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GARY GENSLER: Thank you
again for all being here.

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We're going to talk a little
bit about the challenges

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of blockchain technology.

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I'm apologizing in advance.

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I'm supposed to be, like, across
campus for a 4 o'clock meeting.

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So I won't have much
time right at the end

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00:00:39,500 --> 00:00:44,650
to do the little wrap
with students coming up.

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I will note also that if
you want to come see me

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I'm open to it.

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Next week's a great week,
by the way, because I'm here

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all four or five days.

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But I don't have
set office hours.

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Just email me.

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Copy Dylan, who's the
new course administrator.

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There was a swap out from Ryan.

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Or copy Talida or
Sabrina or something.

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But just shoot me an
email, and then I'll

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set something up with you if
you want to follow up either

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on your projects, or it's
a question about anything

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around blockchain.

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I also want to thank-- we
don't usually have people

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here with jackets on.

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But we have six
or eight veterans

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who have served our country, and
I thank you for your service.

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[APPLAUSE]

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They're here to observe us.

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I don't know whether we'll
scare them away or not.

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But thank you for joining us.

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00:01:41,680 --> 00:01:46,088
So today's topics are
going to be around--

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of course, we're going to
go through the readings

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a little bit.

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We don't have Larry Lessig, and
it's a little bit more relaxed.

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So I might be doing some cold
calling if that's all right.

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I'm going to go
back a little bit

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to the technical features
in a quick wrap-- in two

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slides or three slides.

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But I just want to do
that as the setup again.

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And, of course, because you all
love hash functions so much,

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it's just a way to
bring it back to some

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of the technical features
to set up, really,

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what are some of the issues.

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We have-- I think it's
lecture 11 and 12,

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where it's just what I call
act two as the economics.

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But I want to set up a little
bit about the economics.

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You saw that in the reading--

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the 21st Geneva report
that Simon Johnson and Neha

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Narula and Mike Casey
and Jonah and I wrote.

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So now you all--

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I only assigned his
seven pages out of it.

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So I hope that you
read the seven pages.

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But some of the
costs and trade-offs,

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the challenges of blockchain
technology that are very real.

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I'll give you my own
perspective on where

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I think this will sort out
over the next 3 to 10 years.

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So I'll do some predictions.

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Vitalik Buterin has also
talked about a trilemma,

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and I want to chat about that.

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And that was one of the
readings, if I recall.

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He's such a leader
in this community

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that when he writes and
says something like this,

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it was relevant, I think,
that everybody's understand

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what Vitalik Buterin's
kind of "trilemma" is,

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even though that some
people think he's mistaken.

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Some possible
solutions to this--

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we have, who's
attending today, Madars

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who is actually one of
the developers on some

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of the solutions around
zero-knowledge proofs.

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And he might get called on.

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He works over at the
Digital Currency Initiative.

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I hope you're ready.

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And why I think governance is
the most challenging piece.

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So with that, the readings--

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I have a list of everybody
that hasn't spoken yet.

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[LAUGHTER]

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So the goal is to speak.

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That's what class
participation is.

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I'm going to be
lighthearted about it.

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I-- it's not that long ago
I was a student, really.

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I remember all this, you know.

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You want to get your
name off this list.

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I just want to say
kind of encouraging.

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So should I do it alphabetical
from the list as to who

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wants to tell me?

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No.

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No.

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You look like you're
ducking your head.

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What's your name?

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[LAUGHTER]

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AUDIENCE: Wendy

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GARY GENSLER: What's that?

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AUDIENCE: Wendy.

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00:04:36,468 --> 00:04:37,077
Wendy.

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00:04:37,077 --> 00:04:37,910
GARY GENSLER: Wendy.

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00:04:37,910 --> 00:04:38,410
Wendy.

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What did you take from the seven
pages of the Geneva report?

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Did you read-- did
you do the readings?

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So what did you take from the
great work of Simon Johnson--

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and I helped him out, you know?

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AUDIENCE: [INAUDIBLE]

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00:05:01,833 --> 00:05:04,000
GARY GENSLER: Anything about
the business challenges

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of blockchain from the readings.

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AUDIENCE: It takes a long
time to do the [INAUDIBLE]..

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GARY GENSLER: So one
challenge is time--

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latency.

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It takes a long time to do.

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Wendy raises.

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Yes.

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If you could say
your first name?

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AUDIENCE: Catalina.

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GARY GENSLER: Catalina.

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It really helps Sabrina out--

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get you off the list.

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So it's self-motivation
to say your name.

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So Catalina.

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AUDIENCE: There is also a
problem with performance

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and scalability.

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GARY GENSLER: Right.

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So it's sort of related.

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They're not alone-- but
performance, scalability,

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the time it takes
to do a transaction.

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Other challenges?

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Yes?

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AUDIENCE: There are issues

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GARY GENSLER: First name?

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AUDIENCE: Samir.

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There are issues
with micro payments

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and how they're [INAUDIBLE]
inconsistently confirmed.

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GARY GENSLER: So how
to do micro payments.

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You want to tease that out?

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Why is there a problem
with micro payments?

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AUDIENCE: I can't remember
the exact details,

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00:06:00,430 --> 00:06:02,860
but it was around just the
fact that-- because they're

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so small, they were just
essentially inconsistently

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[INAUDIBLE].

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GARY GENSLER: All right.

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So how to do micro payments.

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And the small micro payments--

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partly because
they're so small--

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may be relative to the fees
and the cost of the network.

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Alexis?

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00:06:16,127 --> 00:06:18,460
AUDIENCE: Yeah, I just wanted
to add, like on this point

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00:06:18,460 --> 00:06:20,340
because basically
the minors will

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00:06:20,340 --> 00:06:22,900
try to add to the
blockchain first

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the transaction with
the highest fees.

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So a small transaction
could take [INAUDIBLE]..

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GARY GENSLER: So there's
economic incentives

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that are involved here.

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We're now moving
a little bit away

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from all that stuff--
the broccoli that I said

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that we were all going to be
eating about hash functions

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and so forth.

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Akira.

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AUDIENCE: Yeah.

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00:06:41,290 --> 00:06:44,650
Other challenges-- the
privacy and security.

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[INAUDIBLE] those concerns
identity of [INAUDIBLE]..

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And [INAUDIBLE] concern privacy
protection of customers.

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GARY GENSLER: OK.

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So Akira just raised
a bunch of points

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about privacy and security--
about the individuals

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and the regulators.

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Does anybody want to tease
that out a little bit more?

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AUDIENCE: Well, the bank
has more of an incentive

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to keep things on
the privacy side,

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whereas regulators
obviously will

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have pried into the details.

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GARY GENSLER: OK.

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So you have that
natural public policy

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tension that doesn't only
exist around blockchain.

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Jihee?

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00:07:20,680 --> 00:07:23,350
AUDIENCE: I could hear
anything back here.

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So if people can
speak up a little bit.

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GARY GENSLER: OK.

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00:07:26,460 --> 00:07:27,820
Do you want to say it again?

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00:07:27,820 --> 00:07:29,770
AUDIENCE: So inherently,
the regulators

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00:07:29,770 --> 00:07:31,978
want to look into the
details of the transaction,

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whereas banks have a high
incentive to keep [INAUDIBLE]

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privacy side.

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GARY GENSLER: So
on the one side,

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there's a commercial interest
to keep things private.

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On the other side, the official
sector might want to peer in.

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And then interestingly, on
top of it-- layered on it--

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the official sector also wants
privacy for everybody other

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than the official sector.

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So like in Europe,
there's a new requirement

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that wasn't in the readings.

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Don't worry.

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But is anybody familiar with
the directive-- the privacy

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00:08:02,710 --> 00:08:06,025
directive called GDPR?

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00:08:06,025 --> 00:08:07,150
I don't remember your name.

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00:08:07,150 --> 00:08:08,195
I'm sorry.

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00:08:08,195 --> 00:08:08,820
AUDIENCE: Erin.

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00:08:08,820 --> 00:08:09,260
GARY GENSLER: Erin.

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00:08:09,260 --> 00:08:10,885
You want to tell the
class a little bit

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00:08:10,885 --> 00:08:12,357
about GDPR, or if you--

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AUDIENCE: I'm not certain there.

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00:08:13,690 --> 00:08:17,053
I just know that it's
a big deal right now

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00:08:17,053 --> 00:08:19,430
with going after [INAUDIBLE]

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GARY GENSLER: Stephanie.

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AUDIENCE: Yeah.

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00:08:21,055 --> 00:08:23,230
So my understanding is
that, especially when

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00:08:23,230 --> 00:08:25,690
it comes to advertising
to consumers, they have--

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consumers in the EU have to
really check certain boxes

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00:08:29,810 --> 00:08:32,799
to agree to be advertised
to as opposed to just

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automatically getting that.

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GARY GENSLER: Right.

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So Joe Quinn?

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AUDIENCE: It's a private deal.

215
00:08:39,460 --> 00:08:48,330
You have also the right to
opt out of being tracked--

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00:08:48,330 --> 00:08:49,243
everything you do.

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GARY GENSLER: Michael?

218
00:08:50,160 --> 00:08:51,096
This is Michael?

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00:08:51,096 --> 00:08:53,096
AUDIENCE: I was going to
say we worked on this--

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00:08:53,096 --> 00:08:55,070
company I worked
on at the summer.

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00:08:55,070 --> 00:08:57,830
We had to put purging
mechanisms into our databases.

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GARY GENSLER: All right.

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So it's a remarkable new law.

224
00:09:00,810 --> 00:09:03,030
Europe is, in a sense--

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00:09:03,030 --> 00:09:07,410
if you wish to say-- either more
privacy protection, or ahead

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00:09:07,410 --> 00:09:09,390
of the US.

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00:09:09,390 --> 00:09:10,920
You know, and each
jurisdiction has

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00:09:10,920 --> 00:09:13,290
their own cultural
and political norms.

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00:09:13,290 --> 00:09:16,920
But Europe as a whole has
moved further, in a sense.

230
00:09:16,920 --> 00:09:19,200
You have a right
to be forgotten.

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00:09:19,200 --> 00:09:22,960
You have a right to access
the information as well.

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00:09:22,960 --> 00:09:25,080
And so how to be
forgotten in the context

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00:09:25,080 --> 00:09:28,680
of an immutable blockchain is an
interesting just technical set

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00:09:28,680 --> 00:09:29,480
of issues.

235
00:09:29,480 --> 00:09:30,245
Yes?

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00:09:30,245 --> 00:09:32,370
AUDIENCE: There was a
question I was going to ask--

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00:09:32,370 --> 00:09:33,288
Kyle is my name.

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00:09:33,288 --> 00:09:34,830
GARY GENSLER: What's
your first name?

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00:09:34,830 --> 00:09:35,770
AUDIENCE: Kyle.

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00:09:35,770 --> 00:09:36,562
GARY GENSLER: Kyle.

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00:09:36,562 --> 00:09:37,237
OK.

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00:09:37,237 --> 00:09:39,070
AUDIENCE: I worked for
a company this summer

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00:09:39,070 --> 00:09:40,860
that processes transactions.

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00:09:40,860 --> 00:09:43,330
And it was our understanding--
speaking with lawyers

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00:09:43,330 --> 00:09:44,290
in Europe--

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00:09:44,290 --> 00:09:49,510
that under GDPR, you're allowed
to request your transactions

247
00:09:49,510 --> 00:09:51,888
because the transactions
count as personal information.

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00:09:51,888 --> 00:09:53,680
You're allowed to
request your transactions

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00:09:53,680 --> 00:09:56,440
to be erased from
the ledger, which

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00:09:56,440 --> 00:10:00,340
obviously opens the door to all
kinds of fraudulent behaviors.

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00:10:00,340 --> 00:10:02,350
I'm just curious
to know if you've

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00:10:02,350 --> 00:10:06,450
heard of any sort of
resolution to that.

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00:10:06,450 --> 00:10:07,450
GARY GENSLER: I haven't.

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00:10:07,450 --> 00:10:09,130
I was speaking at a
conference earlier

255
00:10:09,130 --> 00:10:14,050
today here at MIT with a
bunch of member companies

256
00:10:14,050 --> 00:10:16,690
to the Computer
Science and AI lab.

257
00:10:16,690 --> 00:10:19,690
And one of the
participants said they

258
00:10:19,690 --> 00:10:22,510
thought they had a technical
set of solutions to it.

259
00:10:22,510 --> 00:10:25,570
So we're going to talk
more about the privacy

260
00:10:25,570 --> 00:10:31,600
issues and GDPR in the public
policy session next week.

261
00:10:31,600 --> 00:10:33,070
So I'll try--

262
00:10:33,070 --> 00:10:34,300
Kyle, remind me.

263
00:10:34,300 --> 00:10:37,720
And I will try to get
more up to speed on that.

264
00:10:37,720 --> 00:10:38,605
Kelly.

265
00:10:38,605 --> 00:10:40,420
AUDIENCE: I found the--

266
00:10:40,420 --> 00:10:43,480
specifically in
the GDPR chapter,

267
00:10:43,480 --> 00:10:45,820
there was something
mentioned about what

268
00:10:45,820 --> 00:10:47,710
makes blockchain
uniquely qualified

269
00:10:47,710 --> 00:10:49,550
to solve a lot of
these solutions.

270
00:10:49,550 --> 00:10:53,103
And I found that it had
coincided with what Professor

271
00:10:53,103 --> 00:10:55,420
Lessig said last class about--

272
00:10:55,420 --> 00:10:57,770
there are significant trade
offs that often come down

273
00:10:57,770 --> 00:10:59,330
to the cost of trust.

274
00:10:59,330 --> 00:11:01,720
But it still begs the question--
with so many technical

275
00:11:01,720 --> 00:11:05,900
challenges, why is
it still such a--

276
00:11:05,900 --> 00:11:07,300
something that's
so sought after?

277
00:11:07,300 --> 00:11:09,840
So I'm hoping that we can
clear that up a little.

278
00:11:09,840 --> 00:11:11,470
GARY GENSLER: We'll
give it a shot.

279
00:11:11,470 --> 00:11:15,441
Other thoughts or questions
from the readings?

280
00:11:15,441 --> 00:11:18,790
AUDIENCE: I [INAUDIBLE]
third year with you

281
00:11:18,790 --> 00:11:20,617
about the layer 2.

282
00:11:20,617 --> 00:11:21,950
GARY GENSLER: About the layer 2.

283
00:11:21,950 --> 00:11:22,300
Yes.

284
00:11:22,300 --> 00:11:22,550
AUDIENCE: The layer 2.

285
00:11:22,550 --> 00:11:23,230
Yeah.

286
00:11:23,230 --> 00:11:26,920
And [INAUDIBLE]
that is that it's

287
00:11:26,920 --> 00:11:31,510
OK about having a second layer
to provide the efficiency

288
00:11:31,510 --> 00:11:33,130
and the high performance.

289
00:11:33,130 --> 00:11:37,410
But it's writing it off line.

290
00:11:37,410 --> 00:11:37,910
Yeah?

291
00:11:37,910 --> 00:11:44,410
So we are starting to trust
in a second layer that

292
00:11:44,410 --> 00:11:48,140
runs off line and then goes
and put inside the blockchain.

293
00:11:48,140 --> 00:11:51,690
How feasible-- how can we trust?

294
00:11:51,690 --> 00:11:54,940
GARY GENSLER: So the question
is about possible solutions

295
00:11:54,940 --> 00:11:57,830
to address performance
and scalability.

296
00:11:57,830 --> 00:11:59,380
And I have a few slides on that.

297
00:11:59,380 --> 00:12:03,040
But in essence, if the
principal protocol--

298
00:12:03,040 --> 00:12:07,000
the Bitcoin protocol, or
the Ethereum protocol,

299
00:12:07,000 --> 00:12:10,870
or maybe tomorrow it'll be
EOS or some other protocol--

300
00:12:10,870 --> 00:12:15,070
has some performance
issues, could some activity

301
00:12:15,070 --> 00:12:19,100
be moved to another channel?

302
00:12:19,100 --> 00:12:21,520
That channel could
be called a layer 2

303
00:12:21,520 --> 00:12:24,280
in the Lightning network, which
there was a reading about.

304
00:12:24,280 --> 00:12:28,660
That could be with a little bit
different technology cord side

305
00:12:28,660 --> 00:12:32,170
chains or sharding, which I
think was an optional-- yeah.

306
00:12:32,170 --> 00:12:33,250
I did that optionally.

307
00:12:33,250 --> 00:12:34,870
I didn't force you.

308
00:12:34,870 --> 00:12:40,760
So there's a number of
alternative channels.

309
00:12:40,760 --> 00:12:44,160
And though the technologies
are, to technologists,

310
00:12:44,160 --> 00:12:46,050
importantly different--

311
00:12:46,050 --> 00:12:49,890
sharding, and side chains, and
layer 2-- for this purpose,

312
00:12:49,890 --> 00:12:55,520
for a moment, let me blur
over the differences.

313
00:12:55,520 --> 00:13:00,460
The question that
Leandro asks is,

314
00:13:00,460 --> 00:13:03,880
well, is that meaning
that we have to trust?

315
00:13:03,880 --> 00:13:06,010
I would contend we
already have to trust

316
00:13:06,010 --> 00:13:09,820
the protocol that the Bitcoin
core developers have written.

317
00:13:09,820 --> 00:13:11,410
It's open GitHub.

318
00:13:11,410 --> 00:13:13,300
It's open code.

319
00:13:13,300 --> 00:13:15,220
But very few people
are actually going

320
00:13:15,220 --> 00:13:19,090
to investigate it
enough to be assured

321
00:13:19,090 --> 00:13:22,420
there's not a bug or an error.

322
00:13:22,420 --> 00:13:25,570
But I agree with
you that the core--

323
00:13:25,570 --> 00:13:28,270
the Bitcoin core or
the Ethereum core

324
00:13:28,270 --> 00:13:30,340
has been living
in-- if I could call

325
00:13:30,340 --> 00:13:34,000
it-- the technological
and commercial swamp.

326
00:13:34,000 --> 00:13:37,180
It's been attacked by so
many viruses and bugs,

327
00:13:37,180 --> 00:13:40,280
you have some
reason to trust it.

328
00:13:40,280 --> 00:13:43,350
But you should
never be 100% sure.

329
00:13:43,350 --> 00:13:46,840
The side chains are less tested.

330
00:13:46,840 --> 00:13:47,870
But I do agree with you.

331
00:13:47,870 --> 00:13:51,370
You have some trust, unless
I misunderstand the question.

332
00:13:51,370 --> 00:13:55,270
I thought it was a trust
in the underlying code.

333
00:13:55,270 --> 00:13:57,000
AUDIENCE: My main
point is working

334
00:13:57,000 --> 00:14:01,870
with secondary that's offline.

335
00:14:01,870 --> 00:14:08,310
You are not really transacting
in the block chain.

336
00:14:08,310 --> 00:14:08,810
Yeah.

337
00:14:08,810 --> 00:14:09,435
It's off chain.

338
00:14:09,435 --> 00:14:10,230
Yeah.

339
00:14:10,230 --> 00:14:11,160
[INAUDIBLE]

340
00:14:11,160 --> 00:14:14,050
GARY GENSLER: So the question
is, if you're off chain,

341
00:14:14,050 --> 00:14:15,550
should you be more worried?

342
00:14:15,550 --> 00:14:18,910
I was addressing just a
narrow part about the code.

343
00:14:18,910 --> 00:14:21,910
You're saying, should you be
worried because it doesn't have

344
00:14:21,910 --> 00:14:23,890
the same validation models?

345
00:14:23,890 --> 00:14:26,600
So can I hold that question
until we get to the slides?

346
00:14:26,600 --> 00:14:28,840
Because I think you
do actually have

347
00:14:28,840 --> 00:14:30,550
some pretty good
validation, but I

348
00:14:30,550 --> 00:14:34,210
think you're right that
it's a valid question--

349
00:14:34,210 --> 00:14:37,630
is the validation in these
off chains still work?

350
00:14:37,630 --> 00:14:39,123
There was a question back here.

351
00:14:39,123 --> 00:14:40,540
AUDIENCE: I was
just sort of going

352
00:14:40,540 --> 00:14:43,810
to respond to the issue
of sort of trusting

353
00:14:43,810 --> 00:14:45,730
these offline mechanisms.

354
00:14:45,730 --> 00:14:48,970
It's not in the same
vein, but 90% of--

355
00:14:48,970 --> 00:14:50,620
according to this--
daily trading

356
00:14:50,620 --> 00:14:53,230
volumes occurs in
these crypto exchanges.

357
00:14:53,230 --> 00:14:56,350
So that's also sort of
happening off the chain.

358
00:14:56,350 --> 00:14:59,530
So I think that in this
community of people

359
00:14:59,530 --> 00:15:02,620
who are currently
participating, there

360
00:15:02,620 --> 00:15:04,510
is no reason that
we're not going

361
00:15:04,510 --> 00:15:07,518
to trust third-party vendors.

362
00:15:07,518 --> 00:15:09,310
GARY GENSLER: So you're
raising the point--

363
00:15:09,310 --> 00:15:13,480
and it's a sort of an irony
of the whole ecosystem--

364
00:15:13,480 --> 00:15:19,930
that the majority-- and, in some
cryptocurrencies, over 90%--

365
00:15:19,930 --> 00:15:22,570
of the actual daily
transactions are happening

366
00:15:22,570 --> 00:15:24,710
in very centralized ways--

367
00:15:24,710 --> 00:15:27,220
on exchanges, particularly
the centralized

368
00:15:27,220 --> 00:15:31,030
crypto exchanges, where--

369
00:15:31,030 --> 00:15:32,080
I can't remember.

370
00:15:32,080 --> 00:15:34,120
But it was about half
of you have owned

371
00:15:34,120 --> 00:15:37,870
Bitcoin at some point in time.

372
00:15:37,870 --> 00:15:40,090
But can I ask how many
of you have actually

373
00:15:40,090 --> 00:15:43,350
operated a full node?

374
00:15:43,350 --> 00:15:46,670
So there's the two technologists
at the middle table, and Hugo,

375
00:15:46,670 --> 00:15:48,240
who is also, if
I remember right,

376
00:15:48,240 --> 00:15:50,750
an engineering PhD student?

377
00:15:50,750 --> 00:15:51,480
OK.

378
00:15:51,480 --> 00:15:56,700
So we have our 3 PhD students
who have operate full nodes.

379
00:15:56,700 --> 00:15:59,370
Honors to you all.

380
00:15:59,370 --> 00:16:02,700
But for most of you-- and it was
half the class have owned some

381
00:16:02,700 --> 00:16:03,240
Bitcoin--

382
00:16:03,240 --> 00:16:07,320
you've trusted some
other authority

383
00:16:07,320 --> 00:16:09,058
to hold your private keys.

384
00:16:09,058 --> 00:16:10,600
I'm not saying you're
wrong or right,

385
00:16:10,600 --> 00:16:13,440
but it's an interesting
and important point

386
00:16:13,440 --> 00:16:15,780
about this ecosystem.

387
00:16:15,780 --> 00:16:18,840
So let me, unless
there's other points,

388
00:16:18,840 --> 00:16:22,050
just go through some of how
I thought about these things

389
00:16:22,050 --> 00:16:22,920
and laid it out.

390
00:16:22,920 --> 00:16:25,530
And I-- of course,
the study questions

391
00:16:25,530 --> 00:16:26,800
we've been talking about.

392
00:16:26,800 --> 00:16:28,170
So I'll come back.

393
00:16:28,170 --> 00:16:31,230
But we will talk a little
bit about hard forks.

394
00:16:31,230 --> 00:16:35,550
And we-- I didn't hear anybody
talk about interoperability.

395
00:16:35,550 --> 00:16:37,750
So we'll come back
to that as well.

396
00:16:37,750 --> 00:16:43,080
We've talked more about
performance and privacy issues.

397
00:16:43,080 --> 00:16:45,210
Just back to the
technical features--

398
00:16:45,210 --> 00:16:46,950
it's just repetition.

399
00:16:46,950 --> 00:16:48,240
Sorry.

400
00:16:48,240 --> 00:16:50,950
But I do think it's worthwhile.

401
00:16:50,950 --> 00:16:54,240
There is, of course, the
cryptography and timestamp

402
00:16:54,240 --> 00:16:55,150
logs--

403
00:16:55,150 --> 00:16:59,460
so the bedrock of this
technology that we

404
00:16:59,460 --> 00:17:02,250
did three or four lectures ago.

405
00:17:02,250 --> 00:17:04,510
You will find that in
permissioned systems.

406
00:17:04,510 --> 00:17:06,390
You will find it in
permissionless systems.

407
00:17:06,390 --> 00:17:07,890
That is a bedrock.

408
00:17:07,890 --> 00:17:11,970
You will find in Ethereum
Bitcoin and 1,600 others.

409
00:17:11,970 --> 00:17:14,160
There will be some
shifts around--

410
00:17:14,160 --> 00:17:16,450
the hash functions might
be a little different.

411
00:17:16,450 --> 00:17:20,940
But that's kind of a
bedrock of this technology.

412
00:17:20,940 --> 00:17:24,960
The Network Consensus is not
necessarily always the same,

413
00:17:24,960 --> 00:17:25,800
as we talked about.

414
00:17:25,800 --> 00:17:27,460
Sometimes, it's proof of work.

415
00:17:27,460 --> 00:17:29,910
Sometimes, it's proof of stake.

416
00:17:29,910 --> 00:17:33,900
Or in the permissioned systems,
the consensus is really,

417
00:17:33,900 --> 00:17:36,930
are you amongst the club?

418
00:17:36,930 --> 00:17:41,430
And then there's kind of
some form of a club deal.

419
00:17:41,430 --> 00:17:43,380
If you're the Australian
Stock Exchange,

420
00:17:43,380 --> 00:17:46,810
the only member of the club is
the Australian Stock Exchange.

421
00:17:46,810 --> 00:17:49,260
But in other
permissioned systems,

422
00:17:49,260 --> 00:17:54,240
it's 20 banks or 15 banks that
are sharing that some delegated

423
00:17:54,240 --> 00:17:57,270
randomized authority
to say, what's

424
00:17:57,270 --> 00:18:00,580
the next amendment to the--

425
00:18:00,580 --> 00:18:05,940
And the transactions
code and ledgers

426
00:18:05,940 --> 00:18:10,770
shifts largely dependent upon
whether it's a transaction

427
00:18:10,770 --> 00:18:12,870
ledger or an account ledger.

428
00:18:12,870 --> 00:18:15,450
So transaction ledgers
have to have some way

429
00:18:15,450 --> 00:18:17,010
to record transactions.

430
00:18:17,010 --> 00:18:19,410
Account ledgers have
to have some way

431
00:18:19,410 --> 00:18:22,050
to record the change
in accounts, which

432
00:18:22,050 --> 00:18:25,080
Ether calls state transitions.

433
00:18:25,080 --> 00:18:27,460
But either you have to
record a transaction,

434
00:18:27,460 --> 00:18:31,020
or you have to record a change
in the state or a change

435
00:18:31,020 --> 00:18:32,250
in the account.

436
00:18:32,250 --> 00:18:34,050
An account would
say, yeah, it would

437
00:18:34,050 --> 00:18:37,060
be like the income statement
versus the balance sheet.

438
00:18:37,060 --> 00:18:41,110
But you kind of
need to record that.

439
00:18:41,110 --> 00:18:44,340
And basically, all of
these technologies,

440
00:18:44,340 --> 00:18:48,960
as I understand it, have some
way to keep those ledgers,

441
00:18:48,960 --> 00:18:50,760
though there's
multiple ways to do it.

442
00:18:50,760 --> 00:18:52,170
And as we talked
about last week,

443
00:18:52,170 --> 00:18:55,560
some have one Merkle tree, and
some have four or five Merkle

444
00:18:55,560 --> 00:18:56,130
trees.

445
00:18:56,130 --> 00:18:57,420
And so forth.

446
00:18:57,420 --> 00:19:01,290
But it's embedded
in this, and they

447
00:19:01,290 --> 00:19:03,090
could have different scripting.

448
00:19:03,090 --> 00:19:03,780
Questions?

449
00:19:03,780 --> 00:19:05,790
Just-- that's like
the thumbnail just

450
00:19:05,790 --> 00:19:09,550
to remind you about
the technology.

451
00:19:09,550 --> 00:19:11,478
It's the T in MIT.

452
00:19:11,478 --> 00:19:13,270
AUDIENCE: Just a quick
[INAUDIBLE] question

453
00:19:13,270 --> 00:19:14,900
on ledgers.

454
00:19:14,900 --> 00:19:17,260
So for a transaction versus
account in an account-based

455
00:19:17,260 --> 00:19:19,200
ledger, does it say--

456
00:19:19,200 --> 00:19:21,310
like, if you spend
$5, does it say

457
00:19:21,310 --> 00:19:23,420
who you're spending that $5 to?

458
00:19:23,420 --> 00:19:25,780
Or does it just say, your
account went down $5,

459
00:19:25,780 --> 00:19:28,170
and somebody's else went
up $5, but it doesn't

460
00:19:28,170 --> 00:19:29,602
matter where it came from?

461
00:19:29,602 --> 00:19:31,060
GARY GENSLER: So
I'm going to take,

462
00:19:31,060 --> 00:19:34,490
as I understand
Ether and Madars.

463
00:19:34,490 --> 00:19:36,170
You'll bail me out.

464
00:19:36,170 --> 00:19:41,460
But you put a state transition--

465
00:19:44,460 --> 00:19:48,400
instead of a transaction input,
it's a state transition input.

466
00:19:48,400 --> 00:19:51,810
And that state transition input
does have one account going

467
00:19:51,810 --> 00:19:53,237
down, another account going up.

468
00:19:53,237 --> 00:19:54,945
AUDIENCE: So if you
investigate that, you

469
00:19:54,945 --> 00:19:55,890
can see where it came from.

470
00:19:55,890 --> 00:19:58,390
GARY GENSLER: You can see both
sides of it, as I understand.

471
00:19:58,390 --> 00:20:00,390
And there is a receipt ledger.

472
00:20:00,390 --> 00:20:02,430
There's actually a
receipt Merkle tree

473
00:20:02,430 --> 00:20:07,060
that then keeps this
state transition happened.

474
00:20:07,060 --> 00:20:09,272
Did I did I roughly
get that right, Madars?

475
00:20:09,272 --> 00:20:10,453
AUDIENCE: [INAUDIBLE]

476
00:20:10,453 --> 00:20:11,370
GARY GENSLER: Oh, wow.

477
00:20:11,370 --> 00:20:12,330
All right.

478
00:20:12,330 --> 00:20:14,560
Madars actually does
this for a living.

479
00:20:14,560 --> 00:20:19,420
I mean, he's the one of the
founding people of Zcash

480
00:20:19,420 --> 00:20:21,280
and a bunch of other
wonderful things.

481
00:20:21,280 --> 00:20:23,280
I'm not going to go through
each of the details,

482
00:20:23,280 --> 00:20:25,710
but there was about
15 or 20 details

483
00:20:25,710 --> 00:20:28,650
in these slides about the
differences between Bitcoin

484
00:20:28,650 --> 00:20:30,000
and Ether.

485
00:20:30,000 --> 00:20:32,310
And I just use it to remind--
because it's saying, OK,

486
00:20:32,310 --> 00:20:35,670
why did the professor--
why did the--

487
00:20:35,670 --> 00:20:37,930
why did Gary put it up there?

488
00:20:37,930 --> 00:20:40,470
This professor Lessig--
that was nice for Larry.

489
00:20:40,470 --> 00:20:42,310
But for me, you don't need--

490
00:20:42,310 --> 00:20:45,000
But in essence,
the big difference

491
00:20:45,000 --> 00:20:47,820
is account-based versus
transaction-based.

492
00:20:47,820 --> 00:20:52,060
The kind of big difference is
Ether does seem to go faster,

493
00:20:52,060 --> 00:20:54,300
but it doesn't have
a lot of throughput.

494
00:20:54,300 --> 00:20:56,040
They still both
use proof of work.

495
00:20:56,040 --> 00:20:57,620
Even though Ether
says they're going

496
00:20:57,620 --> 00:21:01,440
to move to proof of state,
they're not there yet.

497
00:21:01,440 --> 00:21:04,500
When they get there,
we'll all know together.

498
00:21:04,500 --> 00:21:07,725
The economics are a bit
different, of course, as well.

499
00:21:11,220 --> 00:21:15,090
But all of these details
are part of the reason

500
00:21:15,090 --> 00:21:17,430
why there's problems.

501
00:21:17,430 --> 00:21:21,090
And so you read in the
Geneva report a little bit

502
00:21:21,090 --> 00:21:22,890
about a professor--

503
00:21:22,890 --> 00:21:24,810
an economist from the 1930s.

504
00:21:24,810 --> 00:21:26,550
Does anybody want to
take a crack at it?

505
00:21:26,550 --> 00:21:28,650
Or should I just do my slides?

506
00:21:28,650 --> 00:21:30,170
Here we go.

507
00:21:30,170 --> 00:21:31,350
AUDIENCE: It was [INAUDIBLE]

508
00:21:31,350 --> 00:21:31,620
GARY GENSLER: Yes.

509
00:21:31,620 --> 00:21:33,912
AUDIENCE: He had the fact
that everything you should be

510
00:21:33,912 --> 00:21:40,050
analyzed on the cost-benefit
analysis so that if one wants

511
00:21:40,050 --> 00:21:42,780
to use the blockchain
decentralized network,

512
00:21:42,780 --> 00:21:46,170
you should take into account
all the benefits in terms

513
00:21:46,170 --> 00:21:48,330
of various costs of trust--

514
00:21:48,330 --> 00:21:50,670
enhancing security,
but also the cost

515
00:21:50,670 --> 00:21:53,120
of switching to a
decentralized system.

516
00:21:53,120 --> 00:21:55,830
GARY GENSLER: Coase
is an economist

517
00:21:55,830 --> 00:21:58,170
from the 1930s who
wrote extensively

518
00:21:58,170 --> 00:22:02,930
about the cost and empirically
about the corporation.

519
00:22:02,930 --> 00:22:03,430
Kelly?

520
00:22:03,430 --> 00:22:04,320
AUDIENCE: Yeah.

521
00:22:04,320 --> 00:22:06,950
Basically trying to
understand why transactions

522
00:22:06,950 --> 00:22:09,650
would aggregate into a firm.

523
00:22:09,650 --> 00:22:12,160
Why move all your
activity into one?

524
00:22:12,160 --> 00:22:13,340
GARY GENSLER: Right.

525
00:22:13,340 --> 00:22:15,800
So in a much earlier time--

526
00:22:15,800 --> 00:22:18,910
way pre-Bitcoin,
but a different--

527
00:22:18,910 --> 00:22:22,520
why does economic activity
cluster into a firm,

528
00:22:22,520 --> 00:22:23,720
rather than--

529
00:22:23,720 --> 00:22:26,720
if it was truly
market-based, I might just

530
00:22:26,720 --> 00:22:30,380
be selling my services.

531
00:22:30,380 --> 00:22:32,120
In essence, he was
asking the question,

532
00:22:32,120 --> 00:22:36,020
why don't we have a fully
gig economy in the 1930s,

533
00:22:36,020 --> 00:22:41,630
where everybody's free labor,
and even capital and labor

534
00:22:41,630 --> 00:22:45,890
meets individually, and
we collect up together?

535
00:22:45,890 --> 00:22:49,100
That was kind of the body of
his question that he was--

536
00:22:49,100 --> 00:22:52,100
so centralization
versus decentralization

537
00:22:52,100 --> 00:22:56,120
80 years ago studied
by a great economist.

538
00:22:56,120 --> 00:22:59,030
So just thinking about
it here a little bit,

539
00:22:59,030 --> 00:23:01,520
I think that when you
go from decentralization

540
00:23:01,520 --> 00:23:04,490
to centralization, you tend--

541
00:23:04,490 --> 00:23:11,520
on the centralized
side, you get capture.

542
00:23:11,520 --> 00:23:14,400
You get economic
rents, and you do

543
00:23:14,400 --> 00:23:16,410
have a single point of failure.

544
00:23:16,410 --> 00:23:19,290
In some sense, the
resiliency of the system,

545
00:23:19,290 --> 00:23:23,220
whether it's in finance, where
you worry about systemic risk--

546
00:23:23,220 --> 00:23:26,940
one clearinghouse, one
central bank, one government.

547
00:23:26,940 --> 00:23:32,760
If it's knocked out, it's
so relevant to the economy

548
00:23:32,760 --> 00:23:33,360
at large.

549
00:23:33,360 --> 00:23:34,710
It brings it down.

550
00:23:34,710 --> 00:23:36,990
Or if it's one database--

551
00:23:36,990 --> 00:23:40,310
you have a single point,
in essence, of failure.

552
00:23:40,310 --> 00:23:43,830
Economic rents is an ability
to collect excess profits.

553
00:23:43,830 --> 00:23:46,230
I assure you everybody
in this class

554
00:23:46,230 --> 00:23:48,900
wants to collect economic rents.

555
00:23:48,900 --> 00:23:51,660
We start out as venture
capitalists and entrepreneurs,

556
00:23:51,660 --> 00:23:56,820
but we have a motivation and
an incentive to be monopolists.

557
00:23:56,820 --> 00:23:58,830
But we don't want to do
it illegal, of course.

558
00:23:58,830 --> 00:24:02,320
I mean, we just want to get
there by dominating the market.

559
00:24:02,320 --> 00:24:02,820
I'm sorry.

560
00:24:02,820 --> 00:24:05,320
Was there a question here?

561
00:24:05,320 --> 00:24:08,560
You're just-- you're shaking
your head, and I didn't know.

562
00:24:08,560 --> 00:24:11,910
But on the other side,
there's the benefits.

563
00:24:11,910 --> 00:24:14,040
The y-scale is not
written on here.

564
00:24:14,040 --> 00:24:16,610
The y-scale is how however
you want to think of it,

565
00:24:16,610 --> 00:24:19,490
but I think of it
as kind of costs.

566
00:24:19,490 --> 00:24:23,730
So the y-scale-- up the
y-scale is greater costs.

567
00:24:23,730 --> 00:24:25,890
Decentralization--
the big costs that

568
00:24:25,890 --> 00:24:28,980
come there is coordination.

569
00:24:28,980 --> 00:24:31,620
You have a lot of
collective action issues.

570
00:24:31,620 --> 00:24:34,210
If the 100 or so
people in this room

571
00:24:34,210 --> 00:24:35,760
were trying to do
something together,

572
00:24:35,760 --> 00:24:38,820
you would have to figure out
how to do it collectively

573
00:24:38,820 --> 00:24:40,950
in coordination.

574
00:24:40,950 --> 00:24:44,160
And that's true of
every blockchain

575
00:24:44,160 --> 00:24:45,540
that you can think about.

576
00:24:45,540 --> 00:24:48,600
Governance relates
to coordination

577
00:24:48,600 --> 00:24:51,920
and collective action issues.

578
00:24:51,920 --> 00:24:54,710
And then security
and scalability--

579
00:24:54,710 --> 00:24:58,130
these two lines are not
in any of the readings,

580
00:24:58,130 --> 00:25:01,790
but they try to capture what--

581
00:25:01,790 --> 00:25:04,010
and depending upon the
slope of the two lines,

582
00:25:04,010 --> 00:25:07,070
you might say that
a market might tend

583
00:25:07,070 --> 00:25:08,720
towards more centralization.

584
00:25:08,720 --> 00:25:11,420
In theory, if I
change the slope,

585
00:25:11,420 --> 00:25:14,340
it would be further to
the decentralized side.

586
00:25:14,340 --> 00:25:14,840
Right?

587
00:25:14,840 --> 00:25:18,590
If the cost of decentralization
is a lower slope,

588
00:25:18,590 --> 00:25:21,080
and the cost of
centralization is higher,

589
00:25:21,080 --> 00:25:23,690
we will tend more
towards decentralization.

590
00:25:23,690 --> 00:25:29,090
So it's just a
way to visualize--

591
00:25:29,090 --> 00:25:31,550
here are the costs
of centralization,

592
00:25:31,550 --> 00:25:34,520
which are basically capture
rents and single point

593
00:25:34,520 --> 00:25:36,380
of failure, not
that there aren't

594
00:25:36,380 --> 00:25:38,780
other costs of centralization.

595
00:25:38,780 --> 00:25:42,830
Here are the costs
of decentralization.

596
00:25:42,830 --> 00:25:45,800
I think in each one
of the applications,

597
00:25:45,800 --> 00:25:47,960
when you're thinking of
use cases, it's worthy--

598
00:25:47,960 --> 00:25:51,260
this is kind of a core thing.

599
00:25:51,260 --> 00:25:54,020
Will this application
lend itself

600
00:25:54,020 --> 00:25:59,090
to a low slope decentralization
curve and a high slope

601
00:25:59,090 --> 00:26:01,220
centralization curve?

602
00:26:01,220 --> 00:26:03,050
Are there a lot
of economic rents?

603
00:26:03,050 --> 00:26:05,030
Are there real problems
with single points

604
00:26:05,030 --> 00:26:07,580
of failure or capture?

605
00:26:07,580 --> 00:26:10,650
And if it's a low slope
decentralization curve,

606
00:26:10,650 --> 00:26:13,550
meaning there's not much cost to
the governance of coordination

607
00:26:13,550 --> 00:26:15,650
and scalability
issues, then you're

608
00:26:15,650 --> 00:26:18,120
going to be more towards
decentralization.

609
00:26:21,060 --> 00:26:22,620
This isn't any reading or book.

610
00:26:22,620 --> 00:26:27,390
It's just a shot at
trying to visualize it.

611
00:26:27,390 --> 00:26:27,940
Sean?

612
00:26:27,940 --> 00:26:29,450
Any question?

613
00:26:29,450 --> 00:26:31,070
AUDIENCE: [INAUDIBLE]
One question

614
00:26:31,070 --> 00:26:33,870
I have-- it's slightly
irrelevant from this area--

615
00:26:33,870 --> 00:26:41,110
is that why are all the privacy
coins are off the hard fork?

616
00:26:41,110 --> 00:26:45,072
What-- a lot of them are off
the hard fork for the Bitcoin

617
00:26:45,072 --> 00:26:45,780
as a [INAUDIBLE].

618
00:26:45,780 --> 00:26:47,450
GARY GENSLER: So
Sean's question is why

619
00:26:47,450 --> 00:26:50,360
are the privacy coins forked--

620
00:26:50,360 --> 00:26:53,330
not all of them,
but many of them

621
00:26:53,330 --> 00:26:58,390
are forked off Bitcoin or
one of the major coins.

622
00:26:58,390 --> 00:27:00,810
Madars, you want
to say-- did you--

623
00:27:00,810 --> 00:27:02,830
you have one privacy coin.

624
00:27:02,830 --> 00:27:06,220
AUDIENCE: So Bitcoin has a very
robust and well-established

625
00:27:06,220 --> 00:27:06,940
code base.

626
00:27:06,940 --> 00:27:09,200
So there is a lot of
high-quality code.

627
00:27:09,200 --> 00:27:10,970
GARY GENSLER:
Could you speak up?

628
00:27:10,970 --> 00:27:13,310
AUDIENCE: Bitcoin has a
lot of high-quality code

629
00:27:13,310 --> 00:27:14,840
so you can build up on it.

630
00:27:14,840 --> 00:27:21,070
So it's natural to add privacy
on top of Bitcoin in your fork

631
00:27:21,070 --> 00:27:24,540
rather than write
it from scratch.

632
00:27:24,540 --> 00:27:26,150
GARY GENSLER: What
Madars is answering

633
00:27:26,150 --> 00:27:30,520
is there's something
that's freely available--

634
00:27:30,520 --> 00:27:33,080
the Bitcoin Core code.

635
00:27:33,080 --> 00:27:35,500
It's actually under
a copyright license

636
00:27:35,500 --> 00:27:38,980
here at MIT, which
makes it free.

637
00:27:38,980 --> 00:27:41,080
That was Satoshi
Nakamoto's decision.

638
00:27:41,080 --> 00:27:44,274
It wasn't that-- well, maybe
Nakamoto does work here.

639
00:27:44,274 --> 00:27:47,060
[LAUGHTER]

640
00:27:47,060 --> 00:27:48,800
It's a clue.

641
00:27:48,800 --> 00:27:51,320
But it's been
developed, and it's

642
00:27:51,320 --> 00:27:55,920
knocked around, as I call
it, in the proverbial swamp--

643
00:27:55,920 --> 00:27:59,240
I mean, with all these
attack viruses and so forth.

644
00:27:59,240 --> 00:28:03,250
And so Madars is saying,
build off of that

645
00:28:03,250 --> 00:28:07,390
and basically get
that code for free.

646
00:28:07,390 --> 00:28:08,470
And then fork.

647
00:28:08,470 --> 00:28:08,970
Is that--

648
00:28:11,830 --> 00:28:15,280
So the challenges--
we talked about it--

649
00:28:15,280 --> 00:28:19,480
of performance, scalability,
efficiency, privacy, security.

650
00:28:19,480 --> 00:28:21,040
What there was
less talk about was

651
00:28:21,040 --> 00:28:24,310
interoperability, governance
and collective action.

652
00:28:24,310 --> 00:28:26,290
And I'm going to dig
into those two more

653
00:28:26,290 --> 00:28:31,330
because it feels like
that's worthwhile.

654
00:28:31,330 --> 00:28:34,240
I also believe that
the first bucket--

655
00:28:34,240 --> 00:28:37,300
performance and privacy bucket--

656
00:28:37,300 --> 00:28:40,360
are more susceptible to fixes.

657
00:28:40,360 --> 00:28:44,170
Though that might take three or
five or even eight or 10 years

658
00:28:44,170 --> 00:28:49,300
to happen, I think they're more
susceptible to the bright men

659
00:28:49,300 --> 00:28:53,330
and women that are
in these fields

660
00:28:53,330 --> 00:28:55,640
addressing themselves
to the computer science

661
00:28:55,640 --> 00:29:00,290
and cryptography of the
space, whereas governance

662
00:29:00,290 --> 00:29:04,920
and collective action
might be solvable.

663
00:29:04,920 --> 00:29:09,420
But I think it's sort of
inherent in the human element

664
00:29:09,420 --> 00:29:12,570
and the commercial
arrangements that governance

665
00:29:12,570 --> 00:29:17,640
and collective action are the
harder of these four buckets.

666
00:29:17,640 --> 00:29:20,340
That's just one
person's read of it.

667
00:29:20,340 --> 00:29:22,380
But we'll go through
some of the reasons

668
00:29:22,380 --> 00:29:27,210
as well why I kind
of get to that view.

669
00:29:27,210 --> 00:29:29,610
There's also commercial
use case challenges.

670
00:29:29,610 --> 00:29:31,440
We're not going to dig
into that much here.

671
00:29:31,440 --> 00:29:34,680
That's mostly the second
half of the semester.

672
00:29:34,680 --> 00:29:37,140
But I just wanted to
mention that's a real thing

673
00:29:37,140 --> 00:29:41,190
that a lot of folks are
saying, well, would--

674
00:29:41,190 --> 00:29:42,990
I have to make sure
that this is the best

675
00:29:42,990 --> 00:29:44,940
commercial application,
and so forth.

676
00:29:44,940 --> 00:29:50,250
And can I make money, I
mean, ultimately on it?

677
00:29:50,250 --> 00:29:52,310
And then we are,
next week, going

678
00:29:52,310 --> 00:29:55,020
to talk about the public
policy issues and challenges.

679
00:29:55,020 --> 00:29:58,880
And they all kind of
intersect in a way, as well.

680
00:29:58,880 --> 00:30:00,410
So Vitalik Buterin--

681
00:30:00,410 --> 00:30:03,610
I think there was a Medium
post I had you all read.

682
00:30:03,610 --> 00:30:05,660
Bo, do you want to
tell us a little bit

683
00:30:05,660 --> 00:30:07,580
about what you think?

684
00:30:07,580 --> 00:30:12,020
Is Vitalik not only a
brilliant computer scientist,

685
00:30:12,020 --> 00:30:14,270
but does he get the
economics of this right?

686
00:30:14,270 --> 00:30:16,980
Or you think he's off?

687
00:30:16,980 --> 00:30:18,820
You can be on-- there's
no right answer.

688
00:30:18,820 --> 00:30:21,870
I know people that feel
both ends of the spectrum

689
00:30:21,870 --> 00:30:23,680
about his trilemma.

690
00:30:23,680 --> 00:30:26,840
So I'm setting you up that--

691
00:30:26,840 --> 00:30:29,230
AUDIENCE: Geneva
[INAUDIBLE] it first.

692
00:30:29,230 --> 00:30:30,470
It seems like it makes sense.

693
00:30:30,470 --> 00:30:35,655
But his-- he's basically
saying choose two.

694
00:30:35,655 --> 00:30:37,127
You can't have all three.

695
00:30:37,127 --> 00:30:37,960
GARY GENSLER: Right.

696
00:30:37,960 --> 00:30:40,252
There's an old saying about--
how many of you have ever

697
00:30:40,252 --> 00:30:43,060
hired a contractor to fix
something in your kitchen

698
00:30:43,060 --> 00:30:45,400
or renovate something?

699
00:30:45,400 --> 00:30:46,060
I mean, I have.

700
00:30:46,060 --> 00:30:47,410
I'm a little older, right?

701
00:30:47,410 --> 00:30:50,620
You know the old saw that
it's good, quick, cheap,

702
00:30:50,620 --> 00:30:53,380
but you can't get all three?

703
00:30:53,380 --> 00:30:54,820
You can only get
two out of three.

704
00:30:54,820 --> 00:30:59,033
That's sort of the
contractor dilemma.

705
00:30:59,033 --> 00:30:59,950
But what do you think?

706
00:30:59,950 --> 00:31:00,950
Do you think he's right?

707
00:31:00,950 --> 00:31:05,470
Or do you think you could maybe,
over time, get all three--

708
00:31:05,470 --> 00:31:09,375
good, cheap, quick, scalable,
decentralized, and secure?

709
00:31:09,375 --> 00:31:12,370
AUDIENCE: My very
unsophisticated knowledge

710
00:31:12,370 --> 00:31:15,328
of the technicalities
behind this--

711
00:31:15,328 --> 00:31:16,120
I think he's right.

712
00:31:16,120 --> 00:31:17,578
GARY GENSLER: You
think he's right.

713
00:31:17,578 --> 00:31:19,220
Who wants to take
the other side just

714
00:31:19,220 --> 00:31:20,620
to have some fun
and some debate?

715
00:31:23,540 --> 00:31:24,090
Sure.

716
00:31:24,090 --> 00:31:24,590
Yeah.

717
00:31:24,590 --> 00:31:26,770
Go out at it, Leonardo.

718
00:31:26,770 --> 00:31:27,520
AUDIENCE: So--

719
00:31:27,520 --> 00:31:27,700
GARY GENSLER: There.

720
00:31:27,700 --> 00:31:28,200
You got it.

721
00:31:28,200 --> 00:31:29,514
We got the name.

722
00:31:29,514 --> 00:31:31,233
[LAUGHTER]

723
00:31:31,233 --> 00:31:32,650
AUDIENCE: I think
one of the texts

724
00:31:32,650 --> 00:31:36,040
we're talking about--
the time that systems

725
00:31:36,040 --> 00:31:37,090
have had to develop.

726
00:31:37,090 --> 00:31:39,820
So the image, for example,
Visa has had 60 years

727
00:31:39,820 --> 00:31:42,310
to develop a system that works.

728
00:31:42,310 --> 00:31:46,100
Some of those currencies have
three, four, five, ten years.

729
00:31:46,100 --> 00:31:48,652
So they will, I think,
even put a number.

730
00:31:48,652 --> 00:31:50,110
His personal opinion
of [INAUDIBLE]

731
00:31:50,110 --> 00:31:55,540
was that less than 5% that
will not overcome the hurdle.

732
00:31:55,540 --> 00:31:58,150
I don't know if that
is right or wrong,

733
00:31:58,150 --> 00:32:02,890
but I think the fact
that it's so recent--

734
00:32:02,890 --> 00:32:04,160
I think the jury's still out.

735
00:32:04,160 --> 00:32:05,160
GARY GENSLER: All right.

736
00:32:05,160 --> 00:32:07,330
So Leonardo's point
is it's recent.

737
00:32:07,330 --> 00:32:08,730
This is a new technology.

738
00:32:08,730 --> 00:32:11,590
Yes, maybe Vitalik is
right that only 5%--

739
00:32:11,590 --> 00:32:14,790
maybe only 1% will succeed.

740
00:32:14,790 --> 00:32:19,670
But to say that no one will deal
with these three points in this

741
00:32:19,670 --> 00:32:22,950
simultaneous satisfactory
way-- and ultimately,

742
00:32:22,950 --> 00:32:26,780
it has to be satisfactory
in a commercial way--

743
00:32:26,780 --> 00:32:29,120
taking the risk and trade offs.

744
00:32:29,120 --> 00:32:30,860
So Leonardo takes
the other side.

745
00:32:30,860 --> 00:32:32,900
Anybody want to
say why Leonardo--

746
00:32:32,900 --> 00:32:35,810
Hugo, were you-- which
side are you taking?

747
00:32:35,810 --> 00:32:38,833
Leonardo's side,
or Vitalik's side?

748
00:32:38,833 --> 00:32:40,250
AUDIENCE: Somewhere
in the middle.

749
00:32:40,250 --> 00:32:42,300
GARY GENSLER: OK.

750
00:32:42,300 --> 00:32:45,990
AUDIENCE: So I think that
there is a trade off.

751
00:32:45,990 --> 00:32:49,290
But I agree that it might
take time to improve all three

752
00:32:49,290 --> 00:32:49,950
simultaneously.

753
00:32:49,950 --> 00:32:54,030
I mean, one thing that happened
just this last week in Bitcoin

754
00:32:54,030 --> 00:32:56,720
was there was a
vulnerability discovered.

755
00:32:56,720 --> 00:33:01,670
And as somebody who doesn't
know how to check the code

756
00:33:01,670 --> 00:33:02,490
base, really--

757
00:33:02,490 --> 00:33:03,907
I'm not a computer
science person,

758
00:33:03,907 --> 00:33:06,115
so I've never checked for
bugs or anything like that.

759
00:33:06,115 --> 00:33:07,282
I don't know how to do that.

760
00:33:07,282 --> 00:33:09,190
I kind of just take the
software as it stands

761
00:33:09,190 --> 00:33:11,100
and download it and install it.

762
00:33:11,100 --> 00:33:12,540
And when they say
I need to update

763
00:33:12,540 --> 00:33:14,130
my software because
there's a bug,

764
00:33:14,130 --> 00:33:16,088
I'll update the software
because there's a bug.

765
00:33:16,088 --> 00:33:19,230
And that kind of feels like
more of a centralized system,

766
00:33:19,230 --> 00:33:20,890
but you're getting
that security.

767
00:33:20,890 --> 00:33:23,467
But then the decentralization
comes from the fact

768
00:33:23,467 --> 00:33:25,800
that the network is still
spread out over so many nodes.

769
00:33:25,800 --> 00:33:28,200
So there are trade
offs that I think

770
00:33:28,200 --> 00:33:31,440
you can kind of build on one
and then climb another cliff

771
00:33:31,440 --> 00:33:34,690
and kind of build on each,
but not the same time.

772
00:33:34,690 --> 00:33:37,790
GARY GENSLER: So Hugo is
somewhere in the middle.

773
00:33:37,790 --> 00:33:42,360
I'm probably an optimist
enough on the human condition

774
00:33:42,360 --> 00:33:46,840
and that the technologists
will solve more than Vitalik.

775
00:33:46,840 --> 00:33:50,250
So I'm not saying I'm all
the way where Leonardo--

776
00:33:50,250 --> 00:33:52,770
wherever yeah-- there would be.

777
00:33:52,770 --> 00:33:55,620
But I'm probably closer to
Leonardo than to Vitalik.

778
00:33:55,620 --> 00:33:57,097
But that's just
my point of view.

779
00:33:57,097 --> 00:33:59,430
I also find it interesting,
if it's all right if I say--

780
00:33:59,430 --> 00:34:04,890
Hugo's an engineering
doctoral student here.

781
00:34:04,890 --> 00:34:07,020
And yet, he's not
checking the code.

782
00:34:07,020 --> 00:34:08,330
Not any-- right?

783
00:34:08,330 --> 00:34:09,345
Because-- right.

784
00:34:09,345 --> 00:34:09,600
AUDIENCE: [INAUDIBLE]

785
00:34:09,600 --> 00:34:11,183
GARY GENSLER: So
there's a trust issue

786
00:34:11,183 --> 00:34:15,270
that-- in the marketplace,
the trust of the code.

787
00:34:15,270 --> 00:34:18,929
We all also trust
Facebook and Dropbox

788
00:34:18,929 --> 00:34:21,989
and, broadly speaking,
the internet as well.

789
00:34:21,989 --> 00:34:22,525
Priya?

790
00:34:22,525 --> 00:34:24,150
AUDIENCE: I was going
to say that there

791
00:34:24,150 --> 00:34:26,940
are several examples
throughout the evolution

792
00:34:26,940 --> 00:34:31,710
of human interaction where these
three things have been sorted.

793
00:34:31,710 --> 00:34:34,530
So it might not be that
any-- in some systems, at any

794
00:34:34,530 --> 00:34:37,578
one time, all these three
nodes are working, right?

795
00:34:37,578 --> 00:34:39,120
Like for our current
payment systems,

796
00:34:39,120 --> 00:34:41,429
there are moments
of vulnerability.

797
00:34:41,429 --> 00:34:44,400
Yes, but then you catch
it sooner or later.

798
00:34:44,400 --> 00:34:46,679
So I feel like it's maybe not--

799
00:34:46,679 --> 00:34:50,310
it's about having it all perfect
right now versus, will you

800
00:34:50,310 --> 00:34:53,370
get to a point where all
three are mostly in place

801
00:34:53,370 --> 00:34:54,284
and working.

802
00:34:54,284 --> 00:34:55,409
GARY GENSLER: And I think--

803
00:34:55,409 --> 00:35:00,970
I like how Priya said
working enough, right?

804
00:35:00,970 --> 00:35:04,300
It doesn't have to be
scalable to the place

805
00:35:04,300 --> 00:35:08,540
where it's millions of
transactions a second.

806
00:35:08,540 --> 00:35:13,970
But maybe it needs to be faster
than seven or 10 transactions

807
00:35:13,970 --> 00:35:19,190
a second, or Ethereum 20
transactions a second.

808
00:35:19,190 --> 00:35:23,150
We had-- I should also remind
everybody Tuesday nights

809
00:35:23,150 --> 00:35:24,230
we have dinner.

810
00:35:24,230 --> 00:35:28,490
Simon Johnson treats
every Tuesday night.

811
00:35:28,490 --> 00:35:31,550
It's not required to come,
but it's 5:30 to 7:00

812
00:35:31,550 --> 00:35:34,850
that we have an outside speaker
around the blockchain space,

813
00:35:34,850 --> 00:35:36,620
and you're welcome to come.

814
00:35:36,620 --> 00:35:38,780
Michelle is here, who--

815
00:35:38,780 --> 00:35:39,662
Michelle Fiorenza.

816
00:35:39,662 --> 00:35:41,120
AUDIENCE: [INAUDIBLE]
mailing list.

817
00:35:41,120 --> 00:35:45,393
So please-- I'll put my
name on the board later.

818
00:35:45,393 --> 00:35:47,810
GARY GENSLER: So Michelle will
put her name on the board--

819
00:35:47,810 --> 00:35:48,980
anybody that wants to come.

820
00:35:48,980 --> 00:35:52,670
But this past week, we
had somebody speaking

821
00:35:52,670 --> 00:35:55,910
about the scalability issues.

822
00:35:55,910 --> 00:35:59,800
And when his company
did a $25 million

823
00:35:59,800 --> 00:36:04,810
initial coin offering,
the day of the offering,

824
00:36:04,810 --> 00:36:09,360
which only had 40,000
to 50,000 purchasers--

825
00:36:09,360 --> 00:36:12,600
so 40,000 or 50,000
purchasers on that day--

826
00:36:12,600 --> 00:36:14,890
that means a smart contract
had to be triggered

827
00:36:14,890 --> 00:36:16,900
numerous times that day.

828
00:36:16,900 --> 00:36:22,840
Took over a third of the entire
Ethereum network on that day.

829
00:36:22,840 --> 00:36:24,280
And it's sluggish.

830
00:36:24,280 --> 00:36:28,090
And just to close and settle
on its initial coin offering,

831
00:36:28,090 --> 00:36:30,610
it was saying, jeez.

832
00:36:30,610 --> 00:36:33,700
That's not the
scalability we want.

833
00:36:33,700 --> 00:36:37,570
So we know that's
where we are today.

834
00:36:37,570 --> 00:36:42,360
Visa runs around 20,000 to
30,000 transactions a second.

835
00:36:42,360 --> 00:36:46,420
DTCC, which settles all the
stock and equity trades here

836
00:36:46,420 --> 00:36:52,860
in the US, has to be available
to transact at least 100,000

837
00:36:52,860 --> 00:36:53,640
a second.

838
00:36:53,640 --> 00:36:55,920
Most seconds, it's
5,000, or 10,000.

839
00:36:55,920 --> 00:36:57,660
Or some seconds, it's 30,000.

840
00:36:57,660 --> 00:37:00,360
But the Securities and
Exchange Commission says, no.

841
00:37:00,360 --> 00:37:04,440
You have to be rated for four
times your average, roughly.

842
00:37:06,990 --> 00:37:10,140
So this gives you a sense
of the scalability issues,

843
00:37:10,140 --> 00:37:14,730
just in the current environment.

844
00:37:14,730 --> 00:37:17,982
If one layer is the Internet
of Things on top of it--

845
00:37:17,982 --> 00:37:20,190
there's somewhere that I've
heard different estimates

846
00:37:20,190 --> 00:37:24,270
of 8 to 10 billion devices
currently connected

847
00:37:24,270 --> 00:37:26,500
to the internet.

848
00:37:26,500 --> 00:37:31,000
And that's likely to grow as
more refrigerators, and street

849
00:37:31,000 --> 00:37:33,060
lights, and traffic
lights are tied

850
00:37:33,060 --> 00:37:35,610
into the internet in the
next five or 10 years

851
00:37:35,610 --> 00:37:40,510
to 50 to 100 billion devices
tied to the internet.

852
00:37:40,510 --> 00:37:43,930
If they start communicating
to each other,

853
00:37:43,930 --> 00:37:46,930
will it be a blockchain
for Internet of Things?

854
00:37:46,930 --> 00:37:49,960
Can't do it at these
types of scaling numbers.

855
00:37:49,960 --> 00:37:57,040
Or can you do it in
some alternative method?

856
00:37:57,040 --> 00:38:00,880
Proof of work is also has a
bunch of energy consumption.

857
00:38:00,880 --> 00:38:02,740
We didn't have that
a lot in the writing.

858
00:38:02,740 --> 00:38:06,370
We chose not to put a bunch
of that in the Geneva report.

859
00:38:06,370 --> 00:38:12,150
One estimate is that it's 200
million kilowatt hours per day.

860
00:38:12,150 --> 00:38:15,700
That's equivalent to about 7
million US homes, on average,

861
00:38:15,700 --> 00:38:20,850
just to give you a rough
digicomonist estimate.

862
00:38:20,850 --> 00:38:26,710
That's 1/3 of 1% of all the
world's electricity just

863
00:38:26,710 --> 00:38:28,780
scale it if you--

864
00:38:28,780 --> 00:38:35,790
now you can have a nice dinner
party conversation point.

865
00:38:35,790 --> 00:38:39,320
It's the electricity of
the country of Austria.

866
00:38:39,320 --> 00:38:41,910
Is anybody Austrian?

867
00:38:41,910 --> 00:38:42,410
No.

868
00:38:42,410 --> 00:38:45,110
I just was-- you know.

869
00:38:45,110 --> 00:38:48,940
So that's one set of trade
offs of proof of work as well.

870
00:38:48,940 --> 00:38:52,590
But it also costs a lot of
money to run the banking system.

871
00:38:52,590 --> 00:38:55,250
So I think that when somebody
says, well, it's terrible.

872
00:38:55,250 --> 00:38:57,740
It's challenging, all
this electric costs.

873
00:38:57,740 --> 00:38:59,420
Yes, we always want
to lower costs.

874
00:38:59,420 --> 00:39:03,110
But the US financial system
is 7.5% percent of our economy

875
00:39:03,110 --> 00:39:04,910
and costs $1.5 trillion.

876
00:39:04,910 --> 00:39:09,980
So the payment system around
the globe costs a 0.5% to 1%

877
00:39:09,980 --> 00:39:14,150
of the global economy,
which is more than 1/3

878
00:39:14,150 --> 00:39:17,810
of 1% of the world
electricity costs.

879
00:39:17,810 --> 00:39:19,420
So I'm just putting it in--

880
00:39:19,420 --> 00:39:21,190
it's back to those
questions of which

881
00:39:21,190 --> 00:39:24,676
costs of trust, which costs--

882
00:39:24,676 --> 00:39:29,840
I'm neither a maximalist or
a minimalist, as you recall.

883
00:39:29,840 --> 00:39:31,970
So what are some of
the alternatives?

884
00:39:31,970 --> 00:39:34,030
We're not going to dig
into each of these-- side

885
00:39:34,030 --> 00:39:36,970
chains, sharding, layer
2, payment channels.

886
00:39:36,970 --> 00:39:38,650
Anybody want to take a crack?

887
00:39:38,650 --> 00:39:40,650
They're not all identical.

888
00:39:40,650 --> 00:39:44,255
It's-- Madars and I had a
conversation earlier today

889
00:39:44,255 --> 00:39:46,630
and said I couldn't even get
my head around because I get

890
00:39:46,630 --> 00:39:47,570
confused.

891
00:39:47,570 --> 00:39:49,450
But does anybody want
to give the basic--

892
00:39:49,450 --> 00:39:51,990
we were talking about it
earlier-- the basic tenet

893
00:39:51,990 --> 00:39:54,730
because you had a reading
about the Lightning network

894
00:39:54,730 --> 00:39:59,200
as to what's the economic thing
and technical thing that's

895
00:39:59,200 --> 00:40:03,310
being attempted in all four
of these types of thing?

896
00:40:03,310 --> 00:40:04,690
James, was that a hand up?

897
00:40:04,690 --> 00:40:05,982
You're going to give it a shot?

898
00:40:05,982 --> 00:40:08,230
Give it a shot.

899
00:40:08,230 --> 00:40:10,190
AUDIENCE: Most of these
are on the chain--

900
00:40:10,190 --> 00:40:10,690
sorry.

901
00:40:10,690 --> 00:40:13,510
Most of these are off the
chain, but some is on the chain.

902
00:40:13,510 --> 00:40:17,965
And the idea is you transact
off the chain that balances

903
00:40:17,965 --> 00:40:22,392
are traded, and the net of the
results goes onto the chain.

904
00:40:22,392 --> 00:40:24,100
So you try and speed
up by processing off

905
00:40:24,100 --> 00:40:26,200
the chain, where
you have thousands

906
00:40:26,200 --> 00:40:27,550
and millions of transactions.

907
00:40:27,550 --> 00:40:28,925
And it's only the
net amount that

908
00:40:28,925 --> 00:40:30,467
goes in the chain
that is [INAUDIBLE]

909
00:40:30,467 --> 00:40:32,350
GARY GENSLER: So James
has summarized it

910
00:40:32,350 --> 00:40:35,110
as, it's like saying,
there's this chain--

911
00:40:35,110 --> 00:40:40,990
this channel, if you wish,
that the water is running in,

912
00:40:40,990 --> 00:40:43,300
or the digital
money is running in,

913
00:40:43,300 --> 00:40:45,100
that only has a certain speed.

914
00:40:45,100 --> 00:40:47,710
It can only take a certain
amount of performance.

915
00:40:47,710 --> 00:40:49,750
Why not take a lot of
activity and put it

916
00:40:49,750 --> 00:40:51,880
in a side channel,
which is called

917
00:40:51,880 --> 00:40:55,510
a payment channel, actually--
but a side chain, or a payment

918
00:40:55,510 --> 00:40:58,150
channel, or a layer
2, all with slightly

919
00:40:58,150 --> 00:41:00,820
different technical features.

920
00:41:00,820 --> 00:41:03,610
And maybe do millions
of things off here,

921
00:41:03,610 --> 00:41:05,740
and only put some here.

922
00:41:05,740 --> 00:41:08,560
It is not new to
blockchain and Bitcoin.

923
00:41:08,560 --> 00:41:12,820
We already have that in the
world of finance for decades,

924
00:41:12,820 --> 00:41:17,530
in some way or another,
where some activity can't go

925
00:41:17,530 --> 00:41:21,370
to a central settlement system.

926
00:41:21,370 --> 00:41:24,960
And recalling ledgers--
the central bank,

927
00:41:24,960 --> 00:41:27,590
whether it's the US central
bank or any central bank,

928
00:41:27,590 --> 00:41:30,740
could have been set up that
all of our deposit accounts

929
00:41:30,740 --> 00:41:34,440
were directly with
the central bank.

930
00:41:34,440 --> 00:41:37,920
And in a sense, the side
chains in finance right

931
00:41:37,920 --> 00:41:41,040
now are 9,000 commercial banks.

932
00:41:41,040 --> 00:41:45,450
9000 commercial banks are
dealing with our money flows

933
00:41:45,450 --> 00:41:49,500
and then sort of net
settling to the central banks

934
00:41:49,500 --> 00:41:52,350
ledger in what's called
digital reserves.

935
00:41:52,350 --> 00:41:54,180
And in fact, even
the banking system--

936
00:41:54,180 --> 00:41:56,070
the 9,000 banks in the US--

937
00:41:56,070 --> 00:41:58,050
have their side chains--

938
00:41:58,050 --> 00:42:02,980
Visa, MasterCard, First Data,
all the money processing.

939
00:42:02,980 --> 00:42:04,890
So there's already a layering.

940
00:42:04,890 --> 00:42:07,350
I look at layer
2 and side chains

941
00:42:07,350 --> 00:42:11,070
as kind of taking a
similar economic approach

942
00:42:11,070 --> 00:42:13,560
and technical approach
that's already been around,

943
00:42:13,560 --> 00:42:15,270
but in a new way.

944
00:42:15,270 --> 00:42:17,760
I grabbed a chart from 2015.

945
00:42:17,760 --> 00:42:20,520
The details don't
matter, but this was--

946
00:42:20,520 --> 00:42:22,350
I did it because it
was three years old.

947
00:42:22,350 --> 00:42:26,520
This was one
person's truth coin.

948
00:42:26,520 --> 00:42:28,740
One person's view is
what side chains--

949
00:42:28,740 --> 00:42:30,150
basically what James says.

950
00:42:30,150 --> 00:42:33,660
Lots of activity over
here, and only a few things

951
00:42:33,660 --> 00:42:35,760
go over to the main chain.

952
00:42:35,760 --> 00:42:38,100
The visual is what I
wanted to get across.

953
00:42:38,100 --> 00:42:40,350
It was just that it's kind of--

954
00:42:40,350 --> 00:42:44,070
think of it as loads
of activity over here,

955
00:42:44,070 --> 00:42:49,260
and then we only settle at
some times to the main chain.

956
00:42:49,260 --> 00:42:52,140
Another visualization
of a different

957
00:42:52,140 --> 00:42:53,910
is the Lightning network.

958
00:42:53,910 --> 00:43:00,720
Again, a lot of activity,
then settle to the main chain.

959
00:43:00,720 --> 00:43:01,910
Questions?

960
00:43:01,910 --> 00:43:02,850
AUDIENCE: Zack.

961
00:43:02,850 --> 00:43:05,280
There seems to be
a good trade off.

962
00:43:05,280 --> 00:43:07,290
A lot of people are
proponents of making

963
00:43:07,290 --> 00:43:08,800
the block size bigger.

964
00:43:08,800 --> 00:43:10,550
A lot of people say
the side chains.

965
00:43:10,550 --> 00:43:13,840
I have trouble understanding the
trade offs between those two.

966
00:43:13,840 --> 00:43:17,160
So why not just a bigger block?

967
00:43:17,160 --> 00:43:18,720
What's the problem there?

968
00:43:18,720 --> 00:43:24,070
GARY GENSLER: So there's
a series of trade offs

969
00:43:24,070 --> 00:43:26,900
of economics and technology.

970
00:43:26,900 --> 00:43:32,710
The more you put inside the--
let's call it the main chain--

971
00:43:32,710 --> 00:43:35,770
the blue boxes at
the bottom, to speak.

972
00:43:35,770 --> 00:43:41,770
The more you're putting in
there, you weighed it down.

973
00:43:41,770 --> 00:43:44,770
There's more
processing, of course,

974
00:43:44,770 --> 00:43:48,010
and more storage, and so forth.

975
00:43:48,010 --> 00:43:50,620
But also, there's some--
there's too much latency.

976
00:43:50,620 --> 00:43:52,480
In Bitcoin, it's
every 10 minutes,

977
00:43:52,480 --> 00:43:55,900
and you're not really
sure until 3, 4, 5,

978
00:43:55,900 --> 00:43:59,320
some would say 6 blocks
to an hour go by.

979
00:43:59,320 --> 00:44:05,380
So economically, if you want
high frequency, low latency--

980
00:44:05,380 --> 00:44:08,530
short time periods--
you might say,

981
00:44:08,530 --> 00:44:10,420
I can't get that
on the main chain

982
00:44:10,420 --> 00:44:14,590
because the main chain
wants to have low latency.

983
00:44:14,590 --> 00:44:17,950
Every 10 minutes
is low latency now.

984
00:44:17,950 --> 00:44:22,120
Low latency to be more
secure to keep the mining

985
00:44:22,120 --> 00:44:23,680
cost and the proof of work up.

986
00:44:23,680 --> 00:44:25,900
So there's some economic
and technological

987
00:44:25,900 --> 00:44:31,090
both crosscurrents with that.

988
00:44:31,090 --> 00:44:33,970
Unrelated to what I just
said, but overlapping,

989
00:44:33,970 --> 00:44:38,020
there's also a bunch of miner
and mining poll operator

990
00:44:38,020 --> 00:44:41,020
economics as to whether
they want big blocks,

991
00:44:41,020 --> 00:44:42,130
or small blocks.

992
00:44:42,130 --> 00:44:47,070
And part of the
split last year was--

993
00:44:47,070 --> 00:44:52,090
it was sort of more motivated
around local politics rather

994
00:44:52,090 --> 00:44:53,940
than global politics.

995
00:44:53,940 --> 00:44:57,370
As the former Speaker of the
House, Tip O'Neill, said,

996
00:44:57,370 --> 00:44:59,170
all politics is local.

997
00:44:59,170 --> 00:45:01,150
I think some of the
debates last year

998
00:45:01,150 --> 00:45:04,990
was about local economics
and the economics of miners

999
00:45:04,990 --> 00:45:05,970
But I don't know--

1000
00:45:05,970 --> 00:45:07,210
Madars do you--

1001
00:45:07,210 --> 00:45:09,220
Madars was probably
in the middle

1002
00:45:09,220 --> 00:45:11,240
of some of those debates.

1003
00:45:11,240 --> 00:45:13,300
But would you have
a different view?

1004
00:45:13,300 --> 00:45:15,910
There was a big debate last
year as to whether the Bitcoin

1005
00:45:15,910 --> 00:45:18,970
block should go bigger
or stay the size.

1006
00:45:18,970 --> 00:45:20,530
It was not the
only reason, but it

1007
00:45:20,530 --> 00:45:25,570
was part of the reason we have
now Bitcoin Cash and Bitcoin

1008
00:45:25,570 --> 00:45:29,560
because Bitcoin Cash has a
bigger block size and a shorter

1009
00:45:29,560 --> 00:45:32,373
2.5 minute processing time.

1010
00:45:32,373 --> 00:45:34,540
AUDIENCE: There's something
that can be said about--

1011
00:45:34,540 --> 00:45:35,300
GARY GENSLER: Speak up.

1012
00:45:35,300 --> 00:45:36,717
AUDIENCE: --mining
centralization.

1013
00:45:36,717 --> 00:45:38,590
The bigger blocks you
have, only the miners

1014
00:45:38,590 --> 00:45:41,050
that can handle
the enormous blocks

1015
00:45:41,050 --> 00:45:43,000
will be able to
stay in business.

1016
00:45:43,000 --> 00:45:46,760
And less decentralization
means less security.

1017
00:45:46,760 --> 00:45:51,240
So there is incentive, both from
decentralization and security,

1018
00:45:51,240 --> 00:45:54,527
to keep the blocks
smaller, not bigger.

1019
00:45:54,527 --> 00:45:56,110
GARY GENSLER: So
what Madars is saying

1020
00:45:56,110 --> 00:45:58,540
is there's also a
bit of economics

1021
00:45:58,540 --> 00:46:00,280
around centralization.

1022
00:46:00,280 --> 00:46:04,240
The bigger the blocks, the
fewer miners can handle it.

1023
00:46:04,240 --> 00:46:07,600
The fewer miners, the more
centralization, and thus,

1024
00:46:07,600 --> 00:46:10,330
less secure, and
maybe even economic

1025
00:46:10,330 --> 00:46:13,150
rents because every
centralized system

1026
00:46:13,150 --> 00:46:15,270
can collect economic rents.

1027
00:46:15,270 --> 00:46:15,770
Yes.

1028
00:46:15,770 --> 00:46:15,940
Alin.

1029
00:46:15,940 --> 00:46:18,440
AUDIENCE: Another problem is
that if you have bigger blocks,

1030
00:46:18,440 --> 00:46:20,710
they take longer to
propagate to the network.

1031
00:46:20,710 --> 00:46:24,970
And in sort of unintuitive
ways, if that happens,

1032
00:46:24,970 --> 00:46:27,420
you get more accidental
forks to the blockchain.

1033
00:46:27,420 --> 00:46:28,870
And people hate
accidental forks,

1034
00:46:28,870 --> 00:46:31,870
especially minus accidental
forks because they lose coins

1035
00:46:31,870 --> 00:46:33,843
when their blocks aren't--

1036
00:46:33,843 --> 00:46:36,010
GARY GENSLER: So Aleen is
saying a technical feature

1037
00:46:36,010 --> 00:46:41,230
is bigger blocks are more
likely to take time to propagate

1038
00:46:41,230 --> 00:46:42,520
through the network.

1039
00:46:42,520 --> 00:46:45,400
And thus, you might
end up inadvertently

1040
00:46:45,400 --> 00:46:54,280
having more chains that are
discredited, in a sense,

1041
00:46:54,280 --> 00:46:57,520
because there was work being
done until the first one gets

1042
00:46:57,520 --> 00:46:59,640
propagated.

1043
00:46:59,640 --> 00:47:01,300
AUDIENCE: My question
is about keeping

1044
00:47:01,300 --> 00:47:03,475
track of the transactions.

1045
00:47:03,475 --> 00:47:04,600
GARY GENSLER: That's right.

1046
00:47:04,600 --> 00:47:08,155
So Leandro-- did I-- no?

1047
00:47:08,155 --> 00:47:09,030
AUDIENCE: Yeah, yeah.

1048
00:47:09,030 --> 00:47:09,350
That's right.

1049
00:47:09,350 --> 00:47:10,308
GARY GENSLER: Leandro--

1050
00:47:10,308 --> 00:47:14,710
OK-- was asking, how do we
validate the Lightning network?

1051
00:47:14,710 --> 00:47:18,260
And how do we assure
that that is--

1052
00:47:18,260 --> 00:47:19,640
though-- though--

1053
00:47:19,640 --> 00:47:23,680
AUDIENCE: Yeah because we're
working with net [INAUDIBLE]

1054
00:47:23,680 --> 00:47:29,170
in the chain, how do we really
keep record of everything

1055
00:47:29,170 --> 00:47:29,790
that's--

1056
00:47:29,790 --> 00:47:30,550
GARY GENSLER: OK.

1057
00:47:30,550 --> 00:47:33,550
So the side chains
are not recorded

1058
00:47:33,550 --> 00:47:37,270
gross on the main chain.

1059
00:47:37,270 --> 00:47:41,250
They're, in essence,
recorded net.

1060
00:47:41,250 --> 00:47:43,817
And in Lightning network--

1061
00:47:43,817 --> 00:47:45,900
I said I wasn't going to
get into the differences,

1062
00:47:45,900 --> 00:47:47,130
but here I go.

1063
00:47:47,130 --> 00:47:49,980
The Lightning network is
more a bilateral network.

1064
00:47:52,500 --> 00:47:55,740
It can take on the
feeling of multilateral

1065
00:47:55,740 --> 00:47:57,960
because I could have a
transaction with James.

1066
00:47:57,960 --> 00:48:00,402
James could have a
transaction with Kelly.

1067
00:48:00,402 --> 00:48:01,860
And it feels like
it's three of us,

1068
00:48:01,860 --> 00:48:06,360
but it's bilateral James
and Gary, bilateral James

1069
00:48:06,360 --> 00:48:08,670
and Kelly, as I understand it.

1070
00:48:08,670 --> 00:48:12,360
And so those individual
transactions,

1071
00:48:12,360 --> 00:48:14,400
while they're recorded--

1072
00:48:14,400 --> 00:48:15,480
keep me going here--

1073
00:48:15,480 --> 00:48:18,480
recorded in the
Lightning network,

1074
00:48:18,480 --> 00:48:20,070
they're not on the main chain.

1075
00:48:20,070 --> 00:48:25,410
We ultimately, then, net
settle to the main chain.

1076
00:48:25,410 --> 00:48:29,690
And we actually, in a
sense, pre-fund or pre--

1077
00:48:29,690 --> 00:48:36,970
it's a form loosely of
escrowing at the beginning.

1078
00:48:36,970 --> 00:48:40,240
So James and I might be
messing with each other,

1079
00:48:40,240 --> 00:48:41,470
but we're bilateral.

1080
00:48:41,470 --> 00:48:45,170
And so we have another
approach to the trust.

1081
00:48:45,170 --> 00:48:47,780
In addition to
the computer code,

1082
00:48:47,780 --> 00:48:50,030
James and I might have
other reasons to trust.

1083
00:48:50,030 --> 00:48:51,200
Joe Quinn.

1084
00:48:51,200 --> 00:48:52,670
AUDIENCE: Sorry.

1085
00:48:52,670 --> 00:48:55,790
What keeps me out
of double spending--

1086
00:48:55,790 --> 00:48:58,220
once on the Lightning
network, and another one

1087
00:48:58,220 --> 00:49:01,430
on the blockchain main
network at the same time?

1088
00:49:04,210 --> 00:49:07,031
GARY GENSLER: Because there's--

1089
00:49:07,031 --> 00:49:09,880
I want to be careful because
I'm using the terms loosely.

1090
00:49:09,880 --> 00:49:11,510
There's a form of prefunding.

1091
00:49:11,510 --> 00:49:15,080
It's not that you actually
fund onto the main chain,

1092
00:49:15,080 --> 00:49:17,260
but there's a little
bit of partitioning.

1093
00:49:17,260 --> 00:49:18,550
Does that-- Madars?

1094
00:49:18,550 --> 00:49:19,050
All right.

1095
00:49:19,050 --> 00:49:23,090
I keep looking at Madars because
he's actually coded this.

1096
00:49:23,090 --> 00:49:27,950
So that's what protects you,
in essence, that James and I--

1097
00:49:27,950 --> 00:49:31,410
if I'm saying, well I'll
send you a one bitcoin.

1098
00:49:31,410 --> 00:49:34,430
And tomorrow, if the sun
does come up tomorrow,

1099
00:49:34,430 --> 00:49:38,150
you'll send me half, we're
partitioning that one Bitcoin

1100
00:49:38,150 --> 00:49:45,090
or his half Bitcoin until
we then close out that--

1101
00:49:45,090 --> 00:49:47,730
it's written into
the scripting code.

1102
00:49:47,730 --> 00:49:49,890
And it's written almost
like a smart contract--

1103
00:49:49,890 --> 00:49:53,670
but it's not called
smart contracts--

1104
00:49:53,670 --> 00:49:56,430
to sort of partition,
or you might loosely

1105
00:49:56,430 --> 00:49:59,010
think of it as escrowing,
even though technically it

1106
00:49:59,010 --> 00:50:00,900
might be different.

1107
00:50:00,900 --> 00:50:03,680
But stop by, and we can--

1108
00:50:03,680 --> 00:50:05,700
and if not, some
of our colleagues

1109
00:50:05,700 --> 00:50:07,200
at the digital
currency initiative

1110
00:50:07,200 --> 00:50:11,610
like Taj Draga, who programmed
the Lightning network.

1111
00:50:11,610 --> 00:50:16,970
I mean, that's an MIT
collaboration with others.

1112
00:50:16,970 --> 00:50:19,010
And we don't promote it
just because it's MIT.

1113
00:50:19,010 --> 00:50:22,570
It's like one of the leading
ways to do performance.

1114
00:50:22,570 --> 00:50:24,860
It happens to be MIT.

1115
00:50:24,860 --> 00:50:27,860
So let me talk about other ways
to do performance and move on.

1116
00:50:27,860 --> 00:50:30,110
We already talked about
alternative consensus

1117
00:50:30,110 --> 00:50:31,040
protocols.

1118
00:50:31,040 --> 00:50:33,110
You've seen this slide,
I'm just bringing it back

1119
00:50:33,110 --> 00:50:36,170
because it is a way to
deal with scalability.

1120
00:50:36,170 --> 00:50:38,390
It's a really critical,
important ways.

1121
00:50:38,390 --> 00:50:42,080
Proof of work is one of the
issues about scalability.

1122
00:50:42,080 --> 00:50:44,600
And generally-- I'm summarizing.

1123
00:50:44,600 --> 00:50:46,250
I'm simplifying, in a sense.

1124
00:50:46,250 --> 00:50:48,290
But generally, all
the alternatives

1125
00:50:48,290 --> 00:50:51,960
have some way to
randomize or delegate

1126
00:50:51,960 --> 00:50:55,390
the node that will
do the next block.

1127
00:50:55,390 --> 00:50:57,050
It kind of all comes back--

1128
00:50:57,050 --> 00:50:59,780
how do you add another block?

1129
00:50:59,780 --> 00:51:02,180
And Stuart Haber
in the 1990s, when

1130
00:51:02,180 --> 00:51:04,220
he started with all
this blockchain stuff

1131
00:51:04,220 --> 00:51:06,980
and put it in the New York
Times, had a central authority.

1132
00:51:06,980 --> 00:51:08,810
And he set up that
company Surety.

1133
00:51:08,810 --> 00:51:11,750
And he put it in
the New York Times.

1134
00:51:11,750 --> 00:51:15,380
And what Nakamoto consensus
is, is he said, well, no.

1135
00:51:15,380 --> 00:51:20,350
We're not going to have Haber
and a central authority.

1136
00:51:20,350 --> 00:51:22,670
It's going to be decentralized.

1137
00:51:22,670 --> 00:51:26,210
So these other consensus
protocols generally

1138
00:51:26,210 --> 00:51:31,220
have some randomized approach
to delegate the selection

1139
00:51:31,220 --> 00:51:32,540
of the next block.

1140
00:51:32,540 --> 00:51:34,010
It's not always that way.

1141
00:51:34,010 --> 00:51:36,470
But they may also
have a mechanism

1142
00:51:36,470 --> 00:51:38,060
to do a second thing--

1143
00:51:38,060 --> 00:51:40,270
a second touch.

1144
00:51:40,270 --> 00:51:43,740
Silvio Micali's algorand--
he's a professor

1145
00:51:43,740 --> 00:51:47,210
over in the Computer Science
and AI Lab and a Turing Award

1146
00:51:47,210 --> 00:51:48,140
winner.

1147
00:51:48,140 --> 00:51:51,330
He's got a company that
has an interesting thing.

1148
00:51:51,330 --> 00:51:53,390
It's like a jury selection.

1149
00:51:53,390 --> 00:51:57,440
It's like picking somebody
for the jury that's

1150
00:51:57,440 --> 00:52:02,270
picking this short group of 12
nodes that might do something.

1151
00:52:02,270 --> 00:52:05,730
And every block has
that selection process.

1152
00:52:05,730 --> 00:52:07,550
But then there's
another broader group

1153
00:52:07,550 --> 00:52:10,250
that then can check
the work of the jury.

1154
00:52:10,250 --> 00:52:14,360
So often, there's kind
of a second automated

1155
00:52:14,360 --> 00:52:20,390
way, because trust isn't
there, ensuring that there's

1156
00:52:20,390 --> 00:52:23,170
a quick second check.

1157
00:52:23,170 --> 00:52:26,990
Did they decide guilty
or innocent correctly,

1158
00:52:26,990 --> 00:52:29,190
so to speak.

1159
00:52:29,190 --> 00:52:32,340
Again, I apologize if I'm a
little oversimplifying Silvio's

1160
00:52:32,340 --> 00:52:33,250
brilliant work.

1161
00:52:36,020 --> 00:52:38,480
So it could be proof of
stake, proof of activity,

1162
00:52:38,480 --> 00:52:41,400
proof of burn, as we talked
about, proof of capacity.

1163
00:52:41,400 --> 00:52:46,370
And as I mentioned last week,
there's not large-scale uses,

1164
00:52:46,370 --> 00:52:49,430
but DASH and NEO
both have some form

1165
00:52:49,430 --> 00:52:52,530
of this going on right now.

1166
00:52:52,530 --> 00:52:55,640
And Ethereum has a big project.

1167
00:52:58,980 --> 00:53:00,500
I'm confusing
their two projects.

1168
00:53:00,500 --> 00:53:03,320
There's Plasma and
there's Casper.

1169
00:53:03,320 --> 00:53:05,870
Casper is their project
to get to prove of stake,

1170
00:53:05,870 --> 00:53:08,450
but they're not there.

1171
00:53:08,450 --> 00:53:10,470
Privacy and security.

1172
00:53:10,470 --> 00:53:12,980
So I'm trying to
remember who raised

1173
00:53:12,980 --> 00:53:14,300
the contradictory tensions.

1174
00:53:17,460 --> 00:53:20,340
The contradictory tensions
is law enforcement

1175
00:53:20,340 --> 00:53:23,160
and regulators want
more transparency.

1176
00:53:23,160 --> 00:53:25,350
Even though the
FBI did, you know,

1177
00:53:25,350 --> 00:53:28,410
sort of figure out some
Russians were using Bitcoin

1178
00:53:28,410 --> 00:53:32,610
to mess in our elections, they
want some more transparency

1179
00:53:32,610 --> 00:53:34,650
in financial institutions.

1180
00:53:34,650 --> 00:53:38,460
Users and even some regulators
want less transparency.

1181
00:53:38,460 --> 00:53:42,260
So it's not-- it kind
of goes both ways.

1182
00:53:42,260 --> 00:53:46,250
But these, I think, are
also truly solvable.

1183
00:53:46,250 --> 00:53:52,820
Well, for consumers, there's
DASH and Monero and Zcash.

1184
00:53:52,820 --> 00:53:56,540
And there's even mechanisms
called mixing and tumbling,

1185
00:53:56,540 --> 00:53:58,880
which I truthfully can't
tell you the difference.

1186
00:53:58,880 --> 00:54:03,200
But I can tell you regulators
talk about mixers and tumblers

1187
00:54:03,200 --> 00:54:04,670
and privacy coins.

1188
00:54:04,670 --> 00:54:07,013
When I go to some
regulatory conferences--

1189
00:54:07,013 --> 00:54:08,930
because they sometimes
invite me as a former--

1190
00:54:12,310 --> 00:54:16,600
that middle slide-- the
privacy coins and the mixers

1191
00:54:16,600 --> 00:54:18,760
and tumblers--

1192
00:54:18,760 --> 00:54:22,360
the finance ministries and the
law enforcement stuff, that's

1193
00:54:22,360 --> 00:54:24,967
where they kind of get worried.

1194
00:54:24,967 --> 00:54:26,800
Madars, you want to
come up here and tell us

1195
00:54:26,800 --> 00:54:27,922
anything about Zcash?

1196
00:54:27,922 --> 00:54:29,380
Or you want to do
it from there, as

1197
00:54:29,380 --> 00:54:34,930
to what inspired
you to do a privacy

1198
00:54:34,930 --> 00:54:38,646
coin that a bunch of law
enforcement folks don't like?

1199
00:54:38,646 --> 00:54:39,480
[LAUGHTER]

1200
00:54:39,480 --> 00:54:40,870
Oh, I don't mean--

1201
00:54:40,870 --> 00:54:41,920
I mean, but, you know.

1202
00:54:41,920 --> 00:54:42,835
AUDIENCE: Obviously.

1203
00:54:42,835 --> 00:54:44,110
GARY GENSLER: And it's legal.

1204
00:54:44,110 --> 00:54:45,080
I mean, it's a coin.

1205
00:54:45,080 --> 00:54:47,368
It's real.

1206
00:54:47,368 --> 00:54:49,120
AUDIENCE: So just
like cash can be

1207
00:54:49,120 --> 00:54:52,090
used for illicit
purposes, also systems

1208
00:54:52,090 --> 00:54:54,490
that provide strong
privacy like Torque

1209
00:54:54,490 --> 00:54:56,740
can be used for
illicit purposes.

1210
00:54:56,740 --> 00:54:59,656
So it's said privacy
is a human right,

1211
00:54:59,656 --> 00:55:03,970
and we shouldn't be giving up
our financial independence just

1212
00:55:03,970 --> 00:55:05,290
because I want to buy a coffee.

1213
00:55:05,290 --> 00:55:08,135
I don't want to reveal
all my other transactions.

1214
00:55:08,135 --> 00:55:09,760
Well, I think that
there are mechanisms

1215
00:55:09,760 --> 00:55:14,260
how law enforcement can against
our regulatory objectives,

1216
00:55:14,260 --> 00:55:17,100
but privacy I think
is fundamental right,

1217
00:55:17,100 --> 00:55:19,275
so we should fight for it.

1218
00:55:19,275 --> 00:55:20,650
GARY GENSLER: And
so when did you

1219
00:55:20,650 --> 00:55:22,525
start working on the project?

1220
00:55:22,525 --> 00:55:24,580
AUDIENCE: I think
it was 2014 when

1221
00:55:24,580 --> 00:55:26,830
we started writing the paper.

1222
00:55:26,830 --> 00:55:28,940
GARY GENSLER: So you
started with a paper.

1223
00:55:28,940 --> 00:55:31,010
AUDIENCE: [INAUDIBLE]
like prototype,

1224
00:55:31,010 --> 00:55:34,550
codebase, we put it open source.

1225
00:55:34,550 --> 00:55:36,910
And then there
were the companies

1226
00:55:36,910 --> 00:55:41,130
that got formed to
launch the project.

1227
00:55:41,130 --> 00:55:42,670
GARY GENSLER: And
I think Zcash now

1228
00:55:42,670 --> 00:55:45,850
is somewhere around a
billion dollar market cap.

1229
00:55:45,850 --> 00:55:47,420
AUDIENCE: It fluctuates wildly.

1230
00:55:47,420 --> 00:55:49,280
GARY GENSLER: Fluctuates.

1231
00:55:49,280 --> 00:55:50,770
So that's why you're here.

1232
00:55:50,770 --> 00:55:53,090
It went down?

1233
00:55:53,090 --> 00:55:53,590
No, no.

1234
00:55:53,590 --> 00:55:54,980
You don't need to answer that.

1235
00:55:54,980 --> 00:55:55,690
Sorry.

1236
00:55:55,690 --> 00:55:57,030
Privacy.

1237
00:55:57,030 --> 00:56:00,490
But in essence, what
Madars is saying

1238
00:56:00,490 --> 00:56:03,730
that he came to this-- what
were you doing in 2014?

1239
00:56:03,730 --> 00:56:05,720
AUDIENCE: I was a grad
student here at MIT.

1240
00:56:05,720 --> 00:56:07,777
I was mostly working in
zero knowledge groups.

1241
00:56:07,777 --> 00:56:09,402
GARY GENSLER: On zero
knowledge groups.

1242
00:56:09,402 --> 00:56:11,610
AUDIENCE: It seemed to be
like a natural application,

1243
00:56:11,610 --> 00:56:14,650
like Bitcoin plus
[INAUDIBLE] techniques.

1244
00:56:14,650 --> 00:56:17,320
Maybe there's something there.

1245
00:56:17,320 --> 00:56:19,840
GARY GENSLER: So here, a
talented graduate student

1246
00:56:19,840 --> 00:56:22,210
at MIT with the
collaboration of others

1247
00:56:22,210 --> 00:56:26,080
said here's this cryptographic
mechanism called zero knowledge

1248
00:56:26,080 --> 00:56:30,320
proofs, which we'll chat
about in 30 seconds.

1249
00:56:30,320 --> 00:56:31,960
And here's something
called Bitcoin.

1250
00:56:31,960 --> 00:56:34,600
Why don't we bring
them together, and we

1251
00:56:34,600 --> 00:56:38,440
can promote in his own
words some human rights?

1252
00:56:38,440 --> 00:56:40,270
Just as you buy a
cup of coffee and you

1253
00:56:40,270 --> 00:56:42,160
don't have to say
who you are, you

1254
00:56:42,160 --> 00:56:46,520
could use this new Bitcoin
enhanced zero knowledge

1255
00:56:46,520 --> 00:56:49,300
proof, Zcash.

1256
00:56:49,300 --> 00:56:50,950
AUDIENCE: I have a
question regarding

1257
00:56:50,950 --> 00:56:56,230
how do you define illicit
activity in a way [INAUDIBLE]..

1258
00:56:56,230 --> 00:56:58,560
Living in a country that
has capital control,

1259
00:56:58,560 --> 00:57:02,330
and if I use, for instance,
Monero or Zcash as a way

1260
00:57:02,330 --> 00:57:06,610
to get the money out, does
that count in these activities,

1261
00:57:06,610 --> 00:57:07,870
or [INAUDIBLE]?

1262
00:57:07,870 --> 00:57:11,050
GARY GENSLER: So
fortunately, I don't have

1263
00:57:11,050 --> 00:57:14,140
to define illicit activity.

1264
00:57:14,140 --> 00:57:17,500
But generally,
societies come together

1265
00:57:17,500 --> 00:57:22,060
through their
reasonable mechanisms,

1266
00:57:22,060 --> 00:57:24,550
whether they're democratic
societies or not,

1267
00:57:24,550 --> 00:57:27,250
but they come together through
their legislative branches

1268
00:57:27,250 --> 00:57:29,350
and their executive
branches and their courts

1269
00:57:29,350 --> 00:57:32,350
and define some things
that are not allowed.

1270
00:57:32,350 --> 00:57:36,760
But generally speaking, when I'm
using the term in this class.

1271
00:57:36,760 --> 00:57:39,790
I'm thinking about
four or five buckets.

1272
00:57:39,790 --> 00:57:44,110
Most societies do not want
to shrink their tax base.

1273
00:57:44,110 --> 00:57:48,760
So they want economic activity
be inside the tax envelope,

1274
00:57:48,760 --> 00:57:51,100
rather than outside
the tax envelope.

1275
00:57:51,100 --> 00:57:54,190
And that's usually the
words that finance ministers

1276
00:57:54,190 --> 00:57:59,140
call that is a tax base, how
much is outside versus inside.

1277
00:57:59,140 --> 00:58:04,150
Secondly, most law
enforcement and most societies

1278
00:58:04,150 --> 00:58:08,980
do not want to have the
money rails, the banking,

1279
00:58:08,980 --> 00:58:13,930
and other ways you can
move value to facilitate

1280
00:58:13,930 --> 00:58:16,040
otherwise illegal activity.

1281
00:58:16,040 --> 00:58:18,100
So it's using
money to facilitate

1282
00:58:18,100 --> 00:58:19,820
otherwise illegal activity.

1283
00:58:19,820 --> 00:58:22,900
So the otherwise illegal
activity might be drug running.

1284
00:58:22,900 --> 00:58:25,690
The otherwise illegal
activity might be terrorism.

1285
00:58:25,690 --> 00:58:30,670
It might be child
slavery literally.

1286
00:58:30,670 --> 00:58:35,200
So it's whatever the
otherwise illegal activity

1287
00:58:35,200 --> 00:58:38,110
is to use money,
and that's generally

1288
00:58:38,110 --> 00:58:42,550
called money laundering
or other things.

1289
00:58:42,550 --> 00:58:45,420
So you're absolutely right.

1290
00:58:45,420 --> 00:58:48,750
Another thing is that
for some countries,

1291
00:58:48,750 --> 00:58:50,580
less than a majority,
but some countries

1292
00:58:50,580 --> 00:58:51,930
have capital controls.

1293
00:58:51,930 --> 00:58:56,520
They're trying to maintain the
value of their Fiat currency

1294
00:58:56,520 --> 00:58:59,340
relative to other
Fiat currencies.

1295
00:58:59,340 --> 00:59:02,100
And in an effort to
maintain some either

1296
00:59:02,100 --> 00:59:07,260
fixed or relationship,
they have capital controls,

1297
00:59:07,260 --> 00:59:09,720
and thus, in those
countries, they

1298
00:59:09,720 --> 00:59:15,360
might say illicit activity also
is running around the capital

1299
00:59:15,360 --> 00:59:16,230
controls.

1300
00:59:16,230 --> 00:59:19,020
But it's each
country, each society.

1301
00:59:19,020 --> 00:59:23,610
And Sean, you raise a good
point as to what does it mean.

1302
00:59:23,610 --> 00:59:26,970
I mean it not to show any value.

1303
00:59:26,970 --> 00:59:29,850
I'm saying there's a
series of these things

1304
00:59:29,850 --> 00:59:33,410
that each society comes together
and says usually around the tax

1305
00:59:33,410 --> 00:59:38,580
base, usually around trying
to not use money to facilitate

1306
00:59:38,580 --> 00:59:41,730
otherwise bad stuff
and in some countries,

1307
00:59:41,730 --> 00:59:44,840
the capital controls.

1308
00:59:44,840 --> 00:59:46,320
I saw a hand here.

1309
00:59:46,320 --> 00:59:48,160
Daniel, no.

1310
00:59:48,160 --> 00:59:49,750
Was there-- and
we're going to do

1311
00:59:49,750 --> 00:59:52,900
more about illicit
activity next week

1312
00:59:52,900 --> 00:59:55,627
about guarding against
illicit activity.

1313
00:59:58,900 --> 01:00:02,920
Hope the correction
got filmed, too.

1314
01:00:02,920 --> 01:00:05,350
So there's another
set of security issues

1315
01:00:05,350 --> 01:00:07,930
around private keys.

1316
01:00:07,930 --> 01:00:10,030
And to most of us
that have passwords,

1317
01:00:10,030 --> 01:00:11,640
you know if you
lose your password,

1318
01:00:11,640 --> 01:00:14,890
they're usually in essence
a back door that somehow

1319
01:00:14,890 --> 01:00:18,910
the platform, whether it's
Facebook or even at Bank

1320
01:00:18,910 --> 01:00:22,540
of America, if you lose your
password, There's a back door,

1321
01:00:22,540 --> 01:00:27,080
and they can say, there
is a way to validate

1322
01:00:27,080 --> 01:00:29,150
with enough
probability weighting

1323
01:00:29,150 --> 01:00:33,810
that I'm Gary Gensler, and
they'll give me a new password.

1324
01:00:33,810 --> 01:00:36,830
I mean, in some circumstances,
it's a high bar,

1325
01:00:36,830 --> 01:00:38,790
and there's some
biometrics involved.

1326
01:00:38,790 --> 01:00:41,370
But in most cases,
it's a pretty low bar,

1327
01:00:41,370 --> 01:00:44,070
and they'll give
you another password

1328
01:00:44,070 --> 01:00:48,420
if you can, like me, remember
the answer to my high school

1329
01:00:48,420 --> 01:00:50,730
girlfriend was or something.

1330
01:00:50,730 --> 01:00:54,710
These questions, like
I remember it's Irene,

1331
01:00:54,710 --> 01:00:57,250
but then I've just given it up.

1332
01:00:57,250 --> 01:00:58,490
I've just given it up.

1333
01:00:58,490 --> 01:00:59,160
That's terrible.

1334
01:01:02,760 --> 01:01:03,810
I have to change it.

1335
01:01:08,850 --> 01:01:13,350
But custodial private
keys is a very real thing,

1336
01:01:13,350 --> 01:01:15,090
and you've read
about the hacking,

1337
01:01:15,090 --> 01:01:16,800
and we'll read
more about it when

1338
01:01:16,800 --> 01:01:18,950
we get to crypto exchanges.

1339
01:01:18,950 --> 01:01:23,680
It's a very dominant issue,
not just for individuals,

1340
01:01:23,680 --> 01:01:25,250
but for institutional actors.

1341
01:01:25,250 --> 01:01:27,900
How does a hedge
fund or more likely

1342
01:01:27,900 --> 01:01:33,020
how does BlackRock or
Fidelity, as an asset manager,

1343
01:01:33,020 --> 01:01:37,340
secure custody in
a way that works?

1344
01:01:37,340 --> 01:01:39,110
And it's an asymmetric risk.

1345
01:01:39,110 --> 01:01:40,610
It's a tricky risk.

1346
01:01:40,610 --> 01:01:44,750
For most of finance, they
don't have custody any longer

1347
01:01:44,750 --> 01:01:46,130
of the securities.

1348
01:01:46,130 --> 01:01:48,710
When I started on Wall Street,
they were still the cage.

1349
01:01:48,710 --> 01:01:55,550
C-A-G-E. It was a physical cage
where the remnants of paper

1350
01:01:55,550 --> 01:01:58,430
stock certificates
were still in the cage.

1351
01:01:58,430 --> 01:02:02,150
I didn't start so long ago
that it was before DTCC.

1352
01:02:02,150 --> 01:02:04,760
Things were getting
electric, you know, digital.

1353
01:02:04,760 --> 01:02:09,140
But there was still a physical
cage for some physical paper

1354
01:02:09,140 --> 01:02:10,990
certificates.

1355
01:02:10,990 --> 01:02:12,800
If you lost the
paper certificate,

1356
01:02:12,800 --> 01:02:15,310
you could still go to the
government or the company that

1357
01:02:15,310 --> 01:02:18,940
issued it and back door and
get a new paper certificate.

1358
01:02:18,940 --> 01:02:19,690
It took time.

1359
01:02:19,690 --> 01:02:20,320
It was hard.

1360
01:02:20,320 --> 01:02:21,910
It was to authenticate it.

1361
01:02:21,910 --> 01:02:27,170
But in this circumstance if
you lose the private key,

1362
01:02:27,170 --> 01:02:30,450
there's not the back door
issuer to get the next one.

1363
01:02:30,450 --> 01:02:32,420
So it's a very
interesting issue,

1364
01:02:32,420 --> 01:02:35,990
not just a technological issue
and a cybersecurity issue,

1365
01:02:35,990 --> 01:02:39,350
but it's a whole set
of financial custody

1366
01:02:39,350 --> 01:02:42,110
issues, an asymmetric
risk if you're

1367
01:02:42,110 --> 01:02:46,990
a Goldman Sachs or Fidelity,
and you lost a key,

1368
01:02:46,990 --> 01:02:50,810
or it got hacked, and it
was billions of dollars.

1369
01:02:50,810 --> 01:02:53,770
So it's just interesting--

1370
01:02:53,770 --> 01:02:55,870
I don't think it's
unique to blockchain,

1371
01:02:55,870 --> 01:02:58,930
but it's rather specific
to blockchain and finance

1372
01:02:58,930 --> 01:03:00,560
and how it overlaps.

1373
01:03:00,560 --> 01:03:03,400
So some of the solutions-- and
I do think there are solutions

1374
01:03:03,400 --> 01:03:04,270
here--

1375
01:03:04,270 --> 01:03:07,488
are some of the things
that Madars and Neha

1376
01:03:07,488 --> 01:03:09,530
Narula, who runs the
Digital Currency Initiative,

1377
01:03:09,530 --> 01:03:10,180
are working on.

1378
01:03:10,180 --> 01:03:14,410
And they're working on using two
cryptographic primitives we're

1379
01:03:14,410 --> 01:03:16,840
not going to deeply go into.

1380
01:03:16,840 --> 01:03:20,260
We did hash functions, and
we did digital signatures.

1381
01:03:20,260 --> 01:03:22,450
Those are algorithms,
or they're called

1382
01:03:22,450 --> 01:03:24,190
cryptographic primitives.

1383
01:03:24,190 --> 01:03:26,470
Well, there's dozens of
cryptographic primitives,

1384
01:03:26,470 --> 01:03:29,410
math algorithms.

1385
01:03:29,410 --> 01:03:33,430
Well, the other two that
are used a lot in this field

1386
01:03:33,430 --> 01:03:36,820
are zero knowledge proofs
and less often probably

1387
01:03:36,820 --> 01:03:38,990
as Peterson commitments.

1388
01:03:38,990 --> 01:03:41,230
And I put up there my words.

1389
01:03:41,230 --> 01:03:44,080
I got Madars to help
me write this one.

1390
01:03:44,080 --> 01:03:46,660
But my words is zero
knowledge proves

1391
01:03:46,660 --> 01:03:51,690
let someone prove a statement
is true without revealing

1392
01:03:51,690 --> 01:03:55,170
the details of exactly why
that statement is true.

1393
01:03:55,170 --> 01:03:58,410
You might say, wait a minute,
you can prove something's true.

1394
01:03:58,410 --> 01:04:00,510
It's sort of like if
you walk into a bar

1395
01:04:00,510 --> 01:04:02,880
and they need to know
you're 21 to get a drink,

1396
01:04:02,880 --> 01:04:05,430
let's make this tangible.

1397
01:04:05,430 --> 01:04:08,130
What do you need to
prove that you're 21?

1398
01:04:08,130 --> 01:04:15,710
You need to prove that you were
born before 1997, September 27.

1399
01:04:15,710 --> 01:04:18,470
But you don't need
a lot more details.

1400
01:04:18,470 --> 01:04:23,610
And so there's some computer
scientists here at MIT

1401
01:04:23,610 --> 01:04:26,070
that actually did the
foundational work on zero

1402
01:04:26,070 --> 01:04:27,870
knowledge proofs
20 to 30 years ago,

1403
01:04:27,870 --> 01:04:31,632
Silvio Micali and
others, for which I think

1404
01:04:31,632 --> 01:04:33,090
was part of why
they won the Turing

1405
01:04:33,090 --> 01:04:37,380
Award, amongst other work.

1406
01:04:37,380 --> 01:04:39,870
So zero knowledge proofs
are very interesting

1407
01:04:39,870 --> 01:04:43,200
cryptographic mathematical
puzzle solving

1408
01:04:43,200 --> 01:04:46,450
that Madars used for Zcash.

1409
01:04:46,450 --> 01:04:49,830
Neha and Madars is using for
something called ZK Ledger,

1410
01:04:49,830 --> 01:04:52,680
which was an optional reading.

1411
01:04:52,680 --> 01:04:55,590
My gut tells me there are
ways that we can go forward

1412
01:04:55,590 --> 01:04:58,830
that regulators and
the official sector

1413
01:04:58,830 --> 01:05:02,130
can get their
transparency they want

1414
01:05:02,130 --> 01:05:05,070
and the financial
sector at the same time

1415
01:05:05,070 --> 01:05:08,430
can get the privacy they want,
that the two can actually

1416
01:05:08,430 --> 01:05:15,000
coexist through the modern
methods of technology.

1417
01:05:15,000 --> 01:05:19,680
Alexi, is that a hand
up or just a waving--

1418
01:05:19,680 --> 01:05:21,820
no, all right.

1419
01:05:21,820 --> 01:05:24,100
You want to add anything
Madars since you're

1420
01:05:24,100 --> 01:05:27,340
the co-author of this the ZK
Ledger paper that was optional.

1421
01:05:30,135 --> 01:05:37,760
AUDIENCE: [INAUDIBLE] an
influential [INAUDIBLE]

1422
01:05:37,760 --> 01:05:41,945
called zero coin protocol
developed at Johns Hopkins.

1423
01:05:41,945 --> 01:05:45,028
GARY GENSLER: So Johns Hopkins
developed a middle coin--

1424
01:05:45,028 --> 01:05:46,820
AUDIENCE: Middle protocol
called Zero Coin.

1425
01:05:46,820 --> 01:05:48,200
GARY GENSLER: Zero Coin.

1426
01:05:48,200 --> 01:05:49,700
AUDIENCE: Using
Pedersen commitments

1427
01:05:49,700 --> 01:05:52,520
and Zcash didn't use
Pedersen commitments.

1428
01:05:52,520 --> 01:05:55,887
There's a lot of very
interesting history behind.

1429
01:05:55,887 --> 01:05:57,470
GARY GENSLER: And
Pedersen commitments

1430
01:05:57,470 --> 01:06:01,640
are yet another cryptographic
primitive or algorithm, which

1431
01:06:01,640 --> 01:06:04,400
interestingly, they're
similar to hash functions,

1432
01:06:04,400 --> 01:06:07,260
where you take a bunch of data,
and you squish it together

1433
01:06:07,260 --> 01:06:08,180
in a sense.

1434
01:06:08,180 --> 01:06:10,500
You compress it and
get a commitment.

1435
01:06:10,500 --> 01:06:13,260
But you can actually
add and subtract them.

1436
01:06:13,260 --> 01:06:15,560
It's an interesting
thing where you

1437
01:06:15,560 --> 01:06:18,830
can commit to data like
a hash, but you can also

1438
01:06:18,830 --> 01:06:22,890
add and subtract commitments.

1439
01:06:22,890 --> 01:06:25,970
So it has some
interesting features.

1440
01:06:25,970 --> 01:06:29,420
If you're deeply interested, I
will probably line up Sabrina

1441
01:06:29,420 --> 01:06:33,380
to help you, or Madars might
help because I'm at the edge.

1442
01:06:33,380 --> 01:06:38,090
But what I'm saying from a
business side is my hunch--

1443
01:06:38,090 --> 01:06:40,580
and this is that-- we're at
the we're at the cutting edge

1444
01:06:40,580 --> 01:06:42,550
here at MIT of some
of the folks try

1445
01:06:42,550 --> 01:06:48,330
to figure out how to do privacy
and security at the same time.

1446
01:06:48,330 --> 01:06:49,138
Questions on that?

1447
01:06:49,138 --> 01:06:51,180
Because we're going to
get to the tougher things.

1448
01:06:51,180 --> 01:06:52,770
Interoperability.

1449
01:06:52,770 --> 01:06:56,460
Linking Blockchain applications
to legacy databases

1450
01:06:56,460 --> 01:06:58,810
or linking them to each other.

1451
01:06:58,810 --> 01:07:01,410
So you might want to link
Blockchain application--

1452
01:07:01,410 --> 01:07:04,740
if you're thinking about
a payments protocol,

1453
01:07:04,740 --> 01:07:07,670
how does that payments
protocol and Blockchain world

1454
01:07:07,670 --> 01:07:09,410
link to the fiat.

1455
01:07:09,410 --> 01:07:11,910
Because ultimately, if you're
doing, let's say, remittances,

1456
01:07:11,910 --> 01:07:14,370
and you want to move
money from here to Mexico,

1457
01:07:14,370 --> 01:07:16,020
somebody wants
Mexican peso, they

1458
01:07:16,020 --> 01:07:19,350
might be starting
in US dollars, how

1459
01:07:19,350 --> 01:07:23,370
do you operate basically
with three different systems

1460
01:07:23,370 --> 01:07:24,910
in that case?

1461
01:07:24,910 --> 01:07:29,390
Your ingenious,
innovative start-up,

1462
01:07:29,390 --> 01:07:34,100
but the US dollar fiats system
and the Mexican peso system.

1463
01:07:34,100 --> 01:07:36,890
So that's a form
of interoperability

1464
01:07:36,890 --> 01:07:40,430
and the challenge around it,
or Blockchain to Blockchain

1465
01:07:40,430 --> 01:07:42,920
if we've got 1,600
of them, or even

1466
01:07:42,920 --> 01:07:46,520
interoperability
of the main chain

1467
01:07:46,520 --> 01:07:49,340
and some of these layer
two and side chains.

1468
01:07:49,340 --> 01:07:51,350
That's an easier
interoperability

1469
01:07:51,350 --> 01:07:54,300
because it's kind
of coded right in.

1470
01:07:54,300 --> 01:07:58,320
But it's always-- and
this is not a new thing.

1471
01:07:58,320 --> 01:08:02,000
Banking has had
interoperability all the time.

1472
01:08:02,000 --> 01:08:04,310
Take my example of
the US to Mexico.

1473
01:08:04,310 --> 01:08:08,420
To move US dollars and
convert it to Mexican peso

1474
01:08:08,420 --> 01:08:11,120
is in two entirely
different banking systems

1475
01:08:11,120 --> 01:08:13,190
and two entirely
different ledger systems.

1476
01:08:13,190 --> 01:08:17,029
So we have to have this question
of interoperability even

1477
01:08:17,029 --> 01:08:19,060
pre Blockchain.

1478
01:08:19,060 --> 01:08:23,060
But it's just bringing it
to this new technology.

1479
01:08:23,060 --> 01:08:25,540
It raises costs of
trust in coordinating

1480
01:08:25,540 --> 01:08:28,149
the transfer assets
and information

1481
01:08:28,149 --> 01:08:34,740
across chains, in essence, or as
we talk about, across ledgers.

1482
01:08:34,740 --> 01:08:37,880
So it's an issue that
it's been around.

1483
01:08:37,880 --> 01:08:42,470
We just got to sort of
see how we solve it here.

1484
01:08:42,470 --> 01:08:43,383
One solution.

1485
01:08:43,383 --> 01:08:45,050
It doesn't mean it's
the right solution,

1486
01:08:45,050 --> 01:08:46,760
it's the only solution,
but one solution

1487
01:08:46,760 --> 01:08:50,779
is to do through some
decentralized mechanisms

1488
01:08:50,779 --> 01:08:55,040
including side chains, or one
of the favorites of the director

1489
01:08:55,040 --> 01:08:57,350
of the Media Lab,
Joey Ito, thanks maybe

1490
01:08:57,350 --> 01:09:01,220
if we have layer 2, we
should also have layer 0.

1491
01:09:01,220 --> 01:09:05,800
Underneath all of these
coins, underneath Ethereum

1492
01:09:05,800 --> 01:09:07,490
and Bitcoin, maybe
there's a layer

1493
01:09:07,490 --> 01:09:10,250
that we can
technologically create.

1494
01:09:10,250 --> 01:09:15,210
Nobody's done this yet,
but Joey's a visionary.

1495
01:09:15,210 --> 01:09:17,750
Joey had the first
internet service provider

1496
01:09:17,750 --> 01:09:19,760
in Japan at the
age of 23 when he

1497
01:09:19,760 --> 01:09:24,387
got $1,500 of computer equipment
and put it in his bathroom.

1498
01:09:24,387 --> 01:09:25,470
And that's how he started.

1499
01:09:25,470 --> 01:09:27,359
Yes.

1500
01:09:27,359 --> 01:09:28,439
Yes, his bathroom.

1501
01:09:28,439 --> 01:09:30,050
It was the only
real estate he had.

1502
01:09:33,160 --> 01:09:37,000
So which way does this go?

1503
01:09:37,000 --> 01:09:40,499
You hadn't heard
that about Joey?

1504
01:09:40,499 --> 01:09:41,874
So it's a way to
start a company.

1505
01:09:44,560 --> 01:09:48,380
And I think far more
work needs to be done.

1506
01:09:48,380 --> 01:09:51,920
So it may be solvable.

1507
01:09:51,920 --> 01:09:53,520
I'm not sure.

1508
01:09:53,520 --> 01:09:56,870
And then consensus required
for software updates.

1509
01:09:56,870 --> 01:09:57,650
It's a tough one.

1510
01:09:57,650 --> 01:10:01,370
Open source software updates,
which are not backward

1511
01:10:01,370 --> 01:10:02,280
compatible.

1512
01:10:02,280 --> 01:10:04,640
Like, can I update
the software, but then

1513
01:10:04,640 --> 01:10:07,250
you can't use it for
the 500,000 blocks

1514
01:10:07,250 --> 01:10:10,380
that are already out there
in Bitcoin, or in some--

1515
01:10:10,380 --> 01:10:13,020
or the millions of
blocks in the ether.

1516
01:10:13,020 --> 01:10:16,850
So the problem often happens
that the older versions won't

1517
01:10:16,850 --> 01:10:19,840
validate all the new blocks.

1518
01:10:19,840 --> 01:10:21,910
And if they won't validate
all the new blocks,

1519
01:10:21,910 --> 01:10:23,930
I'm simplifying again--

1520
01:10:23,930 --> 01:10:27,230
think of like Excel and you get
that update on Excel or Word

1521
01:10:27,230 --> 01:10:31,570
for Windows, and you
can't open your old files.

1522
01:10:31,570 --> 01:10:34,710
I mean, it's a
rough lay definition

1523
01:10:34,710 --> 01:10:37,110
of what this issue is.

1524
01:10:37,110 --> 01:10:40,020
And so it leads to
something called hard forks.

1525
01:10:40,020 --> 01:10:44,220
And this little visual
on the right hand side

1526
01:10:44,220 --> 01:10:49,570
is basically what happens
is you can't validate

1527
01:10:49,570 --> 01:10:52,750
all the old blocks,
because the new software

1528
01:10:52,750 --> 01:10:54,520
is kind of going beyond it.

1529
01:10:54,520 --> 01:10:59,530
A hard fork would happen is if
you took two megabyte blocks,

1530
01:10:59,530 --> 01:11:03,580
if you made the
block size bigger.

1531
01:11:03,580 --> 01:11:08,080
The old software would not take
that if I've got this right.

1532
01:11:08,080 --> 01:11:11,160
That would be a hard fork.

1533
01:11:11,160 --> 01:11:14,460
And so that's an issue,
and it's happened.

1534
01:11:14,460 --> 01:11:17,520
The Ethereum network
has Ethereum Classic

1535
01:11:17,520 --> 01:11:21,630
and has Ethereum
because of a hard fork

1536
01:11:21,630 --> 01:11:24,570
that was encouraged
by Vitalik Buterin,

1537
01:11:24,570 --> 01:11:27,490
and the Bitcoin network
has one from last year,

1538
01:11:27,490 --> 01:11:30,540
where it was this debate
about block sizes.

1539
01:11:30,540 --> 01:11:34,170
So most software for
decades has dealt

1540
01:11:34,170 --> 01:11:37,440
with how do we update software,
but they can push it to us.

1541
01:11:37,440 --> 01:11:40,770
And we get it, and we hit
a button and we get it,

1542
01:11:40,770 --> 01:11:42,330
and after a while,
we get annoyed

1543
01:11:42,330 --> 01:11:46,410
and we don't update
if you're like me.

1544
01:11:46,410 --> 01:11:50,160
But the consensus-- remember,
this was a graph that we had.

1545
01:11:50,160 --> 01:11:52,515
The consensus always
supports the longest chain.

1546
01:11:55,420 --> 01:11:59,160
If the consensus is to
adopt this new technology,

1547
01:11:59,160 --> 01:12:02,070
and only 80% or
90% adopt it, it's

1548
01:12:02,070 --> 01:12:04,320
a question of whether
the other 10% or 15%

1549
01:12:04,320 --> 01:12:07,290
will keep maintaining
the shorter chain.

1550
01:12:07,290 --> 01:12:11,080
And in Bitcoin Cash, they have.

1551
01:12:11,080 --> 01:12:14,520
And so in essence, now
you have two currencies.

1552
01:12:14,520 --> 01:12:16,620
If, for some reason,
it atrophied,

1553
01:12:16,620 --> 01:12:20,730
and they stopped maintaining
it, then the value, in a sense,

1554
01:12:20,730 --> 01:12:23,360
in a commercial setting
might go to zero.

1555
01:12:23,360 --> 01:12:26,130
Was there a question?

1556
01:12:26,130 --> 01:12:28,410
So broadly speaking, I
think the toughest issue

1557
01:12:28,410 --> 01:12:30,910
is about collective
action and governance.

1558
01:12:30,910 --> 01:12:32,760
How do you get a
whole group of people

1559
01:12:32,760 --> 01:12:35,610
to be moving in a
similar direction?

1560
01:12:35,610 --> 01:12:39,000
Blockchain applications
derive part of their value

1561
01:12:39,000 --> 01:12:41,610
from participation of multiple
parties on the network

1562
01:12:41,610 --> 01:12:45,120
as well, that multiple
people are involved.

1563
01:12:45,120 --> 01:12:48,840
It's remarkable in hindsight
that Satoshi Nakamoto, whomever

1564
01:12:48,840 --> 01:12:51,630
he or she was, got
this many people.

1565
01:12:51,630 --> 01:12:54,570
There's nearly 100 people in
this room studying this 10

1566
01:12:54,570 --> 01:12:55,800
years later.

1567
01:12:55,800 --> 01:12:58,320
But somehow he solved a
collective action issue

1568
01:12:58,320 --> 01:13:02,550
because it was just
software code back in 2009.

1569
01:13:02,550 --> 01:13:07,170
But it's still the example, how
does Silvio Micali with a very

1570
01:13:07,170 --> 01:13:12,300
clever Blockchain adaptation
and Algorand, how does he

1571
01:13:12,300 --> 01:13:14,140
get people to start using it?

1572
01:13:14,140 --> 01:13:16,510
And until he starts to
get people to use it,

1573
01:13:16,510 --> 01:13:18,240
where's the value?

1574
01:13:18,240 --> 01:13:22,950
Or if you have an application
that's to be file sharing

1575
01:13:22,950 --> 01:13:26,580
or for medical records, there is
a medical records project here

1576
01:13:26,580 --> 01:13:30,530
at MIT, but how do you start
to get people to use it?

1577
01:13:30,530 --> 01:13:34,310
And these are solved every
day in the internet space,

1578
01:13:34,310 --> 01:13:37,350
but Blockchain has a
little bit greater wrinkle.

1579
01:13:37,350 --> 01:13:39,070
So there's a chicken
and egg issue.

1580
01:13:39,070 --> 01:13:39,570
Priya.

1581
01:13:41,702 --> 01:13:43,910
AUDIENCE: This is like heresy
in this room, but is it

1582
01:13:43,910 --> 01:13:46,360
because it isn't a real thing?

1583
01:13:46,360 --> 01:13:49,610
Versus like a medical records,
it's really a real thing.

1584
01:13:49,610 --> 01:13:51,680
Because I wonder
about that a lot.

1585
01:13:51,680 --> 01:13:55,190
Does it proliferate because
there's essentially not much

1586
01:13:55,190 --> 01:13:57,140
effort, real cost to it--

1587
01:13:57,140 --> 01:14:01,790
GARY GENSLER: Priya's question
is is there some perception--

1588
01:14:01,790 --> 01:14:03,110
can I use that word?

1589
01:14:03,110 --> 01:14:05,780
There's some perception
it's not a real thing,

1590
01:14:05,780 --> 01:14:07,850
so it might not propagate,
and there might not

1591
01:14:07,850 --> 01:14:12,230
be as much consumer adoption.

1592
01:14:12,230 --> 01:14:14,380
That may well be one of
the commercial challenges.

1593
01:14:14,380 --> 01:14:15,713
Eilon, did you have [INAUDIBLE]?

1594
01:14:15,713 --> 01:14:17,840
AUDIENCE: Yeah, I think
the adoption of Bitcoin

1595
01:14:17,840 --> 01:14:19,400
was because people
were interested

1596
01:14:19,400 --> 01:14:23,090
in the innovative solution.

1597
01:14:23,090 --> 01:14:26,070
And then Ethereum and
with Algorand leaving

1598
01:14:26,070 --> 01:14:29,060
in a few months, it will
happen in other blockchains,

1599
01:14:29,060 --> 01:14:33,380
are basically pouring
money into the ecosystem,

1600
01:14:33,380 --> 01:14:36,380
giving money to developers
to develop solutions,

1601
01:14:36,380 --> 01:14:40,417
because they are betting on
the success of that network.

1602
01:14:40,417 --> 01:14:41,250
GARY GENSLER: Right.

1603
01:14:41,250 --> 01:14:43,940
But for every one
of you as you're

1604
01:14:43,940 --> 01:14:45,860
thinking about your
final projects,

1605
01:14:45,860 --> 01:14:50,590
this collective action
issue has multiple features.

1606
01:14:50,590 --> 01:14:54,370
One, to me, is the governance
of the Blockchain software

1607
01:14:54,370 --> 01:14:57,820
updates, which we said is a
little bit about hard forks

1608
01:14:57,820 --> 01:15:00,400
and so forth and how
do you have consensus

1609
01:15:00,400 --> 01:15:04,420
and how centralized to the
governance stay, which we'll

1610
01:15:04,420 --> 01:15:07,120
come back to when we talk about
the Securities and Exchange

1611
01:15:07,120 --> 01:15:09,430
Commission and whether
it's a token that's

1612
01:15:09,430 --> 01:15:11,660
regulated as a security.

1613
01:15:11,660 --> 01:15:13,630
So there's that
part of governance.

1614
01:15:13,630 --> 01:15:15,610
But then there's the
collective action issue

1615
01:15:15,610 --> 01:15:20,260
that if you have a payments
or medical records or trade

1616
01:15:20,260 --> 01:15:23,350
finance, how do you
get folks to adopt.

1617
01:15:23,350 --> 01:15:25,330
And in the banking
sector, the banks

1618
01:15:25,330 --> 01:15:28,360
are the big sort of
elephants in the room,

1619
01:15:28,360 --> 01:15:32,230
the big dominant incumbents,
how do you get them to adopt,

1620
01:15:32,230 --> 01:15:35,200
or are you somehow
competing away their profits

1621
01:15:35,200 --> 01:15:38,050
and not having them adopt, which
is more a commercial business

1622
01:15:38,050 --> 01:15:40,810
issue about collective action.

1623
01:15:40,810 --> 01:15:43,060
So the financial sector,
as we've talked about,

1624
01:15:43,060 --> 01:15:48,190
favors permissioned blockchains
that don't have as many--

1625
01:15:48,190 --> 01:15:50,230
they have some
collective action issues,

1626
01:15:50,230 --> 01:15:53,170
but they don't have as many
collective action issues.

1627
01:15:53,170 --> 01:15:57,490
They have far fewer scalability
and performance issues,

1628
01:15:57,490 --> 01:16:00,890
because they say, I'm
not using proof of work.

1629
01:16:00,890 --> 01:16:05,200
It might be 15, 20, or
even 75 or 100 nodes,

1630
01:16:05,200 --> 01:16:08,500
but they think that way,
they can secure their privacy

1631
01:16:08,500 --> 01:16:10,010
and security.

1632
01:16:10,010 --> 01:16:18,020
Now, Madars and Neha's paper on
ZK Ledger might be a solution.

1633
01:16:18,020 --> 01:16:20,050
And some of those banks
might start using that.

1634
01:16:20,050 --> 01:16:21,820
But I'm talking about 2018.

1635
01:16:21,820 --> 01:16:25,270
I'm not talking
about 2020 or 2025.

1636
01:16:25,270 --> 01:16:28,360
Right now, they're favoring
permissioned closed loop

1637
01:16:28,360 --> 01:16:31,570
systems, rather than
permission-less open loop

1638
01:16:31,570 --> 01:16:33,100
systems.

1639
01:16:33,100 --> 01:16:38,410
So next week, we're going to
be moving to public policy.

1640
01:16:38,410 --> 01:16:39,820
Oh my god.

1641
01:16:39,820 --> 01:16:45,590
You're going to get to read my
testimony, all 28 pages of it.

1642
01:16:45,590 --> 01:16:47,200
Yeah, look, I get it.

1643
01:16:47,200 --> 01:16:50,230
But I was asked to testify
in the House Agriculture

1644
01:16:50,230 --> 01:16:52,600
Committee in July.

1645
01:16:52,600 --> 01:16:55,900
It's a venue I'd been at
a whole bunch of times.

1646
01:16:55,900 --> 01:17:00,880
It was fun to be back
in front of them,

1647
01:17:00,880 --> 01:17:09,100
Chairman Conaway from Texas and
Collin Peterson from Minnesota.

1648
01:17:09,100 --> 01:17:12,070
But yes, you'll get to read my--

1649
01:17:12,070 --> 01:17:14,410
I knew that there was
no legislation that

1650
01:17:14,410 --> 01:17:15,808
was going to happen this year.

1651
01:17:15,808 --> 01:17:17,350
I want to just give
you the feedback.

1652
01:17:17,350 --> 01:17:21,160
But Republicans
run the committee.

1653
01:17:21,160 --> 01:17:23,830
They get to invite as
many witnesses they want,

1654
01:17:23,830 --> 01:17:27,550
and then they let the
minority invite one, sometimes

1655
01:17:27,550 --> 01:17:28,390
two witnesses.

1656
01:17:28,390 --> 01:17:31,840
So I got the call to
testify, because I'm

1657
01:17:31,840 --> 01:17:35,440
like the old sea dog, and
they're bringing me in

1658
01:17:35,440 --> 01:17:36,490
or something.

1659
01:17:36,490 --> 01:17:38,720
But it was fun.

1660
01:17:38,720 --> 01:17:42,070
But I was preparing
for this class anyway.

1661
01:17:42,070 --> 01:17:47,320
So I kind of wrote the
testimony for you all.

1662
01:17:47,320 --> 01:17:50,390
Congress thought
it was for them.

1663
01:17:50,390 --> 01:17:51,095
And it was.

1664
01:17:51,095 --> 01:17:51,595
It was.

1665
01:17:54,220 --> 01:17:55,420
But that's the main thing.

1666
01:17:55,420 --> 01:17:58,210
Mark Carney, who runs
the Bank of England,

1667
01:17:58,210 --> 01:18:00,850
wrote this really
beautifully written piece

1668
01:18:00,850 --> 01:18:04,480
that he gave in the spring,
about a little bit the history

1669
01:18:04,480 --> 01:18:05,650
currency and so forth.

1670
01:18:05,650 --> 01:18:13,500
But Mark also runs the
Financial Stability Board,

1671
01:18:13,500 --> 01:18:17,550
which has the finance ministers
and central bank governors

1672
01:18:17,550 --> 01:18:19,890
and securities regulators
from 20 countries.

1673
01:18:19,890 --> 01:18:24,000
So it's the G20's
finance heavies.

1674
01:18:24,000 --> 01:18:26,580
I used to go to that,
not as a finance heavy,

1675
01:18:26,580 --> 01:18:29,923
but I used to go because they
wanted me inside the tent,

1676
01:18:29,923 --> 01:18:31,590
rather than outside
the tent, because we

1677
01:18:31,590 --> 01:18:34,590
were doing derivatives
reform here in the US.

1678
01:18:34,590 --> 01:18:37,740
And some of the foreign
finance ministers

1679
01:18:37,740 --> 01:18:39,880
had a different point of view.

1680
01:18:39,880 --> 01:18:43,350
And when it got to the place
when finance ministers--

1681
01:18:43,350 --> 01:18:46,160
and it was an interesting group,
the Russian finance minister

1682
01:18:46,160 --> 01:18:49,920
in the UK and the South African
and four others wrote a joint

1683
01:18:49,920 --> 01:18:54,240
letter to Secretary
Geithner pointing out some--

1684
01:18:54,240 --> 01:18:57,780
shall we say observations
on what we were doing.

1685
01:18:57,780 --> 01:18:59,760
They had differences.

1686
01:18:59,760 --> 01:19:01,380
I got invited, so I used to go.

1687
01:19:01,380 --> 01:19:03,070
I got to know Mark very well.

1688
01:19:03,070 --> 01:19:05,820
But it's a good paper.

1689
01:19:05,820 --> 01:19:08,310
And you'll get a sense really--

1690
01:19:08,310 --> 01:19:11,130
I would say, Mark
is neither a Bitcoin

1691
01:19:11,130 --> 01:19:13,290
maximalist or
minimalist, but he does

1692
01:19:13,290 --> 01:19:15,930
say don't use the
word cryptocurrency.

1693
01:19:15,930 --> 01:19:18,030
Use the term crypto asset.

1694
01:19:18,030 --> 01:19:20,200
So it's kind of an
interesting piece.

1695
01:19:20,200 --> 01:19:22,140
And then I don't know
how many of you are

1696
01:19:22,140 --> 01:19:24,420
Sloan Fellows that are here.

1697
01:19:24,420 --> 01:19:26,340
I recognize some of
the Sloan Fellows.

1698
01:19:26,340 --> 01:19:29,870
I think about 20% or 25% of
the class are Sloan Fellows.

1699
01:19:29,870 --> 01:19:32,910
You're going to get to see
Joe Stiglitz in New York

1700
01:19:32,910 --> 01:19:36,810
in a few weeks, and I think--

1701
01:19:36,810 --> 01:19:39,210
yeah, this is the
CNBC piece where

1702
01:19:39,210 --> 01:19:43,680
Joe, who's a Nobel laureate
at Columbia University,

1703
01:19:43,680 --> 01:19:47,640
has a stark and distinct
point of view about Bitcoin.

1704
01:19:47,640 --> 01:19:50,550
I've had two or three lively
conversations with Joe

1705
01:19:50,550 --> 01:19:52,440
about this.

1706
01:19:52,440 --> 01:19:56,040
Later in the semester, you'll
read Paul Krugman and Nouriel

1707
01:19:56,040 --> 01:20:01,020
Roubini, and there's a little
video of Bill Gates talking

1708
01:20:01,020 --> 01:20:03,270
about Bitcoin.

1709
01:20:03,270 --> 01:20:07,380
I want you all to be aware
of the Bitcoin minimalist

1710
01:20:07,380 --> 01:20:10,210
and understand what
they're saying.

1711
01:20:10,210 --> 01:20:12,980
And I would put Joe
on a 1 to 10 scale,

1712
01:20:12,980 --> 01:20:18,960
at maybe 1 and 1/2 or maybe 2.

1713
01:20:18,960 --> 01:20:21,960
Paul, you'll read Paul
Krugman's piece a little later.

1714
01:20:21,960 --> 01:20:23,610
He's kind of down there, too.

1715
01:20:23,610 --> 01:20:27,090
I can't just-- they can't
modulate between them.

1716
01:20:27,090 --> 01:20:28,560
But I think it's
really important

1717
01:20:28,560 --> 01:20:31,950
to understand what some really
great minds are thinking

1718
01:20:31,950 --> 01:20:33,520
about this from
that side as well.

1719
01:20:33,520 --> 01:20:36,640
So that's what the three
things are for next week.

1720
01:20:36,640 --> 01:20:44,530
And the conclusion, I think that
it does provide the networking,

1721
01:20:44,530 --> 01:20:45,600
but it comes with costs.

1722
01:20:45,600 --> 01:20:48,270
As we said, there are
a bunch of trade-offs.

1723
01:20:48,270 --> 01:20:51,060
I think the scalability,
the efficiency, the privacy

1724
01:20:51,060 --> 01:20:52,950
they want are solvable.

1725
01:20:52,950 --> 01:20:54,600
I can't prove it.

1726
01:20:54,600 --> 01:20:56,500
But I think in a
matter of years--

1727
01:20:56,500 --> 01:20:58,080
and it might be
three or 10 years--

1728
01:20:58,080 --> 01:21:00,870
it won't be three to
10 months, though.

1729
01:21:00,870 --> 01:21:05,490
I think a lot of that is
susceptible to the bright minds

1730
01:21:05,490 --> 01:21:08,610
of MIT and elsewhere
as computer scientists.

1731
01:21:08,610 --> 01:21:12,070
I think the challenges
that are tougher,

1732
01:21:12,070 --> 01:21:14,690
it really relates to governance.

1733
01:21:14,690 --> 01:21:16,890
I think governance
and collective action

1734
01:21:16,890 --> 01:21:19,260
and back to those two
graphs, there really

1735
01:21:19,260 --> 01:21:23,700
are places that are better to
centralize than decentralize.

1736
01:21:23,700 --> 01:21:25,200
And we're going to
be exploring that

1737
01:21:25,200 --> 01:21:26,825
for the rest of this
semester together.

1738
01:21:26,825 --> 01:21:27,660
So thank you.

1739
01:21:27,660 --> 01:21:31,000
Thank you for the veterans
who sat through all that.

1740
01:21:31,000 --> 01:21:33,750
[APPLAUSE]