[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 crypto currency, except for one big glaring problem, whic
h is that it relies upon
the centralized authority called Scrooge. And we end it with the question of,
how do we de-scroogify this currency? How do we go to a decentralized
version of this? That's what we're gonna 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 asnd a lot of
the magic or mystery of Bitcoin should become clear to you and how it works and
why it's 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 decentralizat
ion,
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 email, which is a decentrali
zed
system, fundamentally, I would say. It's based on a standard spaced protocol,
SMTP. But, what has happened,
especially in the last decade or so, is that we see a dominance of
a few different web mail 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 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 l
ike, 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 no
de,
and there's a fairly low barrier to entry. You can go online, you can download
a Bitcoin client yourself. It requires a lot of disconsumption
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 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.