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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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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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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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Wendy.

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GARY GENSLER: Wendy.

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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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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.

00:05:53.250 --> 00:05:55.060
GARY GENSLER: So how
to do micro payments.

00:05:55.060 --> 00:05:56.185
You want to tease that out?

00:05:56.185 --> 00:05:58.555
Why is there a problem
with micro payments?

00:05:58.555 --> 00:06:00.430
AUDIENCE: I can't remember
the exact details,

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].

00:06:06.800 --> 00:06:07.800
GARY GENSLER: All right.

00:06:07.800 --> 00:06:09.250
So how to do micro payments.

00:06:09.250 --> 00:06:11.325
And the small micro payments--

00:06:11.325 --> 00:06:12.700
partly because
they're so small--

00:06:12.700 --> 00:06:15.520
may be relative to the fees
and the cost of the network.

00:06:15.520 --> 00:06:16.127
Alexis?

00:06:16.127 --> 00:06:18.460
AUDIENCE: Yeah, I just wanted
to add, like on this point

00:06:18.460 --> 00:06:20.340
because basically
the minors will

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.

00:06:25.510 --> 00:06:27.570
So a small transaction
could take [INAUDIBLE]..

00:06:27.570 --> 00:06:29.590
GARY GENSLER: So there's
economic incentives

00:06:29.590 --> 00:06:30.550
that are involved here.

00:06:30.550 --> 00:06:32.260
We're now moving
a little bit away

00:06:32.260 --> 00:06:36.370
from all that stuff--
the broccoli that I said

00:06:36.370 --> 00:06:38.800
that we were all going to be
eating about hash functions

00:06:38.800 --> 00:06:39.950
and so forth.

00:06:39.950 --> 00:06:40.665
Akira.

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AUDIENCE: Yeah.

00:06:41.290 --> 00:06:44.650
Other challenges-- the
privacy and security.

00:06:44.650 --> 00:06:47.620
[INAUDIBLE] those concerns
identity of [INAUDIBLE]..

00:06:47.620 --> 00:06:52.792
And [INAUDIBLE] concern privacy
protection of customers.

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GARY GENSLER: OK.

00:06:53.500 --> 00:06:55.690
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?

00:07:04.800 --> 00:07:07.090
AUDIENCE: Well, the bank
has more of an incentive

00:07:07.090 --> 00:07:09.130
to keep things on
the privacy side,

00:07:09.130 --> 00:07:10.590
whereas regulators
obviously will

00:07:10.590 --> 00:07:12.062
have pried into the details.

00:07:12.062 --> 00:07:12.770
GARY GENSLER: OK.

00:07:12.770 --> 00:07:14.980
So you have that
natural public policy

00:07:14.980 --> 00:07:20.180
tension that doesn't only
exist around blockchain.

00:07:20.180 --> 00:07:20.680
Jihee?

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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Do you want to say it again?

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AUDIENCE: So inherently,
the regulators

00:07:29.770 --> 00:07:31.978
want to look into the
details of the transaction,

00:07:31.978 --> 00:07:34.270
whereas banks have a high
incentive to keep [INAUDIBLE]

00:07:34.270 --> 00:07:35.325
privacy side.

00:07:35.325 --> 00:07:36.700
GARY GENSLER: So
on the one side,

00:07:36.700 --> 00:07:39.160
there's a commercial interest
to keep things private.

00:07:39.160 --> 00:07:43.630
On the other side, the official
sector might want to peer in.

00:07:43.630 --> 00:07:47.110
And then interestingly, on
top of it-- layered on it--

00:07:47.110 --> 00:07:50.800
the official sector also wants
privacy for everybody other

00:07:50.800 --> 00:07:53.260
than the official sector.

00:07:53.260 --> 00:07:56.343
So like in Europe,
there's a new requirement

00:07:56.343 --> 00:07:57.510
that wasn't in the readings.

00:07:57.510 --> 00:07:58.660
Don't worry.

00:07:58.660 --> 00:08:02.710
But is anybody familiar with
the directive-- the privacy

00:08:02.710 --> 00:08:06.025
directive called GDPR?

00:08:06.025 --> 00:08:07.150
I don't remember your name.

00:08:07.150 --> 00:08:08.195
I'm sorry.

00:08:08.195 --> 00:08:08.820
AUDIENCE: Erin.

00:08:08.820 --> 00:08:09.260
GARY GENSLER: Erin.

00:08:09.260 --> 00:08:10.885
You want to tell the
class a little bit

00:08:10.885 --> 00:08:12.357
about GDPR, or if you--

00:08:12.357 --> 00:08:13.690
AUDIENCE: I'm not certain there.

00:08:13.690 --> 00:08:17.053
I just know that it's
a big deal right now

00:08:17.053 --> 00:08:19.430
with going after [INAUDIBLE]

00:08:19.430 --> 00:08:20.430
GARY GENSLER: Stephanie.

00:08:20.430 --> 00:08:21.055
AUDIENCE: Yeah.

00:08:21.055 --> 00:08:23.230
So my understanding is
that, especially when

00:08:23.230 --> 00:08:25.690
it comes to advertising
to consumers, they have--

00:08:25.690 --> 00:08:29.810
consumers in the EU have to
really check certain boxes

00:08:29.810 --> 00:08:32.799
to agree to be advertised
to as opposed to just

00:08:32.799 --> 00:08:34.277
automatically getting that.

00:08:34.277 --> 00:08:35.110
GARY GENSLER: Right.

00:08:35.110 --> 00:08:37.570
So Joe Quinn?

00:08:37.570 --> 00:08:39.460
AUDIENCE: It's a private deal.

00:08:39.460 --> 00:08:48.330
You have also the right to
opt out of being tracked--

00:08:48.330 --> 00:08:49.243
everything you do.

00:08:49.243 --> 00:08:50.160
GARY GENSLER: Michael?

00:08:50.160 --> 00:08:51.096
This is Michael?

00:08:51.096 --> 00:08:53.096
AUDIENCE: I was going to
say we worked on this--

00:08:53.096 --> 00:08:55.070
company I worked
on at the summer.

00:08:55.070 --> 00:08:57.830
We had to put purging
mechanisms into our databases.

00:08:57.830 --> 00:08:58.830
GARY GENSLER: All right.

00:08:58.830 --> 00:09:00.810
So it's a remarkable new law.

00:09:00.810 --> 00:09:03.030
Europe is, in a sense--

00:09:03.030 --> 00:09:07.410
if you wish to say-- either more
privacy protection, or ahead

00:09:07.410 --> 00:09:09.390
of the US.

00:09:09.390 --> 00:09:10.920
You know, and each
jurisdiction has

00:09:10.920 --> 00:09:13.290
their own cultural
and political norms.

00:09:13.290 --> 00:09:16.920
But Europe as a whole has
moved further, in a sense.

00:09:16.920 --> 00:09:19.200
You have a right
to be forgotten.

00:09:19.200 --> 00:09:22.960
You have a right to access
the information as well.

00:09:22.960 --> 00:09:25.080
And so how to be
forgotten in the context

00:09:25.080 --> 00:09:28.680
of an immutable blockchain is an
interesting just technical set

00:09:28.680 --> 00:09:29.480
of issues.

00:09:29.480 --> 00:09:30.245
Yes?

00:09:30.245 --> 00:09:32.370
AUDIENCE: There was a
question I was going to ask--

00:09:32.370 --> 00:09:33.288
Kyle is my name.

00:09:33.288 --> 00:09:34.830
GARY GENSLER: What's
your first name?

00:09:34.830 --> 00:09:35.770
AUDIENCE: Kyle.

00:09:35.770 --> 00:09:36.562
GARY GENSLER: Kyle.

00:09:36.562 --> 00:09:37.237
OK.

00:09:37.237 --> 00:09:39.070
AUDIENCE: I worked for
a company this summer

00:09:39.070 --> 00:09:40.860
that processes transactions.

00:09:40.860 --> 00:09:43.330
And it was our understanding--
speaking with lawyers

00:09:43.330 --> 00:09:44.290
in Europe--

00:09:44.290 --> 00:09:49.510
that under GDPR, you're allowed
to request your transactions

00:09:49.510 --> 00:09:51.888
because the transactions
count as personal information.

00:09:51.888 --> 00:09:53.680
You're allowed to
request your transactions

00:09:53.680 --> 00:09:56.440
to be erased from
the ledger, which

00:09:56.440 --> 00:10:00.340
obviously opens the door to all
kinds of fraudulent behaviors.

00:10:00.340 --> 00:10:02.350
I'm just curious
to know if you've

00:10:02.350 --> 00:10:06.450
heard of any sort of
resolution to that.

00:10:06.450 --> 00:10:07.450
GARY GENSLER: I haven't.

00:10:07.450 --> 00:10:09.130
I was speaking at a
conference earlier

00:10:09.130 --> 00:10:14.050
today here at MIT with a
bunch of member companies

00:10:14.050 --> 00:10:16.690
to the Computer
Science and AI lab.

00:10:16.690 --> 00:10:19.690
And one of the
participants said they

00:10:19.690 --> 00:10:22.510
thought they had a technical
set of solutions to it.

00:10:22.510 --> 00:10:25.570
So we're going to talk
more about the privacy

00:10:25.570 --> 00:10:31.600
issues and GDPR in the public
policy session next week.

00:10:31.600 --> 00:10:33.070
So I'll try--

00:10:33.070 --> 00:10:34.300
Kyle, remind me.

00:10:34.300 --> 00:10:37.720
And I will try to get
more up to speed on that.

00:10:37.720 --> 00:10:38.605
Kelly.

00:10:38.605 --> 00:10:40.420
AUDIENCE: I found the--

00:10:40.420 --> 00:10:43.480
specifically in
the GDPR chapter,

00:10:43.480 --> 00:10:45.820
there was something
mentioned about what

00:10:45.820 --> 00:10:47.710
makes blockchain
uniquely qualified

00:10:47.710 --> 00:10:49.550
to solve a lot of
these solutions.

00:10:49.550 --> 00:10:53.103
And I found that it had
coincided with what Professor

00:10:53.103 --> 00:10:55.420
Lessig said last class about--

00:10:55.420 --> 00:10:57.770
there are significant trade
offs that often come down

00:10:57.770 --> 00:10:59.330
to the cost of trust.

00:10:59.330 --> 00:11:01.720
But it still begs the question--
with so many technical

00:11:01.720 --> 00:11:05.900
challenges, why is
it still such a--

00:11:05.900 --> 00:11:07.300
something that's
so sought after?

00:11:07.300 --> 00:11:09.840
So I'm hoping that we can
clear that up a little.

00:11:09.840 --> 00:11:11.470
GARY GENSLER: We'll
give it a shot.

00:11:11.470 --> 00:11:15.441
Other thoughts or questions
from the readings?

00:11:15.441 --> 00:11:18.790
AUDIENCE: I [INAUDIBLE]
third year with you

00:11:18.790 --> 00:11:20.617
about the layer 2.

00:11:20.617 --> 00:11:21.950
GARY GENSLER: About the layer 2.

00:11:21.950 --> 00:11:22.300
Yes.

00:11:22.300 --> 00:11:22.550
AUDIENCE: The layer 2.

00:11:22.550 --> 00:11:23.230
Yeah.

00:11:23.230 --> 00:11:26.920
And [INAUDIBLE]
that is that it's

00:11:26.920 --> 00:11:31.510
OK about having a second layer
to provide the efficiency

00:11:31.510 --> 00:11:33.130
and the high performance.

00:11:33.130 --> 00:11:37.410
But it's writing it off line.

00:11:37.410 --> 00:11:37.910
Yeah?

00:11:37.910 --> 00:11:44.410
So we are starting to trust
in a second layer that

00:11:44.410 --> 00:11:48.140
runs off line and then goes
and put inside the blockchain.

00:11:48.140 --> 00:11:51.690
How feasible-- how can we trust?

00:11:51.690 --> 00:11:54.940
GARY GENSLER: So the question
is about possible solutions

00:11:54.940 --> 00:11:57.830
to address performance
and scalability.

00:11:57.830 --> 00:11:59.380
And I have a few slides on that.

00:11:59.380 --> 00:12:03.040
But in essence, if the
principal protocol--

00:12:03.040 --> 00:12:07.000
the Bitcoin protocol, or
the Ethereum protocol,

00:12:07.000 --> 00:12:10.870
or maybe tomorrow it'll be
EOS or some other protocol--

00:12:10.870 --> 00:12:15.070
has some performance
issues, could some activity

00:12:15.070 --> 00:12:19.100
be moved to another channel?

00:12:19.100 --> 00:12:21.520
That channel could
be called a layer 2

00:12:21.520 --> 00:12:24.280
in the Lightning network, which
there was a reading about.

00:12:24.280 --> 00:12:28.660
That could be with a little bit
different technology cord side

00:12:28.660 --> 00:12:32.170
chains or sharding, which I
think was an optional-- yeah.

00:12:32.170 --> 00:12:33.250
I did that optionally.

00:12:33.250 --> 00:12:34.870
I didn't force you.

00:12:34.870 --> 00:12:40.760
So there's a number of
alternative channels.

00:12:40.760 --> 00:12:44.160
And though the technologies
are, to technologists,

00:12:44.160 --> 00:12:46.050
importantly different--

00:12:46.050 --> 00:12:49.890
sharding, and side chains, and
layer 2-- for this purpose,

00:12:49.890 --> 00:12:55.520
for a moment, let me blur
over the differences.

00:12:55.520 --> 00:13:00.460
The question that
Leandro asks is,

00:13:00.460 --> 00:13:03.880
well, is that meaning
that we have to trust?

00:13:03.880 --> 00:13:06.010
I would contend we
already have to trust

00:13:06.010 --> 00:13:09.820
the protocol that the Bitcoin
core developers have written.

00:13:09.820 --> 00:13:11.410
It's open GitHub.

00:13:11.410 --> 00:13:13.300
It's open code.

00:13:13.300 --> 00:13:15.220
But very few people
are actually going

00:13:15.220 --> 00:13:19.090
to investigate it
enough to be assured

00:13:19.090 --> 00:13:22.420
there's not a bug or an error.

00:13:22.420 --> 00:13:25.570
But I agree with
you that the core--

00:13:25.570 --> 00:13:28.270
the Bitcoin core or
the Ethereum core

00:13:28.270 --> 00:13:30.340
has been living
in-- if I could call

00:13:30.340 --> 00:13:34.000
it-- the technological
and commercial swamp.

00:13:34.000 --> 00:13:37.180
It's been attacked by so
many viruses and bugs,

00:13:37.180 --> 00:13:40.280
you have some
reason to trust it.

00:13:40.280 --> 00:13:43.350
But you should
never be 100% sure.

00:13:43.350 --> 00:13:46.840
The side chains are less tested.

00:13:46.840 --> 00:13:47.870
But I do agree with you.

00:13:47.870 --> 00:13:51.370
You have some trust, unless
I misunderstand the question.

00:13:51.370 --> 00:13:55.270
I thought it was a trust
in the underlying code.

00:13:55.270 --> 00:13:57.000
AUDIENCE: My main
point is working

00:13:57.000 --> 00:14:01.870
with secondary that's offline.

00:14:01.870 --> 00:14:08.310
You are not really transacting
in the block chain.

00:14:08.310 --> 00:14:08.810
Yeah.

00:14:08.810 --> 00:14:09.435
It's off chain.

00:14:09.435 --> 00:14:10.230
Yeah.

00:14:10.230 --> 00:14:11.160
[INAUDIBLE]

00:14:11.160 --> 00:14:14.050
GARY GENSLER: So the question
is, if you're off chain,

00:14:14.050 --> 00:14:15.550
should you be more worried?

00:14:15.550 --> 00:14:18.910
I was addressing just a
narrow part about the code.

00:14:18.910 --> 00:14:21.910
You're saying, should you be
worried because it doesn't have

00:14:21.910 --> 00:14:23.890
the same validation models?

00:14:23.890 --> 00:14:26.600
So can I hold that question
until we get to the slides?

00:14:26.600 --> 00:14:28.840
Because I think you
do actually have

00:14:28.840 --> 00:14:30.550
some pretty good
validation, but I

00:14:30.550 --> 00:14:34.210
think you're right that
it's a valid question--

00:14:34.210 --> 00:14:37.630
is the validation in these
off chains still work?

00:14:37.630 --> 00:14:39.123
There was a question back here.

00:14:39.123 --> 00:14:40.540
AUDIENCE: I was
just sort of going

00:14:40.540 --> 00:14:43.810
to respond to the issue
of sort of trusting

00:14:43.810 --> 00:14:45.730
these offline mechanisms.

00:14:45.730 --> 00:14:48.970
It's not in the same
vein, but 90% of--

00:14:48.970 --> 00:14:50.620
according to this--
daily trading

00:14:50.620 --> 00:14:53.230
volumes occurs in
these crypto exchanges.

00:14:53.230 --> 00:14:56.350
So that's also sort of
happening off the chain.

00:14:56.350 --> 00:14:59.530
So I think that in this
community of people

00:14:59.530 --> 00:15:02.620
who are currently
participating, there

00:15:02.620 --> 00:15:04.510
is no reason that
we're not going

00:15:04.510 --> 00:15:07.518
to trust third-party vendors.

00:15:07.518 --> 00:15:09.310
GARY GENSLER: So you're
raising the point--

00:15:09.310 --> 00:15:13.480
and it's a sort of an irony
of the whole ecosystem--

00:15:13.480 --> 00:15:19.930
that the majority-- and, in some
cryptocurrencies, over 90%--

00:15:19.930 --> 00:15:22.570
of the actual daily
transactions are happening

00:15:22.570 --> 00:15:24.710
in very centralized ways--

00:15:24.710 --> 00:15:27.220
on exchanges, particularly
the centralized

00:15:27.220 --> 00:15:31.030
crypto exchanges, where--

00:15:31.030 --> 00:15:32.080
I can't remember.

00:15:32.080 --> 00:15:34.120
But it was about half
of you have owned

00:15:34.120 --> 00:15:37.870
Bitcoin at some point in time.

00:15:37.870 --> 00:15:40.090
But can I ask how many
of you have actually

00:15:40.090 --> 00:15:43.350
operated a full node?

00:15:43.350 --> 00:15:46.670
So there's the two technologists
at the middle table, and Hugo,

00:15:46.670 --> 00:15:48.240
who is also, if
I remember right,

00:15:48.240 --> 00:15:50.750
an engineering PhD student?

00:15:50.750 --> 00:15:51.480
OK.

00:15:51.480 --> 00:15:56.700
So we have our 3 PhD students
who have operate full nodes.

00:15:56.700 --> 00:15:59.370
Honors to you all.

00:15:59.370 --> 00:16:02.700
But for most of you-- and it was
half the class have owned some

00:16:02.700 --> 00:16:03.240
Bitcoin--

00:16:03.240 --> 00:16:07.320
you've trusted some
other authority

00:16:07.320 --> 00:16:09.058
to hold your private keys.

00:16:09.058 --> 00:16:10.600
I'm not saying you're
wrong or right,

00:16:10.600 --> 00:16:13.440
but it's an interesting
and important point

00:16:13.440 --> 00:16:15.780
about this ecosystem.

00:16:15.780 --> 00:16:18.840
So let me, unless
there's other points,

00:16:18.840 --> 00:16:22.050
just go through some of how
I thought about these things

00:16:22.050 --> 00:16:22.920
and laid it out.

00:16:22.920 --> 00:16:25.530
And I-- of course,
the study questions

00:16:25.530 --> 00:16:26.800
we've been talking about.

00:16:26.800 --> 00:16:28.170
So I'll come back.

00:16:28.170 --> 00:16:31.230
But we will talk a little
bit about hard forks.

00:16:31.230 --> 00:16:35.550
And we-- I didn't hear anybody
talk about interoperability.

00:16:35.550 --> 00:16:37.750
So we'll come back
to that as well.

00:16:37.750 --> 00:16:43.080
We've talked more about
performance and privacy issues.

00:16:43.080 --> 00:16:45.210
Just back to the
technical features--

00:16:45.210 --> 00:16:46.950
it's just repetition.

00:16:46.950 --> 00:16:48.240
Sorry.

00:16:48.240 --> 00:16:50.950
But I do think it's worthwhile.

00:16:50.950 --> 00:16:54.240
There is, of course, the
cryptography and timestamp

00:16:54.240 --> 00:16:55.150
logs--

00:16:55.150 --> 00:16:59.460
so the bedrock of this
technology that we

00:16:59.460 --> 00:17:02.250
did three or four lectures ago.

00:17:02.250 --> 00:17:04.510
You will find that in
permissioned systems.

00:17:04.510 --> 00:17:06.390
You will find it in
permissionless systems.

00:17:06.390 --> 00:17:07.890
That is a bedrock.

00:17:07.890 --> 00:17:11.970
You will find in Ethereum
Bitcoin and 1,600 others.

00:17:11.970 --> 00:17:14.160
There will be some
shifts around--

00:17:14.160 --> 00:17:16.450
the hash functions might
be a little different.

00:17:16.450 --> 00:17:20.940
But that's kind of a
bedrock of this technology.

00:17:20.940 --> 00:17:24.960
The Network Consensus is not
necessarily always the same,

00:17:24.960 --> 00:17:25.800
as we talked about.

00:17:25.800 --> 00:17:27.460
Sometimes, it's proof of work.

00:17:27.460 --> 00:17:29.910
Sometimes, it's proof of stake.

00:17:29.910 --> 00:17:33.900
Or in the permissioned systems,
the consensus is really,

00:17:33.900 --> 00:17:36.930
are you amongst the club?

00:17:36.930 --> 00:17:41.430
And then there's kind of
some form of a club deal.

00:17:41.430 --> 00:17:43.380
If you're the Australian
Stock Exchange,

00:17:43.380 --> 00:17:46.810
the only member of the club is
the Australian Stock Exchange.

00:17:46.810 --> 00:17:49.260
But in other
permissioned systems,

00:17:49.260 --> 00:17:54.240
it's 20 banks or 15 banks that
are sharing that some delegated

00:17:54.240 --> 00:17:57.270
randomized authority
to say, what's

00:17:57.270 --> 00:18:00.580
the next amendment to the--

00:18:00.580 --> 00:18:05.940
And the transactions
code and ledgers

00:18:05.940 --> 00:18:10.770
shifts largely dependent upon
whether it's a transaction

00:18:10.770 --> 00:18:12.870
ledger or an account ledger.

00:18:12.870 --> 00:18:15.450
So transaction ledgers
have to have some way

00:18:15.450 --> 00:18:17.010
to record transactions.

00:18:17.010 --> 00:18:19.410
Account ledgers have
to have some way

00:18:19.410 --> 00:18:22.050
to record the change
in accounts, which

00:18:22.050 --> 00:18:25.080
Ether calls state transitions.

00:18:25.080 --> 00:18:27.460
But either you have to
record a transaction,

00:18:27.460 --> 00:18:31.020
or you have to record a change
in the state or a change

00:18:31.020 --> 00:18:32.250
in the account.

00:18:32.250 --> 00:18:34.050
An account would
say, yeah, it would

00:18:34.050 --> 00:18:37.060
be like the income statement
versus the balance sheet.

00:18:37.060 --> 00:18:41.110
But you kind of
need to record that.

00:18:41.110 --> 00:18:44.340
And basically, all of
these technologies,

00:18:44.340 --> 00:18:48.960
as I understand it, have some
way to keep those ledgers,

00:18:48.960 --> 00:18:50.760
though there's
multiple ways to do it.

00:18:50.760 --> 00:18:52.170
And as we talked
about last week,

00:18:52.170 --> 00:18:55.560
some have one Merkle tree, and
some have four or five Merkle

00:18:55.560 --> 00:18:56.130
trees.

00:18:56.130 --> 00:18:57.420
And so forth.

00:18:57.420 --> 00:19:01.290
But it's embedded
in this, and they

00:19:01.290 --> 00:19:03.090
could have different scripting.

00:19:03.090 --> 00:19:03.780
Questions?

00:19:03.780 --> 00:19:05.790
Just-- that's like
the thumbnail just

00:19:05.790 --> 00:19:09.550
to remind you about
the technology.

00:19:09.550 --> 00:19:11.478
It's the T in MIT.

00:19:11.478 --> 00:19:13.270
AUDIENCE: Just a quick
[INAUDIBLE] question

00:19:13.270 --> 00:19:14.900
on ledgers.

00:19:14.900 --> 00:19:17.260
So for a transaction versus
account in an account-based

00:19:17.260 --> 00:19:19.200
ledger, does it say--

00:19:19.200 --> 00:19:21.310
like, if you spend
$5, does it say

00:19:21.310 --> 00:19:23.420
who you're spending that $5 to?

00:19:23.420 --> 00:19:25.780
Or does it just say, your
account went down $5,

00:19:25.780 --> 00:19:28.170
and somebody's else went
up $5, but it doesn't

00:19:28.170 --> 00:19:29.602
matter where it came from?

00:19:29.602 --> 00:19:31.060
GARY GENSLER: So
I'm going to take,

00:19:31.060 --> 00:19:34.490
as I understand
Ether and Madars.

00:19:34.490 --> 00:19:36.170
You'll bail me out.

00:19:36.170 --> 00:19:41.460
But you put a state transition--

00:19:44.460 --> 00:19:48.400
instead of a transaction input,
it's a state transition input.

00:19:48.400 --> 00:19:51.810
And that state transition input
does have one account going

00:19:51.810 --> 00:19:53.237
down, another account going up.

00:19:53.237 --> 00:19:54.945
AUDIENCE: So if you
investigate that, you

00:19:54.945 --> 00:19:55.890
can see where it came from.

00:19:55.890 --> 00:19:58.390
GARY GENSLER: You can see both
sides of it, as I understand.

00:19:58.390 --> 00:20:00.390
And there is a receipt ledger.

00:20:00.390 --> 00:20:02.430
There's actually a
receipt Merkle tree

00:20:02.430 --> 00:20:07.060
that then keeps this
state transition happened.

00:20:07.060 --> 00:20:09.272
Did I did I roughly
get that right, Madars?

00:20:09.272 --> 00:20:10.453
AUDIENCE: [INAUDIBLE]

00:20:10.453 --> 00:20:11.370
GARY GENSLER: Oh, wow.

00:20:11.370 --> 00:20:12.330
All right.

00:20:12.330 --> 00:20:14.560
Madars actually does
this for a living.

00:20:14.560 --> 00:20:19.420
I mean, he's the one of the
founding people of Zcash

00:20:19.420 --> 00:20:21.280
and a bunch of other
wonderful things.

00:20:21.280 --> 00:20:23.280
I'm not going to go through
each of the details,

00:20:23.280 --> 00:20:25.710
but there was about
15 or 20 details

00:20:25.710 --> 00:20:28.650
in these slides about the
differences between Bitcoin

00:20:28.650 --> 00:20:30.000
and Ether.

00:20:30.000 --> 00:20:32.310
And I just use it to remind--
because it's saying, OK,

00:20:32.310 --> 00:20:35.670
why did the professor--
why did the--

00:20:35.670 --> 00:20:37.930
why did Gary put it up there?

00:20:37.930 --> 00:20:40.470
This professor Lessig--
that was nice for Larry.

00:20:40.470 --> 00:20:42.310
But for me, you don't need--

00:20:42.310 --> 00:20:45.000
But in essence,
the big difference

00:20:45.000 --> 00:20:47.820
is account-based versus
transaction-based.

00:20:47.820 --> 00:20:52.060
The kind of big difference is
Ether does seem to go faster,

00:20:52.060 --> 00:20:54.300
but it doesn't have
a lot of throughput.

00:20:54.300 --> 00:20:56.040
They still both
use proof of work.

00:20:56.040 --> 00:20:57.620
Even though Ether
says they're going

00:20:57.620 --> 00:21:01.440
to move to proof of state,
they're not there yet.

00:21:01.440 --> 00:21:04.500
When they get there,
we'll all know together.

00:21:04.500 --> 00:21:07.725
The economics are a bit
different, of course, as well.

00:21:11.220 --> 00:21:15.090
But all of these details
are part of the reason

00:21:15.090 --> 00:21:17.430
why there's problems.

00:21:17.430 --> 00:21:21.090
And so you read in the
Geneva report a little bit

00:21:21.090 --> 00:21:22.890
about a professor--

00:21:22.890 --> 00:21:24.810
an economist from the 1930s.

00:21:24.810 --> 00:21:26.550
Does anybody want to
take a crack at it?

00:21:26.550 --> 00:21:28.650
Or should I just do my slides?

00:21:28.650 --> 00:21:30.170
Here we go.

00:21:30.170 --> 00:21:31.350
AUDIENCE: It was [INAUDIBLE]

00:21:31.350 --> 00:21:31.620
GARY GENSLER: Yes.

00:21:31.620 --> 00:21:33.912
AUDIENCE: He had the fact
that everything you should be

00:21:33.912 --> 00:21:40.050
analyzed on the cost-benefit
analysis so that if one wants

00:21:40.050 --> 00:21:42.780
to use the blockchain
decentralized network,

00:21:42.780 --> 00:21:46.170
you should take into account
all the benefits in terms

00:21:46.170 --> 00:21:48.330
of various costs of trust--

00:21:48.330 --> 00:21:50.670
enhancing security,
but also the cost

00:21:50.670 --> 00:21:53.120
of switching to a
decentralized system.

00:21:53.120 --> 00:21:55.830
GARY GENSLER: Coase
is an economist

00:21:55.830 --> 00:21:58.170
from the 1930s who
wrote extensively

00:21:58.170 --> 00:22:02.930
about the cost and empirically
about the corporation.

00:22:02.930 --> 00:22:03.430
Kelly?

00:22:03.430 --> 00:22:04.320
AUDIENCE: Yeah.

00:22:04.320 --> 00:22:06.950
Basically trying to
understand why transactions

00:22:06.950 --> 00:22:09.650
would aggregate into a firm.

00:22:09.650 --> 00:22:12.160
Why move all your
activity into one?

00:22:12.160 --> 00:22:13.340
GARY GENSLER: Right.

00:22:13.340 --> 00:22:15.800
So in a much earlier time--

00:22:15.800 --> 00:22:18.910
way pre-Bitcoin,
but a different--

00:22:18.910 --> 00:22:22.520
why does economic activity
cluster into a firm,

00:22:22.520 --> 00:22:23.720
rather than--

00:22:23.720 --> 00:22:26.720
if it was truly
market-based, I might just

00:22:26.720 --> 00:22:30.380
be selling my services.

00:22:30.380 --> 00:22:32.120
In essence, he was
asking the question,

00:22:32.120 --> 00:22:36.020
why don't we have a fully
gig economy in the 1930s,

00:22:36.020 --> 00:22:41.630
where everybody's free labor,
and even capital and labor

00:22:41.630 --> 00:22:45.890
meets individually, and
we collect up together?

00:22:45.890 --> 00:22:49.100
That was kind of the body of
his question that he was--

00:22:49.100 --> 00:22:52.100
so centralization
versus decentralization

00:22:52.100 --> 00:22:56.120
80 years ago studied
by a great economist.

00:22:56.120 --> 00:22:59.030
So just thinking about
it here a little bit,

00:22:59.030 --> 00:23:01.520
I think that when you
go from decentralization

00:23:01.520 --> 00:23:04.490
to centralization, you tend--

00:23:04.490 --> 00:23:11.520
on the centralized
side, you get capture.

00:23:11.520 --> 00:23:14.400
You get economic
rents, and you do

00:23:14.400 --> 00:23:16.410
have a single point of failure.

00:23:16.410 --> 00:23:19.290
In some sense, the
resiliency of the system,

00:23:19.290 --> 00:23:23.220
whether it's in finance, where
you worry about systemic risk--

00:23:23.220 --> 00:23:26.940
one clearinghouse, one
central bank, one government.

00:23:26.940 --> 00:23:32.760
If it's knocked out, it's
so relevant to the economy

00:23:32.760 --> 00:23:33.360
at large.

00:23:33.360 --> 00:23:34.710
It brings it down.

00:23:34.710 --> 00:23:36.990
Or if it's one database--

00:23:36.990 --> 00:23:40.310
you have a single point,
in essence, of failure.

00:23:40.310 --> 00:23:43.830
Economic rents is an ability
to collect excess profits.

00:23:43.830 --> 00:23:46.230
I assure you everybody
in this class

00:23:46.230 --> 00:23:48.900
wants to collect economic rents.

00:23:48.900 --> 00:23:51.660
We start out as venture
capitalists and entrepreneurs,

00:23:51.660 --> 00:23:56.820
but we have a motivation and
an incentive to be monopolists.

00:23:56.820 --> 00:23:58.830
But we don't want to do
it illegal, of course.

00:23:58.830 --> 00:24:02.320
I mean, we just want to get
there by dominating the market.

00:24:02.320 --> 00:24:02.820
I'm sorry.

00:24:02.820 --> 00:24:05.320
Was there a question here?

00:24:05.320 --> 00:24:08.560
You're just-- you're shaking
your head, and I didn't know.

00:24:08.560 --> 00:24:11.910
But on the other side,
there's the benefits.

00:24:11.910 --> 00:24:14.040
The y-scale is not
written on here.

00:24:14.040 --> 00:24:16.610
The y-scale is how however
you want to think of it,

00:24:16.610 --> 00:24:19.490
but I think of it
as kind of costs.

00:24:19.490 --> 00:24:23.730
So the y-scale-- up the
y-scale is greater costs.

00:24:23.730 --> 00:24:25.890
Decentralization--
the big costs that

00:24:25.890 --> 00:24:28.980
come there is coordination.

00:24:28.980 --> 00:24:31.620
You have a lot of
collective action issues.

00:24:31.620 --> 00:24:34.210
If the 100 or so
people in this room

00:24:34.210 --> 00:24:35.760
were trying to do
something together,

00:24:35.760 --> 00:24:38.820
you would have to figure out
how to do it collectively

00:24:38.820 --> 00:24:40.950
in coordination.

00:24:40.950 --> 00:24:44.160
And that's true of
every blockchain

00:24:44.160 --> 00:24:45.540
that you can think about.

00:24:45.540 --> 00:24:48.600
Governance relates
to coordination

00:24:48.600 --> 00:24:51.920
and collective action issues.

00:24:51.920 --> 00:24:54.710
And then security
and scalability--

00:24:54.710 --> 00:24:58.130
these two lines are not
in any of the readings,

00:24:58.130 --> 00:25:01.790
but they try to capture what--

00:25:01.790 --> 00:25:04.010
and depending upon the
slope of the two lines,

00:25:04.010 --> 00:25:07.070
you might say that
a market might tend

00:25:07.070 --> 00:25:08.720
towards more centralization.

00:25:08.720 --> 00:25:11.420
In theory, if I
change the slope,

00:25:11.420 --> 00:25:14.340
it would be further to
the decentralized side.

00:25:14.340 --> 00:25:14.840
Right?

00:25:14.840 --> 00:25:18.590
If the cost of decentralization
is a lower slope,

00:25:18.590 --> 00:25:21.080
and the cost of
centralization is higher,

00:25:21.080 --> 00:25:23.690
we will tend more
towards decentralization.

00:25:23.690 --> 00:25:29.090
So it's just a
way to visualize--

00:25:29.090 --> 00:25:31.550
here are the costs
of centralization,

00:25:31.550 --> 00:25:34.520
which are basically capture
rents and single point

00:25:34.520 --> 00:25:36.380
of failure, not
that there aren't

00:25:36.380 --> 00:25:38.780
other costs of centralization.

00:25:38.780 --> 00:25:42.830
Here are the costs
of decentralization.

00:25:42.830 --> 00:25:45.800
I think in each one
of the applications,

00:25:45.800 --> 00:25:47.960
when you're thinking of
use cases, it's worthy--

00:25:47.960 --> 00:25:51.260
this is kind of a core thing.

00:25:51.260 --> 00:25:54.020
Will this application
lend itself

00:25:54.020 --> 00:25:59.090
to a low slope decentralization
curve and a high slope

00:25:59.090 --> 00:26:01.220
centralization curve?

00:26:01.220 --> 00:26:03.050
Are there a lot
of economic rents?

00:26:03.050 --> 00:26:05.030
Are there real problems
with single points

00:26:05.030 --> 00:26:07.580
of failure or capture?

00:26:07.580 --> 00:26:10.650
And if it's a low slope
decentralization curve,

00:26:10.650 --> 00:26:13.550
meaning there's not much cost to
the governance of coordination

00:26:13.550 --> 00:26:15.650
and scalability
issues, then you're

00:26:15.650 --> 00:26:18.120
going to be more towards
decentralization.

00:26:21.060 --> 00:26:22.620
This isn't any reading or book.

00:26:22.620 --> 00:26:27.390
It's just a shot at
trying to visualize it.

00:26:27.390 --> 00:26:27.940
Sean?

00:26:27.940 --> 00:26:29.450
Any question?

00:26:29.450 --> 00:26:31.070
AUDIENCE: [INAUDIBLE]
One question

00:26:31.070 --> 00:26:33.870
I have-- it's slightly
irrelevant from this area--

00:26:33.870 --> 00:26:41.110
is that why are all the privacy
coins are off the hard fork?

00:26:41.110 --> 00:26:45.072
What-- a lot of them are off
the hard fork for the Bitcoin

00:26:45.072 --> 00:26:45.780
as a [INAUDIBLE].

00:26:45.780 --> 00:26:47.450
GARY GENSLER: So
Sean's question is why

00:26:47.450 --> 00:26:50.360
are the privacy coins forked--

00:26:50.360 --> 00:26:53.330
not all of them,
but many of them

00:26:53.330 --> 00:26:58.390
are forked off Bitcoin or
one of the major coins.

00:26:58.390 --> 00:27:00.810
Madars, you want
to say-- did you--

00:27:00.810 --> 00:27:02.830
you have one privacy coin.

00:27:02.830 --> 00:27:06.220
AUDIENCE: So Bitcoin has a very
robust and well-established

00:27:06.220 --> 00:27:06.940
code base.

00:27:06.940 --> 00:27:09.200
So there is a lot of
high-quality code.

00:27:09.200 --> 00:27:10.970
GARY GENSLER:
Could you speak up?

00:27:10.970 --> 00:27:13.310
AUDIENCE: Bitcoin has a
lot of high-quality code

00:27:13.310 --> 00:27:14.840
so you can build up on it.

00:27:14.840 --> 00:27:21.070
So it's natural to add privacy
on top of Bitcoin in your fork

00:27:21.070 --> 00:27:24.540
rather than write
it from scratch.

00:27:24.540 --> 00:27:26.150
GARY GENSLER: What
Madars is answering

00:27:26.150 --> 00:27:30.520
is there's something
that's freely available--

00:27:30.520 --> 00:27:33.080
the Bitcoin Core code.

00:27:33.080 --> 00:27:35.500
It's actually under
a copyright license

00:27:35.500 --> 00:27:38.980
here at MIT, which
makes it free.

00:27:38.980 --> 00:27:41.080
That was Satoshi
Nakamoto's decision.

00:27:41.080 --> 00:27:44.274
It wasn't that-- well, maybe
Nakamoto does work here.

00:27:44.274 --> 00:27:47.060
[LAUGHTER]

00:27:47.060 --> 00:27:48.800
It's a clue.

00:27:48.800 --> 00:27:51.320
But it's been
developed, and it's

00:27:51.320 --> 00:27:55.920
knocked around, as I call
it, in the proverbial swamp--

00:27:55.920 --> 00:27:59.240
I mean, with all these
attack viruses and so forth.

00:27:59.240 --> 00:28:03.250
And so Madars is saying,
build off of that

00:28:03.250 --> 00:28:07.390
and basically get
that code for free.

00:28:07.390 --> 00:28:08.470
And then fork.

00:28:08.470 --> 00:28:08.970
Is that--

00:28:11.830 --> 00:28:15.280
So the challenges--
we talked about it--

00:28:15.280 --> 00:28:19.480
of performance, scalability,
efficiency, privacy, security.

00:28:19.480 --> 00:28:21.040
What there was
less talk about was

00:28:21.040 --> 00:28:24.310
interoperability, governance
and collective action.

00:28:24.310 --> 00:28:26.290
And I'm going to dig
into those two more

00:28:26.290 --> 00:28:31.330
because it feels like
that's worthwhile.

00:28:31.330 --> 00:28:34.240
I also believe that
the first bucket--

00:28:34.240 --> 00:28:37.300
performance and privacy bucket--

00:28:37.300 --> 00:28:40.360
are more susceptible to fixes.

00:28:40.360 --> 00:28:44.170
Though that might take three or
five or even eight or 10 years

00:28:44.170 --> 00:28:49.300
to happen, I think they're more
susceptible to the bright men

00:28:49.300 --> 00:28:53.330
and women that are
in these fields

00:28:53.330 --> 00:28:55.640
addressing themselves
to the computer science

00:28:55.640 --> 00:29:00.290
and cryptography of the
space, whereas governance

00:29:00.290 --> 00:29:04.920
and collective action
might be solvable.

00:29:04.920 --> 00:29:09.420
But I think it's sort of
inherent in the human element

00:29:09.420 --> 00:29:12.570
and the commercial
arrangements that governance

00:29:12.570 --> 00:29:17.640
and collective action are the
harder of these four buckets.

00:29:17.640 --> 00:29:20.340
That's just one
person's read of it.

00:29:20.340 --> 00:29:22.380
But we'll go through
some of the reasons

00:29:22.380 --> 00:29:27.210
as well why I kind
of get to that view.

00:29:27.210 --> 00:29:29.610
There's also commercial
use case challenges.

00:29:29.610 --> 00:29:31.440
We're not going to dig
into that much here.

00:29:31.440 --> 00:29:34.680
That's mostly the second
half of the semester.

00:29:34.680 --> 00:29:37.140
But I just wanted to
mention that's a real thing

00:29:37.140 --> 00:29:41.190
that a lot of folks are
saying, well, would--

00:29:41.190 --> 00:29:42.990
I have to make sure
that this is the best

00:29:42.990 --> 00:29:44.940
commercial application,
and so forth.

00:29:44.940 --> 00:29:50.250
And can I make money, I
mean, ultimately on it?

00:29:50.250 --> 00:29:52.310
And then we are,
next week, going

00:29:52.310 --> 00:29:55.020
to talk about the public
policy issues and challenges.

00:29:55.020 --> 00:29:58.880
And they all kind of
intersect in a way, as well.

00:29:58.880 --> 00:30:00.410
So Vitalik Buterin--

00:30:00.410 --> 00:30:03.610
I think there was a Medium
post I had you all read.

00:30:03.610 --> 00:30:05.660
Bo, do you want to
tell us a little bit

00:30:05.660 --> 00:30:07.580
about what you think?

00:30:07.580 --> 00:30:12.020
Is Vitalik not only a
brilliant computer scientist,

00:30:12.020 --> 00:30:14.270
but does he get the
economics of this right?

00:30:14.270 --> 00:30:16.980
Or you think he's off?

00:30:16.980 --> 00:30:18.820
You can be on-- there's
no right answer.

00:30:18.820 --> 00:30:21.870
I know people that feel
both ends of the spectrum

00:30:21.870 --> 00:30:23.680
about his trilemma.

00:30:23.680 --> 00:30:26.840
So I'm setting you up that--

00:30:26.840 --> 00:30:29.230
AUDIENCE: Geneva
[INAUDIBLE] it first.

00:30:29.230 --> 00:30:30.470
It seems like it makes sense.

00:30:30.470 --> 00:30:35.655
But his-- he's basically
saying choose two.

00:30:35.655 --> 00:30:37.127
You can't have all three.

00:30:37.127 --> 00:30:37.960
GARY GENSLER: Right.

00:30:37.960 --> 00:30:40.252
There's an old saying about--
how many of you have ever

00:30:40.252 --> 00:30:43.060
hired a contractor to fix
something in your kitchen

00:30:43.060 --> 00:30:45.400
or renovate something?

00:30:45.400 --> 00:30:46.060
I mean, I have.

00:30:46.060 --> 00:30:47.410
I'm a little older, right?

00:30:47.410 --> 00:30:50.620
You know the old saw that
it's good, quick, cheap,

00:30:50.620 --> 00:30:53.380
but you can't get all three?

00:30:53.380 --> 00:30:54.820
You can only get
two out of three.

00:30:54.820 --> 00:30:59.033
That's sort of the
contractor dilemma.

00:30:59.033 --> 00:30:59.950
But what do you think?

00:30:59.950 --> 00:31:00.950
Do you think he's right?

00:31:00.950 --> 00:31:05.470
Or do you think you could maybe,
over time, get all three--

00:31:05.470 --> 00:31:09.375
good, cheap, quick, scalable,
decentralized, and secure?

00:31:09.375 --> 00:31:12.370
AUDIENCE: My very
unsophisticated knowledge

00:31:12.370 --> 00:31:15.328
of the technicalities
behind this--

00:31:15.328 --> 00:31:16.120
I think he's right.

00:31:16.120 --> 00:31:17.578
GARY GENSLER: You
think he's right.

00:31:17.578 --> 00:31:19.220
Who wants to take
the other side just

00:31:19.220 --> 00:31:20.620
to have some fun
and some debate?

00:31:23.540 --> 00:31:24.090
Sure.

00:31:24.090 --> 00:31:24.590
Yeah.

00:31:24.590 --> 00:31:26.770
Go out at it, Leonardo.

00:31:26.770 --> 00:31:27.520
AUDIENCE: So--

00:31:27.520 --> 00:31:27.700
GARY GENSLER: There.

00:31:27.700 --> 00:31:28.200
You got it.

00:31:28.200 --> 00:31:29.514
We got the name.

00:31:29.514 --> 00:31:31.233
[LAUGHTER]

00:31:31.233 --> 00:31:32.650
AUDIENCE: I think
one of the texts

00:31:32.650 --> 00:31:36.040
we're talking about--
the time that systems

00:31:36.040 --> 00:31:37.090
have had to develop.

00:31:37.090 --> 00:31:39.820
So the image, for example,
Visa has had 60 years

00:31:39.820 --> 00:31:42.310
to develop a system that works.

00:31:42.310 --> 00:31:46.100
Some of those currencies have
three, four, five, ten years.

00:31:46.100 --> 00:31:48.652
So they will, I think,
even put a number.

00:31:48.652 --> 00:31:50.110
His personal opinion
of [INAUDIBLE]

00:31:50.110 --> 00:31:55.540
was that less than 5% that
will not overcome the hurdle.

00:31:55.540 --> 00:31:58.150
I don't know if that
is right or wrong,

00:31:58.150 --> 00:32:02.890
but I think the fact
that it's so recent--

00:32:02.890 --> 00:32:04.160
I think the jury's still out.

00:32:04.160 --> 00:32:05.160
GARY GENSLER: All right.

00:32:05.160 --> 00:32:07.330
So Leonardo's point
is it's recent.

00:32:07.330 --> 00:32:08.730
This is a new technology.

00:32:08.730 --> 00:32:11.590
Yes, maybe Vitalik is
right that only 5%--

00:32:11.590 --> 00:32:14.790
maybe only 1% will succeed.

00:32:14.790 --> 00:32:19.670
But to say that no one will deal
with these three points in this

00:32:19.670 --> 00:32:22.950
simultaneous satisfactory
way-- and ultimately,

00:32:22.950 --> 00:32:26.780
it has to be satisfactory
in a commercial way--

00:32:26.780 --> 00:32:29.120
taking the risk and trade offs.

00:32:29.120 --> 00:32:30.860
So Leonardo takes
the other side.

00:32:30.860 --> 00:32:32.900
Anybody want to
say why Leonardo--

00:32:32.900 --> 00:32:35.810
Hugo, were you-- which
side are you taking?

00:32:35.810 --> 00:32:38.833
Leonardo's side,
or Vitalik's side?

00:32:38.833 --> 00:32:40.250
AUDIENCE: Somewhere
in the middle.

00:32:40.250 --> 00:32:42.300
GARY GENSLER: OK.

00:32:42.300 --> 00:32:45.990
AUDIENCE: So I think that
there is a trade off.

00:32:45.990 --> 00:32:49.290
But I agree that it might
take time to improve all three

00:32:49.290 --> 00:32:49.950
simultaneously.

00:32:49.950 --> 00:32:54.030
I mean, one thing that happened
just this last week in Bitcoin

00:32:54.030 --> 00:32:56.720
was there was a
vulnerability discovered.

00:32:56.720 --> 00:33:01.670
And as somebody who doesn't
know how to check the code

00:33:01.670 --> 00:33:02.490
base, really--

00:33:02.490 --> 00:33:03.907
I'm not a computer
science person,

00:33:03.907 --> 00:33:06.115
so I've never checked for
bugs or anything like that.

00:33:06.115 --> 00:33:07.282
I don't know how to do that.

00:33:07.282 --> 00:33:09.190
I kind of just take the
software as it stands

00:33:09.190 --> 00:33:11.100
and download it and install it.

00:33:11.100 --> 00:33:12.540
And when they say
I need to update

00:33:12.540 --> 00:33:14.130
my software because
there's a bug,

00:33:14.130 --> 00:33:16.088
I'll update the software
because there's a bug.

00:33:16.088 --> 00:33:19.230
And that kind of feels like
more of a centralized system,

00:33:19.230 --> 00:33:20.890
but you're getting
that security.

00:33:20.890 --> 00:33:23.467
But then the decentralization
comes from the fact

00:33:23.467 --> 00:33:25.800
that the network is still
spread out over so many nodes.

00:33:25.800 --> 00:33:28.200
So there are trade
offs that I think

00:33:28.200 --> 00:33:31.440
you can kind of build on one
and then climb another cliff

00:33:31.440 --> 00:33:34.690
and kind of build on each,
but not the same time.

00:33:34.690 --> 00:33:37.790
GARY GENSLER: So Hugo is
somewhere in the middle.

00:33:37.790 --> 00:33:42.360
I'm probably an optimist
enough on the human condition

00:33:42.360 --> 00:33:46.840
and that the technologists
will solve more than Vitalik.

00:33:46.840 --> 00:33:50.250
So I'm not saying I'm all
the way where Leonardo--

00:33:50.250 --> 00:33:52.770
wherever yeah-- there would be.

00:33:52.770 --> 00:33:55.620
But I'm probably closer to
Leonardo than to Vitalik.

00:33:55.620 --> 00:33:57.097
But that's just
my point of view.

00:33:57.097 --> 00:33:59.430
I also find it interesting,
if it's all right if I say--

00:33:59.430 --> 00:34:04.890
Hugo's an engineering
doctoral student here.

00:34:04.890 --> 00:34:07.020
And yet, he's not
checking the code.

00:34:07.020 --> 00:34:08.330
Not any-- right?

00:34:08.330 --> 00:34:09.345
Because-- right.

00:34:09.345 --> 00:34:09.600
AUDIENCE: [INAUDIBLE]

00:34:09.600 --> 00:34:11.183
GARY GENSLER: So
there's a trust issue

00:34:11.183 --> 00:34:15.270
that-- in the marketplace,
the trust of the code.

00:34:15.270 --> 00:34:18.929
We all also trust
Facebook and Dropbox

00:34:18.929 --> 00:34:21.989
and, broadly speaking,
the internet as well.

00:34:21.989 --> 00:34:22.525
Priya?

00:34:22.525 --> 00:34:24.150
AUDIENCE: I was going
to say that there

00:34:24.150 --> 00:34:26.940
are several examples
throughout the evolution

00:34:26.940 --> 00:34:31.710
of human interaction where these
three things have been sorted.

00:34:31.710 --> 00:34:34.530
So it might not be that
any-- in some systems, at any

00:34:34.530 --> 00:34:37.578
one time, all these three
nodes are working, right?

00:34:37.578 --> 00:34:39.120
Like for our current
payment systems,

00:34:39.120 --> 00:34:41.429
there are moments
of vulnerability.

00:34:41.429 --> 00:34:44.400
Yes, but then you catch
it sooner or later.

00:34:44.400 --> 00:34:46.679
So I feel like it's maybe not--

00:34:46.679 --> 00:34:50.310
it's about having it all perfect
right now versus, will you

00:34:50.310 --> 00:34:53.370
get to a point where all
three are mostly in place

00:34:53.370 --> 00:34:54.284
and working.

00:34:54.284 --> 00:34:55.409
GARY GENSLER: And I think--

00:34:55.409 --> 00:35:00.970
I like how Priya said
working enough, right?

00:35:00.970 --> 00:35:04.300
It doesn't have to be
scalable to the place

00:35:04.300 --> 00:35:08.540
where it's millions of
transactions a second.

00:35:08.540 --> 00:35:13.970
But maybe it needs to be faster
than seven or 10 transactions

00:35:13.970 --> 00:35:19.190
a second, or Ethereum 20
transactions a second.

00:35:19.190 --> 00:35:23.150
We had-- I should also remind
everybody Tuesday nights

00:35:23.150 --> 00:35:24.230
we have dinner.

00:35:24.230 --> 00:35:28.490
Simon Johnson treats
every Tuesday night.

00:35:28.490 --> 00:35:31.550
It's not required to come,
but it's 5:30 to 7:00

00:35:31.550 --> 00:35:34.850
that we have an outside speaker
around the blockchain space,

00:35:34.850 --> 00:35:36.620
and you're welcome to come.

00:35:36.620 --> 00:35:38.780
Michelle is here, who--

00:35:38.780 --> 00:35:39.662
Michelle Fiorenza.

00:35:39.662 --> 00:35:41.120
AUDIENCE: [INAUDIBLE]
mailing list.

00:35:41.120 --> 00:35:45.393
So please-- I'll put my
name on the board later.

00:35:45.393 --> 00:35:47.810
GARY GENSLER: So Michelle will
put her name on the board--

00:35:47.810 --> 00:35:48.980
anybody that wants to come.

00:35:48.980 --> 00:35:52.670
But this past week, we
had somebody speaking

00:35:52.670 --> 00:35:55.910
about the scalability issues.

00:35:55.910 --> 00:35:59.800
And when his company
did a $25 million

00:35:59.800 --> 00:36:04.810
initial coin offering,
the day of the offering,

00:36:04.810 --> 00:36:09.360
which only had 40,000
to 50,000 purchasers--

00:36:09.360 --> 00:36:12.600
so 40,000 or 50,000
purchasers on that day--

00:36:12.600 --> 00:36:14.890
that means a smart contract
had to be triggered

00:36:14.890 --> 00:36:16.900
numerous times that day.

00:36:16.900 --> 00:36:22.840
Took over a third of the entire
Ethereum network on that day.

00:36:22.840 --> 00:36:24.280
And it's sluggish.

00:36:24.280 --> 00:36:28.090
And just to close and settle
on its initial coin offering,

00:36:28.090 --> 00:36:30.610
it was saying, jeez.

00:36:30.610 --> 00:36:33.700
That's not the
scalability we want.

00:36:33.700 --> 00:36:37.570
So we know that's
where we are today.

00:36:37.570 --> 00:36:42.360
Visa runs around 20,000 to
30,000 transactions a second.

00:36:42.360 --> 00:36:46.420
DTCC, which settles all the
stock and equity trades here

00:36:46.420 --> 00:36:52.860
in the US, has to be available
to transact at least 100,000

00:36:52.860 --> 00:36:53.640
a second.

00:36:53.640 --> 00:36:55.920
Most seconds, it's
5,000, or 10,000.

00:36:55.920 --> 00:36:57.660
Or some seconds, it's 30,000.

00:36:57.660 --> 00:37:00.360
But the Securities and
Exchange Commission says, no.

00:37:00.360 --> 00:37:04.440
You have to be rated for four
times your average, roughly.

00:37:06.990 --> 00:37:10.140
So this gives you a sense
of the scalability issues,

00:37:10.140 --> 00:37:14.730
just in the current environment.

00:37:14.730 --> 00:37:17.982
If one layer is the Internet
of Things on top of it--

00:37:17.982 --> 00:37:20.190
there's somewhere that I've
heard different estimates

00:37:20.190 --> 00:37:24.270
of 8 to 10 billion devices
currently connected

00:37:24.270 --> 00:37:26.500
to the internet.

00:37:26.500 --> 00:37:31.000
And that's likely to grow as
more refrigerators, and street

00:37:31.000 --> 00:37:33.060
lights, and traffic
lights are tied

00:37:33.060 --> 00:37:35.610
into the internet in the
next five or 10 years

00:37:35.610 --> 00:37:40.510
to 50 to 100 billion devices
tied to the internet.

00:37:40.510 --> 00:37:43.930
If they start communicating
to each other,

00:37:43.930 --> 00:37:46.930
will it be a blockchain
for Internet of Things?

00:37:46.930 --> 00:37:49.960
Can't do it at these
types of scaling numbers.

00:37:49.960 --> 00:37:57.040
Or can you do it in
some alternative method?

00:37:57.040 --> 00:38:00.880
Proof of work is also has a
bunch of energy consumption.

00:38:00.880 --> 00:38:02.740
We didn't have that
a lot in the writing.

00:38:02.740 --> 00:38:06.370
We chose not to put a bunch
of that in the Geneva report.

00:38:06.370 --> 00:38:12.150
One estimate is that it's 200
million kilowatt hours per day.

00:38:12.150 --> 00:38:15.700
That's equivalent to about 7
million US homes, on average,

00:38:15.700 --> 00:38:20.850
just to give you a rough
digicomonist estimate.

00:38:20.850 --> 00:38:26.710
That's 1/3 of 1% of all the
world's electricity just

00:38:26.710 --> 00:38:28.780
scale it if you--

00:38:28.780 --> 00:38:35.790
now you can have a nice dinner
party conversation point.

00:38:35.790 --> 00:38:39.320
It's the electricity of
the country of Austria.

00:38:39.320 --> 00:38:41.910
Is anybody Austrian?

00:38:41.910 --> 00:38:42.410
No.

00:38:42.410 --> 00:38:45.110
I just was-- you know.

00:38:45.110 --> 00:38:48.940
So that's one set of trade
offs of proof of work as well.

00:38:48.940 --> 00:38:52.590
But it also costs a lot of
money to run the banking system.

00:38:52.590 --> 00:38:55.250
So I think that when somebody
says, well, it's terrible.

00:38:55.250 --> 00:38:57.740
It's challenging, all
this electric costs.

00:38:57.740 --> 00:38:59.420
Yes, we always want
to lower costs.

00:38:59.420 --> 00:39:03.110
But the US financial system
is 7.5% percent of our economy

00:39:03.110 --> 00:39:04.910
and costs $1.5 trillion.

00:39:04.910 --> 00:39:09.980
So the payment system around
the globe costs a 0.5% to 1%

00:39:09.980 --> 00:39:14.150
of the global economy,
which is more than 1/3

00:39:14.150 --> 00:39:17.810
of 1% of the world
electricity costs.

00:39:17.810 --> 00:39:19.420
So I'm just putting it in--

00:39:19.420 --> 00:39:21.190
it's back to those
questions of which

00:39:21.190 --> 00:39:24.676
costs of trust, which costs--

00:39:24.676 --> 00:39:29.840
I'm neither a maximalist or
a minimalist, as you recall.

00:39:29.840 --> 00:39:31.970
So what are some of
the alternatives?

00:39:31.970 --> 00:39:34.030
We're not going to dig
into each of these-- side

00:39:34.030 --> 00:39:36.970
chains, sharding, layer
2, payment channels.

00:39:36.970 --> 00:39:38.650
Anybody want to take a crack?

00:39:38.650 --> 00:39:40.650
They're not all identical.

00:39:40.650 --> 00:39:44.255
It's-- Madars and I had a
conversation earlier today

00:39:44.255 --> 00:39:46.630
and said I couldn't even get
my head around because I get

00:39:46.630 --> 00:39:47.570
confused.

00:39:47.570 --> 00:39:49.450
But does anybody want
to give the basic--

00:39:49.450 --> 00:39:51.990
we were talking about it
earlier-- the basic tenet

00:39:51.990 --> 00:39:54.730
because you had a reading
about the Lightning network

00:39:54.730 --> 00:39:59.200
as to what's the economic thing
and technical thing that's

00:39:59.200 --> 00:40:03.310
being attempted in all four
of these types of thing?

00:40:03.310 --> 00:40:04.690
James, was that a hand up?

00:40:04.690 --> 00:40:05.982
You're going to give it a shot?

00:40:05.982 --> 00:40:08.230
Give it a shot.

00:40:08.230 --> 00:40:10.190
AUDIENCE: Most of these
are on the chain--

00:40:10.190 --> 00:40:10.690
sorry.

00:40:10.690 --> 00:40:13.510
Most of these are off the
chain, but some is on the chain.

00:40:13.510 --> 00:40:17.965
And the idea is you transact
off the chain that balances

00:40:17.965 --> 00:40:22.392
are traded, and the net of the
results goes onto the chain.

00:40:22.392 --> 00:40:24.100
So you try and speed
up by processing off

00:40:24.100 --> 00:40:26.200
the chain, where
you have thousands

00:40:26.200 --> 00:40:27.550
and millions of transactions.

00:40:27.550 --> 00:40:28.925
And it's only the
net amount that

00:40:28.925 --> 00:40:30.467
goes in the chain
that is [INAUDIBLE]

00:40:30.467 --> 00:40:32.350
GARY GENSLER: So James
has summarized it

00:40:32.350 --> 00:40:35.110
as, it's like saying,
there's this chain--

00:40:35.110 --> 00:40:40.990
this channel, if you wish,
that the water is running in,

00:40:40.990 --> 00:40:43.300
or the digital
money is running in,

00:40:43.300 --> 00:40:45.100
that only has a certain speed.

00:40:45.100 --> 00:40:47.710
It can only take a certain
amount of performance.

00:40:47.710 --> 00:40:49.750
Why not take a lot of
activity and put it

00:40:49.750 --> 00:40:51.880
in a side channel,
which is called

00:40:51.880 --> 00:40:55.510
a payment channel, actually--
but a side chain, or a payment

00:40:55.510 --> 00:40:58.150
channel, or a layer
2, all with slightly

00:40:58.150 --> 00:41:00.820
different technical features.

00:41:00.820 --> 00:41:03.610
And maybe do millions
of things off here,

00:41:03.610 --> 00:41:05.740
and only put some here.

00:41:05.740 --> 00:41:08.560
It is not new to
blockchain and Bitcoin.

00:41:08.560 --> 00:41:12.820
We already have that in the
world of finance for decades,

00:41:12.820 --> 00:41:17.530
in some way or another,
where some activity can't go

00:41:17.530 --> 00:41:21.370
to a central settlement system.

00:41:21.370 --> 00:41:24.960
And recalling ledgers--
the central bank,

00:41:24.960 --> 00:41:27.590
whether it's the US central
bank or any central bank,

00:41:27.590 --> 00:41:30.740
could have been set up that
all of our deposit accounts

00:41:30.740 --> 00:41:34.440
were directly with
the central bank.

00:41:34.440 --> 00:41:37.920
And in a sense, the side
chains in finance right

00:41:37.920 --> 00:41:41.040
now are 9,000 commercial banks.

00:41:41.040 --> 00:41:45.450
9000 commercial banks are
dealing with our money flows

00:41:45.450 --> 00:41:49.500
and then sort of net
settling to the central banks

00:41:49.500 --> 00:41:52.350
ledger in what's called
digital reserves.

00:41:52.350 --> 00:41:54.180
And in fact, even
the banking system--

00:41:54.180 --> 00:41:56.070
the 9,000 banks in the US--

00:41:56.070 --> 00:41:58.050
have their side chains--

00:41:58.050 --> 00:42:02.980
Visa, MasterCard, First Data,
all the money processing.

00:42:02.980 --> 00:42:04.890
So there's already a layering.

00:42:04.890 --> 00:42:07.350
I look at layer
2 and side chains

00:42:07.350 --> 00:42:11.070
as kind of taking a
similar economic approach

00:42:11.070 --> 00:42:13.560
and technical approach
that's already been around,

00:42:13.560 --> 00:42:15.270
but in a new way.

00:42:15.270 --> 00:42:17.760
I grabbed a chart from 2015.

00:42:17.760 --> 00:42:20.520
The details don't
matter, but this was--

00:42:20.520 --> 00:42:22.350
I did it because it
was three years old.

00:42:22.350 --> 00:42:26.520
This was one
person's truth coin.

00:42:26.520 --> 00:42:28.740
One person's view is
what side chains--

00:42:28.740 --> 00:42:30.150
basically what James says.

00:42:30.150 --> 00:42:33.660
Lots of activity over
here, and only a few things

00:42:33.660 --> 00:42:35.760
go over to the main chain.

00:42:35.760 --> 00:42:38.100
The visual is what I
wanted to get across.

00:42:38.100 --> 00:42:40.350
It was just that it's kind of--

00:42:40.350 --> 00:42:44.070
think of it as loads
of activity over here,

00:42:44.070 --> 00:42:49.260
and then we only settle at
some times to the main chain.

00:42:49.260 --> 00:42:52.140
Another visualization
of a different

00:42:52.140 --> 00:42:53.910
is the Lightning network.

00:42:53.910 --> 00:43:00.720
Again, a lot of activity,
then settle to the main chain.

00:43:00.720 --> 00:43:01.910
Questions?

00:43:01.910 --> 00:43:02.850
AUDIENCE: Zack.

00:43:02.850 --> 00:43:05.280
There seems to be
a good trade off.

00:43:05.280 --> 00:43:07.290
A lot of people are
proponents of making

00:43:07.290 --> 00:43:08.800
the block size bigger.

00:43:08.800 --> 00:43:10.550
A lot of people say
the side chains.

00:43:10.550 --> 00:43:13.840
I have trouble understanding the
trade offs between those two.

00:43:13.840 --> 00:43:17.160
So why not just a bigger block?

00:43:17.160 --> 00:43:18.720
What's the problem there?

00:43:18.720 --> 00:43:24.070
GARY GENSLER: So there's
a series of trade offs

00:43:24.070 --> 00:43:26.900
of economics and technology.

00:43:26.900 --> 00:43:32.710
The more you put inside the--
let's call it the main chain--

00:43:32.710 --> 00:43:35.770
the blue boxes at
the bottom, to speak.

00:43:35.770 --> 00:43:41.770
The more you're putting in
there, you weighed it down.

00:43:41.770 --> 00:43:44.770
There's more
processing, of course,

00:43:44.770 --> 00:43:48.010
and more storage, and so forth.

00:43:48.010 --> 00:43:50.620
But also, there's some--
there's too much latency.

00:43:50.620 --> 00:43:52.480
In Bitcoin, it's
every 10 minutes,

00:43:52.480 --> 00:43:55.900
and you're not really
sure until 3, 4, 5,

00:43:55.900 --> 00:43:59.320
some would say 6 blocks
to an hour go by.

00:43:59.320 --> 00:44:05.380
So economically, if you want
high frequency, low latency--

00:44:05.380 --> 00:44:08.530
short time periods--
you might say,

00:44:08.530 --> 00:44:10.420
I can't get that
on the main chain

00:44:10.420 --> 00:44:14.590
because the main chain
wants to have low latency.

00:44:14.590 --> 00:44:17.950
Every 10 minutes
is low latency now.

00:44:17.950 --> 00:44:22.120
Low latency to be more
secure to keep the mining

00:44:22.120 --> 00:44:23.680
cost and the proof of work up.

00:44:23.680 --> 00:44:25.900
So there's some economic
and technological

00:44:25.900 --> 00:44:31.090
both crosscurrents with that.

00:44:31.090 --> 00:44:33.970
Unrelated to what I just
said, but overlapping,

00:44:33.970 --> 00:44:38.020
there's also a bunch of miner
and mining poll operator

00:44:38.020 --> 00:44:41.020
economics as to whether
they want big blocks,

00:44:41.020 --> 00:44:42.130
or small blocks.

00:44:42.130 --> 00:44:47.070
And part of the
split last year was--

00:44:47.070 --> 00:44:52.090
it was sort of more motivated
around local politics rather

00:44:52.090 --> 00:44:53.940
than global politics.

00:44:53.940 --> 00:44:57.370
As the former Speaker of the
House, Tip O'Neill, said,

00:44:57.370 --> 00:44:59.170
all politics is local.

00:44:59.170 --> 00:45:01.150
I think some of the
debates last year

00:45:01.150 --> 00:45:04.990
was about local economics
and the economics of miners

00:45:04.990 --> 00:45:05.970
But I don't know--

00:45:05.970 --> 00:45:07.210
Madars do you--

00:45:07.210 --> 00:45:09.220
Madars was probably
in the middle

00:45:09.220 --> 00:45:11.240
of some of those debates.

00:45:11.240 --> 00:45:13.300
But would you have
a different view?

00:45:13.300 --> 00:45:15.910
There was a big debate last
year as to whether the Bitcoin

00:45:15.910 --> 00:45:18.970
block should go bigger
or stay the size.

00:45:18.970 --> 00:45:20.530
It was not the
only reason, but it

00:45:20.530 --> 00:45:25.570
was part of the reason we have
now Bitcoin Cash and Bitcoin

00:45:25.570 --> 00:45:29.560
because Bitcoin Cash has a
bigger block size and a shorter

00:45:29.560 --> 00:45:32.373
2.5 minute processing time.

00:45:32.373 --> 00:45:34.540
AUDIENCE: There's something
that can be said about--

00:45:34.540 --> 00:45:35.300
GARY GENSLER: Speak up.

00:45:35.300 --> 00:45:36.717
AUDIENCE: --mining
centralization.

00:45:36.717 --> 00:45:38.590
The bigger blocks you
have, only the miners

00:45:38.590 --> 00:45:41.050
that can handle
the enormous blocks

00:45:41.050 --> 00:45:43.000
will be able to
stay in business.

00:45:43.000 --> 00:45:46.760
And less decentralization
means less security.

00:45:46.760 --> 00:45:51.240
So there is incentive, both from
decentralization and security,

00:45:51.240 --> 00:45:54.527
to keep the blocks
smaller, not bigger.

00:45:54.527 --> 00:45:56.110
GARY GENSLER: So
what Madars is saying

00:45:56.110 --> 00:45:58.540
is there's also a
bit of economics

00:45:58.540 --> 00:46:00.280
around centralization.

00:46:00.280 --> 00:46:04.240
The bigger the blocks, the
fewer miners can handle it.

00:46:04.240 --> 00:46:07.600
The fewer miners, the more
centralization, and thus,

00:46:07.600 --> 00:46:10.330
less secure, and
maybe even economic

00:46:10.330 --> 00:46:13.150
rents because every
centralized system

00:46:13.150 --> 00:46:15.270
can collect economic rents.

00:46:15.270 --> 00:46:15.770
Yes.

00:46:15.770 --> 00:46:15.940
Alin.

00:46:15.940 --> 00:46:18.440
AUDIENCE: Another problem is
that if you have bigger blocks,

00:46:18.440 --> 00:46:20.710
they take longer to
propagate to the network.

00:46:20.710 --> 00:46:24.970
And in sort of unintuitive
ways, if that happens,

00:46:24.970 --> 00:46:27.420
you get more accidental
forks to the blockchain.

00:46:27.420 --> 00:46:28.870
And people hate
accidental forks,

00:46:28.870 --> 00:46:31.870
especially minus accidental
forks because they lose coins

00:46:31.870 --> 00:46:33.843
when their blocks aren't--

00:46:33.843 --> 00:46:36.010
GARY GENSLER: So Aleen is
saying a technical feature

00:46:36.010 --> 00:46:41.230
is bigger blocks are more
likely to take time to propagate

00:46:41.230 --> 00:46:42.520
through the network.

00:46:42.520 --> 00:46:45.400
And thus, you might
end up inadvertently

00:46:45.400 --> 00:46:54.280
having more chains that are
discredited, in a sense,

00:46:54.280 --> 00:46:57.520
because there was work being
done until the first one gets

00:46:57.520 --> 00:46:59.640
propagated.

00:46:59.640 --> 00:47:01.300
AUDIENCE: My question
is about keeping

00:47:01.300 --> 00:47:03.475
track of the transactions.

00:47:03.475 --> 00:47:04.600
GARY GENSLER: That's right.

00:47:04.600 --> 00:47:08.155
So Leandro-- did I-- no?

00:47:08.155 --> 00:47:09.030
AUDIENCE: Yeah, yeah.

00:47:09.030 --> 00:47:09.350
That's right.

00:47:09.350 --> 00:47:10.308
GARY GENSLER: Leandro--

00:47:10.308 --> 00:47:14.710
OK-- was asking, how do we
validate the Lightning network?

00:47:14.710 --> 00:47:18.260
And how do we assure
that that is--

00:47:18.260 --> 00:47:19.640
though-- though--

00:47:19.640 --> 00:47:23.680
AUDIENCE: Yeah because we're
working with net [INAUDIBLE]

00:47:23.680 --> 00:47:29.170
in the chain, how do we really
keep record of everything

00:47:29.170 --> 00:47:29.790
that's--

00:47:29.790 --> 00:47:30.550
GARY GENSLER: OK.

00:47:30.550 --> 00:47:33.550
So the side chains
are not recorded

00:47:33.550 --> 00:47:37.270
gross on the main chain.

00:47:37.270 --> 00:47:41.250
They're, in essence,
recorded net.

00:47:41.250 --> 00:47:43.817
And in Lightning network--

00:47:43.817 --> 00:47:45.900
I said I wasn't going to
get into the differences,

00:47:45.900 --> 00:47:47.130
but here I go.

00:47:47.130 --> 00:47:49.980
The Lightning network is
more a bilateral network.

00:47:52.500 --> 00:47:55.740
It can take on the
feeling of multilateral

00:47:55.740 --> 00:47:57.960
because I could have a
transaction with James.

00:47:57.960 --> 00:48:00.402
James could have a
transaction with Kelly.

00:48:00.402 --> 00:48:01.860
And it feels like
it's three of us,

00:48:01.860 --> 00:48:06.360
but it's bilateral James
and Gary, bilateral James

00:48:06.360 --> 00:48:08.670
and Kelly, as I understand it.

00:48:08.670 --> 00:48:12.360
And so those individual
transactions,

00:48:12.360 --> 00:48:14.400
while they're recorded--

00:48:14.400 --> 00:48:15.480
keep me going here--

00:48:15.480 --> 00:48:18.480
recorded in the
Lightning network,

00:48:18.480 --> 00:48:20.070
they're not on the main chain.

00:48:20.070 --> 00:48:25.410
We ultimately, then, net
settle to the main chain.

00:48:25.410 --> 00:48:29.690
And we actually, in a
sense, pre-fund or pre--

00:48:29.690 --> 00:48:36.970
it's a form loosely of
escrowing at the beginning.

00:48:36.970 --> 00:48:40.240
So James and I might be
messing with each other,

00:48:40.240 --> 00:48:41.470
but we're bilateral.

00:48:41.470 --> 00:48:45.170
And so we have another
approach to the trust.

00:48:45.170 --> 00:48:47.780
In addition to
the computer code,

00:48:47.780 --> 00:48:50.030
James and I might have
other reasons to trust.

00:48:50.030 --> 00:48:51.200
Joe Quinn.

00:48:51.200 --> 00:48:52.670
AUDIENCE: Sorry.

00:48:52.670 --> 00:48:55.790
What keeps me out
of double spending--

00:48:55.790 --> 00:48:58.220
once on the Lightning
network, and another one

00:48:58.220 --> 00:49:01.430
on the blockchain main
network at the same time?

00:49:04.210 --> 00:49:07.031
GARY GENSLER: Because there's--

00:49:07.031 --> 00:49:09.880
I want to be careful because
I'm using the terms loosely.

00:49:09.880 --> 00:49:11.510
There's a form of prefunding.

00:49:11.510 --> 00:49:15.080
It's not that you actually
fund onto the main chain,

00:49:15.080 --> 00:49:17.260
but there's a little
bit of partitioning.

00:49:17.260 --> 00:49:18.550
Does that-- Madars?

00:49:18.550 --> 00:49:19.050
All right.

00:49:19.050 --> 00:49:23.090
I keep looking at Madars because
he's actually coded this.

00:49:23.090 --> 00:49:27.950
So that's what protects you,
in essence, that James and I--

00:49:27.950 --> 00:49:31.410
if I'm saying, well I'll
send you a one bitcoin.

00:49:31.410 --> 00:49:34.430
And tomorrow, if the sun
does come up tomorrow,

00:49:34.430 --> 00:49:38.150
you'll send me half, we're
partitioning that one Bitcoin

00:49:38.150 --> 00:49:45.090
or his half Bitcoin until
we then close out that--

00:49:45.090 --> 00:49:47.730
it's written into
the scripting code.

00:49:47.730 --> 00:49:49.890
And it's written almost
like a smart contract--

00:49:49.890 --> 00:49:53.670
but it's not called
smart contracts--

00:49:53.670 --> 00:49:56.430
to sort of partition,
or you might loosely

00:49:56.430 --> 00:49:59.010
think of it as escrowing,
even though technically it

00:49:59.010 --> 00:50:00.900
might be different.

00:50:00.900 --> 00:50:03.680
But stop by, and we can--

00:50:03.680 --> 00:50:05.700
and if not, some
of our colleagues

00:50:05.700 --> 00:50:07.200
at the digital
currency initiative

00:50:07.200 --> 00:50:11.610
like Taj Draga, who programmed
the Lightning network.

00:50:11.610 --> 00:50:16.970
I mean, that's an MIT
collaboration with others.

00:50:16.970 --> 00:50:19.010
And we don't promote it
just because it's MIT.

00:50:19.010 --> 00:50:22.570
It's like one of the leading
ways to do performance.

00:50:22.570 --> 00:50:24.860
It happens to be MIT.

00:50:24.860 --> 00:50:27.860
So let me talk about other ways
to do performance and move on.

00:50:27.860 --> 00:50:30.110
We already talked about
alternative consensus

00:50:30.110 --> 00:50:31.040
protocols.

00:50:31.040 --> 00:50:33.110
You've seen this slide,
I'm just bringing it back

00:50:33.110 --> 00:50:36.170
because it is a way to
deal with scalability.

00:50:36.170 --> 00:50:38.390
It's a really critical,
important ways.

00:50:38.390 --> 00:50:42.080
Proof of work is one of the
issues about scalability.

00:50:42.080 --> 00:50:44.600
And generally-- I'm summarizing.

00:50:44.600 --> 00:50:46.250
I'm simplifying, in a sense.

00:50:46.250 --> 00:50:48.290
But generally, all
the alternatives

00:50:48.290 --> 00:50:51.960
have some way to
randomize or delegate

00:50:51.960 --> 00:50:55.390
the node that will
do the next block.

00:50:55.390 --> 00:50:57.050
It kind of all comes back--

00:50:57.050 --> 00:50:59.780
how do you add another block?

00:50:59.780 --> 00:51:02.180
And Stuart Haber
in the 1990s, when

00:51:02.180 --> 00:51:04.220
he started with all
this blockchain stuff

00:51:04.220 --> 00:51:06.980
and put it in the New York
Times, had a central authority.

00:51:06.980 --> 00:51:08.810
And he set up that
company Surety.

00:51:08.810 --> 00:51:11.750
And he put it in
the New York Times.

00:51:11.750 --> 00:51:15.380
And what Nakamoto consensus
is, is he said, well, no.

00:51:15.380 --> 00:51:20.350
We're not going to have Haber
and a central authority.

00:51:20.350 --> 00:51:22.670
It's going to be decentralized.

00:51:22.670 --> 00:51:26.210
So these other consensus
protocols generally

00:51:26.210 --> 00:51:31.220
have some randomized approach
to delegate the selection

00:51:31.220 --> 00:51:32.540
of the next block.

00:51:32.540 --> 00:51:34.010
It's not always that way.

00:51:34.010 --> 00:51:36.470
But they may also
have a mechanism

00:51:36.470 --> 00:51:38.060
to do a second thing--

00:51:38.060 --> 00:51:40.270
a second touch.

00:51:40.270 --> 00:51:43.740
Silvio Micali's algorand--
he's a professor

00:51:43.740 --> 00:51:47.210
over in the Computer Science
and AI Lab and a Turing Award

00:51:47.210 --> 00:51:48.140
winner.

00:51:48.140 --> 00:51:51.330
He's got a company that
has an interesting thing.

00:51:51.330 --> 00:51:53.390
It's like a jury selection.

00:51:53.390 --> 00:51:57.440
It's like picking somebody
for the jury that's

00:51:57.440 --> 00:52:02.270
picking this short group of 12
nodes that might do something.

00:52:02.270 --> 00:52:05.730
And every block has
that selection process.

00:52:05.730 --> 00:52:07.550
But then there's
another broader group

00:52:07.550 --> 00:52:10.250
that then can check
the work of the jury.

00:52:10.250 --> 00:52:14.360
So often, there's kind
of a second automated

00:52:14.360 --> 00:52:20.390
way, because trust isn't
there, ensuring that there's

00:52:20.390 --> 00:52:23.170
a quick second check.

00:52:23.170 --> 00:52:26.990
Did they decide guilty
or innocent correctly,

00:52:26.990 --> 00:52:29.190
so to speak.

00:52:29.190 --> 00:52:32.340
Again, I apologize if I'm a
little oversimplifying Silvio's

00:52:32.340 --> 00:52:33.250
brilliant work.

00:52:36.020 --> 00:52:38.480
So it could be proof of
stake, proof of activity,

00:52:38.480 --> 00:52:41.400
proof of burn, as we talked
about, proof of capacity.

00:52:41.400 --> 00:52:46.370
And as I mentioned last week,
there's not large-scale uses,

00:52:46.370 --> 00:52:49.430
but DASH and NEO
both have some form

00:52:49.430 --> 00:52:52.530
of this going on right now.

00:52:52.530 --> 00:52:55.640
And Ethereum has a big project.

00:52:58.980 --> 00:53:00.500
I'm confusing
their two projects.

00:53:00.500 --> 00:53:03.320
There's Plasma and
there's Casper.

00:53:03.320 --> 00:53:05.870
Casper is their project
to get to prove of stake,

00:53:05.870 --> 00:53:08.450
but they're not there.

00:53:08.450 --> 00:53:10.470
Privacy and security.

00:53:10.470 --> 00:53:12.980
So I'm trying to
remember who raised

00:53:12.980 --> 00:53:14.300
the contradictory tensions.

00:53:17.460 --> 00:53:20.340
The contradictory tensions
is law enforcement

00:53:20.340 --> 00:53:23.160
and regulators want
more transparency.

00:53:23.160 --> 00:53:25.350
Even though the
FBI did, you know,

00:53:25.350 --> 00:53:28.410
sort of figure out some
Russians were using Bitcoin

00:53:28.410 --> 00:53:32.610
to mess in our elections, they
want some more transparency

00:53:32.610 --> 00:53:34.650
in financial institutions.

00:53:34.650 --> 00:53:38.460
Users and even some regulators
want less transparency.

00:53:38.460 --> 00:53:42.260
So it's not-- it kind
of goes both ways.

00:53:42.260 --> 00:53:46.250
But these, I think, are
also truly solvable.

00:53:46.250 --> 00:53:52.820
Well, for consumers, there's
DASH and Monero and Zcash.

00:53:52.820 --> 00:53:56.540
And there's even mechanisms
called mixing and tumbling,

00:53:56.540 --> 00:53:58.880
which I truthfully can't
tell you the difference.

00:53:58.880 --> 00:54:03.200
But I can tell you regulators
talk about mixers and tumblers

00:54:03.200 --> 00:54:04.670
and privacy coins.

00:54:04.670 --> 00:54:07.013
When I go to some
regulatory conferences--

00:54:07.013 --> 00:54:08.930
because they sometimes
invite me as a former--

00:54:12.310 --> 00:54:16.600
that middle slide-- the
privacy coins and the mixers

00:54:16.600 --> 00:54:18.760
and tumblers--

00:54:18.760 --> 00:54:22.360
the finance ministries and the
law enforcement stuff, that's

00:54:22.360 --> 00:54:24.967
where they kind of get worried.

00:54:24.967 --> 00:54:26.800
Madars, you want to
come up here and tell us

00:54:26.800 --> 00:54:27.922
anything about Zcash?

00:54:27.922 --> 00:54:29.380
Or you want to do
it from there, as

00:54:29.380 --> 00:54:34.930
to what inspired
you to do a privacy

00:54:34.930 --> 00:54:38.646
coin that a bunch of law
enforcement folks don't like?

00:54:38.646 --> 00:54:39.480
[LAUGHTER]

00:54:39.480 --> 00:54:40.870
Oh, I don't mean--

00:54:40.870 --> 00:54:41.920
I mean, but, you know.

00:54:41.920 --> 00:54:42.835
AUDIENCE: Obviously.

00:54:42.835 --> 00:54:44.110
GARY GENSLER: And it's legal.

00:54:44.110 --> 00:54:45.080
I mean, it's a coin.

00:54:45.080 --> 00:54:47.368
It's real.

00:54:47.368 --> 00:54:49.120
AUDIENCE: So just
like cash can be

00:54:49.120 --> 00:54:52.090
used for illicit
purposes, also systems

00:54:52.090 --> 00:54:54.490
that provide strong
privacy like Torque

00:54:54.490 --> 00:54:56.740
can be used for
illicit purposes.

00:54:56.740 --> 00:54:59.656
So it's said privacy
is a human right,

00:54:59.656 --> 00:55:03.970
and we shouldn't be giving up
our financial independence just

00:55:03.970 --> 00:55:05.290
because I want to buy a coffee.

00:55:05.290 --> 00:55:08.135
I don't want to reveal
all my other transactions.

00:55:08.135 --> 00:55:09.760
Well, I think that
there are mechanisms

00:55:09.760 --> 00:55:14.260
how law enforcement can against
our regulatory objectives,

00:55:14.260 --> 00:55:17.100
but privacy I think
is fundamental right,

00:55:17.100 --> 00:55:19.275
so we should fight for it.

00:55:19.275 --> 00:55:20.650
GARY GENSLER: And
so when did you

00:55:20.650 --> 00:55:22.525
start working on the project?

00:55:22.525 --> 00:55:24.580
AUDIENCE: I think
it was 2014 when

00:55:24.580 --> 00:55:26.830
we started writing the paper.

00:55:26.830 --> 00:55:28.940
GARY GENSLER: So you
started with a paper.

00:55:28.940 --> 00:55:31.010
AUDIENCE: [INAUDIBLE]
like prototype,

00:55:31.010 --> 00:55:34.550
codebase, we put it open source.

00:55:34.550 --> 00:55:36.910
And then there
were the companies

00:55:36.910 --> 00:55:41.130
that got formed to
launch the project.

00:55:41.130 --> 00:55:42.670
GARY GENSLER: And
I think Zcash now

00:55:42.670 --> 00:55:45.850
is somewhere around a
billion dollar market cap.

00:55:45.850 --> 00:55:47.420
AUDIENCE: It fluctuates wildly.

00:55:47.420 --> 00:55:49.280
GARY GENSLER: Fluctuates.

00:55:49.280 --> 00:55:50.770
So that's why you're here.

00:55:50.770 --> 00:55:53.090
It went down?

00:55:53.090 --> 00:55:53.590
No, no.

00:55:53.590 --> 00:55:54.980
You don't need to answer that.

00:55:54.980 --> 00:55:55.690
Sorry.

00:55:55.690 --> 00:55:57.030
Privacy.

00:55:57.030 --> 00:56:00.490
But in essence, what
Madars is saying

00:56:00.490 --> 00:56:03.730
that he came to this-- what
were you doing in 2014?

00:56:03.730 --> 00:56:05.720
AUDIENCE: I was a grad
student here at MIT.

00:56:05.720 --> 00:56:07.777
I was mostly working in
zero knowledge groups.

00:56:07.777 --> 00:56:09.402
GARY GENSLER: On zero
knowledge groups.

00:56:09.402 --> 00:56:11.610
AUDIENCE: It seemed to be
like a natural application,

00:56:11.610 --> 00:56:14.650
like Bitcoin plus
[INAUDIBLE] techniques.

00:56:14.650 --> 00:56:17.320
Maybe there's something there.

00:56:17.320 --> 00:56:19.840
GARY GENSLER: So here, a
talented graduate student

00:56:19.840 --> 00:56:22.210
at MIT with the
collaboration of others

00:56:22.210 --> 00:56:26.080
said here's this cryptographic
mechanism called zero knowledge

00:56:26.080 --> 00:56:30.320
proofs, which we'll chat
about in 30 seconds.

00:56:30.320 --> 00:56:31.960
And here's something
called Bitcoin.

00:56:31.960 --> 00:56:34.600
Why don't we bring
them together, and we

00:56:34.600 --> 00:56:38.440
can promote in his own
words some human rights?

00:56:38.440 --> 00:56:40.270
Just as you buy a
cup of coffee and you

00:56:40.270 --> 00:56:42.160
don't have to say
who you are, you

00:56:42.160 --> 00:56:46.520
could use this new Bitcoin
enhanced zero knowledge

00:56:46.520 --> 00:56:49.300
proof, Zcash.

00:56:49.300 --> 00:56:50.950
AUDIENCE: I have a
question regarding

00:56:50.950 --> 00:56:56.230
how do you define illicit
activity in a way [INAUDIBLE]..

00:56:56.230 --> 00:56:58.560
Living in a country that
has capital control,

00:56:58.560 --> 00:57:02.330
and if I use, for instance,
Monero or Zcash as a way

00:57:02.330 --> 00:57:06.610
to get the money out, does
that count in these activities,

00:57:06.610 --> 00:57:07.870
or [INAUDIBLE]?

00:57:07.870 --> 00:57:11.050
GARY GENSLER: So
fortunately, I don't have

00:57:11.050 --> 00:57:14.140
to define illicit activity.

00:57:14.140 --> 00:57:17.500
But generally,
societies come together

00:57:17.500 --> 00:57:22.060
through their
reasonable mechanisms,

00:57:22.060 --> 00:57:24.550
whether they're democratic
societies or not,

00:57:24.550 --> 00:57:27.250
but they come together through
their legislative branches

00:57:27.250 --> 00:57:29.350
and their executive
branches and their courts

00:57:29.350 --> 00:57:32.350
and define some things
that are not allowed.

00:57:32.350 --> 00:57:36.760
But generally speaking, when I'm
using the term in this class.

00:57:36.760 --> 00:57:39.790
I'm thinking about
four or five buckets.

00:57:39.790 --> 00:57:44.110
Most societies do not want
to shrink their tax base.

00:57:44.110 --> 00:57:48.760
So they want economic activity
be inside the tax envelope,

00:57:48.760 --> 00:57:51.100
rather than outside
the tax envelope.

00:57:51.100 --> 00:57:54.190
And that's usually the
words that finance ministers

00:57:54.190 --> 00:57:59.140
call that is a tax base, how
much is outside versus inside.

00:57:59.140 --> 00:58:04.150
Secondly, most law
enforcement and most societies

00:58:04.150 --> 00:58:08.980
do not want to have the
money rails, the banking,

00:58:08.980 --> 00:58:13.930
and other ways you can
move value to facilitate

00:58:13.930 --> 00:58:16.040
otherwise illegal activity.

00:58:16.040 --> 00:58:18.100
So it's using
money to facilitate

00:58:18.100 --> 00:58:19.820
otherwise illegal activity.

00:58:19.820 --> 00:58:22.900
So the otherwise illegal
activity might be drug running.

00:58:22.900 --> 00:58:25.690
The otherwise illegal
activity might be terrorism.

00:58:25.690 --> 00:58:30.670
It might be child
slavery literally.

00:58:30.670 --> 00:58:35.200
So it's whatever the
otherwise illegal activity

00:58:35.200 --> 00:58:38.110
is to use money,
and that's generally

00:58:38.110 --> 00:58:42.550
called money laundering
or other things.

00:58:42.550 --> 00:58:45.420
So you're absolutely right.

00:58:45.420 --> 00:58:48.750
Another thing is that
for some countries,

00:58:48.750 --> 00:58:50.580
less than a majority,
but some countries

00:58:50.580 --> 00:58:51.930
have capital controls.

00:58:51.930 --> 00:58:56.520
They're trying to maintain the
value of their Fiat currency

00:58:56.520 --> 00:58:59.340
relative to other
Fiat currencies.

00:58:59.340 --> 00:59:02.100
And in an effort to
maintain some either

00:59:02.100 --> 00:59:07.260
fixed or relationship,
they have capital controls,

00:59:07.260 --> 00:59:09.720
and thus, in those
countries, they

00:59:09.720 --> 00:59:15.360
might say illicit activity also
is running around the capital

00:59:15.360 --> 00:59:16.230
controls.

00:59:16.230 --> 00:59:19.020
But it's each
country, each society.

00:59:19.020 --> 00:59:23.610
And Sean, you raise a good
point as to what does it mean.

00:59:23.610 --> 00:59:26.970
I mean it not to show any value.

00:59:26.970 --> 00:59:29.850
I'm saying there's a
series of these things

00:59:29.850 --> 00:59:33.410
that each society comes together
and says usually around the tax

00:59:33.410 --> 00:59:38.580
base, usually around trying
to not use money to facilitate

00:59:38.580 --> 00:59:41.730
otherwise bad stuff
and in some countries,

00:59:41.730 --> 00:59:44.840
the capital controls.

00:59:44.840 --> 00:59:46.320
I saw a hand here.

00:59:46.320 --> 00:59:48.160
Daniel, no.

00:59:48.160 --> 00:59:49.750
Was there-- and
we're going to do

00:59:49.750 --> 00:59:52.900
more about illicit
activity next week

00:59:52.900 --> 00:59:55.627
about guarding against
illicit activity.

00:59:58.900 --> 01:00:02.920
Hope the correction
got filmed, too.

01:00:02.920 --> 01:00:05.350
So there's another
set of security issues

01:00:05.350 --> 01:00:07.930
around private keys.

01:00:07.930 --> 01:00:10.030
And to most of us
that have passwords,

01:00:10.030 --> 01:00:11.640
you know if you
lose your password,

01:00:11.640 --> 01:00:14.890
they're usually in essence
a back door that somehow

01:00:14.890 --> 01:00:18.910
the platform, whether it's
Facebook or even at Bank

01:00:18.910 --> 01:00:22.540
of America, if you lose your
password, There's a back door,

01:00:22.540 --> 01:00:27.080
and they can say, there
is a way to validate

01:00:27.080 --> 01:00:29.150
with enough
probability weighting

01:00:29.150 --> 01:00:33.810
that I'm Gary Gensler, and
they'll give me a new password.

01:00:33.810 --> 01:00:36.830
I mean, in some circumstances,
it's a high bar,

01:00:36.830 --> 01:00:38.790
and there's some
biometrics involved.

01:00:38.790 --> 01:00:41.370
But in most cases,
it's a pretty low bar,

01:00:41.370 --> 01:00:44.070
and they'll give
you another password

01:00:44.070 --> 01:00:48.420
if you can, like me, remember
the answer to my high school

01:00:48.420 --> 01:00:50.730
girlfriend was or something.

01:00:50.730 --> 01:00:54.710
These questions, like
I remember it's Irene,

01:00:54.710 --> 01:00:57.250
but then I've just given it up.

01:00:57.250 --> 01:00:58.490
I've just given it up.

01:00:58.490 --> 01:00:59.160
That's terrible.

01:01:02.760 --> 01:01:03.810
I have to change it.

01:01:08.850 --> 01:01:13.350
But custodial private
keys is a very real thing,

01:01:13.350 --> 01:01:15.090
and you've read
about the hacking,

01:01:15.090 --> 01:01:16.800
and we'll read
more about it when

01:01:16.800 --> 01:01:18.950
we get to crypto exchanges.

01:01:18.950 --> 01:01:23.680
It's a very dominant issue,
not just for individuals,

01:01:23.680 --> 01:01:25.250
but for institutional actors.

01:01:25.250 --> 01:01:27.900
How does a hedge
fund or more likely

01:01:27.900 --> 01:01:33.020
how does BlackRock or
Fidelity, as an asset manager,

01:01:33.020 --> 01:01:37.340
secure custody in
a way that works?

01:01:37.340 --> 01:01:39.110
And it's an asymmetric risk.

01:01:39.110 --> 01:01:40.610
It's a tricky risk.

01:01:40.610 --> 01:01:44.750
For most of finance, they
don't have custody any longer

01:01:44.750 --> 01:01:46.130
of the securities.

01:01:46.130 --> 01:01:48.710
When I started on Wall Street,
they were still the cage.

01:01:48.710 --> 01:01:55.550
C-A-G-E. It was a physical cage
where the remnants of paper

01:01:55.550 --> 01:01:58.430
stock certificates
were still in the cage.

01:01:58.430 --> 01:02:02.150
I didn't start so long ago
that it was before DTCC.

01:02:02.150 --> 01:02:04.760
Things were getting
electric, you know, digital.

01:02:04.760 --> 01:02:09.140
But there was still a physical
cage for some physical paper

01:02:09.140 --> 01:02:10.990
certificates.

01:02:10.990 --> 01:02:12.800
If you lost the
paper certificate,

01:02:12.800 --> 01:02:15.310
you could still go to the
government or the company that

01:02:15.310 --> 01:02:18.940
issued it and back door and
get a new paper certificate.

01:02:18.940 --> 01:02:19.690
It took time.

01:02:19.690 --> 01:02:20.320
It was hard.

01:02:20.320 --> 01:02:21.910
It was to authenticate it.

01:02:21.910 --> 01:02:27.170
But in this circumstance if
you lose the private key,

01:02:27.170 --> 01:02:30.450
there's not the back door
issuer to get the next one.

01:02:30.450 --> 01:02:32.420
So it's a very
interesting issue,

01:02:32.420 --> 01:02:35.990
not just a technological issue
and a cybersecurity issue,

01:02:35.990 --> 01:02:39.350
but it's a whole set
of financial custody

01:02:39.350 --> 01:02:42.110
issues, an asymmetric
risk if you're

01:02:42.110 --> 01:02:46.990
a Goldman Sachs or Fidelity,
and you lost a key,

01:02:46.990 --> 01:02:50.810
or it got hacked, and it
was billions of dollars.

01:02:50.810 --> 01:02:53.770
So it's just interesting--

01:02:53.770 --> 01:02:55.870
I don't think it's
unique to blockchain,

01:02:55.870 --> 01:02:58.930
but it's rather specific
to blockchain and finance

01:02:58.930 --> 01:03:00.560
and how it overlaps.

01:03:00.560 --> 01:03:03.400
So some of the solutions-- and
I do think there are solutions

01:03:03.400 --> 01:03:04.270
here--

01:03:04.270 --> 01:03:07.488
are some of the things
that Madars and Neha

01:03:07.488 --> 01:03:09.530
Narula, who runs the
Digital Currency Initiative,

01:03:09.530 --> 01:03:10.180
are working on.

01:03:10.180 --> 01:03:14.410
And they're working on using two
cryptographic primitives we're

01:03:14.410 --> 01:03:16.840
not going to deeply go into.

01:03:16.840 --> 01:03:20.260
We did hash functions, and
we did digital signatures.

01:03:20.260 --> 01:03:22.450
Those are algorithms,
or they're called

01:03:22.450 --> 01:03:24.190
cryptographic primitives.

01:03:24.190 --> 01:03:26.470
Well, there's dozens of
cryptographic primitives,

01:03:26.470 --> 01:03:29.410
math algorithms.

01:03:29.410 --> 01:03:33.430
Well, the other two that
are used a lot in this field

01:03:33.430 --> 01:03:36.820
are zero knowledge proofs
and less often probably

01:03:36.820 --> 01:03:38.990
as Peterson commitments.

01:03:38.990 --> 01:03:41.230
And I put up there my words.

01:03:41.230 --> 01:03:44.080
I got Madars to help
me write this one.

01:03:44.080 --> 01:03:46.660
But my words is zero
knowledge proves

01:03:46.660 --> 01:03:51.690
let someone prove a statement
is true without revealing

01:03:51.690 --> 01:03:55.170
the details of exactly why
that statement is true.

01:03:55.170 --> 01:03:58.410
You might say, wait a minute,
you can prove something's true.

01:03:58.410 --> 01:04:00.510
It's sort of like if
you walk into a bar

01:04:00.510 --> 01:04:02.880
and they need to know
you're 21 to get a drink,

01:04:02.880 --> 01:04:05.430
let's make this tangible.

01:04:05.430 --> 01:04:08.130
What do you need to
prove that you're 21?

01:04:08.130 --> 01:04:15.710
You need to prove that you were
born before 1997, September 27.

01:04:15.710 --> 01:04:18.470
But you don't need
a lot more details.

01:04:18.470 --> 01:04:23.610
And so there's some computer
scientists here at MIT

01:04:23.610 --> 01:04:26.070
that actually did the
foundational work on zero

01:04:26.070 --> 01:04:27.870
knowledge proofs
20 to 30 years ago,

01:04:27.870 --> 01:04:31.632
Silvio Micali and
others, for which I think

01:04:31.632 --> 01:04:33.090
was part of why
they won the Turing

01:04:33.090 --> 01:04:37.380
Award, amongst other work.

01:04:37.380 --> 01:04:39.870
So zero knowledge proofs
are very interesting

01:04:39.870 --> 01:04:43.200
cryptographic mathematical
puzzle solving

01:04:43.200 --> 01:04:46.450
that Madars used for Zcash.

01:04:46.450 --> 01:04:49.830
Neha and Madars is using for
something called ZK Ledger,

01:04:49.830 --> 01:04:52.680
which was an optional reading.

01:04:52.680 --> 01:04:55.590
My gut tells me there are
ways that we can go forward

01:04:55.590 --> 01:04:58.830
that regulators and
the official sector

01:04:58.830 --> 01:05:02.130
can get their
transparency they want

01:05:02.130 --> 01:05:05.070
and the financial
sector at the same time

01:05:05.070 --> 01:05:08.430
can get the privacy they want,
that the two can actually

01:05:08.430 --> 01:05:15.000
coexist through the modern
methods of technology.

01:05:15.000 --> 01:05:19.680
Alexi, is that a hand
up or just a waving--

01:05:19.680 --> 01:05:21.820
no, all right.

01:05:21.820 --> 01:05:24.100
You want to add anything
Madars since you're

01:05:24.100 --> 01:05:27.340
the co-author of this the ZK
Ledger paper that was optional.

01:05:30.135 --> 01:05:37.760
AUDIENCE: [INAUDIBLE] an
influential [INAUDIBLE]

01:05:37.760 --> 01:05:41.945
called zero coin protocol
developed at Johns Hopkins.

01:05:41.945 --> 01:05:45.028
GARY GENSLER: So Johns Hopkins
developed a middle coin--

01:05:45.028 --> 01:05:46.820
AUDIENCE: Middle protocol
called Zero Coin.

01:05:46.820 --> 01:05:48.200
GARY GENSLER: Zero Coin.

01:05:48.200 --> 01:05:49.700
AUDIENCE: Using
Pedersen commitments

01:05:49.700 --> 01:05:52.520
and Zcash didn't use
Pedersen commitments.

01:05:52.520 --> 01:05:55.887
There's a lot of very
interesting history behind.

01:05:55.887 --> 01:05:57.470
GARY GENSLER: And
Pedersen commitments

01:05:57.470 --> 01:06:01.640
are yet another cryptographic
primitive or algorithm, which

01:06:01.640 --> 01:06:04.400
interestingly, they're
similar to hash functions,

01:06:04.400 --> 01:06:07.260
where you take a bunch of data,
and you squish it together

01:06:07.260 --> 01:06:08.180
in a sense.

01:06:08.180 --> 01:06:10.500
You compress it and
get a commitment.

01:06:10.500 --> 01:06:13.260
But you can actually
add and subtract them.

01:06:13.260 --> 01:06:15.560
It's an interesting
thing where you

01:06:15.560 --> 01:06:18.830
can commit to data like
a hash, but you can also

01:06:18.830 --> 01:06:22.890
add and subtract commitments.

01:06:22.890 --> 01:06:25.970
So it has some
interesting features.

01:06:25.970 --> 01:06:29.420
If you're deeply interested, I
will probably line up Sabrina

01:06:29.420 --> 01:06:33.380
to help you, or Madars might
help because I'm at the edge.

01:06:33.380 --> 01:06:38.090
But what I'm saying from a
business side is my hunch--

01:06:38.090 --> 01:06:40.580
and this is that-- we're at
the we're at the cutting edge

01:06:40.580 --> 01:06:42.550
here at MIT of some
of the folks try

01:06:42.550 --> 01:06:48.330
to figure out how to do privacy
and security at the same time.

01:06:48.330 --> 01:06:49.138
Questions on that?

01:06:49.138 --> 01:06:51.180
Because we're going to
get to the tougher things.

01:06:51.180 --> 01:06:52.770
Interoperability.

01:06:52.770 --> 01:06:56.460
Linking Blockchain applications
to legacy databases

01:06:56.460 --> 01:06:58.810
or linking them to each other.

01:06:58.810 --> 01:07:01.410
So you might want to link
Blockchain application--

01:07:01.410 --> 01:07:04.740
if you're thinking about
a payments protocol,

01:07:04.740 --> 01:07:07.670
how does that payments
protocol and Blockchain world

01:07:07.670 --> 01:07:09.410
link to the fiat.

01:07:09.410 --> 01:07:11.910
Because ultimately, if you're
doing, let's say, remittances,

01:07:11.910 --> 01:07:14.370
and you want to move
money from here to Mexico,

01:07:14.370 --> 01:07:16.020
somebody wants
Mexican peso, they

01:07:16.020 --> 01:07:19.350
might be starting
in US dollars, how

01:07:19.350 --> 01:07:23.370
do you operate basically
with three different systems

01:07:23.370 --> 01:07:24.910
in that case?

01:07:24.910 --> 01:07:29.390
Your ingenious,
innovative start-up,

01:07:29.390 --> 01:07:34.100
but the US dollar fiats system
and the Mexican peso system.

01:07:34.100 --> 01:07:36.890
So that's a form
of interoperability

01:07:36.890 --> 01:07:40.430
and the challenge around it,
or Blockchain to Blockchain

01:07:40.430 --> 01:07:42.920
if we've got 1,600
of them, or even

01:07:42.920 --> 01:07:46.520
interoperability
of the main chain

01:07:46.520 --> 01:07:49.340
and some of these layer
two and side chains.

01:07:49.340 --> 01:07:51.350
That's an easier
interoperability

01:07:51.350 --> 01:07:54.300
because it's kind
of coded right in.

01:07:54.300 --> 01:07:58.320
But it's always-- and
this is not a new thing.

01:07:58.320 --> 01:08:02.000
Banking has had
interoperability all the time.

01:08:02.000 --> 01:08:04.310
Take my example of
the US to Mexico.

01:08:04.310 --> 01:08:08.420
To move US dollars and
convert it to Mexican peso

01:08:08.420 --> 01:08:11.120
is in two entirely
different banking systems

01:08:11.120 --> 01:08:13.190
and two entirely
different ledger systems.

01:08:13.190 --> 01:08:17.029
So we have to have this question
of interoperability even

01:08:17.029 --> 01:08:19.060
pre Blockchain.

01:08:19.060 --> 01:08:23.060
But it's just bringing it
to this new technology.

01:08:23.060 --> 01:08:25.540
It raises costs of
trust in coordinating

01:08:25.540 --> 01:08:28.149
the transfer assets
and information

01:08:28.149 --> 01:08:34.740
across chains, in essence, or as
we talk about, across ledgers.

01:08:34.740 --> 01:08:37.880
So it's an issue that
it's been around.

01:08:37.880 --> 01:08:42.470
We just got to sort of
see how we solve it here.

01:08:42.470 --> 01:08:43.383
One solution.

01:08:43.383 --> 01:08:45.050
It doesn't mean it's
the right solution,

01:08:45.050 --> 01:08:46.760
it's the only solution,
but one solution

01:08:46.760 --> 01:08:50.779
is to do through some
decentralized mechanisms

01:08:50.779 --> 01:08:55.040
including side chains, or one
of the favorites of the director

01:08:55.040 --> 01:08:57.350
of the Media Lab,
Joey Ito, thanks maybe

01:08:57.350 --> 01:09:01.220
if we have layer 2, we
should also have layer 0.

01:09:01.220 --> 01:09:05.800
Underneath all of these
coins, underneath Ethereum

01:09:05.800 --> 01:09:07.490
and Bitcoin, maybe
there's a layer

01:09:07.490 --> 01:09:10.250
that we can
technologically create.

01:09:10.250 --> 01:09:15.210
Nobody's done this yet,
but Joey's a visionary.

01:09:15.210 --> 01:09:17.750
Joey had the first
internet service provider

01:09:17.750 --> 01:09:19.760
in Japan at the
age of 23 when he

01:09:19.760 --> 01:09:24.387
got $1,500 of computer equipment
and put it in his bathroom.

01:09:24.387 --> 01:09:25.470
And that's how he started.

01:09:25.470 --> 01:09:27.359
Yes.

01:09:27.359 --> 01:09:28.439
Yes, his bathroom.

01:09:28.439 --> 01:09:30.050
It was the only
real estate he had.

01:09:33.160 --> 01:09:37.000
So which way does this go?

01:09:37.000 --> 01:09:40.499
You hadn't heard
that about Joey?

01:09:40.499 --> 01:09:41.874
So it's a way to
start a company.

01:09:44.560 --> 01:09:48.380
And I think far more
work needs to be done.

01:09:48.380 --> 01:09:51.920
So it may be solvable.

01:09:51.920 --> 01:09:53.520
I'm not sure.

01:09:53.520 --> 01:09:56.870
And then consensus required
for software updates.

01:09:56.870 --> 01:09:57.650
It's a tough one.

01:09:57.650 --> 01:10:01.370
Open source software updates,
which are not backward

01:10:01.370 --> 01:10:02.280
compatible.

01:10:02.280 --> 01:10:04.640
Like, can I update
the software, but then

01:10:04.640 --> 01:10:07.250
you can't use it for
the 500,000 blocks

01:10:07.250 --> 01:10:10.380
that are already out there
in Bitcoin, or in some--

01:10:10.380 --> 01:10:13.020
or the millions of
blocks in the ether.

01:10:13.020 --> 01:10:16.850
So the problem often happens
that the older versions won't

01:10:16.850 --> 01:10:19.840
validate all the new blocks.

01:10:19.840 --> 01:10:21.910
And if they won't validate
all the new blocks,

01:10:21.910 --> 01:10:23.930
I'm simplifying again--

01:10:23.930 --> 01:10:27.230
think of like Excel and you get
that update on Excel or Word

01:10:27.230 --> 01:10:31.570
for Windows, and you
can't open your old files.

01:10:31.570 --> 01:10:34.710
I mean, it's a
rough lay definition

01:10:34.710 --> 01:10:37.110
of what this issue is.

01:10:37.110 --> 01:10:40.020
And so it leads to
something called hard forks.

01:10:40.020 --> 01:10:44.220
And this little visual
on the right hand side

01:10:44.220 --> 01:10:49.570
is basically what happens
is you can't validate

01:10:49.570 --> 01:10:52.750
all the old blocks,
because the new software

01:10:52.750 --> 01:10:54.520
is kind of going beyond it.

01:10:54.520 --> 01:10:59.530
A hard fork would happen is if
you took two megabyte blocks,

01:10:59.530 --> 01:11:03.580
if you made the
block size bigger.

01:11:03.580 --> 01:11:08.080
The old software would not take
that if I've got this right.

01:11:08.080 --> 01:11:11.160
That would be a hard fork.

01:11:11.160 --> 01:11:14.460
And so that's an issue,
and it's happened.

01:11:14.460 --> 01:11:17.520
The Ethereum network
has Ethereum Classic

01:11:17.520 --> 01:11:21.630
and has Ethereum
because of a hard fork

01:11:21.630 --> 01:11:24.570
that was encouraged
by Vitalik Buterin,

01:11:24.570 --> 01:11:27.490
and the Bitcoin network
has one from last year,

01:11:27.490 --> 01:11:30.540
where it was this debate
about block sizes.

01:11:30.540 --> 01:11:34.170
So most software for
decades has dealt

01:11:34.170 --> 01:11:37.440
with how do we update software,
but they can push it to us.

01:11:37.440 --> 01:11:40.770
And we get it, and we hit
a button and we get it,

01:11:40.770 --> 01:11:42.330
and after a while,
we get annoyed

01:11:42.330 --> 01:11:46.410
and we don't update
if you're like me.

01:11:46.410 --> 01:11:50.160
But the consensus-- remember,
this was a graph that we had.

01:11:50.160 --> 01:11:52.515
The consensus always
supports the longest chain.

01:11:55.420 --> 01:11:59.160
If the consensus is to
adopt this new technology,

01:11:59.160 --> 01:12:02.070
and only 80% or
90% adopt it, it's

01:12:02.070 --> 01:12:04.320
a question of whether
the other 10% or 15%

01:12:04.320 --> 01:12:07.290
will keep maintaining
the shorter chain.

01:12:07.290 --> 01:12:11.080
And in Bitcoin Cash, they have.

01:12:11.080 --> 01:12:14.520
And so in essence, now
you have two currencies.

01:12:14.520 --> 01:12:16.620
If, for some reason,
it atrophied,

01:12:16.620 --> 01:12:20.730
and they stopped maintaining
it, then the value, in a sense,

01:12:20.730 --> 01:12:23.360
in a commercial setting
might go to zero.

01:12:23.360 --> 01:12:26.130
Was there a question?

01:12:26.130 --> 01:12:28.410
So broadly speaking, I
think the toughest issue

01:12:28.410 --> 01:12:30.910
is about collective
action and governance.

01:12:30.910 --> 01:12:32.760
How do you get a
whole group of people

01:12:32.760 --> 01:12:35.610
to be moving in a
similar direction?

01:12:35.610 --> 01:12:39.000
Blockchain applications
derive part of their value

01:12:39.000 --> 01:12:41.610
from participation of multiple
parties on the network

01:12:41.610 --> 01:12:45.120
as well, that multiple
people are involved.

01:12:45.120 --> 01:12:48.840
It's remarkable in hindsight
that Satoshi Nakamoto, whomever

01:12:48.840 --> 01:12:51.630
he or she was, got
this many people.

01:12:51.630 --> 01:12:54.570
There's nearly 100 people in
this room studying this 10

01:12:54.570 --> 01:12:55.800
years later.

01:12:55.800 --> 01:12:58.320
But somehow he solved a
collective action issue

01:12:58.320 --> 01:13:02.550
because it was just
software code back in 2009.

01:13:02.550 --> 01:13:07.170
But it's still the example, how
does Silvio Micali with a very

01:13:07.170 --> 01:13:12.300
clever Blockchain adaptation
and Algorand, how does he

01:13:12.300 --> 01:13:14.140
get people to start using it?

01:13:14.140 --> 01:13:16.510
And until he starts to
get people to use it,

01:13:16.510 --> 01:13:18.240
where's the value?

01:13:18.240 --> 01:13:22.950
Or if you have an application
that's to be file sharing

01:13:22.950 --> 01:13:26.580
or for medical records, there is
a medical records project here

01:13:26.580 --> 01:13:30.530
at MIT, but how do you start
to get people to use it?

01:13:30.530 --> 01:13:34.310
And these are solved every
day in the internet space,

01:13:34.310 --> 01:13:37.350
but Blockchain has a
little bit greater wrinkle.

01:13:37.350 --> 01:13:39.070
So there's a chicken
and egg issue.

01:13:39.070 --> 01:13:39.570
Priya.

01:13:41.702 --> 01:13:43.910
AUDIENCE: This is like heresy
in this room, but is it

01:13:43.910 --> 01:13:46.360
because it isn't a real thing?

01:13:46.360 --> 01:13:49.610
Versus like a medical records,
it's really a real thing.

01:13:49.610 --> 01:13:51.680
Because I wonder
about that a lot.

01:13:51.680 --> 01:13:55.190
Does it proliferate because
there's essentially not much

01:13:55.190 --> 01:13:57.140
effort, real cost to it--

01:13:57.140 --> 01:14:01.790
GARY GENSLER: Priya's question
is is there some perception--

01:14:01.790 --> 01:14:03.110
can I use that word?

01:14:03.110 --> 01:14:05.780
There's some perception
it's not a real thing,

01:14:05.780 --> 01:14:07.850
so it might not propagate,
and there might not

01:14:07.850 --> 01:14:12.230
be as much consumer adoption.

01:14:12.230 --> 01:14:14.380
That may well be one of
the commercial challenges.

01:14:14.380 --> 01:14:15.713
Eilon, did you have [INAUDIBLE]?

01:14:15.713 --> 01:14:17.840
AUDIENCE: Yeah, I think
the adoption of Bitcoin

01:14:17.840 --> 01:14:19.400
was because people
were interested

01:14:19.400 --> 01:14:23.090
in the innovative solution.

01:14:23.090 --> 01:14:26.070
And then Ethereum and
with Algorand leaving

01:14:26.070 --> 01:14:29.060
in a few months, it will
happen in other blockchains,

01:14:29.060 --> 01:14:33.380
are basically pouring
money into the ecosystem,

01:14:33.380 --> 01:14:36.380
giving money to developers
to develop solutions,

01:14:36.380 --> 01:14:40.417
because they are betting on
the success of that network.

01:14:40.417 --> 01:14:41.250
GARY GENSLER: Right.

01:14:41.250 --> 01:14:43.940
But for every one
of you as you're

01:14:43.940 --> 01:14:45.860
thinking about your
final projects,

01:14:45.860 --> 01:14:50.590
this collective action
issue has multiple features.

01:14:50.590 --> 01:14:54.370
One, to me, is the governance
of the Blockchain software

01:14:54.370 --> 01:14:57.820
updates, which we said is a
little bit about hard forks

01:14:57.820 --> 01:15:00.400
and so forth and how
do you have consensus

01:15:00.400 --> 01:15:04.420
and how centralized to the
governance stay, which we'll

01:15:04.420 --> 01:15:07.120
come back to when we talk about
the Securities and Exchange

01:15:07.120 --> 01:15:09.430
Commission and whether
it's a token that's

01:15:09.430 --> 01:15:11.660
regulated as a security.

01:15:11.660 --> 01:15:13.630
So there's that
part of governance.

01:15:13.630 --> 01:15:15.610
But then there's the
collective action issue

01:15:15.610 --> 01:15:20.260
that if you have a payments
or medical records or trade

01:15:20.260 --> 01:15:23.350
finance, how do you
get folks to adopt.

01:15:23.350 --> 01:15:25.330
And in the banking
sector, the banks

01:15:25.330 --> 01:15:28.360
are the big sort of
elephants in the room,

01:15:28.360 --> 01:15:32.230
the big dominant incumbents,
how do you get them to adopt,

01:15:32.230 --> 01:15:35.200
or are you somehow
competing away their profits

01:15:35.200 --> 01:15:38.050
and not having them adopt, which
is more a commercial business

01:15:38.050 --> 01:15:40.810
issue about collective action.

01:15:40.810 --> 01:15:43.060
So the financial sector,
as we've talked about,

01:15:43.060 --> 01:15:48.190
favors permissioned blockchains
that don't have as many--

01:15:48.190 --> 01:15:50.230
they have some
collective action issues,

01:15:50.230 --> 01:15:53.170
but they don't have as many
collective action issues.

01:15:53.170 --> 01:15:57.490
They have far fewer scalability
and performance issues,

01:15:57.490 --> 01:16:00.890
because they say, I'm
not using proof of work.

01:16:00.890 --> 01:16:05.200
It might be 15, 20, or
even 75 or 100 nodes,

01:16:05.200 --> 01:16:08.500
but they think that way,
they can secure their privacy

01:16:08.500 --> 01:16:10.010
and security.

01:16:10.010 --> 01:16:18.020
Now, Madars and Neha's paper on
ZK Ledger might be a solution.

01:16:18.020 --> 01:16:20.050
And some of those banks
might start using that.

01:16:20.050 --> 01:16:21.820
But I'm talking about 2018.

01:16:21.820 --> 01:16:25.270
I'm not talking
about 2020 or 2025.

01:16:25.270 --> 01:16:28.360
Right now, they're favoring
permissioned closed loop

01:16:28.360 --> 01:16:31.570
systems, rather than
permission-less open loop

01:16:31.570 --> 01:16:33.100
systems.

01:16:33.100 --> 01:16:38.410
So next week, we're going to
be moving to public policy.

01:16:38.410 --> 01:16:39.820
Oh my god.

01:16:39.820 --> 01:16:45.590
You're going to get to read my
testimony, all 28 pages of it.

01:16:45.590 --> 01:16:47.200
Yeah, look, I get it.

01:16:47.200 --> 01:16:50.230
But I was asked to testify
in the House Agriculture

01:16:50.230 --> 01:16:52.600
Committee in July.

01:16:52.600 --> 01:16:55.900
It's a venue I'd been at
a whole bunch of times.

01:16:55.900 --> 01:17:00.880
It was fun to be back
in front of them,

01:17:00.880 --> 01:17:09.100
Chairman Conaway from Texas and
Collin Peterson from Minnesota.

01:17:09.100 --> 01:17:12.070
But yes, you'll get to read my--

01:17:12.070 --> 01:17:14.410
I knew that there was
no legislation that

01:17:14.410 --> 01:17:15.808
was going to happen this year.

01:17:15.808 --> 01:17:17.350
I want to just give
you the feedback.

01:17:17.350 --> 01:17:21.160
But Republicans
run the committee.

01:17:21.160 --> 01:17:23.830
They get to invite as
many witnesses they want,

01:17:23.830 --> 01:17:27.550
and then they let the
minority invite one, sometimes

01:17:27.550 --> 01:17:28.390
two witnesses.

01:17:28.390 --> 01:17:31.840
So I got the call to
testify, because I'm

01:17:31.840 --> 01:17:35.440
like the old sea dog, and
they're bringing me in

01:17:35.440 --> 01:17:36.490
or something.

01:17:36.490 --> 01:17:38.720
But it was fun.

01:17:38.720 --> 01:17:42.070
But I was preparing
for this class anyway.

01:17:42.070 --> 01:17:47.320
So I kind of wrote the
testimony for you all.

01:17:47.320 --> 01:17:50.390
Congress thought
it was for them.

01:17:50.390 --> 01:17:51.095
And it was.

01:17:51.095 --> 01:17:51.595
It was.

01:17:54.220 --> 01:17:55.420
But that's the main thing.

01:17:55.420 --> 01:17:58.210
Mark Carney, who runs
the Bank of England,

01:17:58.210 --> 01:18:00.850
wrote this really
beautifully written piece

01:18:00.850 --> 01:18:04.480
that he gave in the spring,
about a little bit the history

01:18:04.480 --> 01:18:05.650
currency and so forth.

01:18:05.650 --> 01:18:13.500
But Mark also runs the
Financial Stability Board,

01:18:13.500 --> 01:18:17.550
which has the finance ministers
and central bank governors

01:18:17.550 --> 01:18:19.890
and securities regulators
from 20 countries.

01:18:19.890 --> 01:18:24.000
So it's the G20's
finance heavies.

01:18:24.000 --> 01:18:26.580
I used to go to that,
not as a finance heavy,

01:18:26.580 --> 01:18:29.923
but I used to go because they
wanted me inside the tent,

01:18:29.923 --> 01:18:31.590
rather than outside
the tent, because we

01:18:31.590 --> 01:18:34.590
were doing derivatives
reform here in the US.

01:18:34.590 --> 01:18:37.740
And some of the foreign
finance ministers

01:18:37.740 --> 01:18:39.880
had a different point of view.

01:18:39.880 --> 01:18:43.350
And when it got to the place
when finance ministers--

01:18:43.350 --> 01:18:46.160
and it was an interesting group,
the Russian finance minister

01:18:46.160 --> 01:18:49.920
in the UK and the South African
and four others wrote a joint

01:18:49.920 --> 01:18:54.240
letter to Secretary
Geithner pointing out some--

01:18:54.240 --> 01:18:57.780
shall we say observations
on what we were doing.

01:18:57.780 --> 01:18:59.760
They had differences.

01:18:59.760 --> 01:19:01.380
I got invited, so I used to go.

01:19:01.380 --> 01:19:03.070
I got to know Mark very well.

01:19:03.070 --> 01:19:05.820
But it's a good paper.

01:19:05.820 --> 01:19:08.310
And you'll get a sense really--

01:19:08.310 --> 01:19:11.130
I would say, Mark
is neither a Bitcoin

01:19:11.130 --> 01:19:13.290
maximalist or
minimalist, but he does

01:19:13.290 --> 01:19:15.930
say don't use the
word cryptocurrency.

01:19:15.930 --> 01:19:18.030
Use the term crypto asset.

01:19:18.030 --> 01:19:20.200
So it's kind of an
interesting piece.

01:19:20.200 --> 01:19:22.140
And then I don't know
how many of you are

01:19:22.140 --> 01:19:24.420
Sloan Fellows that are here.

01:19:24.420 --> 01:19:26.340
I recognize some of
the Sloan Fellows.

01:19:26.340 --> 01:19:29.870
I think about 20% or 25% of
the class are Sloan Fellows.

01:19:29.870 --> 01:19:32.910
You're going to get to see
Joe Stiglitz in New York

01:19:32.910 --> 01:19:36.810
in a few weeks, and I think--

01:19:36.810 --> 01:19:39.210
yeah, this is the
CNBC piece where

01:19:39.210 --> 01:19:43.680
Joe, who's a Nobel laureate
at Columbia University,

01:19:43.680 --> 01:19:47.640
has a stark and distinct
point of view about Bitcoin.

01:19:47.640 --> 01:19:50.550
I've had two or three lively
conversations with Joe

01:19:50.550 --> 01:19:52.440
about this.

01:19:52.440 --> 01:19:56.040
Later in the semester, you'll
read Paul Krugman and Nouriel

01:19:56.040 --> 01:20:01.020
Roubini, and there's a little
video of Bill Gates talking

01:20:01.020 --> 01:20:03.270
about Bitcoin.

01:20:03.270 --> 01:20:07.380
I want you all to be aware
of the Bitcoin minimalist

01:20:07.380 --> 01:20:10.210
and understand what
they're saying.

01:20:10.210 --> 01:20:12.980
And I would put Joe
on a 1 to 10 scale,

01:20:12.980 --> 01:20:18.960
at maybe 1 and 1/2 or maybe 2.

01:20:18.960 --> 01:20:21.960
Paul, you'll read Paul
Krugman's piece a little later.

01:20:21.960 --> 01:20:23.610
He's kind of down there, too.

01:20:23.610 --> 01:20:27.090
I can't just-- they can't
modulate between them.

01:20:27.090 --> 01:20:28.560
But I think it's
really important

01:20:28.560 --> 01:20:31.950
to understand what some really
great minds are thinking

01:20:31.950 --> 01:20:33.520
about this from
that side as well.

01:20:33.520 --> 01:20:36.640
So that's what the three
things are for next week.

01:20:36.640 --> 01:20:44.530
And the conclusion, I think that
it does provide the networking,

01:20:44.530 --> 01:20:45.600
but it comes with costs.

01:20:45.600 --> 01:20:48.270
As we said, there are
a bunch of trade-offs.

01:20:48.270 --> 01:20:51.060
I think the scalability,
the efficiency, the privacy

01:20:51.060 --> 01:20:52.950
they want are solvable.

01:20:52.950 --> 01:20:54.600
I can't prove it.

01:20:54.600 --> 01:20:56.500
But I think in a
matter of years--

01:20:56.500 --> 01:20:58.080
and it might be
three or 10 years--

01:20:58.080 --> 01:21:00.870
it won't be three to
10 months, though.

01:21:00.870 --> 01:21:05.490
I think a lot of that is
susceptible to the bright minds

01:21:05.490 --> 01:21:08.610
of MIT and elsewhere
as computer scientists.

01:21:08.610 --> 01:21:12.070
I think the challenges
that are tougher,

01:21:12.070 --> 01:21:14.690
it really relates to governance.

01:21:14.690 --> 01:21:16.890
I think governance
and collective action

01:21:16.890 --> 01:21:19.260
and back to those two
graphs, there really

01:21:19.260 --> 01:21:23.700
are places that are better to
centralize than decentralize.

01:21:23.700 --> 01:21:25.200
And we're going to
be exploring that

01:21:25.200 --> 01:21:26.825
for the rest of this
semester together.

01:21:26.825 --> 01:21:27.660
So thank you.

01:21:27.660 --> 01:21:31.000
Thank you for the veterans
who sat through all that.

01:21:31.000 --> 01:21:33.750
[APPLAUSE]