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

The following content is provided under a Creative Commons license. Your support will help MIT OpenCourseWare continue to offer high-quality educational resources for free. To make a donation or view additional materials from hundreds of MIT courses, visit MIT opencourseware at ocw.mit.edu. Welcome. If you want to learn a little about

blockchain

and its intersection with the world of finance and

money

and you are looking for 15.s 12 you are in the right place if you are here to not do that and just hang out and have a good time. I guess hopefully you're still in the right place because we're going to have a good time this semester. my name.

It's Gary Gensler. I'm a full professor here at MIT Sloan. I am also an advisor at the MIT Media Lab and I have spent my entire life in the world of finance,

money

and public policy and I have been at MIT this last eight months and we are going to learn a lot together about

blockchain

and money, we we'll have some fun here and see what we're going to do so we're talking about blockchain and money that's where we are for the The way I make cold calls I make calls about usage if they want to leave now I get it because I want to have a little interaction about that, so my first question for the class for everyone, whether you're registered or not, how many of you have ever been owners? a cryptocurrency, wait, wait, let's see the yacht, it looks like it's about 45% of you, give or take.

Okay Livan, you want to keep your hand up for a long time and how many of you have ever worked on any blockchain related project in a business or corporate environment. anywhere is fine, then a better third in the room well, fine, then you all probably know more than me, but I'm going to try. I will always start each week with what are the study questions for the week, how. many of you actually got the syllabus. This will not be a graded assignment. I just have to get an idea of ​​who actually received this curriculum. Alright, how many of you and how many of you actually did both readings.

It is not graded. I just got gage. the class, oh, thank you, thank you, by the way, those grades went down, no, okay, so the two main questions for this week's conference really are what is blockchain and why could it be a catalyst and I emphasize the word could it be a catalyst for? change in the world of finance, we could talk a lot about things outside the world of finance and blockchain can have many applications outside of finance, but I have decided to try to limit the scope a little, so this semester is really about blockchain and money or blockchain and finance and secondly you will see chips in each of these round tables an assignment at the end of the class you can do it now or later I would like each of you to write anonymously on the field What you want to achieve in this semester could be anything in this class, from learning about blockchain to making money with Bitcoin.

I don't care if you tell me what it's like to meet your future spouse. I just like what you want to achieve in this class. I can't help you in the third one, but I will try to help you refine the things that I can help you identify and Sabrina and Toledo will pick them up later and next Tuesday they will tell you the results, what is what you want to accomplish in this class and then we'll see at the end of the semester if we've done it, so that's just a way to help guide me, help you, that's what we're trying to do and what the two readings were. one little thing I did and one was something I did with some of my colleagues and Tom as I know you would get it from the readings.

Did you have a good summer? Did you raise your head? Did you have Bitcoin? Do you know who in the class? read the readings and took something different than Tom, he said there was potential and his name is fine, how many agreed with the line, this is a vote, it's only two or three, how many grids with Tom are there more and how many of you Too many shy on the first day to put my hands up, so I'm going to start and go back to the Internet, how can I? I came up with this and thought about what the WAP chain is, what it really is.

Well, the Internet started many decades ago before most of you were born, but in 1974, I mean, there are some predecessors, even from the late '60s, Ethernet, which is actually the way that two computers communicate and Then there was TCP/IP, which was actually the multi-Internet protocol. Computers calculate that by talking to each other and then in 1990, how do we move forward? Does anyone know what HTTP is? We are at MIT. Your name would be helpful. Erik Erik. It is a protocol for communicating with content. Web content hypertext transfer protocol. Does anyone know who is associated with tcp/ip, it was a company started by MIT.

I don't know if it was a company in Sochi, but Vince Cerf may have had some association with it, so these are the first three layers and then there were marketing companies 3com and Cisco and of course Amazon, it still exists today, but something else was happening. How do we market the Internet? Does anyone know what this scene is about? Well thought out, well thought out, the first pizza sold for Bitcoin, but no, okay, movie. network hackers, you know? Have you ever seen the movie? It's not a good movie, so this is the opening scene of the network and yes, that's Sandra Bullock and the 1995s, it's a cyber thriller.

You know, a president is involved, the Department of Defense is involved, etc. go ahead, but actually Pizza Hut is associated with the first online sale anywhere in the world, they started something called pizza night, by the way, this was the screen, if you wanted to continue, you could order your pizza and there was a problem. Does anyone know what the problem was with Pizza Net. I mean, maybe there were several problems. No, Ilana, I have discovered you. You couldn't pay online. Nobody figured out how to move money online. You had to pay when you showed up with the pizza.

Now I'm going to talk a little about cryptography. We're going to spend a lot of time on crypto. They are cryptocurrencies and the like. What is your name? Gigi Gigi Gigi. What is cryptic cryptography? Now you have it, you have to start there. Anyone want to help GE? Does anyone want to help you? Yes, tell me your name. Let's ask. We're going to figure out how to get everyone to have name tags by next week, but we'll work with Ryan and do it that way. So how is something encrypted so that it is not detected by others or is it, in essence, communications?

In the presence of adversaries, you have an adversary who wants the communication that you want to communicate and does not let his adversaries know that communication, and this is true for In ancient times, in ancient times there was something called a cipher and this was a way of taking a Peetha's piece of leather or cloth and having many letters and both sides were encrypted and deciphered because there were different measurements of the cylinder. Has anyone seen the movie imitation games? Well, the Enigma machine. Now the movie was wonderful because it said that Turin deciphered it and he helped decipher it in an automated way, but in reality the Polish government had deciphered it in the 1930s before it fell into the hands of the Polish government.

The Germans, but and the tours built on all of that and cracked it further and then in the 1970s, and this was here at MIT, to some extent there is private key public key cryptography where there is no I'm going to go deeper today, but it's the heart of Bitcoin and blockchain are at the heart of the Internet, but the key is communications in the presence of adversaries, how do you keep a secret when everyone wants to come in and get that information? There's a long history and my t-- is at the heart of a lot of that was that a lot of the early crypto failed on the Internet in the early '90s and late '80s.

David Cha and others tried to do things and we're not going to debate them. today, but I think you will have a reading. It's next week that will give you that history and it's worth knowing the failure history, but cryptography is the reason the Internet works today. Does anyone want to tell me what SSL and TLS is? Do we have a computer scientist who remembers his name? encryption using symmetric keys, which is public key cryptography, so basically it uses asymmetric cryptography which we'll talk about in two lectures from now, but it secures the entire Internet, so all of a sudden you can deliver the pizza and get a code access and I have to tell you that I never knew how this worked before I was at MIT, so PayPal came along in 1998.

I mentioned this, a bunch of other digital currencies then failed, but some of these people who will read later will read the article by Nick Sabo on intelligence. contracts later, Adam who created hash cash, some of these innovations were the ones that Satoshi Nakamoto used later, some innovations that were really useful and worked in a jump and M paisa, does anyone know what M rhythm is, in essence , they discovered in Kenya, this was ten? Twelve years ago when people were trading mobile minutes, they were unbanked but they had cell phones and they traded their minutes as a form of currency and Safaricom realized that and said we could help people be part of the digital economy even yes It is not banked and in Africa today half of the adult population according to world stock market figures is still not banked, but half of that half has mobile phones and the pace has 20 million customers in Kenya right now , so it is a form of money that is a kind of exchange. mobile minutes, but the puzzle remained how money moves on the Internet, where, in essence, how value moves peer-to-peer without a centralized intermediary and that is the core of blockchain technology, so who solved the puzzle and are you ready to tell it?

I, who solved the riddle, who solved this riddle, now you have you, you're wearing a shirt that says Quentin Tarantino, so I think Quentin Tarantino should solve everything, what is that? What is your name? So an effective peer to peer. the actual document at the top of an email that was sent on Halloween 2008 by Satoshi Nakamoto. We don't actually know who Satoshi Nakamoto is, but it's a study question in some lectures asking you to tell me who you think Satoshi Nakamoto is. I won't ask that now and it started with a very simple sentence in his email.

I have been working on a new electronic cash system that is fully peer-to-peer without any trusted third party. It's a modest statement, so the question is: is this another layer of the Internet that we're going to explore all semester? No, I really don't have the answer. I don't think the best minds at MIT can still tell you that there are some who are maximalist and Say yes, it will be and there are others who will say no, no, no, and in this course we are going to review the minimalist and the maximalist that will not. we are, we won't try to center it in one place. but that's the kind of key question, so what is a blockchain?

We'll do this in a lot of lectures, but I'll try to do it in this short version so you have time-stamped logs attached, which means you can add a bit. There's a little bit of information in this and it's timestamped, so these are these blocks that are being added. Satoshi did not invent blockchain. There is much before. Does anyone want to guess what it was? You'll have a read on this later, but in the early 1990s, what is that? Midori. Stuart Haber Stuart Haysbert worked for Bell Labs, so one of his tasks will not be gray to decide which will be a fun task.

Could any of you? I will say that next Thursday you will have fun and find the longest one and in time. The longest running blockchain is not Bitcoin and it has been running since the mid 90's and its clue is the New York Times and we will discuss it next Thursday, but this timestamped block of data creates an auditable database and We'll talk about Ledger in particular next week, but we'll talk about Ledger throughout this course and how it changes the world of finance now that it's protected by cryptography because cryptography remembers communications and makes sure that adversaries can't catch you. , we will learn about hash functions and hash functions which are a really important part of cryptography and initially for databases and how to search and store information and databases, but in these circumstances hash functions were the way to not only add the next block to the previous blocks but, what is really important, to compress data to make it more manipulable and verify it and, as I wrote here, the resistance to manipulation and the integrity of digital signatures that has to do with key cryptography public key and private key, there is no prerequisite for this course that you should not have taken. computer cryptography algorithms, if you could learn a little bit about hash functions and asymmetric cryptography, these are the two important key sides and hopefully we will have enough computer scientists in this room that can solve us if I say the wrong thing in the middle of the door and hopefully then consensus, then there's a really important part of blockchain is how you decide who adds thenext block because when I came back here there is a block or a block in each of these blocks, someone has to decide who adds who can choose the next block and that is what is called consensus protocol and that is why there is debate about the consensus protocol and there will be a lot of talk about the consensus protocol, but in essence it addresses something, a term called trust cost and we will talk about the Byzantine generals problem, which is another read on the Byzantine generals problem. as a sort of mathematical game theory question about thirty years ago, that's what Satoshi Nakamoto solved was this last part of the Byzantine generals' pizza for bitcoins problem a year and a half after Satoshi Nakamoto established out blockchain Bitcoin someone send an email and you will receive these slides, but this is the actual email.

I'll pay you 10,000 bitcoins for a couple of pizzas. I just want some pizzas. The guy who sent this says: I like onions, peppers, sausages. Lazlo mushrooms now see the date: May 18 and are offering 10,000 bitcoins from 2010, but the key line is that what I intend is to receive food in exchange for bitcoins. No one had used bitcoins as a medium of exchange in 16 months of its existence. no one had used it to buy anything and Laszlo is a computer scientist in Florida and was kind of interested and put this on an email list three days later, he still doesn't have his two pizzas so no one wants to buy me a pizza. the amount of Bitcoin I am offering is too low.

Another day goes by, he buys his pizzas and posts photos, so here's a photo of his son reaching for those Papa John's pizzas. Does anyone know how much those 10,000 bitcoins were worth back then in Chicago? Say back then, what is that $41? And lastly I said two pizzas are probably worth 25-30 because there's a whole email thread where I kept saying, Why can't anyone get me my pizzas? You could make money with this today or earlier, afternoon, last night. 66 million dollars, yeah, so it's a nice story, May 22 every year is called pizza day or Bitcoin pizza day or something like that, so what is block contamination technology?

These are my words, but in a way they are taken from literature, etc., it moves in a verifiable way. data on a decentralized network and the economics of blockchain technology really revolve around that verification and the economics of verification and the economics of networks and in many ways blockchain adds certain costs to verification through this protocol of consensus that we will study, but it reduces some other verification costs because it does not depend on a centralized authority, so it is actually a trade-off of the verification cost. I don't think it's a purist who says it's better or worse, but it's an exchange.

Outside of the costs of verification through decentralized networks, the data can have value as if Bitcoin were a monetary system where the data can actually be computer code and we will learn a lot about smart contracts and you could verify the data with computer code and algorithms. global finance this goes straight to the pipelines of Finance because finance is fundamentally about moving money and risk through a network and that network is the seven billion people who live in this world, it is moving money and risk and all of you Have you taken finance courses or many many of you have and it is the intermediation of money and risk throughout our economy, but there are a lot of challenges and over the course of this semester we will talk about these challenges, technical, commercial and financial obstacles. public policies, will they be resolved? but it could be a catalyst but we are still not sure about the change in the world of money and finance.

So, does anyone want to tell me the role of money in society and tell me its name? Come on, Tomas, among people. exchange got that someone give me a second yellow shirt savings okay, so that would be a store of value yeah, third sorry, the gentleman here Wow, okay, here we go, let's go, so we'll spend some time next Tuesday. talk more about money and the role of money in the history of money, which I think is a key piece of this. What about the role of finance? I've already said some things about that, but I'm sorry.

I don't know your name, but I'm here, the woman, yes, the Finance role. Sorry, I'm not going to tell any financial finance professor what your answer is to raising money, so go ahead, someone else will want to. connect savers and borrowers connect savers and bars so connecting is kind of moving money moving valuations so those are the pieces sort of moving making valuations I use the words move assign and set set pricing They are the valuations of good money, let's not forget that it is also about risk when you buy insurance, that is a risk transfer, when you buy a stock, that is a risk transfer, if you enter into a complex credit default swap, it is a transfer of risk, so finance is not only the movement of money, but also the movement of risk. throughout the economy and I always think about finances.

I always thought this when I was at Goldman Sachs for 18 years: finance sits at the neck of an hourglass and that's why it collects so much economic rent from society, because when you sit at the neck of an hourglass and billions, literally trillions of grains of sand go by, if you collect a few of those grains of sand, you get great wealth and that's for other classes, but finance can collect a lot of economic rents, although the financial sector has many. of challenges we will have a conference later in the semester on some of those challenges and we will have a reading.

I think Sheila Bair wrote something recently that I asked everyone to read later in the semester, but we'll talk about the financial crisis and some of the problems, but it's had a lot of crises, fiat currencies have a lot of instabilities, of course, we have middlemen. centralized as I explained and we will talk about collecting a lot of economic rents, so there is an opportunity. Blockchain has a real opportunity to kind of come into this world of finance and maybe do some things better. Central banking also has a lot of legacy payment systems and there are legacy payment systems or they are slowly adapting, but it is slow and why Ally Pay did so well in China is part of the story. because there were many unbanked like m-pesa in Kenya, but here in the US we still pay 2 and a half to 3 percent for our interchange fees for Visa MasterCard and the like, and there is still a lot to do in matter of compensation and settlement. counterparty risk and one that worries me deeply.

Financial inclusion: There are still 1.7 billion people in this world who are unbanked and therefore we don't think about it as much in developed countries, but it is certainly true in many products, even here in the world. United States and these are for me the financial opportunities that represent 7 and a half percent of the American economy, that is, one and a half trillion dollars of income, so any of you who are thinking about business opportunities, the system of payments here in the United States represents half a trillion. percent to one percent of our economy, that's between 100 and 200 billion dollars or revenue.

I think it's around 18 billion, but if you know, when you add up the entire payments system, it's between one hundred and two hundred billion dollars in payments revenue. that is a kind of opportunity, can blockchain technology appear? It has problems, it's slow, it has performance issues, but can it compete with that? These are some of the problems that the financial sector would say with blockchain, they are real things that we are going to study. Later in the semester they say it doesn't have the performance scalability that a modern payment system needs to be able to move around a hundred thousand payments per second a modern securities clearing, the Depository Trust Corporation, the Securities and Exchange Commission says it does . thirty thousand transactions per second, but we need you to scale and your computers and everything has to be resistant to one hundred thousand transactions per second Bitcoin, you can do about seven transactions, a second visa currently depends on the second one does between twenty-two seventy thousand one second , yeah, so it's just a sense of scalability and performance that we could achieve, it could take three to seven years.

I'm optimistic, but there are still a lot of performance and scalability, privacy and security issues with blockchains by their nature or public, so we're not completely censorship resistant, but there is a lot of innovation to make them more private, but that makes the public sector a little nervous. Interoperability does not necessarily work yet with other legacy systems or with each other. The Internet is one of the great innovations the Internet became interoperable and all these different websites could communicate with each other. Governance is a very important topic that we will talk about and one of the things about governance is that it is difficult to update the software of a blockchain because if you create a decentralized system where no one has control, no one can collect economic rents, either. you have someone with the ability to necessarily update the software and we will talk later about how Bitcoin updates its software and what the core developers of Bitcoin are, etc. go ahead, but Facebook you do know one thing, although there is a company that collects a lot of profits and economic rents from its two billion members, they know how to update their software, it is a governance issue, it is a real life challenge and it is why That's what the financial sector The sector says I'm not sure this will work.

This is still ready for me and so what are the commercial use cases and what are the public policy issues. Therefore, right now the financial sector favors permission blockchains over permission list. This will be about four. In a few weeks we'll go over these two differences, but I just want to briefly frame this permission: Blockchains have a substantive group of people who actually participate, the half of you who said you owned Bitcoin, you know it's something where anyone can update the ledger permissions blockchains, you can't do that, in essence, you pick the three or twenty that the Australian Stock Exchange is updating their clearing and settlement, they announced that they are doing a blockchain project, which are doing with digital assets and We're using the Hyper Ledger blockchain, which is open source software from IBM, but the Australian Stock Exchange will put it on three computers, called three nodes, that control all three.

Depository Trust Corporation is looking for blockchain-inspired solutions. for some of your data stores, but they will also control the nodes. I'm just giving them that permission. There is nothing wrong with blockchains. That's how they are. They are viewing these blockchains without permission. They are like Bitcoin. Unknown participants based on values. about incentives, a cryptocurrency and cryptoeconomics, cryptocurrencies are about two hundred billion, but you know you have to update these slides daily two days ago, it was two hundred and thirty billion and this little pie chart is a little more than half of Bitcoin next . slice is something called if the and then wave and on the line we're not going to spend much time on this this semester if your goal is how can you make profits and day trade bitcoin and ether day trading god bless you go prosper you might stay in the class.

I just won't give you much advice on that. You know this is not a class focused on cryptocurrency investing, but I'm fine if that's what you're doing. Does anyone know what the size of the global capital market is? Anyone want to guess? You know, this is 200 billion. How does it look? I've already said that it's modest hundreds of trillions of global equities around 80 trillion global bond and debt markets 250 trillion, so it's still pretty modest compared to that broad breadth of capital formation. and gold, yes bitcoins, digital gold, what is the value of gold? All the gold that has ever been 7 trillion, so just give you an idea of ​​scale.

There is also something interesting about this space is that it is an enormous public attention, even as demonstrated by hundreds of you. in this room versus the actual size relative to the capital markets today, you know there are a lot of public policy issues, we will have a conference. I'm a former regulator, I ran the Commodity Futures Trading Commission, but this course is not about Although we always have to go back to regulation, we always have to infuse what we're doing with regulation, but let me give you a little framework and then they'll have to get bored and spend a couple of weeks and read. some congressional testimony on the matter, yes, it will be necessary to read it,sorry, but it protects against illicit activities.

A lot of Bitcoin and cryptocurrencies started in the cyberpunk and libertarian etc. type of movement, and it's true that you can use this for illicit activities. activity absolutely, but I would say that the crime is not new, just the mechanisms and means are new, so criminals will use this and have used it for a listed activity. financial stability. Central bankers around the world somehow this way will finance well, it's only two hundred billion the financial markets are three hundred trillion and it's still not what they generally say, but for some countries it is a way to bypass capital controls and, Therefore, for those countries concerned about capital controls it is a very real and live set of issues. and then protect the investing public and when we do this in a few weeks, I'll go over each of these investor protection issues and yes, the section on how we test and things like that for those who want to do their own seed coin properly. now give them a broad idea of ​​what the section is trying to accomplish but it's a moving target so it's very interesting unlike a lot of your sloan classes or your c cell classes or media lab classes this one It's a very unstable area of ​​public policy, so that makes it interesting and and and if you all go out and form companies, you'll actually be helping to set the edge of that public policy debate.

I always said, just remember the poet Riley, the duck test. a poet, poets from Indiana, those who are not from the US may not know the duck test, but basically, if it quacks like a duck and walks like a duck, it's a duck, so when you think about politics public, people like me who was once a regulator think of the duck test and then think secondarily about the actual words in the law of Congress, you know where common sense is and if it quacks and walks like a duck it's probably a value or it's probably this or that headlines like this Linus in the corner are watching this space because there is a lot of volatility and Wall Street makes money on volatility volatility is a friend of Wall Street, it may not be a friend of investors, but it is a friend of Wall Street.

They also like trading volumes and spreads. Coinbase, the largest crypto exchange here in the US, has 20 million accounts that may not all be active, but that's the size of Fidelity's membership or account list and twice that of Shaw and Robin Hood. How many of you have ever used? Robin Hood is a trading application. Wow, half of you, so you already know how to trade for free. 5 million members for those who don't. I don't know, you can download Robin Hood and you can trade stocks for free with no commission and if anyone is interested, show up and I'll do office hours.

When heck Robin Hood markets, they market your order flow and make money without taking your commissions. but it's kind of a wonderful app. Millennials love it. It already has 5 million members, so you better believe De Shah and the incumbents are worried about stuff like that. Startups are also more willing to apologize to regulators. They are willing to take risks. and ask for forgiveness, whereas incumbents tend to have to ask for permission, so there's an uneven playing field which is always a set of asymmetric business risks over regulatory risk, I'm not always not like crying about JP Morgan, I mean, the ones big headlines have done it too. its advantages and coinbase is becoming an incumbent rather than just an already known startup in a sense and we will talk throughout the semester about some of the headlines where we will probably bring Jeff Sprecher here in mid-November.

He is going to speak. about what he is doing IntercontinentalExchange on the New York Stock Exchange with Starbucks and Microsoft and similar use cases from the financial sector. I'm not going to go through them, but this is the second half of the course, we will go through each of these and do one or two sessions on each payment system, central bank digital currency, secondary market, venture capital trading and initial offering space of coins, we will do two courses on that and we will move forward, so what are we going to do in this whole process? Of course, basically, our goal is to learn the fundamentals.

This is approximately the first half of the course. We move on to two sessions on economics. We'll talk about economics throughout the course, but I want to really focus on going deeper. about the economics for half the discussions and then let's go through the financial space for the second yeah, that's our journey together for me, it's for anyone who wants to gain critical thinking skills, this isn't just kind of hey, this goes to change. the world and revolutionize everything related to class, so basically I think of an old Department of Defense term called ground truths, it's when the general doesn't really know what's going on but he needs to figure it out and he needs to talk to someone who already You know that cape. the ground that has dirt, you know, everywhere, woman and he has been shot and says here is the real ground truth, we are going to try to talk about the ground truth in this in this in this class and we will separate the mere statement of the hype and some of your readings will be some real Bitcoin and blockchain minimalist stuff by Nouriel Roubini that uses words I'm not supposed to repeat in a recording about this stuff for Paul Krugman, who and Joe Stiglitz and other Nobel laureates who say that No, it's not going to work or Warren Buffett to the maximalists, we're going to try to cover both sides.

Larry Lessig is honoring me because he's at the back of the class and he's a huge Harvard professor who is highly regarded by Lee. I didn't know Larry was going to be here and I made the slide before, but in 1999 I think you wrote this book. Larry is the right code and other laws of cyberspace that I put you on, but I think it's worth thinking about Larry's four bits here and I don't know Larry if you want. I can't say anything, but I'll try to infuse this course into the way you think about this. The technology that we are at MIT.

The technology. And we'll get you a lot of technology. If you want more than I can give you, it's This is a former finance guy for my entire life there will be a group of computer science people in the class that we are going to connect and you will meet with the Media Lab people and you will see Sal and we'll try to connect you with the On the technology side, if you want to swim deeper into that pond, but technology really matters and that's why we're going to go through hash functions and through asymmetric cryptography, etc., from a business perspective, markets matter, why are incumbents or startups or not doing this and that's why it's been ten years and no one still has an enterprise-wide solution for payments using block J, law matters, the public policy side matters and Larry's fourth design, social norms, that's a little harder for me. teaching that's not what this class is about, but it's also a flex, all this is not just technology, markets and law, so it's not just a three-legged store, it's a kind of four-legged stool, is it?

How did I do it, Larry? I really didn't know Harry would be here, so he wanted to give you a framework of how the faculty member thinks of him and how they will be together on this journey. Variety of perspectives. We will not be Bitcoin minimalists or maximalists. I probably will. be self disclosed here a bit of a core minimalist on Bitcoin max minimalist list of smart contracts I'm probably pretty Center Larry probably a bit of a core maximalist I guess so you're still core or Core minimalist what smart contracts and then maximalist or blockchain minimalist I would say a few weeks ago I was kind of a Center maximalist and I'm back to permissioned blockchain in the middle.

I'm a little bit more, you know, and there's something here. Allah is one of your Sloan cohort that maybe you met six months ago when we met he was working on a permissionless system and now you're working on a permission system, you have a startup, yeah, because you've jumped into the realities of the market and We're going to talk a lot in this course about critical thinking about when you really need the advantage of a decentralized peer-to-peer system where the costs of trusts are such that that's the right way to go, but I'm one of those who thinks that too There are so many economic rents in the financial system, that is, that trillion and a half dollars of income or seven and a half percent of our economy or just two hundred billion in the payments systems, for example, that there may be times when those that are not really necessary. a decentralized system, but it could be your chance to hide under all those economic rents and all that income now in Vince will react. be a catalyst for change, even if the incumbents then embrace a lot of that within the course requirements, class participation is a difficult thing to judge is a faculty member when I have so many people, but I always think that participation in class matters, we made it 30% of that, if you have any advice on this for next semester, 30% for individual articles one in the first half, which is up to I think lesson 10, which is basically the fundamentals of blockchain, you choose a topic, I don't care which one. one, but you'll get a much better grade if it's about critical reasoning, if it's really about taking whatever those sets of writings are and and and and and not just repeating what's in the readings, but actually going to the next step. by saying this is what's going on and this is a business objective you don't have to convince me that you know anything about computing it's like critical reasoning about economic opportunities strengths weaknesses opportunities threats that the old business school classifies It What I say about the stripes regarding that week is whether it is hash functions at the beginning of cryptography or whether you wait during the founding period to get permission or not, your choice, but please turn it in before the class conference because it could during the conference say who.

You wrote today, do you want to tell us what you think? It could help stimulate class participation and then a second article in the second half when we look at use cases again, critical reasoning, and finally the usual team approach. up to four no, I don't want teams of five to take care of that right now, three or four alone and at some point in the second half of this semester we will talk more about the content and there are a couple of you here who worked with me the semester past and in a smaller group.

You know, I want you to do well, so I'll give you an idea of ​​what we want to do, but basically the idea is whether you're an entrepreneur or you're an incumbent and what kind of use case you're going to choose and and whether it's permissioned or not, make some kind of proposal, make a use case, use your critical reasoning about this new technology somewhere in the wide world of finance, I mean you. I know and I'm glad the definition of finance is really broad. You know you're going to choose, so it's kind of an act of peace one or the fundamentals.

I won't go through every single piece, but you know that's in the syllabus, of course. Act two. is the axis of the economy and Law three, our financial sector use cases and hopefully the whole law will have a lot of fun, so the study for next Tuesday asks very quickly what are the functions and characteristics of money , so I really want to delve deeper. money money is nothing more than a social construct or a social convention medium of exchange unit of account of stored value there is some reading on the debate over whether money came first from the frontier system or from a really good group of anthropologists and archaeologists and all They say that no, it actually emerged as an accounting system and no one knows for sure ten or fifteen thousand years ago if the money came from the system outside the border or rather as a unit of account that keeps track of credits and the book older, but I would say that when you read through some of those readings, you start to think that this is just a social construct, so I will back up what fiat currency is, fiat currency, which is actually an invention of the last few hundred of years and we take Dale for granted, but how?

Does that fit into that whole story and, more importantly, how to do Ledger's accounting? Ledger's. I know boring things, but that's probably why we came out of the Middle Ages about five or six hundred years ago with double-entry bookkeeping. Sorry, hello, I like Ledger's. We will talk. a little bit about Ledger's and how that fits into money and securities, etc., and then overlay how Bitcoin fits into that story next Tuesday, it's not deeply about Bitcoin, it's just a small portion of that, there will be five or six readings. one of them is a three minute video the third one is fun to watch it's just a fun little video about what money is no need to read Nakamoto's full article when I said email I meant just the cover email it's aPara my goal the readings each week were not each session and Lord, to try to keep less than 50 pages, you would say you are going to look, sometimes you go, it seems like there is more and maybe it is.

I imagine you all understand it. Find out for yourself how to rank the depth of your knowledge, but I will predict that some of you may be up to a quarter or a third of you, one day you will

fall

down a rabbit hole and you will be doing blockchain for the next 48 hours and you won't know where it happened time because it is an addiction that at some point some of you will contract because this is a curious notion. I am not predicting that illness for all of you. I'm just saying something. That will happen to many of you, so from time to time I have just white readings.

Many times it happens to you. Let me conclude and then answer any further questions and illuminate your blockchain. I think it provides an equal alternative. I think I hope Larry can convince him that he does provide and that the peer-to-peer alternative addresses the cost of trust. It doesn't mean it's the only way to address the cost of trust, but it addresses the cost of trust. The financial sector has challenges. not only that it has seven and a half percent of our economy in the US and similar proportions around the world, but resilience, how it survives, impacts the financial crisis and things like that are real and the inclusion of one comma seven billion unbanked people, but then If you look at other products, who has access to credit cards and mortgages and things like that, and then fiat currencies, Ken Rogoff and others have written a lot about the instabilities that come with fiat currencies and we'll talk about some of the history of why central banks exist and how they came to be.

The next key point is that we already live in an electronic age. Satoshi Nakamoto and Bitcoin did not create electronic cash. Electronic cash. I mean, Sandra Bullock couldn't pay electronically. That was in 1995. They made kind of a scolding movie about everything, but today you pay your tuition online, those of you who work get paid online, you pay your car loans online, most of our lives are electronic cash , not one hundred percent, but in some countries like Sweden it is getting very close to one hundred percent. We will learn together and discover that money, but a social and economic consensus, blockchain technology together with cryptocurrencies could be a catalyst for change and are largely disguised as facts, but it is just a mere statement that we will try to analyze You know those differences don't mean that all of you are going to agree with Nobel Prize winner Paul Krugman or Nouriel Roubini that this is just a bunch of nonsense, some of you might, by the way, but I think you will.

I come out with real critical thinking skills and I hope that some of you will say that I really discovered where there is a real opportunity in the world of finance to use blockchain technology and make it a better financial sector, democratizing finance or in some way providing a service at a lower cost and better service at all times. I hope we learn together and have some fun along the way. That's my opinion. Questions. We have exactly 18 minutes. There you have it, but we can shorten it. I don't care here we go, did you tell me your name and let's make signs?

Ryan goes to work to find out that you make posters because I wonder how our team is formed. Traditionally, anyone is slow and can talk to this too, but students can. It's yours so that the teachers don't try to insert themselves to help you, but we tend to the second half and we say well who is formed in groups and when you know if it's a smaller group, well, no one hasn't done it yet. formed into a team, why don't you move to the left side of the room and we'll just hang out? But we could do it electronically.

And you know, Talita and Sabrina, who you know well, help the Internet, basically have a social network to help form. the teams because this is a large group, you're right, but traditionally it's people, those students do it on their own other questions, is anyone going to go out and sell their Bitcoin now? Larry, why are you here? We are incredibly informed on the financial side so I want to see the combination of them and if in the end I am convinced that there is something there as we have talked about because it could radically change the cost of trust around the world to the benefit of the developing nation . substantially, but I think I still have a lot of questions.

I appreciate you coming any week. You could be here any day we benefit. I hope so. This should be a conversation. I'm not that far ahead of you, Simon. Johnson came up to me last October and said what do you think about coming to MIT and Tom knows this story and we were sitting at lunch in DC and it was a good time in my life my three daughters I have three daughters and I'm a single father and they two they were in graduate school and one was in undergraduate school. It was a good time in my life.

I said: why not? Come here and participate in this digital currency initiative at the Media Lab. I have spent a life that I had 18 years ago on the investment banking side helping people buy and sell companies called mergers and acquisitions and then I moved to the investment banking side fixed income trading and I went to Asia and did a lot of things. I arranged inbound currency trading and swaps in Asia and then my last job was co-head of finance, so we had a balance sheet of about a quarter of a trillion dollars at the time, wow Goldman Sachs, this is we were so private, which meant that if we lost money we were Personally, I was a general partner, but that's a technical word, but we had 700 legal entities and a thousand people who could commit the capital of the company.

Those are people we generally call traders, but you know, it's a fascinating time period. Then I went into public service because Bob Rubin knew I would be a soft touch; It is a service. He was Secretary of the Treasury. I was a partner at Goldman Sachs and I went to the United States Treasury as deputy secretary and undersecretary in the late '90s were a little different times than today for many reasons, but we were paying down the debt, we were dealing with the Asian debt crisis, long-term capital management, the Russian debt crisis, it was a fascinating period of time that I worked on.

On a bill with John McCain, I didn't get to know Senator McCain very well, but he was extraordinary to work with, even for a short period of time called, I mean, signing, it was a bill that basically said he can sign everything electronically and he was the chairman of the Senate Commerce Committee at the time I was a wonderful little yeah, sometimes in government you can work on small things. I worked on the redesign of the currency and could tell you stories about why it looks the way it does and how it looks. I can redesign the paper currency and for a future conference I will tell you the only design feature that is still on the currency and you can visually tell it is because and when I asked for it, the guy from the Engraving Office said why and I said because go better and I'm the guy who's approving it and maybe we could make it happen.

Can we solve this? And it looked better and he loved it. He was worried about the political risk of doing so. It was a better design. he just said, I'll cover you politically, let's do it, but then I worked with Paul Sarbanes and what became painful for Baines Oxley. I was his main advisor. I worked and ran some political campaigns. We lost two of them, which would be the o8. Hillary's campaign and Hillary's campaign 16 I was her CFO, I was sort of the senior advisor who did economic policy, outreach, and hand-holding, and then in the middle of those two campaigns, I ran something called the Commodity Futures Trading Commission.

It was post-crisis, what do we do? This is a real public policy deficiency and I saw it as an opportunity to, as I said, democratize finance a little bit and reduce risk, so we tried to bring transparency to three or four hundred trillion dollars. The market picked up on swaps that are simply contracts for the transfer of risk and in their derivative form that were unregulated and we were trying to bring transparency to that and reduce risk through central clearing, so that's kind of my professional life and, like I said, I got three daughters and they're well-situated, so when Simon said, "Come on, come on up," I said, great and I love MIT, it's just fantastic and you all are great, unless there are other questions, I'll let you go early.