver the pizza and 00:12:02.350 --> 00:12:07.540 get a passcode and I have to tell you I 00:12:05.139 --> 00:12:13.110 never knew how this worked before I was 00:12:07.539 --> 00:12:15.730 at MIT so PayPal came along in 1998 I 00:12:13.110 --> 00:12:21.100 mentioned this a whole bunch of other 00:12:15.730 --> 00:12:23.289 digital currencies then failed but some 00:12:21.100 --> 00:12:26.139 of these people who will read later like 00:12:23.289 --> 00:12:29.529 will read Nick Sabo's piece on smart 00:12:26.139 --> 00:12:33.639 contracts later Adam back who created 00:12:29.529 --> 00:12:38.470 hash cash some of these innovations were 00:12:33.639 --> 00:12:40.659 what Satoshi Nakamoto later used some 00:12:38.470 --> 00:12:43.480 innovations which were really helpful 00:12:40.659 --> 00:12:53.709 and worked where a leap a and M paisa 00:12:43.480 --> 00:12:58.090 does anybody know what M pace is in 00:12:53.710 --> 00:13:00.190 essence they found out in Kenya this was 00:12:58.090 --> 00:13:02.590 ten twelve years ago that people were 00:13:00.190 --> 00:13:05.470 trading mobile minutes they were 00:13:02.590 --> 00:13:07.300 unbanked but they had cellular phone 00:13:05.470 --> 00:13:10.720 and they were trading their minutes as a 00:13:07.299 --> 00:13:13.139 form of currency and Safaricom realized 00:13:10.720 --> 00:13:16.540 that and said way we could help people 00:13:13.139 --> 00:13:20.350 be part of the digital economy even if 00:13:16.539 --> 00:13:23.259 they're unbanked and in Africa today 1/2 00:13:20.350 --> 00:13:26.470 of the adult population according to 00:13:23.259 --> 00:13:32.230 world bag figures is still unbanked but 00:13:26.470 --> 00:13:35.019 half of that half has mobile phones and 00:13:32.230 --> 00:13:38.170 pace has 20 million customers in Kenya 00:13:35.019 --> 00:13:42.090 right now so it's a it's a form of money 00:13:38.169 --> 00:13:44.559 that's kind of swapping mobile minutes 00:13:42.090 --> 00:13:46.780 but the riddle remained how do you move 00:13:44.559 --> 00:13:48.609 money on the internet where in essence 00:13:46.779 --> 00:13:51.669 how do you move value peer-to-peer 00:13:48.610 --> 00:13:56.820 without a centralized intermediary and 00:13:51.669 --> 00:14:00.669 that's the core of blockchain technology 00:13:56.820 --> 00:14:02.879 so who solved the riddle and they're 00:14:00.669 --> 00:14:09.339 ready to tell me who solved the riddle 00:14:02.879 --> 00:14:10.990 who solved this riddle now have you you 00:14:09.340 --> 00:14:13.450 you're wearing a t-shirt that says 00:14:10.990 --> 00:14:14.980 Quentin Tarantino so I think Quentin 00:14:13.450 --> 00:14:23.290 Tarantino should solve over it all 00:14:14.980 --> 00:14:25.720 what's that what's your name so a 00:14:23.289 --> 00:14:27.490 peer-to-peer cash this is the actual doc 00:14:25.720 --> 00:14:35.980 top of an email that was sent out on 00:14:27.490 --> 00:14:37.750 Halloween 2008 by Satoshi Nakamoto we 00:14:35.980 --> 00:14:40.779 don't actually know who's Satoshi 00:14:37.750 --> 00:14:43.029 Nakamoto is but it's a study question a 00:14:40.779 --> 00:14:45.789 few lectures from now to ask you to tell 00:14:43.029 --> 00:14:49.509 me who you think Satoshi Nakamoto is so 00:14:45.789 --> 00:14:52.809 I won't ask that now and he started with 00:14:49.509 --> 00:14:54.789 a very simple sentence in his email I've 00:14:52.809 --> 00:14:58.209 been working on a new electronic cash 00:14:54.789 --> 00:15:01.569 system that fully peer-to-peer with no 00:14:58.210 --> 00:15:06.160 trusted third party it's kind of a 00:15:01.570 --> 00:15:10.629 modest statement and so the question is 00:15:06.159 --> 00:15:12.610 is this another internet layer we're 00:15:10.629 --> 00:15:14.588 gonna explore that this whole semester I 00:15:12.610 --> 00:15:18.190 don't I don't really have the answer I 00:15:14.589 --> 00:15:19.550 don't think the best minds at MIT could 00:15:18.190 --> 00:15:22.410 really yet tell you 00:15:19.549 --> 00:15:26.009 there are some who are maximalist and 00:15:22.409 --> 00:15:28.409 say yes it will be and there are others 00:15:26.009 --> 00:15:30.029 who will say no no no and in this course 00:15:28.409 --> 00:15:31.889 we're gonna we're gonna review the 00:15:30.029 --> 00:15:33.809 minimalist and the maximalist we're not 00:15:31.889 --> 00:15:36.360 we're not kind of try to Center it in 00:15:33.809 --> 00:15:40.049 one place but that's the key key kind of 00:15:36.360 --> 00:15:42.570 question so what is a blockchain we're 00:15:40.049 --> 00:15:44.399 gonna do this in a lot of lectures but 00:15:42.570 --> 00:15:48.090 I'm gonna try to do it in this short 00:15:44.399 --> 00:15:50.100 version so it's time-stamped append logs 00:15:48.090 --> 00:15:53.850 meaning you can add a little bit of 00:15:50.100 --> 00:15:56.850 information to this and it's 00:15:53.850 --> 00:16:01.159 time-stamped so these are these blocks 00:15:56.850 --> 00:16:06.540 being added Satoshi did not invent 00:16:01.159 --> 00:16:08.429 blockchain there's way earlier does 00:16:06.539 --> 00:16:10.049 anybody want to guess what what it was 00:16:08.429 --> 00:16:19.849 you're gonna have a reading about this 00:16:10.049 --> 00:16:23.399 later but early 1990s what's that Midori 00:16:19.850 --> 00:16:26.190 Stuart Haber Stuart Haysbert worked for 00:16:23.399 --> 00:16:27.840 Bell Labs right so one of your 00:16:26.190 --> 00:16:29.190 assignments it's not gonna be a gray to 00:16:27.840 --> 00:16:32.399 decide which it's gonna be a fun 00:16:29.190 --> 00:16:35.270 assignment could any of you I'm gonna 00:16:32.399 --> 00:16:39.389 say by next Thursday just have some fun 00:16:35.269 --> 00:16:43.710 find the longest and timewise longest 00:16:39.389 --> 00:16:46.230 running blockchain it's not Bitcoin and 00:16:43.710 --> 00:16:51.629 it's been running since the mid 90s and 00:16:46.230 --> 00:16:55.850 your clue is the New York Times and 00:16:51.629 --> 00:17:01.169 we'll discuss it next Thursday but this 00:16:55.850 --> 00:17:04.799 time stamped block block block block of 00:17:01.169 --> 00:17:07.589 data creates a database an auditable 00:17:04.799 --> 00:17:09.299 database and we'll talk about Ledger's 00:17:07.589 --> 00:17:10.740 particularly next week but we'll talk 00:17:09.299 --> 00:17:12.450 about Ledger's all throughout this 00:17:10.740 --> 00:17:13.109 course and how it changes the world of 00:17:12.450 --> 00:17:15.720 Finance 00:17:13.109 --> 00:17:18.029 now it's secured by cryptography because 00:17:15.720 --> 00:17:20.039 cryptography remembers communications 00:17:18.029 --> 00:17:22.170 and making sure adversaries can't pick 00:17:20.039 --> 00:17:24.990 you off we're gonna learn about hash 00:17:22.170 --> 00:17:26.519 functions and hash functions that are a 00:17:24.990 --> 00:17:30.269 really important part of cryptography 00:17:26.519 --> 00:17:32.309 and initially for databases and how to 00:17:30.269 --> 00:17:33.210 search and store information and 00:17:32.309 --> 00:17:36.279 database 00:17:33.210 --> 00:17:40.740 but in this circumstances hash functions 00:17:36.279 --> 00:17:44.920 were the way to not only append the next 00:17:40.740 --> 00:17:48.609 block to the prior blocks but really 00:17:44.920 --> 00:17:51.580 importantly to compress data to make it 00:17:48.609 --> 00:17:54.729 more manipulatable and to verify it and 00:17:51.579 --> 00:17:57.490 as I've written here tamper resistance 00:17:54.730 --> 00:17:59.829 and the integrity digital signatures 00:17:57.490 --> 00:18:01.660 which has to do the public key private 00:17:59.829 --> 00:18:03.220 key cryptography there is no 00:18:01.660 --> 00:18:05.460 prerequisite of this course you do not 00:18:03.220 --> 00:18:09.430 have had to have taken computer science 00:18:05.460 --> 00:18:11.789 cryptography algorithms if I could learn 00:18:09.430 --> 00:18:15.190 a little bit about hash functions and 00:18:11.789 --> 00:18:20.259 asymmetric cryptography these are the 00:18:15.190 --> 00:18:22.210 two key important sides and will we have 00:18:20.259 --> 00:18:24.970 enough computer scientists in this room 00:18:22.210 --> 00:18:30.519 that can sort us out if I say the wrong 00:18:24.970 --> 00:18:33.100 thing right mid doors hopefully and then 00:18:30.519 --> 00:18:36.220 consensus so there's a really important 00:18:33.099 --> 00:18:39.339 part of blockchain is how do you decide 00:18:36.220 --> 00:18:40.480 who appends that next block because when 00:18:39.339 --> 00:18:42.339 I went back here 00:18:40.480 --> 00:18:44.140 there's block or block each of these 00:18:42.339 --> 00:18:46.720 blocks somebody has to decide who 00:18:44.140 --> 00:18:49.210 appends who gets to pick the next block 00:18:46.720 --> 00:18:51.549 and that's what's called consensus 00:18:49.210 --> 00:18:54.370 protocol and there's why debates about 00:18:51.549 --> 00:18:57.309 consensus protocol and will talk a lot 00:18:54.369 --> 00:18:59.439 about consensus protocol but in essence 00:18:57.309 --> 00:19:01.000 it addresses something a term called the 00:18:59.440 --> 00:19:03.340 cost of trust and we'll talk about 00:19:01.000 --> 00:19:05.319 Byzantine generals problems which is 00:19:03.339 --> 00:19:07.329 another reading the Byzantine generals 00:19:05.319 --> 00:19:10.689 problem was laid out as a sort of 00:19:07.329 --> 00:19:16.509 mathematical game theory issue some 00:19:10.690 --> 00:19:19.090 thirty as years ago that's what Satoshi 00:19:16.509 --> 00:19:23.500 Nakamoto solved was this last part that 00:19:19.089 --> 00:19:28.720 the Byzantine generals problem pizza for 00:19:23.500 --> 00:19:33.750 bitcoins a year and a half after Satoshi 00:19:28.720 --> 00:19:36.940 Nakamoto laid out blockchain Bitcoin 00:19:33.750 --> 00:19:38.950 somebody sends an email and you'll get 00:19:36.940 --> 00:19:40.990 these slides but this is the real live 00:19:38.950 --> 00:19:44.470 email I'll pay you 10,000 bitcoins for a 00:19:40.990 --> 00:19:46.930 couple of pizzas I I just want some 00:19:44.470 --> 00:19:48.819 pizzas the guy who sent this 00:19:46.930 --> 00:19:51.720 he says I like onions peppers sausage 00:19:48.819 --> 00:19:54.759 mushrooms Lazlo 00:19:51.720 --> 00:19:59.880 now catch the date this is May 18th and 00:19:54.759 --> 00:20:03.460 he's offering 10,000 bitcoins of 2010 00:19:59.880 --> 00:20:05.950 but the key line is what I'm aiming for 00:20:03.460 --> 00:20:08.470 is getting food deliver in exchange for 00:20:05.950 --> 00:20:11.799 bitcoins nobody had used bitcoins as a 00:20:08.470 --> 00:20:14.529 medium of exchange 16 months into its 00:20:11.799 --> 00:20:16.720 existence nobody had used it to buy 00:20:14.529 --> 00:20:18.970 something and Laszlo is a computer 00:20:16.720 --> 00:20:21.430 scientist in Florida was just kind of 00:20:18.970 --> 00:20:26.230 interested and he put this out on an 00:20:21.430 --> 00:20:29.200 email list three days later he still 00:20:26.230 --> 00:20:30.819 doesn't have his two pizzas so nobody 00:20:29.200 --> 00:20:35.680 wants to buy me a pizza is the Bitcoin 00:20:30.819 --> 00:20:39.220 amount I'm offering too low another day 00:20:35.680 --> 00:20:42.730 goes by he gets his pizzas and he post 00:20:39.220 --> 00:20:44.920 pictures so here's a picture of his 00:20:42.730 --> 00:20:50.230 child reaching for those Papa John's 00:20:44.920 --> 00:20:52.990 pizzas anybody know what those 10,000 00:20:50.230 --> 00:20:59.160 bitcoins were worth back in back then 00:20:52.990 --> 00:21:05.259 Chicago anybody want to say back then 00:20:59.160 --> 00:21:07.540 what's that $41 and last I was saying 00:21:05.259 --> 00:21:09.879 two pizzas are probably worth 25 to 30 00:21:07.539 --> 00:21:11.589 because there's a whole email thread he 00:21:09.880 --> 00:21:14.340 kept saying why won't anybody get me my 00:21:11.589 --> 00:21:19.720 pizzas you could make money on this 00:21:14.339 --> 00:21:21.569 today or earlier late yet last night 66 00:21:19.720 --> 00:21:27.850 million dollars 00:21:21.569 --> 00:21:31.089 yeah so it's a cute story may 22nd every 00:21:27.849 --> 00:21:33.909 year is called pizza day or Bitcoin 00:21:31.089 --> 00:21:35.500 pizza day or something so so what is 00:21:33.910 --> 00:21:37.360 block taint technology these are my 00:21:35.500 --> 00:21:39.609 words but they're sort of picked from 00:21:37.359 --> 00:21:42.519 the literature and so forth it 00:21:39.609 --> 00:21:44.679 verifiably moves data on a decentralized 00:21:42.519 --> 00:21:46.960 network and the economics of blockchain 00:21:44.680 --> 00:21:49.299 technology are really around that 00:21:46.960 --> 00:21:52.539 verification and the economics of 00:21:49.299 --> 00:21:56.529 verification and the economics of 00:21:52.539 --> 00:22:00.309 networking and in many ways blockchain 00:21:56.529 --> 00:22:02.410 adds certain costs to the verification 00:22:00.309 --> 00:22:05.529 through this consensus protocol that 00:22:02.410 --> 00:22:07.960 we'll be studying but it lowers some 00:22:05.529 --> 00:22:09.549 other costs of verification because 00:22:07.960 --> 00:22:11.950 you're not relying on a centralized 00:22:09.549 --> 00:22:14.710 Authority so it's really a trade-off of 00:22:11.950 --> 00:22:16.509 cost of verification I don't think it's 00:22:14.710 --> 00:22:18.490 I'm not a purist that says it's better 00:22:16.509 --> 00:22:20.500 or worse but it's it's a trade-off of 00:22:18.490 --> 00:22:24.849 costs of verification through 00:22:20.500 --> 00:22:27.990 decentralized networks the data can be 00:22:24.849 --> 00:22:30.909 value like Bitcoin was a money system 00:22:27.990 --> 00:22:34.029 where the data can be actually computer 00:22:30.910 --> 00:22:36.640 code and we'll learn a lot about smart 00:22:34.029 --> 00:22:39.509 contracts and you could have the data 00:22:36.640 --> 00:22:44.710 being verified computer code and 00:22:39.509 --> 00:22:46.869 algorithms my world finance this 00:22:44.710 --> 00:22:49.380 directly goes to the plumbing of Finance 00:22:46.869 --> 00:22:52.989 because finance is fundamentally about 00:22:49.380 --> 00:22:55.540 moving money and risk through a network 00:22:52.990 --> 00:22:58.390 and that network is the seven billion 00:22:55.539 --> 00:23:02.049 people that live on this world it's 00:22:58.390 --> 00:23:04.090 moving money and risk and you've all 00:23:02.049 --> 00:23:07.149 taken finance courses or many of you 00:23:04.089 --> 00:23:11.309 have and it's the intermediating of 00:23:07.150 --> 00:23:11.310 money and risk throughout our economy 00:23:11.549 --> 00:23:16.269 but there's a whole host of challenges 00:23:13.890 --> 00:23:17.980 and over the course of this semester 00:23:16.269 --> 00:23:19.960 we'll talk about this challenges 00:23:17.980 --> 00:23:23.230 technical commercial and public policy 00:23:19.960 --> 00:23:27.600 hurdles will they be solved will they 00:23:23.230 --> 00:23:30.360 not be solved but it could be a catalyst 00:23:27.599 --> 00:23:32.829 but we're not sure yet 00:23:30.359 --> 00:23:35.529 for change in the world of money and 00:23:32.829 --> 00:23:43.659 Finance so does anybody want to tell me 00:23:35.529 --> 00:23:50.049 the role of money in society and tell me 00:23:43.660 --> 00:23:53.140 your first name come on Tomas between 00:23:50.049 --> 00:23:59.349 people all right medium of exchange got 00:23:53.140 --> 00:24:05.080 that one somebody give me a second 00:23:59.349 --> 00:24:06.969 yellow shirt savings all right so that 00:24:05.079 --> 00:24:12.999 would be a store of value yeah 00:24:06.970 --> 00:24:17.679 third I'm sorry the gentleman here Wow 00:24:12.999 --> 00:24:19.329 all right there we go there we go so 00:24:17.679 --> 00:24:21.429 we're gonna spend some time next Tuesday 00:24:19.329 --> 00:24:24.339 talking more about money and the role of 00:24:21.429 --> 00:24:26.409 money in the history of money which i 00:24:24.339 --> 00:24:29.138 think is sort of lays a foundational 00:24:26.409 --> 00:24:31.929 piece of this what about the role of 00:24:29.138 --> 00:24:36.008 Finance I've already sort of said a few 00:24:31.929 --> 00:24:38.169 things about that but and I'm sorry I 00:24:36.009 --> 00:24:45.700 don't know your name but I'm right here 00:24:38.169 --> 00:24:47.499 the woman yeah role of Finance sorry I'm 00:24:45.700 --> 00:24:51.729 not going to tell any financial finance 00:24:47.499 --> 00:24:57.278 professor what your answer is to raise 00:24:51.729 --> 00:25:00.220 money so keep going I'm gonna anybody 00:24:57.278 --> 00:25:03.759 else want it can connect savers and 00:25:00.220 --> 00:25:05.858 borrowers connect savers and bars so 00:25:03.759 --> 00:25:12.159 connecting is sort of moving money 00:25:05.858 --> 00:25:15.038 moving valuations so that's the pieces 00:25:12.159 --> 00:25:17.499 of it sort of moving making valuations I 00:25:15.038 --> 00:25:20.729 use the words moving allocating and 00:25:17.499 --> 00:25:24.759 pricing pricing is the valuations of 00:25:20.729 --> 00:25:26.979 money well let's not forget it's also 00:25:24.759 --> 00:25:29.200 about risk when you buy insurance 00:25:26.979 --> 00:25:30.999 that's a transference of risk when you 00:25:29.200 --> 00:25:34.330 buy an equity stock that's a 00:25:30.999 --> 00:25:36.970 transference of risk if you enter into a 00:25:34.329 --> 00:25:39.608 complex credit default swap it's a 00:25:36.970 --> 00:25:41.649 transference of risk so finance is not 00:25:39.608 --> 00:25:46.928 just the movement of money it's the 00:25:41.648 --> 00:25:50.819 movement of risk as well throughout the 00:25:46.929 --> 00:25:53.200 economy and I always think finance I 00:25:50.819 --> 00:25:55.450 always I've thought this when I was at 00:25:53.200 --> 00:25:58.389 Goldman Sachs for 18 years that finance 00:25:55.450 --> 00:26:01.419 sits at the neck of an hourglass and 00:25:58.388 --> 00:26:04.058 it's why it collects so much economic 00:26:01.419 --> 00:26:07.200 rents from society because when you sit 00:26:04.058 --> 00:26:10.450 at the neck of an hourglass and billions 00:26:07.200 --> 00:26:14.080 literally trillions of grains of sand go 00:26:10.450 --> 00:26:20.240 by if you collect some of those grains 00:26:14.079 --> 00:26:22.878 of sand you get uber wealth and that's 00:26:20.240 --> 00:26:26.269 those are for other classes but finance 00:26:22.878 --> 00:26:27.888 can collect a lot of economic rents the 00:26:26.269 --> 00:26:29.749 financial sector though has a bunch of 00:26:27.888 --> 00:26:31.278 challenges we'll have one lecture later 00:26:29.749 --> 00:26:33.259 in the semester about some of those 00:26:31.278 --> 00:26:35.388 challenges and we have a reading I think 00:26:33.259 --> 00:26:36.919 sheila bair wrote something recently 00:26:35.388 --> 00:26:38.719 that I asked you all to read later in 00:26:36.919 --> 00:26:40.369 the semester but we'll talk about the 00:26:38.720 --> 00:26:42.679 financial crisis and some of the 00:26:40.368 --> 00:26:44.720 problems but it's had a lot of crises 00:26:42.679 --> 00:26:47.499 fiat currencies have a lot of what 00:26:44.720 --> 00:26:51.079 instabilities of course we have 00:26:47.499 --> 00:26:52.999 centralized intermediaries as I laid out 00:26:51.079 --> 00:26:55.908 and we'll talk about collect a lot of 00:26:52.999 --> 00:26:57.950 economic rents so there's there's 00:26:55.909 --> 00:27:00.590 opportunity blockchain has real 00:26:57.950 --> 00:27:02.509 opportunity to kind of come under this 00:27:00.589 --> 00:27:05.538 world of Finance and maybe do some 00:27:02.509 --> 00:27:07.639 things better central banking also have 00:27:05.538 --> 00:27:10.819 a bunch of legacy payment systems and 00:27:07.638 --> 00:27:15.019 there's legacy payment systems or slowly 00:27:10.819 --> 00:27:18.109 adapting but it's slow and why did Ally 00:27:15.019 --> 00:27:19.399 pay do so well in China is part of the 00:27:18.109 --> 00:27:22.998 story because there were so many 00:27:19.398 --> 00:27:25.278 unbanked just like m-pesa in Kenya but 00:27:22.999 --> 00:27:28.548 here in the US we still pay 2 and a half 00:27:25.278 --> 00:27:32.720 to 3 percent for our interchange charges 00:27:28.548 --> 00:27:34.398 for Visa MasterCard and the like and a 00:27:32.720 --> 00:27:37.339 lot of clearing and settlement still has 00:27:34.398 --> 00:27:39.408 a lot of counterparty risk and one that 00:27:37.339 --> 00:27:41.269 I care deeply about Financial Inclusion 00:27:39.409 --> 00:27:45.350 there's still 1 point 7 billion people 00:27:41.269 --> 00:27:46.878 in this world who are unbanked and so we 00:27:45.349 --> 00:27:47.959 don't think of it as much in the 00:27:46.878 --> 00:27:51.259 developed countries 00:27:47.960 --> 00:27:55.669 but it's certainly true in many products 00:27:51.259 --> 00:27:58.669 even here in the US and these are to me 00:27:55.669 --> 00:28:00.320 the opportunities finance is 7 and a 00:27:58.669 --> 00:28:01.909 half percent of the US economy that's 00:28:00.319 --> 00:28:04.368 one and a half trillion dollars of 00:28:01.909 --> 00:28:08.119 revenues so any of you that are thinking 00:28:04.368 --> 00:28:10.158 about entrepreneurial opportunities the 00:28:08.118 --> 00:28:11.928 payment system just here in the US is a 00:28:10.159 --> 00:28:14.090 half a percent to one percent of our 00:28:11.929 --> 00:28:15.169 economy that's 100 to 200 billion 00:28:14.089 --> 00:28:18.349 dollars or revenues 00:28:15.169 --> 00:28:20.570 I think these is about 18 billion just 00:28:18.349 --> 00:28:22.819 you know but if you you know when you 00:28:20.569 --> 00:28:24.200 add up the whole payment system that's a 00:28:22.819 --> 00:28:26.658 hundred to two hundred billion dollars 00:28:24.200 --> 00:28:28.429 in payment revenues so that's kind of 00:28:26.659 --> 00:28:30.950 the opportunity can blockchain 00:28:28.429 --> 00:28:34.370 technology come in it's got problems 00:28:30.950 --> 00:28:37.819 it's slow its its performance issues 00:28:34.369 --> 00:28:39.259 but can it compete with that here are 00:28:37.819 --> 00:28:41.149 some of the problems the financial 00:28:39.259 --> 00:28:43.369 sector would say with blockchain 00:28:41.150 --> 00:28:44.620 these are real live things that we're 00:28:43.369 --> 00:28:47.239 going to study later in the semester 00:28:44.619 --> 00:28:50.449 they say it doesn't have the performance 00:28:47.240 --> 00:28:52.039 scalability a modern payment system you 00:28:50.450 --> 00:28:54.380 need to be able to move about a hundred 00:28:52.039 --> 00:28:57.349 thousand payments a second a modern 00:28:54.380 --> 00:29:00.860 securities clearing the the Depository 00:28:57.349 --> 00:29:03.199 Trust Corporation the Securities and 00:29:00.859 --> 00:29:05.419 Exchange Commission says you do about 00:29:03.200 --> 00:29:06.890 thirty thousand transactions a second 00:29:05.420 --> 00:29:08.330 but we need you to scale and your 00:29:06.890 --> 00:29:09.680 computers and everything have to be 00:29:08.329 --> 00:29:14.029 resilient to a hundred thousand 00:29:09.680 --> 00:29:17.930 transactions a second Bitcoin you can do 00:29:14.029 --> 00:29:21.049 about seven transactions a second visa 00:29:17.930 --> 00:29:22.490 currently depends on the the second does 00:29:21.049 --> 00:29:25.819 anywhere from twenty two seventy 00:29:22.490 --> 00:29:28.849 thousand a second yeah so it's just a 00:29:25.819 --> 00:29:30.559 sense of scalability and performance we 00:29:28.849 --> 00:29:33.500 might get there it might be three to 00:29:30.559 --> 00:29:35.179 seven years away I'm optimistic but 00:29:33.500 --> 00:29:38.440 there's still a bunch of performance and 00:29:35.180 --> 00:29:42.620 scalability issues privacy and security 00:29:38.440 --> 00:29:44.870 blockchains by their nature or public so 00:29:42.619 --> 00:29:46.789 they're not fully censorship resistant 00:29:44.869 --> 00:29:49.849 but there's a lot of innovation about 00:29:46.789 --> 00:29:53.799 making them more private but then that 00:29:49.849 --> 00:29:55.579 makes the public sector a little nervous 00:29:53.799 --> 00:29:59.480 interoperability they don't necessarily 00:29:55.579 --> 00:30:01.970 work yet with other legacy systems or 00:29:59.480 --> 00:30:03.589 with each other the internet one of the 00:30:01.970 --> 00:30:07.039 great innovations of the internet it 00:30:03.589 --> 00:30:08.779 became interoperable that all of these 00:30:07.039 --> 00:30:12.859 different websites could kind of speak 00:30:08.779 --> 00:30:15.200 with each other governance is a very big 00:30:12.859 --> 00:30:17.119 issue we'll talk about and one of the 00:30:15.200 --> 00:30:21.009 things about governance is it's hard to 00:30:17.119 --> 00:30:23.869 update the software of a blockchain 00:30:21.009 --> 00:30:26.029 because if you create a decentralized 00:30:23.869 --> 00:30:28.759 where no one's in control no one can 00:30:26.029 --> 00:30:32.089 collect economic rents you also don't 00:30:28.759 --> 00:30:35.089 have sort of somebody with the ability 00:30:32.089 --> 00:30:37.369 to necessarily update the software and 00:30:35.089 --> 00:30:39.949 we'll talk later about how Bitcoin 00:30:37.369 --> 00:30:43.389 updates its software and what Bitcoin 00:30:39.950 --> 00:30:46.130 core developers are and so forth but 00:30:43.390 --> 00:30:48.800 Facebook you do know one thing though 00:30:46.130 --> 00:30:51.980 there there a company that collects a 00:30:48.799 --> 00:30:55.159 lot of profits and economic rents off of 00:30:51.980 --> 00:30:59.930 their two billion members they know how 00:30:55.160 --> 00:31:02.950 to update their software it's it's a 00:30:59.930 --> 00:31:05.210 governance issue that's a real life 00:31:02.950 --> 00:31:07.460 challenge and that's why the financial 00:31:05.210 --> 00:31:10.940 sector says I'm not sure this works this 00:31:07.460 --> 00:31:12.740 is ready yet for me and then thus what 00:31:10.940 --> 00:31:15.680 are the commercial use cases and what 00:31:12.740 --> 00:31:17.539 are the public policy issues so right 00:31:15.680 --> 00:31:19.910 now the financial sector favors 00:31:17.539 --> 00:31:22.700 permission blockchains versus permission 00:31:19.910 --> 00:31:24.050 list this is going to be about four 00:31:22.700 --> 00:31:26.390 weeks from now we'll kind of go through 00:31:24.049 --> 00:31:29.180 these two differences but I want to just 00:31:26.390 --> 00:31:31.640 frame this briefly permission 00:31:29.180 --> 00:31:36.500 blockchains have a noun group of people 00:31:31.640 --> 00:31:38.180 who actually participate the half of you 00:31:36.500 --> 00:31:40.190 that said you've owned Bitcoin you know 00:31:38.180 --> 00:31:43.299 it to be something where anybody can 00:31:40.190 --> 00:31:47.180 update the ledger permission blockchains 00:31:43.299 --> 00:31:49.849 you can't do that in essence you pick 00:31:47.180 --> 00:31:51.830 the three or twenty the Australian Stock 00:31:49.849 --> 00:31:53.779 Exchange is updating their clearing and 00:31:51.829 --> 00:31:55.759 settling they announced they're doing a 00:31:53.779 --> 00:31:59.299 blockchain project they're doing it with 00:31:55.759 --> 00:32:02.019 digital assets and they're using the 00:31:59.299 --> 00:32:06.230 hyper ledger blockchain which is an IBM 00:32:02.019 --> 00:32:07.789 software open source software but the 00:32:06.230 --> 00:32:10.039 Australian Stock Exchange is going to 00:32:07.789 --> 00:32:12.680 put it on three computers which is 00:32:10.039 --> 00:32:14.230 called three nodes that they control all 00:32:12.680 --> 00:32:17.630 three of them 00:32:14.230 --> 00:32:19.880 the Depository Trust Corporation is 00:32:17.630 --> 00:32:22.400 looking at blockchain inspired solutions 00:32:19.880 --> 00:32:25.310 for some of their data warehouses but 00:32:22.400 --> 00:32:27.170 they too are gonna control the nodes I'm 00:32:25.309 --> 00:32:28.579 just giving it that's permission 00:32:27.170 --> 00:32:30.440 blockchains there's nothing wrong with 00:32:28.579 --> 00:32:33.019 that that's just how they are the 00:32:30.440 --> 00:32:35.059 they're looking at this permissionless 00:32:33.019 --> 00:32:36.920 block chains are like Bitcoin unknown 00:32:35.059 --> 00:32:40.129 participants securities based on 00:32:36.920 --> 00:32:44.300 incentives a crypto currency and crypto 00:32:40.130 --> 00:32:45.680 economics crypto finance is about two 00:32:44.299 --> 00:32:47.779 hundred billion but it you know you have 00:32:45.680 --> 00:32:49.039 to update these slides daily two days 00:32:47.779 --> 00:32:55.069 ago it was two hundred and thirty 00:32:49.039 --> 00:32:58.730 billion and this little pie chart is a 00:32:55.069 --> 00:33:00.059 little over half as Bitcoin the next 00:32:58.730 --> 00:33:02.549 slice is something called if the 00:33:00.059 --> 00:33:04.200 and then ripple and down the line we're 00:33:02.549 --> 00:33:07.230 not going to spend a lot of time in this 00:33:04.200 --> 00:33:10.500 this semester if you if your goal is to 00:33:07.230 --> 00:33:13.910 how can you profit and trade a trade 00:33:10.500 --> 00:33:16.740 Bitcoin and day trade ether god bless go 00:33:13.910 --> 00:33:18.920 prosper you could stay in the class 00:33:16.740 --> 00:33:22.609 I just won't give you much advice on it 00:33:18.920 --> 00:33:26.550 you know this is not a crypto investing 00:33:22.609 --> 00:33:29.279 centered class but I'm okay if that's 00:33:26.549 --> 00:33:32.659 what you're doing does anybody know what 00:33:29.279 --> 00:33:35.910 the worldwide capital market size is 00:33:32.660 --> 00:33:38.220 anybody want to guess you know this is 00:33:35.910 --> 00:33:42.540 200 billion what's it look like I've 00:33:38.220 --> 00:33:44.940 already said it's modest hundreds of 00:33:42.539 --> 00:33:48.180 trillions global equity about 80 00:33:44.940 --> 00:33:54.150 trillion global bond and debt markets 00:33:48.180 --> 00:33:56.690 250 trillion so it's still quite modest 00:33:54.150 --> 00:34:01.280 compared to that broad breadth of 00:33:56.690 --> 00:34:04.860 capital formation and gold 00:34:01.279 --> 00:34:07.440 if bitcoins digital gold what's the 00:34:04.859 --> 00:34:14.339 value of gold all the gold that's ever 00:34:07.440 --> 00:34:17.130 been 7 trillion so just give you sense 00:34:14.340 --> 00:34:19.320 of scale so there's also something 00:34:17.130 --> 00:34:22.070 that's interesting about this space is 00:34:19.320 --> 00:34:25.200 that it's out sized public attention 00:34:22.070 --> 00:34:30.480 even as evidenced by the hundred of you 00:34:25.199 --> 00:34:32.509 in this room versus the size it is real 00:34:30.480 --> 00:34:35.400 relative to the capital markets today 00:34:32.510 --> 00:34:37.620 you know there's a bunch of public 00:34:35.400 --> 00:34:39.750 policy issues we'll have a lecture I'm a 00:34:37.619 --> 00:34:42.329 former regulator I ran the Commodity 00:34:39.750 --> 00:34:44.519 Futures Trading Commission so but this 00:34:42.329 --> 00:34:46.440 course is not about regulation though we 00:34:44.519 --> 00:34:49.500 have to always come back to regulation 00:34:46.440 --> 00:34:52.079 we always have to infuse what we're 00:34:49.500 --> 00:34:53.579 doing with the regulation but let me 00:34:52.079 --> 00:34:56.009 just give you a little framework and 00:34:53.579 --> 00:34:58.139 then you'll have to be bored and a 00:34:56.010 --> 00:35:00.120 handful of weeks and read I gave some 00:34:58.139 --> 00:35:04.799 congressional testimony on it yes it 00:35:00.119 --> 00:35:07.859 will be required reading sorry but it's 00:35:04.800 --> 00:35:11.970 guarding against illicit activity a lot 00:35:07.860 --> 00:35:13.470 of Bitcoin and crypto currencies started 00:35:11.969 --> 00:35:16.679 out in the cyber 00:35:13.469 --> 00:35:19.858 Punk sort of movement and and 00:35:16.679 --> 00:35:21.809 libertarian movement so forth and it is 00:35:19.858 --> 00:35:24.509 true you can use this for illicit 00:35:21.809 --> 00:35:27.329 activity absolutely but I would say 00:35:24.510 --> 00:35:31.369 crime is not new just the mechanisms and 00:35:27.329 --> 00:35:34.409 means are new and and so the criminals 00:35:31.369 --> 00:35:36.530 yes will use this and have used it for a 00:35:34.409 --> 00:35:39.089 listed activity financial stability 00:35:36.530 --> 00:35:42.570 central bankers around the globe sort of 00:35:39.090 --> 00:35:44.940 will this shape finance well it's only 00:35:42.570 --> 00:35:46.650 two hundred billion the financial 00:35:44.940 --> 00:35:49.108 markets are three hundred trillion plus 00:35:46.650 --> 00:35:52.470 not yet is generally what they're saying 00:35:49.108 --> 00:35:54.989 but for some countries it's a way to get 00:35:52.469 --> 00:35:56.909 around capital controls and so for those 00:35:54.989 --> 00:35:59.519 countries worried about capital controls 00:35:56.909 --> 00:36:02.629 it's a very real and live set of issues 00:35:59.519 --> 00:36:05.909 and then protecting the investing public 00:36:02.630 --> 00:36:07.829 and when we do this in a few weeks I'll 00:36:05.909 --> 00:36:10.469 go through each of these the investor 00:36:07.829 --> 00:36:14.039 protection issues and yes the sec how we 00:36:10.469 --> 00:36:16.500 test and and the like for those who wish 00:36:14.039 --> 00:36:17.039 to do their own initial coin off right 00:36:16.500 --> 00:36:21.059 now 00:36:17.039 --> 00:36:24.719 give some you know broad sense of what 00:36:21.059 --> 00:36:26.190 the sec is trying to accomplish but it's 00:36:24.719 --> 00:36:27.899 a moving target so this is a very 00:36:26.190 --> 00:36:30.720 interesting as opposed to many of your 00:36:27.900 --> 00:36:33.559 sloan classes or your c cell classes or 00:36:30.719 --> 00:36:36.598 media lab classes this is a very 00:36:33.559 --> 00:36:39.389 unsettled area of public policy so it 00:36:36.599 --> 00:36:41.670 makes it interesting and and and and if 00:36:39.389 --> 00:36:43.829 you all go off and form companies you 00:36:41.670 --> 00:36:46.858 will actually be helping sort of set the 00:36:43.829 --> 00:36:49.009 the the edge of that public policy of 00:36:46.858 --> 00:36:52.139 debate I had always say just remember 00:36:49.010 --> 00:36:54.390 poet Riley the duck test this is a poet 00:36:52.139 --> 00:36:56.608 Indiana poets those that aren't from the 00:36:54.389 --> 00:36:58.559 US might not know the duck test but 00:36:56.608 --> 00:37:00.389 basically if it quacks like a duck and 00:36:58.559 --> 00:37:01.679 walks like a duck it's a duck so 00:37:00.389 --> 00:37:05.789 whenever you're thinking about public 00:37:01.679 --> 00:37:09.379 policy folks like myself who once was a 00:37:05.789 --> 00:37:12.300 regulator we think in the duck test and 00:37:09.380 --> 00:37:16.130 then we secondarily think about the 00:37:12.300 --> 00:37:18.900 actual words in the congressional act 00:37:16.130 --> 00:37:21.030 you know where's the common sense and if 00:37:18.900 --> 00:37:24.420 it quacks and walks like a duck it's 00:37:21.030 --> 00:37:26.810 probably a security or it's probably 00:37:24.420 --> 00:37:29.420 this or that 00:37:26.809 --> 00:37:32.269 the incumbents like this Linus in the 00:37:29.420 --> 00:37:34.400 corner are eyeing this space because 00:37:32.269 --> 00:37:36.199 there's a lot of volatility and Wall 00:37:34.400 --> 00:37:38.389 Street makes money on volatility 00:37:36.199 --> 00:37:40.789 volatility is the friend of Wall Street 00:37:38.389 --> 00:37:42.920 it might not be the friend of investors 00:37:40.789 --> 00:37:44.750 but it's a friend of Wall Street they 00:37:42.920 --> 00:37:48.440 also like the trading volumes and the 00:37:44.750 --> 00:37:50.469 spreads coinbase the largest crypto 00:37:48.440 --> 00:37:53.570 exchange here in the US has 20 million 00:37:50.469 --> 00:37:55.459 accounts they might not all be active 00:37:53.570 --> 00:37:57.860 but that's the size of Fidelity's 00:37:55.460 --> 00:38:01.670 membership or account list and twice de 00:37:57.860 --> 00:38:03.769 Shaw and Robin Hood how many of you have 00:38:01.670 --> 00:38:07.940 ever used Robin Hood is a trading app 00:38:03.769 --> 00:38:11.210 Wow half of you so you know free trading 00:38:07.940 --> 00:38:13.369 right 5 million members for those who 00:38:11.210 --> 00:38:16.159 don't know you can download Robin Hood 00:38:13.369 --> 00:38:20.089 and you can trade stocks for free 00:38:16.159 --> 00:38:22.190 no Commission and if anybody's 00:38:20.090 --> 00:38:23.829 interested show up and I'll do office 00:38:22.190 --> 00:38:26.300 hours when the hell Robin Hood 00:38:23.829 --> 00:38:29.599 commercializes they commercialize your 00:38:26.300 --> 00:38:32.240 your order flow and they make money 00:38:29.599 --> 00:38:34.670 without charging your commissions but 00:38:32.239 --> 00:38:38.329 it's a sort of wonderful app Millennials 00:38:34.670 --> 00:38:40.070 love it 5 million members already so you 00:38:38.329 --> 00:38:41.869 better believe de Shah and the 00:38:40.070 --> 00:38:44.690 incumbents are worried about things like 00:38:41.869 --> 00:38:46.940 that the startups are also more willing 00:38:44.690 --> 00:38:48.950 to beg for forgiveness from regulators 00:38:46.940 --> 00:38:50.539 they're willing to sort of take risks 00:38:48.949 --> 00:38:53.210 and beg for forgiveness whereas 00:38:50.539 --> 00:38:55.699 incumbents tend to have to ask for 00:38:53.210 --> 00:39:00.230 permission so there's an unlevel field 00:38:55.699 --> 00:39:03.439 that always it's a asymmetric business 00:39:00.230 --> 00:39:07.809 set of risk about regulatory risk not 00:39:03.440 --> 00:39:11.780 always I'm not like crying for JP Morgan 00:39:07.809 --> 00:39:14.809 I mean the big incumbents have also they 00:39:11.780 --> 00:39:16.790 have their advantages and coinbase is 00:39:14.809 --> 00:39:20.059 becoming an incumbent rather than just a 00:39:16.789 --> 00:39:22.550 you know startup in a sense and we'll 00:39:20.059 --> 00:39:25.309 talk during the semester about some of 00:39:22.550 --> 00:39:27.170 the incumbents where we're probably 00:39:25.309 --> 00:39:28.549 going to get Jeff sprecher here in 00:39:27.170 --> 00:39:30.320 mid-november he's going to talk to you 00:39:28.550 --> 00:39:31.820 about what IntercontinentalExchange in 00:39:30.320 --> 00:39:33.920 the New York Stock Exchange is doing 00:39:31.820 --> 00:39:36.380 with Starbucks and Microsoft and the 00:39:33.920 --> 00:39:37.550 like the financial sector use cases I'm 00:39:36.380 --> 00:39:39.320 not going to go through these but this 00:39:37.550 --> 00:39:40.130 is the second half of the course is 00:39:39.320 --> 00:39:42.530 going to go through 00:39:40.130 --> 00:39:44.930 each of these and we'll do one to two 00:39:42.530 --> 00:39:47.840 sessions on each payment system central 00:39:44.929 --> 00:39:51.319 bank digital currency secondary market 00:39:47.840 --> 00:39:53.090 trading the venture capital and initial 00:39:51.320 --> 00:39:57.710 coin offering space we'll do two a 00:39:53.090 --> 00:39:59.410 course on that and move through so what 00:39:57.710 --> 00:40:02.240 are we gonna do in this whole course 00:39:59.409 --> 00:40:03.259 basically our goal is to learn the 00:40:02.239 --> 00:40:05.389 fundamentals 00:40:03.260 --> 00:40:08.510 it's about roughly the first half of the 00:40:05.389 --> 00:40:10.099 course pivot to two sessions on the 00:40:08.510 --> 00:40:11.690 economics we're gonna be talking about 00:40:10.099 --> 00:40:13.849 the economics throughout the whole 00:40:11.690 --> 00:40:16.039 course but I want to I want to really 00:40:13.849 --> 00:40:20.329 just focus drill down on the economics 00:40:16.039 --> 00:40:22.340 of 1/2 of the discussions and then riff 00:40:20.329 --> 00:40:26.349 through the financial space for the 00:40:22.340 --> 00:40:29.120 second yeah that's our journey together 00:40:26.349 --> 00:40:31.670 to me it's for anybody who wants to gain 00:40:29.119 --> 00:40:35.029 critical reasoning skills this is not 00:40:31.670 --> 00:40:36.769 just kind of a hey this is going to 00:40:35.030 --> 00:40:41.570 change the world and revolutionize 00:40:36.769 --> 00:40:44.420 everything class and so I basically 00:40:41.570 --> 00:40:46.820 think of an old Defense Department term 00:40:44.420 --> 00:40:48.619 called ground truths it's when the 00:40:46.820 --> 00:40:50.930 general doesn't really know what's going 00:40:48.619 --> 00:40:53.349 on but needs to figure it out and needs 00:40:50.929 --> 00:40:55.819 to talk to that you know that that 00:40:53.349 --> 00:40:58.250 corporal on the ground who's got dirt 00:40:55.820 --> 00:41:00.110 you know all over woman and it's been 00:40:58.250 --> 00:41:02.360 shot up and says here's the real ground 00:41:00.110 --> 00:41:04.490 truth we're gonna try to talk about 00:41:02.360 --> 00:41:07.430 ground truth in this in this in this 00:41:04.489 --> 00:41:09.919 class and separate the mere assertion 00:41:07.429 --> 00:41:13.750 from the hype and some of your readings 00:41:09.920 --> 00:41:16.970 will be some real Bitcoin and blockchain 00:41:13.750 --> 00:41:19.190 minimalist from Nouriel Roubini that 00:41:16.969 --> 00:41:22.250 uses words I'm not supposed to repeat on 00:41:19.190 --> 00:41:25.730 a recording about this stuff to Paul 00:41:22.250 --> 00:41:28.849 Krugman who and and Joe Stiglitz and 00:41:25.730 --> 00:41:31.849 other Nobel laureates who say no it's 00:41:28.849 --> 00:41:33.650 not gonna work or Warren Buffett to to 00:41:31.849 --> 00:41:37.190 maximalists we're gonna we're gonna try 00:41:33.650 --> 00:41:38.930 to cover both sides Larry Lessig is 00:41:37.190 --> 00:41:42.610 honoring me because he's in the back of 00:41:38.929 --> 00:41:45.109 the class who's an enormous Lee esteemed 00:41:42.610 --> 00:41:47.090 professor from Harvard I didn't know 00:41:45.110 --> 00:41:49.820 Larry was gonna be here and I did the 00:41:47.090 --> 00:41:54.190 slide before but in 1999 I think you 00:41:49.820 --> 00:41:56.740 wrote this book Larry is that right 00:41:54.190 --> 00:41:58.269 code and other laws of cyberspace I put 00:41:56.739 --> 00:42:01.679 you in though but I think it's 00:41:58.269 --> 00:42:04.599 worthwhile to think about Larry's four 00:42:01.679 --> 00:42:06.519 bits here and I don't know Larry if you 00:42:04.599 --> 00:42:08.949 want to say anything but I'm gonna try 00:42:06.519 --> 00:42:11.679 to infuse this course in just how you 00:42:08.949 --> 00:42:14.139 think about this the tech we're at MIT 00:42:11.679 --> 00:42:15.909 the technology and we're gonna get you a 00:42:14.139 --> 00:42:19.119 lot of technology if you want more than 00:42:15.909 --> 00:42:23.409 I can give you is is is a former finance 00:42:19.119 --> 00:42:25.900 sort of type my whole life there's gonna 00:42:23.409 --> 00:42:28.629 be a bunch of computer science people in 00:42:25.900 --> 00:42:30.460 the class we're gonna hook and you up 00:42:28.630 --> 00:42:33.640 together with the folks from the Media 00:42:30.460 --> 00:42:35.829 Lab and see Sal and and try to connect 00:42:33.639 --> 00:42:38.529 you to the technology side if you want 00:42:35.829 --> 00:42:41.739 to swim deeper in that pond but the 00:42:38.530 --> 00:42:43.780 technology really really matters and 00:42:41.739 --> 00:42:45.909 that's why we are going to go through 00:42:43.780 --> 00:42:48.640 hash functions and go through asymmetric 00:42:45.909 --> 00:42:52.329 cryptography and so forth from a 00:42:48.639 --> 00:42:55.389 business perspective markets matter why 00:42:52.329 --> 00:42:57.549 is it that incumbents or startups or are 00:42:55.389 --> 00:42:59.109 not doing this and that why is it ten 00:42:57.550 --> 00:43:02.350 years in and nobody's got an 00:42:59.110 --> 00:43:05.500 enterprise-wide solution yet to payments 00:43:02.349 --> 00:43:09.400 that use block J the law matters the 00:43:05.500 --> 00:43:14.199 public policy side matters and the forth 00:43:09.400 --> 00:43:16.389 of Larry's layout social norms that's a 00:43:14.199 --> 00:43:18.579 little harder for me to teach that's not 00:43:16.389 --> 00:43:20.889 what this class is about but it is also 00:43:18.579 --> 00:43:23.380 a flex all this it's not just the 00:43:20.889 --> 00:43:25.059 technology the markets and the law so 00:43:23.380 --> 00:43:26.860 it's not just a three-legged store it's 00:43:25.059 --> 00:43:29.219 kind of a four legged stool how'd I do 00:43:26.860 --> 00:43:29.220 Larry 00:43:29.380 --> 00:43:34.989 I really didn't know Harry is gonna be 00:43:31.869 --> 00:43:38.890 here so but I wanted to give you a 00:43:34.989 --> 00:43:41.728 framework for how your faculty member 00:43:38.889 --> 00:43:45.219 thinks and will be on this journey 00:43:41.728 --> 00:43:46.748 together range of perspectives we're not 00:43:45.219 --> 00:43:50.469 gonna be a Bitcoin minimalist or 00:43:46.748 --> 00:43:53.259 maximalist I'm probably to be self 00:43:50.469 --> 00:43:58.058 disclosed here a little bit center 00:43:53.259 --> 00:44:00.429 minimalist on Bitcoin smart contract 00:43:58.059 --> 00:44:03.569 minimalist max list I'm probably pretty 00:44:00.429 --> 00:44:14.739 Center Larry's probably a little bit 00:44:03.568 --> 00:44:16.509 center maximalist I'm guessing so you're 00:44:14.739 --> 00:44:22.179 still you're still center or Center 00:44:16.509 --> 00:44:25.719 minimalist what smart contracts and then 00:44:22.179 --> 00:44:28.328 blockchain maximalist or minimalist I'd 00:44:25.719 --> 00:44:30.459 say a few weeks ago I was kind of Center 00:44:28.329 --> 00:44:36.160 maximalist and I'm sort of skidding back 00:44:30.460 --> 00:44:39.460 to the middle permissioned blockchain 00:44:36.159 --> 00:44:41.889 I'm a little bit more you know and 00:44:39.460 --> 00:44:45.329 there's some in here Allah is one of 00:44:41.889 --> 00:44:47.920 your Sloan cohort that you might know 00:44:45.329 --> 00:44:51.068 six months ago when we met was working 00:44:47.920 --> 00:44:53.019 on a permissionless system and now 00:44:51.068 --> 00:44:56.498 you're working on a permission system 00:44:53.018 --> 00:44:59.139 you have a startup yeah cuz like you've 00:44:56.498 --> 00:45:01.389 bounced up into the market realities is 00:44:59.139 --> 00:45:03.548 and we're gonna talk a lot in this 00:45:01.389 --> 00:45:06.338 course about critical thinking about 00:45:03.548 --> 00:45:08.768 when do you really need the advantage of 00:45:06.338 --> 00:45:13.150 a decentralized peer-to-peer system 00:45:08.768 --> 00:45:17.139 where the costs of trusts are such that 00:45:13.150 --> 00:45:18.969 that's the right way to go but I am one 00:45:17.139 --> 00:45:21.129 who thinks that there's also so much 00:45:18.969 --> 00:45:23.019 economic rents in the financial system 00:45:21.130 --> 00:45:24.818 that's that one and a half trillion 00:45:23.018 --> 00:45:27.189 dollars of revenues or seven and a half 00:45:24.818 --> 00:45:28.659 percent of our economy or just two 00:45:27.190 --> 00:45:30.818 hundred billion in the payment systems 00:45:28.659 --> 00:45:32.818 for instance that there may be times 00:45:30.818 --> 00:45:35.558 that you don't really need a 00:45:32.818 --> 00:45:37.630 decentralized system but it just might 00:45:35.559 --> 00:45:40.150 be your opportunity to tuck in 00:45:37.630 --> 00:45:43.450 underneath all of those economic rents 00:45:40.150 --> 00:45:47.579 and all those revenues now in 00:45:43.449 --> 00:45:50.259 Vince will react you poke an incumbent 00:45:47.579 --> 00:45:51.880 commercially pokum I mean and they're 00:45:50.260 --> 00:45:54.040 gonna react and that's why I think 00:45:51.880 --> 00:45:57.220 blockchain may well be a catalyst for 00:45:54.039 --> 00:46:01.119 change even if incumbents then adopt a 00:45:57.219 --> 00:46:03.609 lot of that inside the requirements of 00:46:01.119 --> 00:46:05.769 the course class participation is a hard 00:46:03.610 --> 00:46:08.590 thing to judge is a faculty member when 00:46:05.769 --> 00:46:12.940 I have this many people so but I always 00:46:08.590 --> 00:46:18.400 think class participation matters we 00:46:12.940 --> 00:46:21.070 made it 30% it which if you have any 00:46:18.400 --> 00:46:24.220 advice on this a next semester 00:46:21.070 --> 00:46:25.960 30% to to individual write-ups one in 00:46:24.219 --> 00:46:28.750 the first half which is up to I think 00:46:25.960 --> 00:46:31.119 lecture 10 which is basically the 00:46:28.750 --> 00:46:32.679 blockchain fundamentals you pick a topic 00:46:31.119 --> 00:46:34.719 I don't care which one 00:46:32.679 --> 00:46:36.699 but it's you'll get you'll get a much 00:46:34.719 --> 00:46:39.219 better grade if it's about critical 00:46:36.699 --> 00:46:43.119 reasoning if it's really taking whatever 00:46:39.219 --> 00:46:46.389 those sets of writings are and and and 00:46:43.119 --> 00:46:49.839 and and not just repeating that which is 00:46:46.389 --> 00:46:51.609 in the readings but really going the 00:46:49.840 --> 00:46:54.370 next step in saying here's what's going 00:46:51.610 --> 00:46:57.730 on and this is a business goal you don't 00:46:54.369 --> 00:46:59.980 have to you know convince me that you 00:46:57.730 --> 00:47:02.139 know something about computer science 00:46:59.980 --> 00:47:05.230 it's like critical reasoning about the 00:47:02.139 --> 00:47:07.269 economic opportunities the strengths the 00:47:05.230 --> 00:47:08.920 weaknesses the opportunities the threats 00:47:07.269 --> 00:47:12.789 that old business school sort of saying 00:47:08.920 --> 00:47:14.980 of swaths with regard to that week's 00:47:12.789 --> 00:47:17.860 whether it's about hash functions early 00:47:14.980 --> 00:47:19.840 on cryptography or you sort of wait 00:47:17.860 --> 00:47:22.210 during the foundational period to 00:47:19.840 --> 00:47:25.390 permission versus permissionless you 00:47:22.210 --> 00:47:28.059 pick but to please hand it in before 00:47:25.389 --> 00:47:29.589 that classes lecture because I might 00:47:28.059 --> 00:47:31.299 during the lecture say who wrote today 00:47:29.590 --> 00:47:33.570 do you want to tell us what you think 00:47:31.300 --> 00:47:36.370 and it might help spur the class 00:47:33.570 --> 00:47:38.470 participation and then a second write-up 00:47:36.369 --> 00:47:42.400 in the second half when we're riffing 00:47:38.469 --> 00:47:46.389 through the use cases again critical 00:47:42.400 --> 00:47:50.260 reasoning and then lastly the usual 00:47:46.389 --> 00:47:52.420 approach of teams of up to four no I 00:47:50.260 --> 00:47:55.420 don't want teams of five 00:47:52.420 --> 00:47:59.500 to handle that right now three or four 00:47:55.420 --> 00:48:01.659 just and and and somewhere in the second 00:47:59.500 --> 00:48:04.539 half of this semester we'll talk about 00:48:01.659 --> 00:48:06.219 more the content and there's a couple of 00:48:04.539 --> 00:48:10.089 you in here that worked with me last 00:48:06.219 --> 00:48:12.699 semester and a smaller group you know I 00:48:10.088 --> 00:48:14.288 want you to do well so I'm gonna sort of 00:48:12.699 --> 00:48:16.318 give you a sense of like what do we want 00:48:14.289 --> 00:48:18.849 to do but it's basically the idea is 00:48:16.318 --> 00:48:22.298 you're an entrepreneur or you're an 00:48:18.849 --> 00:48:24.700 incumbent and what sort of use case or 00:48:22.298 --> 00:48:27.068 you're gonna pick and and and whether 00:48:24.699 --> 00:48:30.338 it's permissioned or permissionless sort 00:48:27.068 --> 00:48:32.710 of make a proposal do a use case use 00:48:30.338 --> 00:48:35.889 your critical reasoning around this new 00:48:32.710 --> 00:48:37.000 technology somewhere in the broad world 00:48:35.889 --> 00:48:39.909 of finance 00:48:37.000 --> 00:48:42.518 I mean you know and I'm glad that define 00:48:39.909 --> 00:48:46.568 finance really broad you know you'll 00:48:42.518 --> 00:48:50.889 pick so that's that's kind of a peace 00:48:46.568 --> 00:48:52.690 act one or the fundamentals I won't go 00:48:50.889 --> 00:48:56.139 through each of the pieces but you know 00:48:52.690 --> 00:49:00.159 that's in the syllabus of course Act two 00:48:56.139 --> 00:49:06.239 is the pivot of the economics and Act 00:49:00.159 --> 00:49:08.920 three our financial sector use cases and 00:49:06.239 --> 00:49:11.979 hopefully throughout law will have a lot 00:49:08.920 --> 00:49:15.430 of fun so the study questions for next 00:49:11.980 --> 00:49:17.440 Tuesday real quick what are the roles 00:49:15.429 --> 00:49:19.929 and characteristics of money so I really 00:49:17.440 --> 00:49:22.778 want to sort of dig behind money money 00:49:19.929 --> 00:49:27.909 is but a social construct or a social 00:49:22.778 --> 00:49:30.489 convention medium of exchange store 00:49:27.909 --> 00:49:33.098 value unit of account there's some 00:49:30.489 --> 00:49:37.479 readings about the debate whether money 00:49:33.099 --> 00:49:40.930 first came from the border system or a 00:49:37.480 --> 00:49:42.730 really good set of anthropologist and 00:49:40.929 --> 00:49:44.288 and and and archaeologists and 00:49:42.730 --> 00:49:46.630 everything say no it actually came as a 00:49:44.289 --> 00:49:48.490 ledger system and no one knows for sure 00:49:46.630 --> 00:49:50.798 at ten and fifteen thousand years ago 00:49:48.489 --> 00:49:53.558 whether money came from the out of the 00:49:50.798 --> 00:49:55.989 border system or more as a unit of 00:49:53.559 --> 00:49:58.390 account keeping account of credits and 00:49:55.989 --> 00:49:59.768 ledger but I'd say when you read through 00:49:58.389 --> 00:50:01.449 some of those readings you start to 00:49:59.768 --> 00:50:05.469 think well this is just a societal 00:50:01.449 --> 00:50:06.219 construct and so that I will get behind 00:50:05.469 --> 00:50:08.649 that what is 00:50:06.219 --> 00:50:10.149 fiat currency fiat currency which is an 00:50:08.650 --> 00:50:11.710 invention really only over the last few 00:50:10.150 --> 00:50:14.230 hundred years and we take for granted 00:50:11.710 --> 00:50:16.809 Dale but how does that fit into that 00:50:14.230 --> 00:50:20.108 whole history and importantly how to 00:50:16.809 --> 00:50:23.739 Ledger's accounting Ledger's I know 00:50:20.108 --> 00:50:25.809 boring stuff but it's probably why we 00:50:23.739 --> 00:50:27.699 came out of the dark ages so about five 00:50:25.809 --> 00:50:31.719 or six hundred years ago with double 00:50:27.699 --> 00:50:35.858 entry bookkeeping sorry hi I like 00:50:31.719 --> 00:50:37.779 Ledger's we'll talk a little bit about 00:50:35.858 --> 00:50:41.009 Ledger's and how that fits into money 00:50:37.780 --> 00:50:44.619 and securities and so forth and then 00:50:41.010 --> 00:50:47.410 layering in how Bitcoin fits on top of 00:50:44.619 --> 00:50:49.329 that history next Tuesday is not deeply 00:50:47.409 --> 00:50:53.500 about Bitcoin it's just a little dollop 00:50:49.329 --> 00:50:56.319 on that there'll be five or six readings 00:50:53.500 --> 00:50:58.989 one of them is a three-minute video the 00:50:56.320 --> 00:51:02.369 third one it's fun watch it's just a 00:50:58.989 --> 00:51:05.439 funny little video on what money is 00:51:02.369 --> 00:51:07.750 there's no need to read nakamoto's full 00:51:05.440 --> 00:51:11.230 paper when I said the email I mean just 00:51:07.750 --> 00:51:12.880 the cover email it's one paragraph my 00:51:11.230 --> 00:51:15.880 goal in the readings each week was not 00:51:12.880 --> 00:51:18.160 an each session was by and Lord to try 00:51:15.880 --> 00:51:19.720 to keep less than 50 pages you'd say 00:51:18.159 --> 00:51:21.779 you're gonna look sometimes you go it 00:51:19.719 --> 00:51:24.309 looks like it's more and maybe it is I 00:51:21.780 --> 00:51:27.490 figure you're all gonna figure out for 00:51:24.309 --> 00:51:29.559 yourself how to sort through the depth 00:51:27.489 --> 00:51:31.509 of your knowledge but I will predict 00:51:29.559 --> 00:51:33.279 that some of you may be as much as a 00:51:31.510 --> 00:51:35.470 quarter or a third of you are gonna go 00:51:33.280 --> 00:51:37.570 down a rabbit hole one day and you're 00:51:35.469 --> 00:51:40.088 gonna be doing blockchain for the next 00:51:37.570 --> 00:51:43.269 48 hours and you won't know where the 00:51:40.088 --> 00:51:45.219 time went because it is an addiction at 00:51:43.269 --> 00:51:49.000 some point that some of you will get 00:51:45.219 --> 00:51:51.519 because this is curious notion I'm not 00:51:49.000 --> 00:51:53.320 predicting that infirmity for all of you 00:51:51.519 --> 00:51:55.358 I'm just saying some of you will have 00:51:53.320 --> 00:51:57.400 that happen to you so occasionally I 00:51:55.358 --> 00:52:02.199 have readings just white a lot it's 00:51:57.400 --> 00:52:03.849 happen to you let me just conclude and 00:52:02.199 --> 00:52:07.029 then take any other questions and light 00:52:03.849 --> 00:52:09.789 up their blockchain I think does provide 00:52:07.030 --> 00:52:12.460 a peer-to-peer alternative I think that 00:52:09.789 --> 00:52:15.608 I hope Larry I'll be able to convince it 00:52:12.460 --> 00:52:18.190 does provide and that peer-to-peer 00:52:15.608 --> 00:52:19.420 alternative addresses cost of trust it 00:52:18.190 --> 00:52:19.929 doesn't mean it's the only way to 00:52:19.420 --> 00:52:21.670 address 00:52:19.929 --> 00:52:25.149 cost the trust but addresses cost a 00:52:21.670 --> 00:52:27.909 trust the financial sector does have 00:52:25.150 --> 00:52:29.440 challenges not just that it has 00:52:27.909 --> 00:52:32.980 seven-and-a-half percent of our economy 00:52:29.440 --> 00:52:36.880 in the US and similar ratios around the 00:52:32.980 --> 00:52:39.670 globe but resilience how it survives 00:52:36.880 --> 00:52:43.030 shocks the financial crisis and things 00:52:39.670 --> 00:52:45.519 like that are real and inclusion one 00:52:43.030 --> 00:52:48.519 point seven billion people unbanked but 00:52:45.519 --> 00:52:50.289 then if you look at other products who 00:52:48.519 --> 00:52:53.369 has access to credit cards and mortgages 00:52:50.289 --> 00:52:56.139 and the like and then fiat currencies 00:52:53.369 --> 00:52:58.299 Ken Rogoff and others have written a lot 00:52:56.139 --> 00:53:00.519 about the instabilities that come that 00:52:58.300 --> 00:53:02.560 fiat currencies and we'll talk about 00:53:00.519 --> 00:53:07.210 some of the history why central bank's 00:53:02.559 --> 00:53:09.099 exist and how they they came about next 00:53:07.210 --> 00:53:11.769 key point is we already live in an 00:53:09.099 --> 00:53:15.159 electronic age Satoshi Nakamoto and 00:53:11.769 --> 00:53:19.599 Bitcoin didn't create electronic cash 00:53:15.159 --> 00:53:22.469 electronic cash I mean Sandra Bullock 00:53:19.599 --> 00:53:26.259 couldn't pay electronically that was 00:53:22.469 --> 00:53:30.909 1995 they did a sort of berated movie 00:53:26.260 --> 00:53:34.660 about it all but by today you pay your 00:53:30.909 --> 00:53:37.059 tuition online those of you who work get 00:53:34.659 --> 00:53:43.029 paid online you pay your auto loans 00:53:37.059 --> 00:53:46.840 online most of our lives are electronic 00:53:43.030 --> 00:53:49.450 cash not a hundred percent but in some 00:53:46.840 --> 00:53:53.950 countries like Sweden it's getting very 00:53:49.449 --> 00:53:56.169 close to a hundred percent we'll learn 00:53:53.949 --> 00:54:02.049 together and discover that monies but a 00:53:56.170 --> 00:54:03.730 social and economic consensus blockchain 00:54:02.050 --> 00:54:05.500 technology along the crypto finance 00:54:03.730 --> 00:54:10.179 might be a catalyst for change and 00:54:05.500 --> 00:54:12.309 they're much masquerades as fact but 00:54:10.179 --> 00:54:15.159 it's only mere assertion we're gonna try 00:54:12.309 --> 00:54:17.949 to sort through you know that those 00:54:15.159 --> 00:54:19.629 differences that doesn't mean that all 00:54:17.949 --> 00:54:22.000 of you are gonna walk out agreeing with 00:54:19.630 --> 00:54:25.450 Paul Krugman a Nobel laureate or Nouriel 00:54:22.000 --> 00:54:29.309 Roubini that this is just a bunch of 00:54:25.449 --> 00:54:31.809 nonsense some of you might by the way 00:54:29.309 --> 00:54:33.250 but but I think you'll come out with 00:54:31.809 --> 00:54:35.380 real critical 00:54:33.250 --> 00:54:37.510 thinking skills and I hope that some of 00:54:35.380 --> 00:54:40.809 you will say I figured out actually 00:54:37.510 --> 00:54:42.520 where there's a real opportunity in the 00:54:40.809 --> 00:54:45.130 world of finance to use blockchain 00:54:42.519 --> 00:54:49.389 technology and make it a better 00:54:45.130 --> 00:54:52.360 financial sector democratizing finance 00:54:49.389 --> 00:54:55.779 or somehow providing a service at a 00:54:52.360 --> 00:54:58.269 lower cost of better service throughout 00:54:55.780 --> 00:55:00.130 I hope throughout that we'll learn 00:54:58.269 --> 00:55:00.989 together and we'll have a bit of fun 00:55:00.130 --> 00:55:04.480 along the way 00:55:00.989 --> 00:55:10.029 that's kind of my thoughts questions we 00:55:04.480 --> 00:55:12.280 have exactly what 18 minutes there you 00:55:10.030 --> 00:55:16.240 go but we can cut it short - I don't 00:55:12.280 --> 00:55:18.250 care there we go did you tell me your 00:55:16.239 --> 00:55:20.799 name and we're gonna do placards Ryan's 00:55:18.250 --> 00:55:30.030 gonna work to figure out you do placards 00:55:20.800 --> 00:55:33.130 cuz it's I wonder how our team's form 00:55:30.030 --> 00:55:35.800 traditionally anybody it's slow and can 00:55:33.130 --> 00:55:38.170 speak to this too but students do it 00:55:35.800 --> 00:55:40.360 their own so that the faculty doesn't 00:55:38.170 --> 00:55:43.840 sort of try to insert themselves to help 00:55:40.360 --> 00:55:46.450 you but we tend towards the latter half 00:55:43.840 --> 00:55:49.090 and say well who's formed up in groups 00:55:46.449 --> 00:55:50.980 and when you know if it's a smaller 00:55:49.090 --> 00:55:52.420 group it's like well anybody has not yet 00:55:50.980 --> 00:55:54.039 formed in a team why don't you move to 00:55:52.420 --> 00:55:55.329 the left hand side of the room and just 00:55:54.039 --> 00:55:58.269 get together but we could do that 00:55:55.329 --> 00:56:01.509 electronically - and you know whether 00:55:58.269 --> 00:56:02.679 talita and Sabrina who you know good 00:56:01.510 --> 00:56:05.260 help Internet 00:56:02.679 --> 00:56:08.349 basically have a social network to help 00:56:05.260 --> 00:56:09.520 form the teams because this is a big 00:56:08.349 --> 00:56:11.529 group you're right but that's 00:56:09.519 --> 00:56:13.530 traditionally people those students do 00:56:11.530 --> 00:56:17.920 it on their own 00:56:13.530 --> 00:56:23.019 other questions is anybody gonna go out 00:56:17.920 --> 00:56:26.220 and sell their Bitcoin now Larry what 00:56:23.019 --> 00:56:26.219 why are you here 00:56:28.280 --> 00:56:43.650 no no let to the whole feel and you're 00:56:41.940 --> 00:56:45.480 incredibly informed about the finance 00:56:43.650 --> 00:56:49.829 side so I want to see the combination of 00:56:45.480 --> 00:56:51.599 those and whether at the end I am 00:56:49.829 --> 00:56:54.869 convinced there's a there there as we've 00:56:51.599 --> 00:56:57.380 spoken because I could radically change 00:56:54.869 --> 00:56:59.579 the cost of trust around the world 00:56:57.380 --> 00:57:02.490 benefit the developing nation 00:56:59.579 --> 00:57:08.250 substantially but I think there's a lot 00:57:02.489 --> 00:57:10.019 of questions I still have I thank you 00:57:08.250 --> 00:57:12.480 for coming in any week you could be here 00:57:10.019 --> 00:57:14.039 any day we benefit and I hope it's 00:57:12.480 --> 00:57:16.110 really this is meant to be a 00:57:14.039 --> 00:57:18.539 conversation I'm not that far ahead of 00:57:16.110 --> 00:57:19.950 you Simon Johnson approached me last 00:57:18.539 --> 00:57:23.070 October and said what do you think about 00:57:19.949 --> 00:57:24.960 coming up to MIT and and Tom knows this 00:57:23.070 --> 00:57:28.410 story and and and we were sitting down 00:57:24.960 --> 00:57:30.150 for lunch in DC and it was a good time 00:57:28.409 --> 00:57:33.299 in my life my three girls I have three 00:57:30.150 --> 00:57:36.180 daughters and I'm a single dad and they 00:57:33.300 --> 00:57:37.769 were two were in grad school and one our 00:57:36.179 --> 00:57:40.409 undergrad it was a good time in my life 00:57:37.769 --> 00:57:43.110 I said why not you know come up here and 00:57:40.409 --> 00:57:45.899 get engaged in this digital currency 00:57:43.110 --> 00:57:48.090 initiative over at the Media Lab and 00:57:45.900 --> 00:57:50.910 I've spent a life I was 18 years ago mid 00:57:48.090 --> 00:57:52.710 sax on the investment banking side 00:57:50.909 --> 00:57:54.839 helping people buy and sell companies 00:57:52.710 --> 00:57:56.699 called mergers and acquisitions and then 00:57:54.840 --> 00:57:59.610 I went to the trading side fixed income 00:57:56.699 --> 00:58:01.679 and went off to Asia and did a bunch of 00:57:59.610 --> 00:58:04.170 I ran the fixed incoming currency and 00:58:01.679 --> 00:58:07.829 swap trading in Asia and then my last 00:58:04.170 --> 00:58:09.000 job was the co Finance Officer so we 00:58:07.829 --> 00:58:11.099 were about a quarter of a trillion 00:58:09.000 --> 00:58:14.039 dollar balance sheet at that time go 00:58:11.099 --> 00:58:16.440 goldman sachs this is we were so private 00:58:14.039 --> 00:58:18.869 which meant if we lost money we were 00:58:16.440 --> 00:58:24.360 personally I was a general partner was 00:58:18.869 --> 00:58:28.289 kaput that's a technical word and but we 00:58:24.360 --> 00:58:30.180 had we had 700 legal entities and one 00:58:28.289 --> 00:58:33.019 thousand people who could commit the 00:58:30.179 --> 00:58:37.139 capital of the firm those are people we 00:58:33.019 --> 00:58:39.269 generally call traders but you know is a 00:58:37.139 --> 00:58:40.289 fascinating period of time I then went 00:58:39.269 --> 00:58:42.630 on to 00:58:40.289 --> 00:58:44.429 public service because Bob Rubin knew 00:58:42.630 --> 00:58:45.088 that I'd be a soft touch - it's a 00:58:44.429 --> 00:58:47.250 service 00:58:45.088 --> 00:58:49.739 he was the Treasury secretary I was a 00:58:47.250 --> 00:58:51.150 former partner at Goldman Sachs and I 00:58:49.739 --> 00:58:53.489 went off to the US Treasury as a 00:58:51.150 --> 00:58:55.050 assistant secretary and undersecretary 00:58:53.489 --> 00:58:58.889 in the late 90s a little different times 00:58:55.050 --> 00:59:00.690 than we have now for many reasons but we 00:58:58.889 --> 00:59:02.460 were paying down the debt we were 00:59:00.690 --> 00:59:04.559 dealing with the Asian debt crisis 00:59:02.460 --> 00:59:06.929 long-term capital management that 00:59:04.559 --> 00:59:10.230 Russian debt crisis is it was sort of a 00:59:06.929 --> 00:59:13.919 fascinating period of time I worked on a 00:59:10.230 --> 00:59:16.108 bill with John McCain I didn't get to 00:59:13.920 --> 00:59:18.000 know Senator McCain that well but it was 00:59:16.108 --> 00:59:20.069 just remarkable to work with even for a 00:59:18.000 --> 00:59:22.199 short period of time called ie signature 00:59:20.070 --> 00:59:24.109 it was a bill that basically said you 00:59:22.199 --> 00:59:26.429 can sign everything electronically and 00:59:24.108 --> 00:59:27.960 he was the chair of the Senate Commerce 00:59:26.429 --> 00:59:30.269 Committee at the time I was a wonderful 00:59:27.960 --> 00:59:32.820 little yes sometimes in government you 00:59:30.269 --> 00:59:35.250 can work on small things I worked on the 00:59:32.820 --> 00:59:36.960 redesign of the currency and I could 00:59:35.250 --> 00:59:38.849 tell you stories about why it looks the 00:59:36.960 --> 00:59:43.199 way it does and how you can redesign 00:59:38.849 --> 00:59:44.670 paper currency and for a future lecture 00:59:43.199 --> 00:59:47.669 I'll tell you the one design feature 00:59:44.670 --> 00:59:50.460 that I it's still in the currency and 00:59:47.670 --> 00:59:52.318 you can visually say it's because and 00:59:50.460 --> 00:59:54.059 when I asked for it the fella that 00:59:52.318 --> 00:59:56.250 rather Bureau of Engraving said why and 00:59:54.059 --> 00:59:57.779 I said because it looks better and I'm 00:59:56.250 --> 00:59:59.789 the guy that's approving it and maybe 00:59:57.780 --> 01:00:02.220 could we get it done can we work this 00:59:59.789 --> 01:00:03.779 out and and it did look better and he 01:00:02.219 --> 01:00:05.909 loved it he was worried about the 01:00:03.780 --> 01:00:08.130 political risk of doing it it was a 01:00:05.909 --> 01:00:11.940 better design he just was I said I'll 01:00:08.130 --> 01:00:13.559 cover you politically let's do it but 01:00:11.940 --> 01:00:15.960 then I worked with Paul sarbanes and 01:00:13.559 --> 01:00:18.150 what became sore Baines Oxley I was his 01:00:15.960 --> 01:00:20.250 senior advisor I worked and kicked 01:00:18.150 --> 01:00:22.710 around some political campaigns we lost 01:00:20.250 --> 01:00:24.929 two of them that would be the o8 Hillary 01:00:22.710 --> 01:00:27.780 campaign and the 16 Hillary campaign I 01:00:24.929 --> 01:00:30.059 was her chief financial officer I was in 01:00:27.780 --> 01:00:35.060 a way the senior advisor doing economic 01:00:30.059 --> 01:00:35.059 policy and outreach and hand-holding and 01:00:35.838 --> 01:00:42.299 and and then in the middle of those two 01:00:40.739 --> 01:00:43.439 campaigns I ran something called the 01:00:42.300 --> 01:00:47.250 Commodity Futures Trading Commission 01:00:43.440 --> 01:00:51.480 which was post-crisis what do we do this 01:00:47.250 --> 01:00:53.610 is a real public policy shortcoming 01:00:51.480 --> 01:00:56.400 and and I looked at as an opportunity to 01:00:53.610 --> 01:00:58.829 as I said democratize finance a bit and 01:00:56.400 --> 01:01:00.780 lower risk and so we tried to bring 01:00:58.829 --> 01:01:03.860 transparency to a three or four hundred 01:01:00.780 --> 01:01:06.570 trillion dollar market caught swaps 01:01:03.860 --> 01:01:09.690 which are just contracts for 01:01:06.570 --> 01:01:11.370 transference of risk and in their form 01:01:09.690 --> 01:01:13.170 of a derivative that that were 01:01:11.369 --> 01:01:14.759 unregulated and we were trying to bring 01:01:13.170 --> 01:01:18.240 transparency to that and lower risk 01:01:14.760 --> 01:01:20.850 through central clearing so that's sort 01:01:18.239 --> 01:01:22.889 of my professional life and as I said I 01:01:20.849 --> 01:01:24.839 got three daughters and they they're 01:01:22.889 --> 01:01:27.599 well situated so when Simon said come on 01:01:24.840 --> 01:01:32.370 up I said great and I love MIT it's just 01:01:27.599 --> 01:01:33.750 terrific and and you you all are great 01:01:32.369 --> 01:01:36.949 unless there's other questions I'm gonna 01:01:33.750 --> 01:01:36.949 let you go early I 01:01:38.250 --> 01:01:44.849 [Applause] 01:01:49.969 --> 01:01:52.029 you