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Welcome to Lecture 7.

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In this lecture, we'll talk about all
the ways that the world of Bitcoin and

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the technology touches
the world of people.

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We'll talk about the community.

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We'll talk about politics
within Bitcoin and

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the way that Bitcoin
interacts with politics.

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And we'll talk about law enforcement and
regulation issues.

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In Lecture 7.1,
we'll talk about Consensus in Bitcoin.

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The way that the operation of Bitcoin
relies on the formation of consensus

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among people.

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Now there are really three kinds of
consensus that have to operate for

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Bitcoin to be successful.

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The first kind is
a consensus about the rules.

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This is a consensus about things like what
is it that makes a transaction valid?

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How can you tell a valid
transaction from an invalid one?

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Second, what makes a block
in the blockchain valid?

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Which block should be accepted and
which block should be rejected?

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Third, how the nodes in
the P2P network should behave.

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How they should interact
with each other and

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what kind of protocol they should
use to discuss with each other.

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And more generally, all the protocols and

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data formats that are involved
in making Bitcoin work.

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You need to have a consensus about
these things so that all the different

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participants in the system can talk to
each other and agree on what's happening.

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And so the first form of consensus that

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goes into Bitcoin is just a consensus
about what these rules should be.

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In order for the system to go forward.

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The second form of consensus in Bitcoin
is consensus about the history.

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That is a consensus about
what's in the blockchain and

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what's not in the blockchain.

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And therefore, consensus about
which transactions have occurred.

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And once you have a consensus about
which transactions have occurred.

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What follows from that is of course,
a consensus about which coins,

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which unspent outputs exist and
who owns them.

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And so, this consensus obviously flows
from the processes that we've talked about

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in earlier lectures by which
the blockchain is built.

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And by which nodes come to consensus.

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The processes that we hope push
Bitcoin toward a consensus

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about the contents of the blockchain.

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So that consensus about
what's in the blockchain and

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therefore what the history is.

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Is the second important form of
consensus that Bitcoin relies on.

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The third form of consensus
that Bitcoin relies on

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is just the consensus
that coins are valuable.

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That is, the general agreement
that Bitcoins are valuable,

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that Bitcoins are a good thing to have.

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And in particular, the consensus that
if somebody gives you a Bitcoin today,

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that tomorrow you'll be able to redeem or
trade that for something that is of value.

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Any currency needs this, whether it's
a fiat currency like the dollar or

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crypto currency like Bitcoin, you need
a consensus that the thing has value.

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That is you need people to generally
accept that it's exchangeable for

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something of value now and in the future.

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And so that's the third kind
of thing that Bitcoin needs.

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Now this form of consensus,

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unlike the others,
can be viewed as a little bit circular.

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In other words, my belief that the
Bitcoins I'm receiving today are of value

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depends on my expectation that tomorrow,
other people will believe the same thing.

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So consensus on value relies on believing
that consensus on value will continue.

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And this is sometimes called the
Tinkerbell effect by analogy to Peter Pan,

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where it's said that Tinkerbell
exists because you believe in her.

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The same thing is kind of true here.

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That the consensus that
Bitcoins have value

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exist because of the consensus
that Bitcoins have value.

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So circular or not, it's a thing that
seems to exist, and it's important for

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Bitcoin to operate.

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Now what's important about
all three forms of consensus

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is the way that they're
intertwined with each other.

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And this diagram shows a little bit
about what I mean when I say that.

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First of all,
the consensus about the rules and

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the consensus about history go together.

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Because it's the rules that determine
which kinds of transactions can go

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into a block.

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And which kind of blocks
can come into existence.

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If you agree on the rules that
is which blocks are valid,

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then it's possible to build a consensus
about the blockchain and about history.

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Whereas without a consensus about the
rules, then people are going to disagree

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about what's in the history and you won't
be able to come to consensus in that way.

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So consensus about rules and
consensus about history are tied together.

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In a similar way,
consensus about history and

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a consensus that coins are valuable
are also tied together.

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Consensus about history means that
we agree on who owns which coins.

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And agreeing on who owns which coins
is a necessary prerequisite for

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believing that the coins have value.

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Because if there's not a consensus
that I own a particular coin,

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then I'm not going to have any expectation
that people will accept that coin from

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me in payment in the future.

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So consensus about history
is a prerequisite for

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consensus that coins are valuable.

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But in the same way, the consensus
that coins are valuable is needed to

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make the consensus about history work.

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And we heard about this in the earlier
lecture when we talked about

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the incentive arguments.

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The ways in which the block reward
that is built into the mining process

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creates an incentive for people to
follow the expectations about mining.

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So the consensus that coins are valuable
is what creates the incentives that allows

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us to get to a consensus about history.

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And so we have all three forms of
consensus here which are tied together

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such that if any one of them failed, then
the other ones would fall apart as well.

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And in a sense, the genius of Bitcoin,

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the genius in Bitcoin's original design
was in recognizing that it would

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be very difficult to get any one of
these forms of consensus by itself.

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Consensus about the rules in a worldwide
decentralized environment where there is

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no strong notion of identity.

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That's just not the kind of
thing that's likely to happen.

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Consensus about a history similarly,

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that is a very difficult distributed
consensus data structure problem.

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Which is not likely to
be solvable on its own.

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And a consensus that some kind
of crypto currency has value

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was also a very difficult
thing to put together.

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What the designer of Bitcoin and what
the continued operation of Bitcoin shows

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is that even if you can't build any one
of these forms of consensus by itself.

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You can somehow stand up all
three of them together and

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get them to operate in
an interdependent way.

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And so, when we talk about how things
operate within the Bitcoin community,

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we have to bear in mind that
Bitcoin relies on consensus,

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it relies on agreement
by the participants.

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And that consensus is a fragile and
interdependent thing.