[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, which 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 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 email, which is a decentralized 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 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 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.
