I’ve been interested in learning about blockchain for a while, especially on what it means for the finance industry.
Starting today, my friends and I will be starting MIT’s Blockchain and Money course by Gary Gensler, who is the current chairman of the U.S. Securities and Exchange Commission.
Thanks to universities like MIT, we can all learn from their world-class content for free.
Each week, I will be going through one lecture and sharing my notes here. I want do this to:
- Keep myself accountable.
- Optimise my learning and retention.
- Share the most interesting ideas with others.
The entire course consists of 24 lectures, but I may skip some based on our group’s interest and progress.
If you have any feedback on my writing or would like to join us on our learning journey, you are more than welcome to reach out on LinkedIn.
1: Introduction
As I mentioned, the lecturer for this course is Gary Gensler, who is one of the big reasons why we have decided to take this course in particular. A bit about him:
- Current chairman of the U.S. Securities and Exchange Commission.
- Former Assistant Secretary of the Treasury for Financial Markets of the Bill Clinton admission.
- Spent 18 years in Goldman Sachs as an investment banker. Became a partner at the age of 30, which was the youngest in history at the time.
The course description reads:
“This course is for students wishing to explore blockchain technology’s potential use — by entrepreneurs and incumbents — to change the world of money and finance. The course begins with a review of Bitcoin and an understanding of the commercial, technical, and public policy fundamentals of blockchain technology, distributed ledgers, and smart contracts. The class then continues on to current and potential blockchain applications in the financial sector.”
While blockchain has applications beyond just the world of finance, it is where the course will focus on.
What is cryptography?
Cryptography can be defined as “communications in the presence of adversaries” — or communicating without being detected by others.
This has taken various forms through human history:
- Scytale Cipher
- Enigma Machine (famously known to be solved by Alan Turing in the movie The Immitation Game (2014), but in fact the Polish government cracked it before him in 1930’s!)
- Asymmetric Cryptography, which this course will focus on. It is at the heart of technologies such as the Internet and Bitcoin today.
In modern times, the biggest challenge for cryptography was: “How do we transfer value over the internet without a centralised intermediary?”
This problem was solved by Satoshi Nakamoto, who on the evening of Halloween 2008 emailed out to the world: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” This was Bitcoin.
Through this course, one of the key questions we will be asking is: “Is blockchain truly the next layer of the internet?” The answer to this question is open-ended as of now.
What is blockchain?
The concept of blockchain can be dated back to early 1990’s. You can think of blockchain as “timestamped append-only log”. Which means you can add timed logs but you cannot remove it. These logs become an auditable database, which is secured with cryptography. The part that decides who gets to append the next log is the consensus protocol.
While we will dive deeper into each of these components, this is the big picture of how the blockchain technology works.
The first transaction with Bitcoin
16 months after the invention of Bitcoin on May 2010, a computer scientist offered 10,000 Bitcoins to buy two large pizzas. Until this point, no one had actually exchanged goods with Bitcoin before. After 4 days of advertising, he finally got his 2 pizzas for 10,000 Bitcoins on May 22nd, 2010. Ever since, 22nd of May has been titled “Bitcoin Pizza Day”. Back then, 10,000 Bitcoins were worth $41. At the time of this lecture, it is worth $66,000,000!
Blockchain and finance
Blockchain technology verifiably moves data on a decentralised network. This fits in nicely with the world of finance, because finance boils down to transfer of money and risk through a network of 7 billion people on this planet.
An optimist might say blockchain can solve some of the biggest challenges the modern finance industry is dealing with:
- Repeated crises and instability
- Fiat currency instabilities associated with unsound policies
- Centralised intermediaries take on concentrated risk and benefits
- Outdated systems in central banks
- Clearing & settlement costs and counterparty risks (Currently, the payment system costs alone equate to 0.5–1% of the global GDP!)
- Financial inclusion
Taking a more conservative perspective, from the financial sector’s point of view, there are many limitations with the blockchain technology that makes it unfit to solve these problems.
- Performance, scalability and efficiency. Modern payment system needs to be able to process about 100,000 payments per second. Bitcoin can handle 7 per second.
- Privacy & security. Blockchain is public by nature
- Interoperability. Many blockchain technologies today don’t integrate with legacy systems or with each other. Interoperability was one of the key attributes for the internet to be successful.
- Governance. Software behind blockchain is often difficult to update
Because of these issues, current commercial use cases of blockchain are mostly with permissioned blockchains, as opposed to permissionless blockchains.
Throughout the course, we will be examining these issues from both perspectives, from the minimalist point of view to the maximalist.
More than anything, this course is meant to be about critical thinking. It is intended to teach you how to think about the blockchain technology and how it will fit (or not) into the future of finance. If you are here to learn how to day trade Bitcoin, I’m afraid you’re reading the wrong course!
The next lecture will discuss money, ledgers and Bitcoin.
