[MUSIC]
Hello, and welcome to the second lecture.
Which is going to be all about
decentralization in Bitcoin.
Now, in the first lecture,
you saw a lot of the crypto
basics that underlie Bitcoin.
And we ended with a simple
currency that we called Scrooge
coin that seems to achieve a lot of what
we want in a ledger-based cryptocurrency,
except for one big glaring problem,
which is that it relies upon
the centralized authority called Scrooge.
And we end it with the question of how
do we de-scrooge-ify this currency?
How do we go to a decentralized
version of this?
That's what we're going to see today.
What I find cool about this is that
the way in which Bitcoin achieves
decentralization is not purely technical.
But it's a combination of technical and
clever incentive engineering.
And at the end of this lecture, you should
have a really good appreciation for
how this happens, and a lot of the magic
or the mystery of Bitcoin should
become clear to you, and how it works and
why it is secure and what makes it tick.
So it turns out that decentralization is
an important concept not just for Bitcoin,
but in fact this notion of competing
paradigms of centralization versus
decentralization plays out in a variety
of different digital technologies.
To understand Bitcoin's decentralization,
I want to start with the caveat
that decentralization, almost always,
is not all-or-nothing.
Almost no system is purely
decentralized or purely centralized.
And a good example of this is e-mail,
which is a decentralized system
fundamentally, I would say.
It's based on a standard-based protocol,
SMTP, but what has happened,
especially in the last decade or
so, is that we see a dominance
of a few different webmail providers which
are sort of centralized service providers.
And this might be a good model for
understanding what might
be happening to Bitcoin.
So with that,
let's delve into some of the technical
aspects of Bitcoin's decentralization, and
I would break this down into at
least five different questions.
Questions like,
who maintains this ledger of transactions?
Who has authority over which
transactions are valid?
Who creates new Bitcoins?
And in fact, other questions like
who determines how the rules of
the system change and
how do Bitcoins acquire exchange value?
So these are all components of
decentralization of the Bitcoin protocol,
more or less, and
the first three of these are going to be
questions that we will
consider in this lecture.
And when I say how is
Bitcoin decentralized,
what I mean encompasses the first
three of these meanings.
And I want to emphasize that there
are aspects to decentralization beyond
the protocol.
That includes things like Bitcoin
exchanges where you can convert
Bitcoin into other currencies.
It includes things like wallet software
and a variety of other service providers.
And so, even though the underlying
protocol is decentralized,
these services that develop on
top of it may be centralized or
decentralized to varying degrees.
And just to drive home this point,
let me show you three different aspects
of Bitcoin and where they fall on the
centralization-decentralization spectrum.
First, there's the peer-to-peer network,
and
this aspect of Bitcoin I would say is
the closest thing to purely decentralized.
Why is that?
Because anybody can run a Bitcoin node and
there's a fairly low barrier to entry.
You can go online, you can download
a Bitcoin client to yourself.
It requires a lot of disk
consumption on your computer, but
basically you can run that on
your laptop or your PC yourself.
And currently,
there are several thousand Bitcoin nodes.
And so this really resembles
a peer-to-peer decentralized system.
But that's not the only
component of Bitcoin.
There's also Bitcoin mining,
which we'll study later in this lecture.
And Bitcoin mining is technically
also open to anyone, but
it turns out that it requires
a very high capital cost.
It's a consequence of how
the system happens to have evolved.
And because of this,
there has been a high centralization or
a concentration of power in
the Bitcoin mining ecosystem,
and the community frequently
sees this as quite undesirable.
So this aspect of Bitcoin is not quite as
decentralized as one might want it to be.
And here's a third aspect.
Updates to the software.
And this really gets to how and
when the rules of the system change.
And once again here, one can conceptually
imagine that everybody running a Bitcoin
node will look at the Bitcoin
specification and
maybe even create their own software.
And again you have a purely
decentralized system.
But of course,
that's not how it works in practice.
The core developers are really
trusted by the community and
they have a lot of power when it
comes to determining what Bitcoin
software each of these nodes
will run on their computer.