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[MUSIC]

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Hello, and welcome to the second lecture.

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Which is going to be all about
decentralization in Bitcoin.

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Now, in the first lecture,

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you saw a lot of the crypto
basics that underlie Bitcoin.

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And we ended with a simple
currency that we called Scrooge

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coin that seems to achieve a lot of what
we want in a ledger-based cryptocurrency,

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except for one big glaring problem,

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which is that it relies upon
the centralized authority called Scrooge.

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And we end it with the question of how
do we de-scrooge-ify this currency?

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How do we go to a decentralized
version of this?

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That's what we're going to see today.

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What I find cool about this is that
the way in which Bitcoin achieves

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decentralization is not purely technical.

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But it's a combination of technical and
clever incentive engineering.

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And at the end of this lecture, you should
have a really good appreciation for

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how this happens, and a lot of the magic
or the mystery of Bitcoin should

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become clear to you, and how it works and
why it is secure and what makes it tick.

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So it turns out that decentralization is
an important concept not just for Bitcoin,

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but in fact this notion of competing
paradigms of centralization versus

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decentralization plays out in a variety
of different digital technologies.

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To understand Bitcoin's decentralization,
I want to start with the caveat

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that decentralization, almost always,
is not all-or-nothing.

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Almost no system is purely
decentralized or purely centralized.

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And a good example of this is e-mail,

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which is a decentralized system
fundamentally, I would say.

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It's based on a standard-based protocol,
SMTP, but what has happened,

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especially in the last decade or
so, is that we see a dominance

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of a few different webmail providers which
are sort of centralized service providers.

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And this might be a good model for

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understanding what might
be happening to Bitcoin.

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So with that,

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let's delve into some of the technical
aspects of Bitcoin's decentralization, and

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I would break this down into at
least five different questions.

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Questions like,
who maintains this ledger of transactions?

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Who has authority over which
transactions are valid?

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Who creates new Bitcoins?

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And in fact, other questions like
who determines how the rules of

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the system change and
how do Bitcoins acquire exchange value?

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So these are all components of
decentralization of the Bitcoin protocol,

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more or less, and
the first three of these are going to be

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questions that we will
consider in this lecture.

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And when I say how is
Bitcoin decentralized,

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what I mean encompasses the first
three of these meanings.

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And I want to emphasize that there
are aspects to decentralization beyond

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the protocol.

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That includes things like Bitcoin
exchanges where you can convert

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Bitcoin into other currencies.

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It includes things like wallet software
and a variety of other service providers.

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And so, even though the underlying
protocol is decentralized,

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these services that develop on
top of it may be centralized or

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decentralized to varying degrees.

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And just to drive home this point,
let me show you three different aspects

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of Bitcoin and where they fall on the
centralization-decentralization spectrum.

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First, there's the peer-to-peer network,
and

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this aspect of Bitcoin I would say is
the closest thing to purely decentralized.

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Why is that?

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Because anybody can run a Bitcoin node and
there's a fairly low barrier to entry.

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You can go online, you can download
a Bitcoin client to yourself.

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It requires a lot of disk
consumption on your computer, but

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basically you can run that on
your laptop or your PC yourself.

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And currently,
there are several thousand Bitcoin nodes.

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And so this really resembles
a peer-to-peer decentralized system.

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But that's not the only
component of Bitcoin.

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There's also Bitcoin mining,
which we'll study later in this lecture.

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And Bitcoin mining is technically
also open to anyone, but

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it turns out that it requires
a very high capital cost.

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It's a consequence of how
the system happens to have evolved.

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And because of this,
there has been a high centralization or

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a concentration of power in
the Bitcoin mining ecosystem,

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and the community frequently
sees this as quite undesirable.

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So this aspect of Bitcoin is not quite as
decentralized as one might want it to be.

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And here's a third aspect.

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Updates to the software.

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And this really gets to how and
when the rules of the system change.

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And once again here, one can conceptually
imagine that everybody running a Bitcoin

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node will look at the Bitcoin
specification and

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maybe even create their own software.

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And again you have a purely
decentralized system.

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But of course,
that's not how it works in practice.

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The core developers are really
trusted by the community and

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they have a lot of power when it
comes to determining what Bitcoin

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software each of these nodes
will run on their computer.