[Music] this is one of my favorite subjects to talk about and the vgy and Casey reading if you have not yet vgna and Casey reading if you've not yet looked at it is really one of the best things we look at the whole semester so I I want to recommend it and remember there is an essay question on the midterm about Bitcoins there's an essay question on the midterm about Bitcoins so we're emphasizing this more than most things in the class let me let me say though by way of review we're trying to put some things kind of together now the contrast that I've tried to draw is not markets or the state remember that markets are institutions for reducing the transactions cost of impersonal exchange states are institutions with a monopoly on the legitimate use of force what we've emphasized is division of labor both markets and States organize division of labor though in different and highly productive ways States organized protected territories with laws and markets organized exchange among or between those States so they have different functions we can't do without either one the debate about markets versus States isn't all that interesting what is interesting is profit seeking versus rent seeking and both of those can happen both in markets and in States we talked about circumstances where Market participants look for ways to have contracts in Restraint of trade to raise prices to cheat in a variety of ways on the normal rules of free markets now they often need the complicity of the state to accomplish that so what it means is that large corporations and the state together can provide an alternative to markets that's better for them but much worse for consumers and taxpayers we talked about profits and profits are the actual value that you take for having created value for consumers profits are what's left over after you an entrepreneur have created value for consumers rent seeking is a way that economic power distorts capitalism and political power distorts economic initiative rent extraction is probably the worst of all and the example that you might think of of rent extraction was the mud farmers in the reavers or the robber barons along the Ry River rent extraction is the corrupt practice of changing the rules or using harm to threaten others who create value or have wealth so we change the rules to take value from someone else and I wanted to raise the question how valuable are markets to you how valuable are access to markets to you this may not be something that we've thought about but there were there's a series of movies online and I'm just going to show part of this first one I think of it as ey sandwich sort of like eye pencil but this is ey sandwich suppose you wanted a sandwich but you had no access to markets what would you have to do well let's suppose it's a turkey sandwich you would need to grow the wheat for the bread you need to grow the tomatoes the lettuce you need to raise the turkey but you'd have to get all of those from somewhere you'd have to get the seeds you'd have to get the young turkey we depend on markets for almost everything so let's look at this for a little bit [Music] bread is one of the most common foods around the world with some evidence showing has been use for over 30,000 years Bread is made by combining flour and water than baking it typically more ingredients are added for flavor I will be adding honey to sweeten it butter to improve its texture and a pinch of salt to boost the flavor but first I need to make my flour all right have we here and try to be separated by the level of dryness these are the driest and they're most likely to work the first I to remove the seeds from the stocks with the seeds came the protective covers called The Cha will separate the seeds from the cha by using a fan to pull the lighter sha [Music] away so now just want to it up and turn the flow the blend so has a fair amount of seeds the I'll strain it and then regret [Applause] those that's kind of understand I think we want up with more I think that happen so we got cup and a half of flour I have all the ingredients to make bread I can get started so after mixing everything together I kneaded my dough and baked it for 30 minutes when we get back I'll sble and eat my [Music] sandwich all right so the point was that it took him quite a quite a while to get just a cup and a half of flour he didn't mention the fact that he needed yeast I don't know where he got that he noticed the honey came in one of those little plastic Bears that's not how Honey comes Honey comes up in a tree with angry bees so salt where would you get salt you'd have to go to the ocean and evaporate the water and then at the bottom you'd get a little bit of salt in one of the other episodes of this series he had gone to the ocean and boiled some salt water down and he had this sort of crusty white powder in a plastic bag the DEA interrogated him for six hours CU it well you know why where would you get the stuff that you need for things that you just take for granted a loaf of bread is about $2 it took him two days just to make the wheat now it's possible that we might say the state could do this but the state needs a lot of information it's possible there was a king who would want what's good for us but Kings likely want what's good for them the advantage of markets for all their disadvantages for all their many disadvantages the advantage of markets is other people work for you other people work for you in all sorts of complicated ways that if you don't think about it you don't even recognize well let's see what happens when people are denied access to markets and this is what has been happening in the past couple of years in the relatively wealthy South American country called Venezuela and recently there were headlines that there had been a big arrest Venezuelan federal police had found that someone had been hoarding food now Venezuela has a has a food shortage they found that someone had been hoarding food in fact they found a large Warehouse full of boxes of cans of corn peas and many other vegetables what sort of rotten person would do this well it was a grocery store no I'm not making this up the Venezuelan police accused a grocery store of hoarding food because they didn't give away all of the food in their warehouse grocery stores gr this is a grocery store chain the idea they had a warehouse full of food that they used as a distribution point for their grocery stores well it is true that the warehouse was full of food it's not full of food now the police arrested the people who owned the grocery store and distributed the food to the people well that may help for a day or two what what do you have now you have a big empty Warehouse where will more food come from they're in the same position that this guy of trying to make bread if you don't have a market system to bring this stuff from all over you have a problem this picture shocks me usually what you see is the police standing around a bunch of weapons or the kind of white powder that they thought this other guy had what did anybody recognize what that is that's baby formula people were smuggling baby formula in because you couldn't buy it now the state had decreed that baby formula was the equivalent of 5 cents not surprisingly nobody would bring baby formula into the country for 5 cents so there wasn't any so they found someone who was selling it on the black market bringing baby formula into the country and selling it for 50 cents the price that a market would have dictated a price that allows them to earn some profits police confiscated it and now there won't be any more baby formula look how proud they are we're keeping this baby formula away from people that need it perhaps most egregiously there's a terrible toilet paper shortage in Venezuela again because of hoarding the state had dictated that it should be given away for free if you had a bunch of toilet paper would you give it away for free well maybe but then you wouldn't have any more and you're certainly not going to bring any more in because it costs something so one of the most valuable Commodities and it's being used as currency you got some cigarettes you got some cocaine I have two rolls of toilet paper oh hell yeah give me that they have shut down markets it's not that they lack currency they have currency they have money and it's not that they don't have wealth Venezuela is of the top 10 oil producing countries in the world it's enormously wealthy what they don't have is markets the socialist government nationalized markets which means they sto functioning now it's entirely possible that you can provide an alternative but nationalizing markets in and of itself just stops them from functioning so the question I started out with is how much would you pay for access to a market think of it this way you go to a grocery store and at the door they're selling tickets at the door they're selling tickets to the grocery store how much would you pay for a ticket to get into the grocery store well if it was the only grocery store you'd pay a lot because the benefit that you get from being able to buy stuff cheaply from having millions of people all over the world work for you is enormous so the price that you would pay for that ticket is a lot the big problem is we have to choose from among badly imperfect Solutions we need other people to do things for us we need a lot of people a lot of things even if we just want something simple like a sandwich or a pencil a king well it's pretty good to be king I would vol unteer if they had a job King I would I'd be willing to do it it may not be so good to be a surf what about the state well the state does doesn't have the information that comes from prices so the single most important thing to remember about everything we've covered so far is that the state doesn't have the information that comes from prices whatever problems markets have and they're real the information that's contained in the price mechanism as a signal of relative scarcity giving both in the information and incentive for people to move resources to higher valued uses is the re is the argument for markets it's the core argument for markets and as I've said several times one way to think about that is it's immoral for you to use something that someone else values more it is immoral for you to use something that someone else values more without a price mechanism you have no idea whether that's true what about markets well there's lots of problems with markets and we've talked about problems with rent seeking contracts and Restraint of trade large corporations that have concentrated power and there's inequality markets exacerbate income inequality and in some cases power inequality but remember we have to choose between imperfect Alternatives there's a bunch of bad Alternatives the argument's not that markets are perfect rather that states and kings are even worse so you can't say well here's a failure of market so the state should do it that doesn't follow so what I have proposed as I've said before is the Munger test if somebody says I think the state should do this stop them and say okay but whenever you say State that's an imaginary thing what you mean is actual politicians elected in actual elections dominated by concentrated interests let's see if you still believe it if you say that so I think there should be large armies and many heavily armed heavily trained people who move around at the command of George W bush Dick Cheney or someone on the other side you have to pick actual human beings because that's what the state is they lack information they are not necessarily concerned only for the welfare of the people states don't have the information that's given by prices and kings are Kings it's not very egalitarian well let's talk about Bitcoin and the reason I gave that introduction is that Bitcoin if you had to guess is probably going to crash and burn and not exist in 5 years but there's some chance if some parts of the Bitcoin software survive that not only will it become an important currency but it'll solve a number of the problems that markets have and provide a better alternative to socialism so the reason to talk about Bitcoin is that it represents a potential radical solution to problems in less developed countries what Bitcoin matters is for Less developed countries less developed countries don't have Banks they don't have credit cards they don't have ways of saving money they don't have ways of signing binding contracts because they don't have rule of law honest judges or police that are not corrupt Bitcoin can potentially solve all those problems and that's why it's so exciting even if Bitcoin does Crash and Burn it's open-source software that can be adapted to solve some of these problems it's only been around since January of 2009 that seems like a long time to y'all I'm old that's not very long it's not issued by any particular entity it's all peer-to-peer it's completely decentralized there's no Central Authority Bitcoins can trade over the Internet over smartphones or even over feature phones all you really need to be able to do is to receive an SMS text so a regular phone won't do it but you don't need a smartphone all you need is a feature phone in Somalia you can buy a feature phone for the equivalent of $7 us then if you have some kind of monthly service for 10 bucks you're set up protocol is open source that is anyone can look at the software and fool with it owners buyers and miners are the three key groups people who transmit and record the transaction are called minors and that's kind of confusing it's a metaphor they're not really minors after all what they're doing is providing the public good of recording trans actions maximum number of Bitcoins will be about 21 million a Bitcoin is a unit of measurement but the unit depends solely on how people value it in transactions it has absolutely no physical existence so we'll talk about the Ledger Bitcoins only exist in the form of public addresses Bitcoin addresses and private keys your public address is like your username your private key is like your password public address though is a 64 character and they can be numbers or letters string and since they're random at least to the eye they don't look like much but each of those if it has a valid number of Bitcoins attached to it is someone's identity you cannot add you can add but you can't take away any Bitcoins without that password so the hard thing to think about is what is the physical existence of a Bitcoin it doesn't exist well last week you heard about dollars what's the physical existence of most dollars they don't exist either the total amount of US currency in circulation the total amount of US currency in circulation worldwide is less than $3,000 per person in the US US population is a little over 300 million total amount of actual physical currency paper money and coins is less than $3,000 all the rest of it is stored as a series of zeros and ones on some magnetic or digital media magnetic or visual media well what that means is those dollars don't exist either we're already using a digital currency the difference is how do you know how many dollars you have will you go to the bank and they tell you what if they changed their mind they'd never do that would they yes yes they would and it's happened in a lot of countries Argentina in particular just redefined the value of their peso and that meant that the amount of wealth that people had was cut in half so it's pretty tenuous since all of your wealth is held in the forms of zeros and ones that somebody else controls is pretty tenuous who controls the digital currency called Bitcoin no one those zeros and ones are stored on millions of nodes well who determines what's right simple answer is they use the 51% rule if half plus one of all the nodes agree on The Ledger that goes back all the way through time to the beginning the first transactions that's the number of Bitcoins you have nobody can change it nobody acting alone can change it no powerful person can change it no one knows where these are no one knows who or where these nodes are they're just computers operating somewhere it appears that most that's not true that the largest single country in terms of Bitcoin nodes is China there's more Bitcoin nodes in China than anywhere else more than twice as many as in the US which is second now part of that is cuz China's big but it wouldn't necessarily be true we'll talk later about some of the reasons why Bitcoin is important for China ban Casey make a distinction between currency and money currency is that thing which is a unit of account a store of value in a medium of exchange any currency is a mix of transactions and speculative motives for transaction means I carry it around to buy stuff speculative means I hold it in hopes that it will appreciate so many people hold Bitcoins for speculative reasons that its transaction purpose is pretty risky if you're holding Bitcoins to buy stuff you're taking a chance because there's so much volatility in its value money on the other hand is a system of clearing transactions it's an entire system of clearing transactions and remember we talked before about the three TRS trust transport and transactions nice thing about Bitcoin is that it's really easy to transport them because I can wire it has anybody tried to wire currency between countries it's not easy I had an account in Germany I was trying to close it was denominated in Euros took 7 days for the money to reach me the money wasn't physical there it was stored in zeros and ones and it cost me 3% to shift it Bitcoin is free and instantaneous there may be up to a 10-minute lag it's not quite instantaneous Bitcoin is free and basically instantaneous is Bitcoin a currency or a money well the currency part of it doesn't work very well it's the money part of it that holds great promise and that's I think the thing that people don't understand about Bitcoin everybody focuses on how it's not a very good currency and that's true what Bitcoin is is a great money for reasons we'll talk about so last time I went to Chile I went and looked up in my safe the place where I keep my passport and some foreign currency and I found hundreds of dollars worth of Chilean pesos that I had brought back with me last time I had been now the Chilean Peso had fallen it had been 500 pesos to the dollar and it had fallen to 650 pesos to the dollar so the Chilean Peso had fallen a long way against the US dollar did I lose money well I would have if ID converted them back into dollars but there' been very little inflation so I took the pesos with me to Chile and spent all of them because I didn't want to hold them anymore I didn't really lose money they were worth the same in Chile as they always had been because there hadn't been much inflation so talking about the value of money is complicated Chile and peso had fallen against the dollar it had not Fallen against goods and services in Chile that's the definition of inflation inflation is when a currency Falls in value in terms of the goods and services that it can buy now you're used to thinking of that as an increase in the price level but that's exactly the same thing it's not that stuff is worth more it's that current the the currency is worth less where does currency come from well the question that vgna and Casey ask is how does a currency become a money how does a currency become a money and their story for where currencies come from as two Alternatives and they're not mutually exclusive medalists are people who say that there were things that had intrinsic value and we would write paper notes that we would use to pass around because it was expensive and maybe dangerous to carry gold or those giant rocks that they talked about in the islands and then it ended up that people would be willing to accept paper in exchange for goods and services so it starts out with these things that have value like gold silver maybe shiny rocks those are cumbersome to use and so we start using tokens or chits the alternative is that what actually came first the charal lists would say what actually came first was debt I did you a favor you and I had exchanged something it turned out that it was much easier to keep written records of those debts once we have writing well once the debts are written down we could use the record of the debt itself that could exchange so the debt came first and what the debt is is a promise to pay and Fiat monies are in effect a promise of the US government to pay you $1 worth of what well nothing it just means that if you have a debt to the US government say you owe $1,000 in taxes you can say well here's $1,000 one bills you have to accept that and they say yes that's fine we'll cancel your debt because we acknowledge our debt to you our debt to you is you have $1,001 bills each one of which is an IOU from the government it says the government owes you a dollar's worth of value when you give that to the government they cancel their debt and they write it off against yours and so the transaction clears neither of those two accounts is obviously true or false some societies may have done one or the other but you need to recognize and this it's much more explicitly done in the uh chapters those two accounts of the origin of money teach you a lot about economics and transactions the simple version of why Bitcoin is important is that Bitcoin may allow countries that now have no rule of law and no Financial infrastructure to Leap Frog over developed Nations the big obstacle that developing nations have had is they need to develop Banks they need to develop ways to save they needs to develop a system of law contracts property you can skip all of that if B if Bitcoin works there's no need to develop those things and it breaks the Monopoly of both governments and large Financial intermediaries Banks and credit cards it's pretty easy for people in developed Nations to use credit cards however they charge a pretty significant fee one of the many things that Bitcoin does is get around that fee but it's only 2 and a half 3% on most transactions so while it's significant it's not enough alone to explain why Bitcoin would work but it's one of the things that Bitcoin does is it gets around monopolistic Financial intermediaries that interpose themselves between buyers and sellers so it's not just a currency but it's actually an entire system for clearing transactions trustless proof it's decentralized it uses the blockchain Ledger which is impossible to falsify and you can't counterfeit or cheat on the number of Bitcoins that you have the problem that the cyber community is most worried about for for cryptocurrencies is called double spending double spending and the the the reason double spending is a problem is I spend it on one thing and then I spend it on something else now I can't do that with physical dollars because if I give you a $10 bill I no longer have it I may be able to counterfit it but it's not easy and in fact the new currency that the United States has is very very difficult to counterfeit there's a number of anti counterfeit measures built in counterfeiting is always an arms race between technology and the state problem of double spending with digital currency though is there is no physical thing which means that you don't actually have it and I didn't actually give it up so the software itself has to solve the problem and in bitcoin's case it does it in a very clever way so let's go over the basic mechanism of how Bitcoin works and I'm going to claim there's eight parts I've seen people do it in five I've seen people do it in 10 it seems to me that there are eight and here they are step one the owner of Bitcoin signs in using the public key or Bitcoin address which is like a username and a private key which is a bit like a password so you're using the the Bitcoin software you're not actually running the Bitcoin software like a node but you now have access to your Bitcoin account second the owner of the Bitcoin sends X Bitcoins and they're highly divisible they're divisible down to 1 over 10 the 8th so 10 the minus 8th is the smallest unit of Bitcoin which is small I can send those to another Bitcoin address all I have to do is say here's the Bitcoin address that I want to send them to and then since I have said here's the Bitcoin address they're coming from and here is my private key which identifies me as the owner we can move the Bitcoins from one to the other now what are the Bitcoins they aren't anything it's actually just the private key it's as if the private key is itself the Bitcoins the amount of the Bitcoins is the number that's associated with my Bitcoin address that information is then broadcast by the software on the sender's phone or PC and it's received by all the active nodes the active nodes are the ones who are running the general Bitcoin software and as I said it takes a pretty significant amount of computing power to store and run the software and internet connection it has to be connected four all the active nodes add the pending transaction to the relevant or current block a block is like a ledger entry a block is a ledger entry and it's 10 minute intervals 10 minute intervals for a block so from 10 to 10 10 101 to 1020 1020 to 1030 and so on all the transaction actions in that 10-minute interval are recorded in a block and the software automatically writes blocks so everybody who's running a node they all have the same block step five miners then run that block through a hash function and this is described at quite a bit more l in vgan and Casey the cool thing about a hash function is that it's one-way encryption it's one-way encryption you could take all of the book War and Peace by Leo Tolstoy and use it to create a 64 character hash and it would be uniquely correct given what hash function you run it through but you couldn't look at the 64 character hash and then use it to generate war in peace so it's a unique encryption device it actually contains all of the information in the block but you can't go back to the block from it and again Vig and Casey described this quite a bit more I recognize it's confusing the point is there is precisely one hash that the correct block generates there is one hash that the correct block generates what bitcoin's founder Satoshi Nakamoto and maybe that's his name it probably isn't what he wanted to do was give people an incentive to check everybody else's math everybody should check everybody else's math to make sure that the block is correct so we added a lottery it looks like a lottery and the lottery is it's a little more complicated than this but it's useful to think of it this way how many zeros do you add to the front of the hash maybe it's three maybe it's 11 so you're guessing how many zeros to add to the front of the hash so after the 10 minutes all the miners run all of the block through the hash function and then they submit to the software that hash Plus in effect tickets to the lottery if the hash is correct and they have correctly guessed the number of zeros they win the lottery but millions of miners all are submitting hashes they're all checking each other's hash what that means is everybody agrees on what the correct value of the transactions are and if you win the lottery you get a new group of Bitcoins right now it's 25 every 10 minutes they give out 25 Bitcoins 2016 it's going to be cut in half I think it was 2014 it was cut in half it used to be 50 now it's 25 it'll be 12.5 and it'll keep on having every two years out through 2040 when that's just a trivial number and then it stops so in 2040 the total number of Bitcoins will be fixed Forever by the software unless they change it and we'll talk later about how to change the software so the cool thing is that how would you defraud this system suppose I say I want to spend Bitcoins that I don't have well people check and it's not in The Ledger I don't have those Bitcoins so when they generate the hash it turns out that my transaction does not go through suppose somebody wants to say instead of going to you it goes to me well they submit the hash but it's not the same hash that everybody else generates through the hash function because they don't think you should have it they want it to go to the person that was actually specified if 51% of all the nodes except the hashes being correct that block is now the correct block those blocks are then linked to previous blocks which forms the Block Chain and the Block Chain is the permanent Ledger the Block Chain Grows by one block every 10 minutes the blockchain Grows by one one block every 10 minutes so I know there's a bunch of stuff going on here in step five all the transactions in a 10-minute period form a block miners take the block run it through the hash function if the hash function checks out and they win the lottery their block is the one that is chosen to add to the blockchain they get 20 5 Bitcoins Bitcoins are now worth $220 as far as I can tell this morning so something just short of $5,000 something just more than $5,000 $5,000 let's say $5,000 thank you so $5,000 is some for just running your computer the problem is this there's such an arms race in computing power there are people who run big arrays of computers that can that can calculate thousands of hashes and submit thousands of lottery tickets per minute so to be to win that you'd have to be pretty lucky you have some chance but your chance of winning is proportional to the amount of computing power that you're employing so unsurprisingly there's some people that have really maxed out on that and a number of people who at the beginning thought Bitcoin would be Democratic have been disappointed remember though what's the reason why you give that person the 25 Bitcoin it's because they have correctly calculated the value of the new block everybody agrees that's the correct value because everyone else also has an incentive to check and then it's added to the blockchain and the blockchain is the permanent Ledger it cannot be changed the blockchain is the permanent Ledger of all the transactions that go back since the beginning of Bitcoin six well i' I've actually already said what six is and seven it's important for you to be able to keep these separate so the transaction and all the other transaction in the block are verified and The Ledger values are updated throughout the whole system so after step eight the new blockchain is established and all of the transactions have either been cleared or rejected and Penny plenty of people try to submit fraudulent transactions they just don't go through there's no way for them to go through because there's nobody for you to talk to and say hey let's do this you don't even know where the other nodes are there are millions of them and you need 51% to agree on on a new entry to The Ledger so here's the value of Bitcoin over time and the bottom one is um volume so as you see it got up close to 1,000 now it's down around 250 here in 2015 it started out at almost zero I remember thinking of buying some when they were at 30 I also thought of buying some when they were 800 I didn't either time because I don't think I'm smart enough to do that and it turns out that I'm right if you look at the volatility of Bitcoin this is really risky now as more and more Bitcoin are created and more people use them in transactions it's possible that the transactions use will start to dominate the speculative use as far as the motivation for why people own them but we're not there we're not even close to there the original version that Satoshi Nakamoto called Bitcoin QT and I should say it's not clear that Satoshi Nakamoto is one person could be three or four people might be one person his or her name is almost certainly not Satoshi Nakamoto his or her English is good programming is excellent we do know that this person this entity owns nearly a million Bitcoins well a million Bitcoins even now is worth more than $200 million so a lot of people say what amazing this guy did this and created something so valuable just and doesn't claim credit yeah but he has $200 million you can buy a lot of stuff and at one point he had a billion dollars or close to it so he did take care of himself which is fair enough delivered the Bitcoin soft Ware with some really insightful design decisions and the software itself is open source and royaltyfree so he's not charging anything for the software there's no licensing the developers who originally wrote the Bitcoin QT program are still mostly working on it they tend to have cyberpunk sensibilities and there's a description in the uh vgna and Casey Casey and vgna and Casey book about cyberpunks they tend to be anarchistic distrust government they have a kind of democratic impulse but they also want to get paid a number of developers are trying to come up with higher security wallets exchanges and transmitters nobody's really in control it is possible for developers to alienate themselves and become irrelevant you could look at the software and change it on your node that would tell everybody else that a a change in the software has been proposed almost everybody would just ignore it a few people would look at it and say hey that's right that is an improvement if 51% adopted the change in the software that you wrote it would become the new software so in a way it's like Wikipedia it is completely crowdsourced you can you could write a change in the software but unless most people adopted it it would be ignored nobody else would be running that software anything that you did would not be recognized there is a Bitcoin Foundation which tries to represent Bitcoin it's a nonprofit modeled after Linux actually and it's headed by Gavin and dreon and those were the um podcasts that I asked you to listen to the the difference between the two podcasts is fascinating one was 2011 the other was 2014 it's a fragile Coalition of interested parties it does pay the developers there are some disagreements that have led to calls for a new organization and Bitcoin is pretty Coy with the US government but it makes sense because that's their only chance for survival so Bitcoin is considered by the US government to be a commodity Bitcoin is not a currency because for the US to call it a currency operating inside the US would violate the laws that say that dollars are the sole currency so the they get around counterfeiting Bitcoin gets around the charge of counterfeiting by being considered a commodity but that means so suppose buy some euros and then a month later I use the Euros to buy something I don't owe any taxes on the increase in the value of the Euro if there was any but if I buy some Bitcoins and I use those a month later it's as if I'm buying a commodity and then cashing it in it's as if I bought a stock and I'm cashing it in so if the Bitcoins went from $200 to $300 I would owe tax on the $100 in increase so Bitcoin as far as the US government is concerned is not a currency it's a commodity the fact that some people will accept it in exchange for goods and services is beside the point it's a commodity and so the TA the the obligations for tax records are pretty significant however how would anybody know it's encrypted and Anonymous so you could get in trouble if you get caught it's hard to imagine getting caught but in principle you have to pay tax on the price difference if the price goes up between Bitcoins when you bought them and Bitcoins when you use them to buy something else here are some key Concepts these are things that you need to know wallets are are a way a digital way of storing your private keys so your private key remember is basically the same thing as your Bitcoin so if I go into your hotel room and steal your wallet I have your dollars if I go under your computer and steal your wallet I have your Bitcoins because I have the private Keys that's all Bitcoin is is those private Keys an exchange is a website that stores wallets and provides security and executes trade including conversion to Fiat currencies so exchanges generally will convert Bitcoin to whatever currency you want if you want to cash out proof of work is a piece of data which is timec consuming to produce but easy to verify producing a proof of work can be a random process with a low probability so that a lot of trial and errors required Bitcoin uses the hash cash proof of work so you have to be able to demonstrate that your hash is correct Mount goau is a remarkable story that's told told a little bit in the book Mount gaau stands for Magic the Gathering online exchange it was originally a bunch of Fanboys of the game the card game magic the Gathering but it turned out that a number of people wanted to buy Magic the Gathering cards with Bitcoins and the guy who ran mount g started to develop software that would allow that and that ended up being the dominant thing that mount goau did so Mount gck catastrophically failed they actually lost a lot of the Bitcoins remember the problem is the Bitcoin only is the private key and they just misplaced them they were so inept at writing software they misplaced them they did find a disconnected hard drive that had several 100,000 Bitcoin private keys on them and they were able to restore them but it was pretty sloppy operation what's amazing is that people who wanted Bitcoin because they wanted to get rid of intermediaries almost immediately tried to pay an intermediary called Mount goau to take care of their Bitcoins for them and it failed silk Roy Silk Road was basically eBay for Bitcoin it sold a lot of things but a lot of what it sold drugs and other illegal items and this bitcoin's ability to act as a currency for illegal items is what many people think of as being the its most Salient feature and it's not it's not two things we should worry about the 51% attack and the Dr Evil attack 51% attack is if somebody could form a Consortium that had 51% of the computing power of nodes if they can get control of 51% of the nodes they could just write a new block that assigns all the value of Bitcoin to them problem with that is if you did that nobody would accept Bitcoins so it would be suicidal 51% attack seems unlikely what's possible is the Dr Evil attack where someone who doesn't have Bitcoin said wouldn't it be fun to take it down and frankly it would there'd be a lot of squealing all you'd have to do is erase the blockchain you'd have chaos because you would no longer have the process of updating the blockchain so Mount gox was magic the Gathering online exchange there are five people you need to know for your essay Satoshi commoto was the founder palini who was the first person the second person to participate he was the first person to download the Bitcoin software and he produced he mined a few Bitcoins and then kind of lost interest Ross ulrick who was the dread pirate Roberts which you recognize I assume from Princess Bride The Dread pirate Roberts was in charge of the Silk Road Roger ver is called Bitcoin Jesus he's very excited about Bitcoin no he's very excited about Bitcoin so in some ways he's the most important spokesman and then Gavin andreon who is the head of the Bitcoin Foundation the term Bitcoin wallet refers to a file that contains the number or numbers of accounts that hold money you have wallet software for managing accounts and transactions since Bitcoins are valuable wallets are almost all encrypted you can print the secret numbers generally as a barcode and then you can take those printed values and lock them up hold them as a backup to an electronic wallet or use them as electronic money because if I give you a piece of paper that has my private key on it you can use that to transfer the Bitcoins which interestingly brings us full circle Bitcoin can be a paper currency because all you need is a piece of paper with a private key written on it I can then go to your public address and transfer your Bitcoin from your public address to mine the key features of Bitcoin is that it's electronic it has provable value although its speculative value May fluctuate it's fast and the transactions are free for now it's highly divisible no third- party trust is required it's uncontrollable in the sense that no Central Authority can control it the trades are irreversible the trades are irreversible so once I've transferred it you have it I can't get it back now in a way that's true of cash also if I go and spend $200 in cash at Walmart for a Blu-ray player and then it doesn't work I go back and I say look you you told me you would this has a warranty so if I have my receipt I can get the money back but only if the other person initiates the trade this is different from credit cards where for a month you can protest and have the charge removed no double spending it's Anonymous but verifiable so the remarkable thing about it is that it's Anonymous but verifiable no one knows who you are but everyone knows exactly every fraction of a Bitcoin that was ever spent and it's international well let me there's several more comparisons here but let me say this if you live in Somalia and you have a feature phone and you want to buy something there's no effective currency some people in Somalia use US Dollars some people use pieces of metal sometimes they just use barter people in Somalia then find themselves without the benefits of access to markets which means that they can't get anybody else to work for them if they do try to write a contract and enforce it the judges are so corrupt and the police such as they are are so corrupt that bribes rather than Merit of the case determines the outcome but if I have Bitcoin I don't need a contract I don't need a lawyer and I don't need a bank you and I come to an agreement I transfer the money it is held in effect in limbo until you agree and I agree that the terms of the contract have been satisfied the transaction is then completed and it's irreversible fraud is impossible I can't pay you in counterfeit money so in terms of getting around problems with fraud problems with the absence of financial institutions and problems with bad judicial or police institutions the real place that Bitcoin is likely to make a difference is in developing nations and 10 years from now we may all remember having talked about it and said why didn't we see it coming I'll see you coming back on [Music] Wednesday