Hello, this is James D’Angelo and welcome
to the Bitcoin 101 blackboard series. On July 5th 2010, Satoshi Nakamoto, the anonymous
inventor of Bitcoin wrote, “Sorry to be a wet blanket. But, writing a description of
Bitcoin for general audiences is bloody hard. There’s nothing to relate it to.”
In truth, anyone who studies Bitcoin runs into the same problem trying to explain Bitcoin
to an absolute beginner so they reach some sort of epiphany. And there is no question
that I have struggled with the same problem. It was not until I got a call a couple of
weeks ago from Harvard to do a talk about what is Bitcoin that I really had to stare
this problem in its face. So, I came up with these slides and I came
up with this talk that I am going to try and do right now. So, this is going to be a story.
It is a parable and it is called “How the Constraints of Digital Define Bitcoin.”
And it is a parable because we do not know all the facts. Satoshi Nakamoto is, we will
talk about, is anonymous so we do not know exactly what he was thinking when he was designing
Bitcoin. But fortunately, he has written enough and
we will use some of his quotes in the story then we get an idea of the processes he was
going through. So let us move forward. In 2008, our story
begins. It was not just coincidence that Bitcoin, as an idea, was born in 2008 amid the turmoil
of the financial crisis. And in these years, it was pretty easy to notice that the average
person was more concerned about the idea of money than normal.
And Bitcoin addressed similar ideas. These people were talking about the Fed a lot in
those years. There were lots of discussions about money creation, monetary control, and
quantitative easing. Of course, there were those who thought the
bailouts were acceptable and the Fed was acting appropriately with the stimulus package and
all that, and there were those who did not. So, a lot of chaos, mistrust and anger ensued
and it was directed at these big financial institutions — banks, insurance companies
like AIG or the Fed. All these organizations that wielded enormous financial powers.
But our story does not deal with those two groups. It deals with a much smaller group
of programmers, individuals who thought that software was the way to address the problems
they perceived with money. And our story focuses on one person in particular and that person
is Satoshi Nakamoto who as we mentioned is anonymous but he uses a male Japanese pseudonym.
We will just honor his request and call him a he. He could be a female; could be a group
of people; could be martians. We do not know who they are.
But we do have some of the writings. So, whoever did this was posting and blogging and updating
Bitcoin. They wrote on white paper and they signed it with Satoshi Nakamoto and in some
of those writings from their account, they wrote this.
“The Central Bank must be trusted not to debase the currency, but the history of fiat currencies
is full of breaches of this trust. Banks must be trusted to hold our money and transfer
it electronically, but they lend it out in waves of credit bubbles with barely a fraction
in reserve.” He wrote that in February of 2009 just a month
after launching Bitcoin. But what becomes evident from this is that he is an excellent
writer. He has got an intimate idea of the history
of finance and cryptography and he believes that inside software there is a solution to
the financial crisis. And his particular solution is devilishly simple. He wants to turn ones
and zeros into money. This is not like your credit card or online
banking where those ones and zeros or those numbers represent money held by the bank or
some other institution. This is actually turning ones and zeros into money such that if you
hold those ones and zeros or you hold that long stringing numbers, you are actually holding
that money and this had never been done before. But, what is important to realize is that
this dream was not new. So, 20 to 30 years ago, IBM and others were very involved in
trying to develop digital currencies. Milton Friedman, the noble laureate in economics
also does a big televised interview where he was talking about the powers that would
be possible if you could create a digital currency. He talked about softening borders
and possibly even eroding the nation state. Still, there were others.
People had written New York Time’s bestsellers that focused on digital currencies and the
provocative changes it might bring into our society. But the most famous group when it
comes to development of digital currencies is the cypherpunks. They are not the cyberpunks.
This was a group that started in San Francisco. Guys that were just meeting up that eventually
became one of the first mailing list in history. In the early 90’s, it was a collection of
really powerful programmers from Apple, Microsoft, the government all getting together.
Some of them are anonymous; some of them using their real names talking about using cryptography
to change the way the world works. So, they believe that inside the digital domain, inside
cryptography, they could side step the problems of money created by politics, banks and special
interests. They had been thinking about this since the 80’s.
And this is from their own manifest that reads, “Cypherpunks advocates the widespread use
of cryptography as a route to social and political change.” And one of their main focuses was
digital currencies. And so, it is important to realize that there
is enormous advantages of taking your currency and turning it into something that is digital
and most of these are fairly obvious. Right now, you can send your currency very fast
and so the velocity of money increases into a maximum.
The currency itself weighs nothing, so storage and transport is minimal. It is programmable,
so depending on how complex the programming algorithm is in the digital currency, it can
actually make decisions based on external factors.
It is very internet ready. Right, current cash is not very good with the internet. It
is international obviously. It provides easy accounting because it already digital and
already typed in. It is cheap to issue. Governments spend billions
of dollars printing and minting and protecting a currency and they also spend billions of
dollars fighting counterfeits. Then there are of course, probably other things that
I did not think of right here. But, there was a big problem. So, going digital,
turning money into digital was proving really elusive to all these genius cypherpunks. They
were having a hard time going digital and it is important to understand the very qualities
of digital that were making this difficult. The biggest problem was that digital is great
at recording things and then once you recorded it, it is even better at making perfect copies.
So, you can make perfect copies of music, perfect copies of video tapes, photos and
data and you could make perfect copies of messages — transactions, digital tokens,
etc. And this is really important because the first
idea that almost anyone would have if they are going to try and create a digital currency
is that they are going to try to make some form of digital token. Something that cannot
be copied that I can pass around and I can prove uniqueness. That is really difficult
with digital domain. Anything that IBM and these others were trying to develop to make
these digital tokens was quickly being copied by hackers. So this perfect ability to copy
was thwarting digital currencies. This is pretty clear, perfect copies make
bad money. So, if counterfeits are indistinguishable from the Real McCoy, you do not have the monetary
system. If you can run off US Dollars from a Xerox copier then you do not have financial
institutions at all. Here is a little poster the US Government
is spending money trying to alert the public to the problems of counterfeit money.
So as the ideas improve, as it got farther away from digital tokens, they run into still
another problem and this problem might even be more famous it is called the “double
spending problem.” The double spending problem has to do with the fact that networks are
noisy and so any transactions of your digital currency that you are going to spit out across
the network are not going to arrive as soon as you send it.
There is going to be a delay time between sending it and when it arrives. This could
be one second or even up to even minutes but it is usually around 15 seconds. But what
can happen is that in this time, a clever hacker or whatever, can resend the same transaction,
using the same value to numerous other people. And so this idea of double spending really
could have been called the infinite spending problem and as more and more experts started
to think about the difficulty of creating these digital tokens or this infinite spending
problem, they started to think that creating digital currencies might just be impossible.
And so all this excitement towards digital currencies started to die off. But in 2008,
with the financial crisis and all these concerns about money, new fires were being rekindled
in the imagination of some of these programmers. And Satoshi Nakamoto working in 2008 was one
of them. Again, he was inflamed and frustrated by the current monetary system and he was
having real difficulties with the double spending problem and these digital tokens and he started
to look elsewhere for inspiration. So, he studied this new software that had
come out in 2001 called BitTorrent which by some estimates in 2008 when Satoshi was working
was responsible for approximately 50% of all internet traffic. There are some estimates
that say that BitTorrent was responsible for up to 80% of all internet traffic.
And BitTorrent was famous partly because it replaced this even more famous company called
Napster. If you say Napster to a programmer it is as famous as if you are saying the Trojan
Horse. Launched in 1999, shut down in 2001. Napster’s
failure became an important case study for hackers and a turning point in the design
of modern software systems. This is because when someone mentions “Napster” to a programmer
they immediately think “centralized” and they think centralized in the worst of all
ways. Centralized, meaning bad and centralized meaning not robust.
For those who are not familiar with Napster, they were a file sharing site where you could
download copies of Michael Jackson’s ‘Billie Jean’ or you could download Jurassic Park
the film but they kept all these files in one set of hard drives in one server in one
place. So, they were ultimately centralized.
What happen is, they probably got some sort of court injunction but I like to picture
it as the FBI went in and when the FBI went in they walked over to these hard drives and
the server and they unplugged them and Napster was done. With one plug, they had shut down
the entire system. So, literally the same year that it was shut
down, the code for BitTorrent was released and it has been running ever since without
being shut down. And its is coup de grace, its solution to the centralized problem was
to flip the problem of storage on its head. Instead of central servers, the BitTorrent
algorithm chopped all the media files up in to tiny pieces and scrambled them on users’
computers everywhere. So Billy Jean and Jurassic Park were put all
over the place — multiple copies everywhere. So, when someone went to download it, they
queried many computers that would bring it all together.
Now, it is important to realize that BitTorrent is not even fully decentralized but it is
a much more decentralized system than Napster and it is the seismic change in software that
moves from Napster which was not robust to BitTorrent which cannot be shut down by authorities.
The rule of software right now is to never centralize again. Much as you kind of consider
the hunters of old as being really proud because they shut this big massive centralized biology
which was an elephant, right? Which is now kind of so pathetic and sad that
if you see someone who has hunted an elephant, you actually feel bad for the elephant and
you feel how antiquitated these hunters are that they could be proud that they shot an
elephant. It is so easy to find an elephant; you can
do it with your infrared camera. You can find it with helicopters from the sky. If you really
want to impress people as a hunter and sort of this new idea of decentralization, you
might have to go around mosquitoes or bacteria or viruses. Things that take the same amount
of biology and spread it out in copy at like crazy everywhere.
Very similar thing that has happened in biology is now happening to software.
And so, we get back to our story. Satoshi was working in 2008 who was read about the
success of BitTorrent at the death of Napster. He was determined to apply this idea of BitTorrent
to banks. He wanted to find out what was the centralized part of banks.
What was it? Money is not the centralized part. That is spread out like mosquitoes everywhere.
It is copied and moved all over the place. He decided that if he could find that centralized
part of the bank, he might be able to create a digital currency. And in a moment of genius,
he decided to start to look at the ledger. It is pretty interesting.
If you walk in to almost any big bank with a gun and you say, “Clean out the vaults or
let me access your ledger,” they probably be more likely to let you clean out their
vaults. Because the ledger is where banks control money.
So, especially if they are big federal banks, the ability to access that ledger and add
zeros or erase accounts is much, much, much more dangerous than stealing everything in
the vault. And so, Satoshi in 2008 decided to focus exclusively
on the ledger. And the question started rolling. Satoshi thought, “What if I could turn a bank
inside out? Instead of one central party controlling the ledger,” because banks control those ledgers
with everything they have got, “What if every user were recruited to maintain a constantly
updated copy?” And so, the ledger is the thing that he is
going to break up into dust and spread it out just like BitTorrent did with Billie Jean
and Jurassic Park. Well, he had some immediate problems. First of all, public ledgers just
are not so great. Here we see a kid who has got some access
to the ATM and he is shooting different numbers into the ledger and he is getting a lot of
cash out. Bank ledgers, turns out, are the ultimate tragedy of the commons. When such
a high incentive to gain the system, there has always been only one result in history
— centralization. If you are an American, that is the Federal
Reserve. But as we spoke about earlier, centralizing leads to major mistrust and that leads to
anger. But Satoshi was old enough and experienced enough to recall that he had some technology
at his disposal. So, to create his decentralized ledgers Satoshi
paired two main technologies. One is called the “Proof of Work” and one is called
“Elliptic Curve digital signatures.” The interesting thing about this is, is none of
this technologies were brand new. So, nothing that he used was more recent than
2001 and these two technologies combined solved the two problems of digital. One was the double
spending problem and the other was unique access to ledger, actually having unique ability
to do something digitally. So, what is really beautiful about this is
Satoshi had taken the real weaknesses of digital – this copying problem and he turned it
into a massive strength by focusing exclusively on the ledger. The strength of digital was
perfect copies, “Okay” he said, “so copy the ledger, everywhere, instantly.” In turn,
he made the uniqueness the flaw. Any ledgers with even one comma not agreeing
with the masses would be discarded leaving fraudsters powerless. He had made Bitcoin
by not fighting the problems of digital, but by accepting the fact that digital is great
at copying and if you can copy the ledger perfectly and everywhere, people cannot fraud
the system. Any individual fraudster with a different
ledger (basically giving themselves extra money) will get immediately noticed and tossed
out of the system. So, what is really ironic about this is that Satoshi’s master stroke,
his real moment of genius was to eliminate cash to make his currency.
There is no cash in Bitcoin. It is only access to specific ledger units. So, the decentralized
consensus of millions is replaced by the centralized decision of the few by reinventing how currencies
can be built. And what is really, really powerful about
this is that the blockchain becomes a new form of public good. We are used to the idea
of public good either being sponsored by the government national parks or sponsored by
a private company which makes parks or amphitheatres or whatever. But we do not have anything which
is protected and controlled by absolutely nothing at all just code running in computers
everywhere. If you shut down ten thousand computers, it
does not matter. The system keeps humming along. So, we end up with something that is
truly unique. It is not ‘state’ or ‘government’ – it is not ‘private’ or ‘individual’
– it is an ‘other.’ A truly public system. If you are driving
up the public road and if you are driving up the private road, out here we have got
Bitcoin. Bitcoin, for the first time in history you
will be driving up this new thing that we do not even have a name for. Perhaps all we
can say right now is it is a blockchain. And this blockchain, this ability to control value
with no third party; no banks; no government; nothing but consensus over seeing Bitcoin
and this leads to what people have referred to as fuel.
Bitcoin is value that can be moved around. It can use to inspire new technologies for
permissionless innovation. You do not need to ask to use the blockchain.
It sits there. It waits for you. You can use it or not use it.
You play by the rules of the code and everything will go smoothly. You do not play by the rules
of code, and you would not be able to access it at all. And there are no fees for employing
the technology. This code is open source. You can copy it.
You can make your own and people have made their own coins left, right and center.
Bitcoin does put in a fee structure to prevent people from spamming the system. Sending millions
of ridiculously small transactions to shut down the network. So, it does have a fee structure
there. But there is no oversight on the transactions.
So, anyone can send value to anyone without any party in the middle. We will not get in
to all of this in this video but this permissionless innovation can lead to things like creating
code that makes contracts, mesh networks, notaries, voting, government and myriad other
things which we will be talking about in all our videos.
Okay, if you stop right here you should have a pretty good idea now about what this decentralized
ledger is all about and how the constraints of digital for Satoshi to decentralize the
ledger and eliminate money entirely. But, in order to get a better idea of Bitcoin,
we have got a few more slides left and we are going to kind of walk through those and
talk about some of this special ideas in Bitcoin. I am just going to jump through the rest of
these slides just letting you know some of the advantages and power of this.
Because the ledger is everywhere, everyone sees every transaction. You end up with the
option for the first time in all of history to create a product or company that works
with full transparency which will be great for charities, great for many companies and
even possible great for eliminating corruption in governments.
Now, a lot of people get upset also because gangsters or mobsters or money launderers
have been using Bitcoin. Well, it turns out that that is actually good measure of a currency
because if a currency is actual deciding who can send what to whom, then it has some sort
of morality base. Any one on earth can give US Dollars to anyone
else on earth, without anyone else interfering. US Dollars and Bitcoin are very similar. If
I could not give it to certain people, well then there is a control issue and that type
of currency will not work. So, the best currencies on earth, US Dollars,
Euros, Yen, Yuan, whatever, diamonds and gold can be given to anyone and anyone can use
it and so gangsters use all of those. But, keep in mind that Bitcoin is not a very
strong currency right now. A strong currency is one that is accepted by more people. So
the strongest currency on earth right now is US Dollars followed pretty close by the
Euro — lots of strong currencies out there. But, if you are trying to use Bitcoin in your
daily transactions you will find that it is not very strong. Lot of people are not accepting
it. But it is a baby, right? It is only 5-years old.
Really as a currency, it is about four or three years old because almost no one in those
first two years was doing any sort of transactions at all. And it got some issues. It is still
being developed. It is software remember, wallets are easy
to steal. It has got a volatility issue that is a real problem for many applications and
it could be hacked and could disappear tomorrow. It is just a real possibility.
But, if it does get hacked, and if something does happen, it is likely that software programmers
are going to notice the problem and try to fix this idea. This idea has been invented.
It is not going away anytime soon. Now, there are probably a number of people
watched this video and do not get Bitcoin yet. It takes a while, but this video is my
best attempt to getting you to understand a little bit about the idea of not using money
and giving everyone a copy of the ledger, replacing money with ledgers.
But, as Satoshi said, “If you don’t believe me or you don’t get it, I don’t have time
to try to convince you, sorry.” That is Satoshi in 2010 about a year or a couple of months
after he launched Bitcoin. So, one of the coolest things about Bitcoin,
is it is really helping us understand what is money and we have to start thinking about
this real dramatic possibility that perhaps cash, like gold or dollars, has always just
been a placeholder in history until we could finally decentralize the ledger. Give the
ledger to everyone. Really eliminate this massive tragedy of commons.
All these questions that we start to hear about money, does it need to have intrinsic
value? Is having actual mass being made of molecules a positive or negative for a currency?
We are not sure but it is really clear that Bitcoin is asking those questions in a provocative
way. It is making us rethink and possibly finally
understand this whole concept of money. Okay, so that is it. I hope that this parable
really does help you begin to understand Bitcoin. It is a very, very, very important technology
and it really needs to be considered as simply that, as a brand new type of technology for
dealing with value, wealth, limitations; all without any third party at all.
No government, no private institution; we have never seen anything like that before.
Please remember to comment, like, subscribe, do whatever it is you do and we will catch
you the next video.