WEBVTT - Bonus: The Crypto Story by Matt Levine - Part 3 0:00:03.640 --> 0:00:06.720 This is Bloomberg Crypto, a daily Bloomberg I Heard podcast, 0:00:07.120 --> 0:00:10.119 and I'm Stacy Marie Ishmael, Managing editor of Crypto for 0:00:10.160 --> 0:00:28.440 Bloomberg News. Let me cut to the chase. Matt Levine, 0:00:28.520 --> 0:00:30.560 my colleague on the Bloomberg Opinion side of the house, 0:00:31.160 --> 0:00:34.959 is perhaps the greatest finance blogger ever to do it, 0:00:35.560 --> 0:00:37.640 and in what is both a flex and a service, 0:00:37.960 --> 0:00:40.920 He's just written tens of thousands of words on the 0:00:40.960 --> 0:00:44.640 subject of crypto for a special issue of Bloomberg Business Week. 0:00:45.840 --> 0:00:49.200 Matt's gone deep into the blockchain to break down its origins, 0:00:49.400 --> 0:00:52.640 it's possible, futures, and the current state of a technology 0:00:52.680 --> 0:00:55.960 that's showing up everywhere in industries ranging from finance to 0:00:56.040 --> 0:00:59.600 shipping too, of course video games. And we're going to 0:00:59.680 --> 0:01:03.360 be bringing his exploration to you in audio form thanks 0:01:03.360 --> 0:01:06.120 to the talents of Bloomberg editor and professional voice actor 0:01:06.319 --> 0:01:10.040 Mark Ledoff. You'll get weekly chapters of the special Crypto 0:01:10.120 --> 0:01:14.320 issue of Bloomberg Business Week. Welcome to the third chapter 0:01:14.440 --> 0:01:16.800 of the special audio edition of the Bloomberg Business Week 0:01:16.840 --> 0:01:20.119 Crypto issue, written by Matt Levine and narrated by Mark Leadoff. 0:01:20.760 --> 0:01:23.720 Mr chapter. You can find previous episodes right here in 0:01:23.720 --> 0:01:44.679 the Bloomberg Crypto podcast feed Part two. What does it mean? Okay, then, 0:01:44.840 --> 0:01:47.960 I've described in some detail the workings of the thing 0:01:48.280 --> 0:01:53.200 bitcoin That'satoshi Nakamoto invented. But let's take a step back. 0:01:53.840 --> 0:01:58.600 What exactly is it that he invented. The simplest answer 0:01:59.200 --> 0:02:03.920 is that he invented bitcoin. Bitcoin is a big thing. 0:02:05.320 --> 0:02:07.480 At its peak, the total value of bitcoin in the 0:02:07.480 --> 0:02:11.040 world was more than one trillion dollars. There are thousands 0:02:11.040 --> 0:02:13.800 of articles about it. It has lots of investors and 0:02:13.919 --> 0:02:18.680 fans and believers. Some of these people are called bitcoin maximalists. 0:02:19.120 --> 0:02:21.720 They believe the only really interesting and valuable thing in 0:02:21.760 --> 0:02:25.720 the world of crypto is bitcoin. Those people could stop here. 0:02:25.880 --> 0:02:30.440 I guess there. It is Bitcoin here, though, I want 0:02:30.440 --> 0:02:33.040 to keep going. I want to talk about different ways 0:02:33.080 --> 0:02:37.120 that you might generalize Satoshi's invention. There are different ways 0:02:37.120 --> 0:02:40.400 to interpret what Setoshi was up to and what he accomplished, 0:02:40.680 --> 0:02:43.639 and each interpretation points you to a different direction. For crypto, 0:02:44.880 --> 0:02:50.079 a a store of value. A minimal generalization of bitcoin 0:02:50.200 --> 0:02:53.560 is something like Satoshi invented a technology for people to 0:02:53.600 --> 0:02:58.400 send numbers to one another. That's not nothing before Setoshi 0:02:58.440 --> 0:03:00.399 I could have written you an email that said one 0:03:00.440 --> 0:03:03.480 thirty two point fifty one, but you'd have no way 0:03:03.520 --> 0:03:05.720 of knowing whether I had the one thirty two point 0:03:05.720 --> 0:03:08.200 fifty one on my computer, or whether I had already 0:03:08.240 --> 0:03:10.760 sent the one thirty two point fifty one to someone else. 0:03:11.040 --> 0:03:13.040 And you'd have no way of proving to other people 0:03:13.080 --> 0:03:15.160 that you now add the one thirty two point fifty 0:03:15.160 --> 0:03:18.360 one on your computer and could send it to them. 0:03:18.400 --> 0:03:22.639 I realized that paragraph sounds very stupid, because it is 0:03:23.240 --> 0:03:26.000 you definitely have one thirty two point fifty one on 0:03:26.040 --> 0:03:29.920 your computer, as well as every other conceivable number. Computers 0:03:29.919 --> 0:03:33.160 can generate numbers arbitrarily and more or less for free. 0:03:33.560 --> 0:03:37.280 Open a spreadsheet type two point fifty one, and there 0:03:37.320 --> 0:03:41.560 you go. In a sense, the technological accomplishment of bitcoin 0:03:41.720 --> 0:03:45.200 is that it invented a decentralized way to create scarcity 0:03:45.480 --> 0:03:49.119 on computers. Bitcoin demonstrated a way for me to send 0:03:49.160 --> 0:03:51.600 you a computer message so that you'd have it and 0:03:51.760 --> 0:03:55.280 I wouldn't to move items of computer information between us 0:03:55.320 --> 0:03:59.320 in a way that limited their supply and transferred possession. 0:04:00.360 --> 0:04:04.200 But the technological accomplishment is not the whole story, arguably 0:04:04.280 --> 0:04:07.240 not even the most important part. The wild thing about 0:04:07.240 --> 0:04:10.160 bitcoin is not that Satoshi invented a particular way for 0:04:10.200 --> 0:04:13.200 people to send numbers to one another and call them payments. 0:04:13.680 --> 0:04:18.320 It's that people accepted the numbers as payments. There's nothing 0:04:18.360 --> 0:04:21.520 inherent in the technology that would make that happen. People 0:04:21.600 --> 0:04:24.560 might have read the Bitcoin white paper and said, huh, 0:04:24.920 --> 0:04:27.240 this is a cool way to send payments, but your 0:04:27.240 --> 0:04:30.160 problem is that you aren't sending dollars. You're sending this 0:04:30.360 --> 0:04:33.800 thing you just made up, and who wants that? Well 0:04:34.040 --> 0:04:37.080 most of them did say that initially, but lots of 0:04:37.080 --> 0:04:43.320 people eventually decided that bitcoin was valuable. That's weird. Satoshi 0:04:43.480 --> 0:04:46.520 was like, I have invented a payment system that works great. 0:04:46.839 --> 0:04:49.400 The only problem is that instead of getting paid in dollars, 0:04:49.440 --> 0:04:51.720 you get paid in this thing I just made up. 0:04:52.160 --> 0:04:55.520 Is that cool? And enough people were like, Yeah, that's 0:04:55.560 --> 0:04:59.440 cool that now crypto is a trillion dollar business. That 0:04:59.600 --> 0:05:03.039 social fact that bitcoin was accepted by many millions of 0:05:03.080 --> 0:05:05.760 people as having a lot of value might be the 0:05:05.839 --> 0:05:09.400 most impressive thing about bitcoin, much more than the stuff 0:05:09.400 --> 0:05:17.200 about hashing shit coins. Here's another extremely simple generalization of bitcoin. 0:05:17.920 --> 0:05:22.800 One you can make up an arbitrary token that trades electronically. Two. 0:05:23.120 --> 0:05:25.920 If you do that, people might pay a non zero 0:05:25.960 --> 0:05:29.599 amount of money for it. Three worth a shot. No. 0:05:30.800 --> 0:05:35.520 As Bitcoin became more visible and valuable, people just did that. 0:05:36.440 --> 0:05:39.200 There was a rash of new cryptocurrencies that were sometimes 0:05:39.240 --> 0:05:43.800 subtle variations on Bitcoin and sometimes just lazy knockoffs. Shit 0:05:43.960 --> 0:05:49.440 coins is the mean name for them. To software engineers 0:05:49.440 --> 0:05:52.840 through together a cryptocurrency and gave it a logo of Doge, 0:05:53.160 --> 0:05:56.599 the talking sheba e new meme. They called it doge coin, 0:05:56.720 --> 0:05:59.600 and it was a parody of the coin boom. It's 0:05:59.600 --> 0:06:03.400 worth a eight billion dollars today. I'm not going to 0:06:03.480 --> 0:06:06.480 explain that to you. Nobody is going to explain that 0:06:06.520 --> 0:06:09.440 to you. Certainly the guys who invented doge coin don't 0:06:09.520 --> 0:06:11.960 understand it. One of them has taken to Twitter to 0:06:12.000 --> 0:06:14.719 say he hates it. It's just like, if you're making 0:06:14.800 --> 0:06:17.760 up an arbitrary token that trades electronically, and you hope 0:06:17.800 --> 0:06:20.360 people will buy it for no particular reason, you might 0:06:20.360 --> 0:06:23.120 as well make it fun, slap a talking dog on it, 0:06:23.400 --> 0:06:26.880 give people stuff to make jokes about online. Incidentally, here's 0:06:26.880 --> 0:06:29.520 a fun argument that was made against bitcoin early in 0:06:29.520 --> 0:06:34.240 its life. One, there's a limited supply of bitcoin. Two, 0:06:34.360 --> 0:06:36.919 but the Bitcoin software is open source and can be 0:06:37.040 --> 0:06:41.200 cloned trivially. Three, So if the price of Bitcoin gets above, 0:06:41.279 --> 0:06:44.880 you know, a hundred dollars, someone will just invent blit coin, 0:06:45.240 --> 0:06:49.720 which will be an exact copy of Bitcoin. Four. Bitcoin 0:06:49.839 --> 0:06:53.320 is arbitrary and blit cooin is arbitrary, so there's no 0:06:53.360 --> 0:06:55.400 reason that blit coin should trade at much of a 0:06:55.400 --> 0:06:59.640 discount to bitcoin. Five. This will dilute the value of 0:06:59.680 --> 0:07:02.960 bit coin. Any sensible person would rather pay ninety dollars 0:07:02.960 --> 0:07:05.159 for blit coin than a hundred and five for Bitcoin, 0:07:05.520 --> 0:07:09.679 since they're the same thing, but one is cheaper. Six. Therefore, 0:07:09.760 --> 0:07:12.720 there's an infinite supply of Bitcoin or things that are 0:07:12.760 --> 0:07:16.000 exactly like it, so the value of bitcoin cannot get 0:07:16.040 --> 0:07:20.280 too high. This argument turned out to be mostly wrong. Socially, 0:07:20.360 --> 0:07:23.760 cryptocurrency is a coordination game. People want to have the 0:07:23.800 --> 0:07:26.360 coin that other people want to have, and some sort 0:07:26.360 --> 0:07:29.960 of abstract technical equivalence doesn't make one cryptocurrency a good 0:07:30.000 --> 0:07:34.480 substitute for another. Social acceptance, legitimacy is what makes a 0:07:34.520 --> 0:07:38.080 cryptocurrency valuable, and you can't just copy the code for that. 0:07:38.720 --> 0:07:42.240 That's a revealing fact. What makes bitcoin valuable isn't the 0:07:42.280 --> 0:07:46.680 elegance of its code, but it's social acceptance, another advantage 0:07:46.680 --> 0:07:51.520 that Bitcoin has over a hypothetical copycat more minors. A big, 0:07:51.520 --> 0:07:55.080 diverse pool of miners keeps a cryptocurrencies blockchain more secure 0:07:55.120 --> 0:07:58.440 than a small concentrated pool, But that security is just 0:07:58.520 --> 0:08:02.360 an instantiation of its rodder social acceptance. All the Bitcoin 0:08:02.440 --> 0:08:07.240 miners could quit and become blitcoin miners, they just don't. 0:08:08.160 --> 0:08:11.560 A thing that worked exactly like Bitcoin but didn't have 0:08:11.800 --> 0:08:15.840 Bitcoin's lineage, didn't descend from Satoshi's genesis block and was 0:08:15.920 --> 0:08:19.400 just made up by some copycat would have the same technology, 0:08:19.960 --> 0:08:27.000 but none of the value. Two an uncorrelated asset. Here's 0:08:27.040 --> 0:08:31.480 another generalization of bitcoin. One Satoshi made up an arbitrary 0:08:31.520 --> 0:08:35.840 token that trades electronically for some price. Two the price 0:08:35.880 --> 0:08:40.040 turns out to be high and volatile. Three the price 0:08:40.080 --> 0:08:45.760 of an arbitrary token is arbitrary. This may not sound 0:08:45.760 --> 0:08:48.080 that great to you, but it's very interesting as a 0:08:48.120 --> 0:08:53.040 matter of finance theory. Modern portfolio theory demonstrates that adding 0:08:53.080 --> 0:08:57.200 an uncorrelated asset to a portfolio can improve returns and 0:08:57.240 --> 0:09:02.120 reduce risk. Big institutions will invest in timberland, or highway 0:09:02.160 --> 0:09:05.400 tolls or hurricane insurance because they think that those things 0:09:05.600 --> 0:09:09.359 won't act just like stocks or bonds, that they'll diversify 0:09:09.400 --> 0:09:12.520 their portfolios, that they'll hold up even in a world 0:09:12.520 --> 0:09:15.800 where stocks go down to the extent that the price 0:09:15.840 --> 0:09:19.040 of bitcoin. One mostly goes up, though with lots of 0:09:19.120 --> 0:09:22.200 ups and downs along the way, and two goes up 0:09:22.240 --> 0:09:24.960 and down for reasons that are arbitrary and mysterious and 0:09:25.120 --> 0:09:29.560 not tied to like corporate earnings or the global economy, 0:09:29.640 --> 0:09:34.719 then bitcoin is interesting to institutional investors. There are variations. 0:09:34.960 --> 0:09:39.240 For instance, one, bitcoin is not just uncorrelated to regular 0:09:39.320 --> 0:09:43.319 financial stuff. It's a hedge to inflation. If the Federal 0:09:43.400 --> 0:09:46.880 Reserve is printing money recklessly, the dollar will lose value, 0:09:47.080 --> 0:09:50.160 but bitcoin is in limited supply and will maintain its 0:09:50.240 --> 0:09:54.800 value even as the dollar is inflated away. Two. Bitcoin 0:09:54.960 --> 0:09:58.559 is like gold, but more convenient. The value of gold 0:09:58.679 --> 0:10:01.840 is also somewhat arbitrary and mysterious, but it's a store 0:10:01.880 --> 0:10:04.440 of value that's not tied to corporate earnings and central 0:10:04.440 --> 0:10:09.960 bank policy. Investors who like gold should buy bitcoin. Well, 0:10:10.120 --> 0:10:13.240 those are some things that people said in practice, it 0:10:13.240 --> 0:10:15.719 turns out that the price of bitcoin is pretty correlated 0:10:15.720 --> 0:10:20.199 with the stock market, especially tech stocks. Bitcoin hasn't been 0:10:20.240 --> 0:10:24.400 a particularly effective inflation hedge. Its price rose during years 0:10:24.400 --> 0:10:27.400 when US inflation was low, and it's fallen this year 0:10:27.440 --> 0:10:31.080 as inflation has increased. The right model of crypto prices 0:10:31.200 --> 0:10:34.160 might be that they go up during broad speculative bubbles 0:10:34.200 --> 0:10:37.040 when stock prices go up, and then they go down 0:10:37.120 --> 0:10:40.800 when those bubbles pop. That's not a particularly appealing story 0:10:40.880 --> 0:10:44.280 for investors looking to diversify. You want stuff that goes 0:10:44.360 --> 0:10:51.320 up when the broad bubbles pop. Three game stop. I'm 0:10:51.320 --> 0:10:53.960 not going to dwell on the meme stock phenomenon here. 0:10:54.400 --> 0:10:57.480 I dwelt on it in this publication last December. But 0:10:57.559 --> 0:11:01.080 one important possibility is that the first general realization of bitcoin, 0:11:01.480 --> 0:11:05.080 that an arbitrary tradeable electronic token can become valuable just 0:11:05.160 --> 0:11:09.640 because people want it to permanently, broke everyone's brains about 0:11:09.679 --> 0:11:13.760 all of finance. Before the rise of bitcoin, the conventional 0:11:13.800 --> 0:11:15.840 thing to say about a share of stock was that 0:11:15.880 --> 0:11:19.480 its price represented the market's expectation of the present value 0:11:19.520 --> 0:11:23.160 of the future cash flows of the business. But bitcoin 0:11:23.320 --> 0:11:26.800 has no cash flows. Its price represents what people are 0:11:26.800 --> 0:11:29.680 willing to pay for it. Still, it has a high 0:11:29.720 --> 0:11:33.840 and fluctuating market price. People have gotten rich buying bitcoin, 0:11:34.600 --> 0:11:37.320 so people copied that model, and the creation of and 0:11:37.400 --> 0:11:42.520 speculation on pure, abstract, scarce electronic tokens became a big business. 0:11:43.240 --> 0:11:46.920 A share of stock is a scarce electronic token. It's 0:11:46.960 --> 0:11:50.800 also something else, acclaim on cash flows or whatever. But 0:11:50.920 --> 0:11:53.880 one thing that it is is an electronic token that's 0:11:53.880 --> 0:11:57.000 in more or less limited supply. If you and your 0:11:57.000 --> 0:12:00.199 buddies online want to make jokes and invest base on 0:12:00.280 --> 0:12:03.320 those jokes, then depending on your sense of humor and 0:12:03.400 --> 0:12:06.040 which online chat group you're in, you might buy either 0:12:06.200 --> 0:12:11.080 dogecoin or GameStop corps stock, and for your purposes those 0:12:11.120 --> 0:12:17.800 things are not that different b a distributed computer. Here's 0:12:17.840 --> 0:12:22.160 another very different generalization of bitcoin. In its sharpest form. 0:12:22.200 --> 0:12:26.160 It's mostly attributed to programmer Vitalic bou Terran, another colorful 0:12:26.240 --> 0:12:29.960 character whom we won't discuss. If you're curious, there are 0:12:30.000 --> 0:12:32.840 two books by former Bloomberg journalists about the early days 0:12:32.840 --> 0:12:35.880 of Ethereum, in which Vitallic is the star but by 0:12:35.880 --> 0:12:39.640 no means the only important player. Camilla Russo's The Infinite 0:12:39.679 --> 0:12:43.960 Machine and Matthew Lisn's Out of the Ether. Bu Terran's 0:12:44.000 --> 0:12:48.120 sketch of bitcoin goes like this. One. Look, this thing 0:12:48.160 --> 0:12:51.760 you made is a big, sprawling computer. The blockchain is 0:12:51.800 --> 0:12:55.000 doing the functions of a computer. Specifically, it's keeping a 0:12:55.080 --> 0:13:01.400 database of bitcoin transactions. Two. This computer has some fascinating properties. 0:13:01.720 --> 0:13:05.280 It's distributed. The computer's data aren't kept on any one 0:13:05.360 --> 0:13:09.000 particular machine, but spread out among lots of nodes. The 0:13:09.000 --> 0:13:11.840 blockchain creates a mechanism to make sure they all agree 0:13:11.920 --> 0:13:16.400 on what the database says. It's decentralized. Different people run 0:13:16.440 --> 0:13:19.960 the database on their own separate machines. It's secure and 0:13:20.080 --> 0:13:23.520 final because of how transactions are encoded into blocks. It's 0:13:23.520 --> 0:13:25.880 more or less impossible for someone to reach back into 0:13:25.920 --> 0:13:29.040 the database and change a transaction from last week. And 0:13:29.120 --> 0:13:32.800 it's trust less and permissionless. Anyone who wants to can 0:13:32.880 --> 0:13:36.920 download the blockchain or mine bitcoin. The mining mechanism gives 0:13:36.960 --> 0:13:40.000 people incentives to collaborate and compete with one another to 0:13:40.120 --> 0:13:44.200 keep the database secure and up to date. Three. But 0:13:44.320 --> 0:13:48.000 it's not a very good computer. Mostly it just keeps 0:13:48.040 --> 0:13:50.880 a list of payments. We'll be right back with more 0:13:50.920 --> 0:13:54.040 from Bloomberg Business Week. Special crypto issue written by Matt 0:13:54.120 --> 0:14:07.480 Levin a narrated by Mark Leadoff. Four. Let's do the 0:14:07.559 --> 0:14:13.680 same thing, but make it a good computer. One. Ethereum, 0:14:13.720 --> 0:14:18.000 the computer that Vitallic invented. Like Setoshi, Vitallic Buterian is 0:14:18.000 --> 0:14:20.640 widely referred to in the crypto world by his first name, 0:14:21.320 --> 0:14:26.040 is generally called Ethereum or the Ethereum Virtual machine. It's 0:14:26.080 --> 0:14:31.120 a virtual computer distributed among thousands of redundant nodes. Each 0:14:31.160 --> 0:14:34.360 node knows the state of the computer, what's in its memory, 0:14:34.600 --> 0:14:38.680 and each transaction on the system updates that state. Ethereum 0:14:38.680 --> 0:14:43.160 works a lot like Bitcoin. People create transactions, they broadcast 0:14:43.200 --> 0:14:46.240 them to the network. The transactions are included in a block. 0:14:46.560 --> 0:14:50.600 The blocks get chained together, everyone can see every transaction, etcetera. 0:14:51.280 --> 0:14:54.880 The currency of the Ethereum blockchain is called I don't know. 0:14:55.000 --> 0:14:57.880 It's common to call it ether, though sometimes people say 0:14:57.880 --> 0:15:01.800 ethereum and often they just write E T H. Similarly, 0:15:01.840 --> 0:15:06.200 Bitcoin is sometimes written BTC in conversation. It's mostly shortened 0:15:06.240 --> 0:15:11.280 to but whereas Bitcoin transactions are mostly about sending payments, 0:15:12.160 --> 0:15:15.080 that's an exaggeration. There is a scripting language in bitcoin, 0:15:15.160 --> 0:15:18.800 and some ability to write programs. Actions on Ethereum are 0:15:18.800 --> 0:15:23.000 conceived of more generally, Ethereum is a big virtual computer, 0:15:23.480 --> 0:15:26.200 and you send it instructions to do stuff on the computer. 0:15:26.920 --> 0:15:30.280 Some of those instructions are send ten ether from address 0:15:30.440 --> 0:15:33.520 X to address why one thing in the computer's memory. 0:15:33.560 --> 0:15:36.320 Is a database of Ethereum addresses and how much ether 0:15:36.520 --> 0:15:38.400 is in each of them, and you can tell the 0:15:38.400 --> 0:15:41.880 computer to update the database. But you can also write 0:15:41.920 --> 0:15:45.200 programs to run on the computer to do things automatically. 0:15:45.760 --> 0:15:48.680 One sort of program might be send ten ether to 0:15:48.760 --> 0:15:53.360 address why if something happens. Alice and Bob might want 0:15:53.360 --> 0:15:56.280 to bet on a football game, or on a presidential election, 0:15:56.760 --> 0:15:59.680 or on the price of ether. Alice and Bob, by 0:15:59.680 --> 0:16:03.320 the way, are stock characters and discussions of crypto, not 0:16:03.560 --> 0:16:07.400 interesting characters, though they might write a computer program on 0:16:07.400 --> 0:16:10.600 the Ethereum virtual machine to do that. The program would 0:16:10.640 --> 0:16:13.160 have its own Ethereum account where it could keep ether, 0:16:13.600 --> 0:16:16.360 and it's programming logic would say something like, if the 0:16:16.440 --> 0:16:20.200 Jets win on Sunday, or if Joe Biden wins the election, 0:16:20.640 --> 0:16:25.400 or if either trades above on November one, then send 0:16:25.400 --> 0:16:28.160 the money in this account to Alice. Otherwise send it 0:16:28.200 --> 0:16:31.440 to Bob. Alice and Bob might then each send one 0:16:31.480 --> 0:16:33.880 Ether to the account, which would whirr along for a 0:16:33.920 --> 0:16:36.560 bit checking the football scores, or the election results or 0:16:36.600 --> 0:16:40.760 the ether prize. How would it check. The standard solution 0:16:40.760 --> 0:16:43.720 in crypto is called an oracle. It's a program that 0:16:43.760 --> 0:16:46.960 will periodically query some company or website that tracks the 0:16:47.000 --> 0:16:51.800 relevant information election results, football scores, whether, etcetera, and post 0:16:51.840 --> 0:16:55.520 the answer to the Ethereum blockchain. An oracle is essentially 0:16:55.520 --> 0:16:58.480 a way to bring information from the outside world, the 0:16:58.560 --> 0:17:02.880 real world, or just the Internet, onto the blockchain. When 0:17:02.880 --> 0:17:05.480 the program had an answer to its question who won 0:17:05.520 --> 0:17:08.960 the game or the election or is ether above, it 0:17:09.000 --> 0:17:12.040 would automatically resolve the bet and send to ether to 0:17:12.040 --> 0:17:14.639 the winner. Or you could have a program that says, 0:17:15.000 --> 0:17:17.959 if anyone sends one ether to this program, the program 0:17:18.000 --> 0:17:21.720 will send them back something nice. Something nice is pretty 0:17:21.720 --> 0:17:25.160 hazy there, and frankly it's pretty hazy in actual practice, 0:17:25.480 --> 0:17:27.760 but in concept, anything that you can put into a 0:17:27.800 --> 0:17:31.560 computer program could be the reward here. So send me 0:17:31.640 --> 0:17:33.760 one ether and I will send you back. A digital 0:17:33.760 --> 0:17:37.280 picture of a monkey would be one possible program. And 0:17:37.320 --> 0:17:39.560 I guess it sounds like I'm joking, but for a 0:17:39.560 --> 0:17:42.800 while digital pictures of monkeys were selling for millions of 0:17:42.840 --> 0:17:46.359 dollars on ethereum. Or there's a thing called the Ethereum 0:17:46.440 --> 0:17:49.240 Name Service, or e n S, which allows people to 0:17:49.320 --> 0:17:52.879 register domain names like Matthew Levine, dot et h and 0:17:53.000 --> 0:17:56.680 use them across various Ethereum functions. You send ether to 0:17:56.720 --> 0:17:58.880 the e n S program and it registers that name 0:17:58.960 --> 0:18:01.399 to you. You send in money, and it sends you 0:18:01.440 --> 0:18:05.320 back a domain. The standard analogy here is a vending machine. 0:18:05.800 --> 0:18:08.119 A vending machine is a computer in the real world 0:18:08.400 --> 0:18:10.120 where you put in a dollar and you get back 0:18:10.160 --> 0:18:13.520 something you want. You don't negotiate with the vending machine 0:18:13.640 --> 0:18:16.000 or make small talk about the weather while it wrings 0:18:16.040 --> 0:18:18.960 you up. The vending machine side of the transaction is 0:18:19.240 --> 0:18:23.480 entirely automated. It's programming makes it respond deterministically to you 0:18:23.560 --> 0:18:27.119 putting in money and pressing buttons. In the crypto world, 0:18:27.200 --> 0:18:31.080 these programs are called smart contracts. The name is a 0:18:31.119 --> 0:18:34.960 bit unfortunate. A smart contract is a computer program that 0:18:35.040 --> 0:18:39.000 runs on the blockchain. Some smart contracts look like contracts. 0:18:39.280 --> 0:18:41.560 Alison Bob's bet on the price of ethereum looks a 0:18:41.600 --> 0:18:44.520 lot like a financial derivative, which is definitely a contract. 0:18:45.119 --> 0:18:48.600 Some smart contracts look like vending machines. They sit around 0:18:48.600 --> 0:18:50.800 in public waiting for people to put money in, and 0:18:50.840 --> 0:18:53.760 then they spit out goods. A vending machine is not 0:18:53.880 --> 0:18:57.280 exactly a normal contract, but it is a transaction, and 0:18:57.359 --> 0:19:01.119 people who are into philosophizing about contracts like thinking about 0:19:01.200 --> 0:19:05.560 vending machines. But some smart contracts just look like, you know, 0:19:05.800 --> 0:19:09.200 computer programs. The concept is more general than the name. 0:19:09.720 --> 0:19:13.239 In the Ethereum white paper, Vitallic Bouterran wrote, note that 0:19:13.400 --> 0:19:16.119 contracts in Ethereum should not be seen as something that 0:19:16.160 --> 0:19:19.720 should be fulfilled or complied with. Rather, they are more 0:19:19.760 --> 0:19:24.120 like autonomous agents that live inside of the Ethereum execution environment, 0:19:24.640 --> 0:19:27.840 always executing a specific piece of code when poked by 0:19:27.880 --> 0:19:31.520 a messenger transaction, and having direct control over their own 0:19:31.520 --> 0:19:34.920 ether balance and their own key value store to keep 0:19:34.960 --> 0:19:39.439 track of persistent variables. There are limits. Ethereum is a 0:19:39.480 --> 0:19:42.840 distributed computer, but it doesn't have a keyboard and a monitor. 0:19:43.480 --> 0:19:45.720 It would be hard to play call of duty on 0:19:45.760 --> 0:19:50.760 the Ethereum virtual machine. But ethereums blockchain and smart contracts 0:19:50.800 --> 0:19:53.040 can serve as sort of a back end to other 0:19:53.080 --> 0:19:58.320 types of programs. Developers build dapts or decentralized apps on 0:19:58.359 --> 0:20:01.960 Ethereum and other block chain. These are computer programs that 0:20:02.040 --> 0:20:05.399 mostly run on the web, perhaps on some centralized or 0:20:05.520 --> 0:20:08.480 cloud server, but keep some of their essential data on 0:20:08.520 --> 0:20:11.680 the blockchain. You play a computer game, and your character's 0:20:11.720 --> 0:20:15.119 attributes are stored on the blockchain. A normal program on 0:20:15.160 --> 0:20:18.600 the game company's servers renders the character's sword on your screen, 0:20:18.880 --> 0:20:21.280 but the fact that she has the sword is stored 0:20:21.320 --> 0:20:23.919 on the blockchain. One other limit is that it's a 0:20:24.000 --> 0:20:27.919 slow computer. The way Ethereum executes programs is that you 0:20:28.000 --> 0:20:31.080 broadcast the instructions two thousands of nodes on the network, 0:20:31.320 --> 0:20:34.159 and they each execute the instructions and reach consensus on 0:20:34.200 --> 0:20:38.200 the results of the instructions. That all takes time. Your 0:20:38.240 --> 0:20:41.800 program needs to run thousands of times on thousands of computers. 0:20:42.440 --> 0:20:45.480 Computers and network connections are pretty fast these days, and 0:20:45.520 --> 0:20:49.320 the Ethereum computer is fast enough for many purposes, such 0:20:49.320 --> 0:20:53.720 as transferring ether or keeping a database of computer game characters. 0:20:53.760 --> 0:20:55.639 But you wouldn't want to use this sort of computer 0:20:55.760 --> 0:21:01.360 architecture for extremely time sensitive, computation intensive application. You wouldn't 0:21:01.359 --> 0:21:04.840 want like a self driving car running on the Ethereum 0:21:04.920 --> 0:21:08.359 virtual machine. You wouldn't want thousands of computers around the 0:21:08.400 --> 0:21:11.919 world redundantly calculating how far you are from hitting someone 0:21:12.000 --> 0:21:18.600 before you could break two proof of steak. This distributed computer, 0:21:18.880 --> 0:21:22.840 the Ethereum Virtual machine, takes its basic design from Bitcoin. 0:21:23.480 --> 0:21:27.000 There are blocks, everyone can see them. They are chained together, 0:21:27.359 --> 0:21:31.800 Transactions are signed with private keys, everything is hashed, etcetera. 0:21:32.040 --> 0:21:34.200 It's just that, in addition to sending money to people, 0:21:34.560 --> 0:21:37.679 you can send computer instructions to the blockchain and the 0:21:37.680 --> 0:21:41.280 blockchain will execute them. What that means is that there 0:21:41.280 --> 0:21:44.720 are thousands of computers each running nodes of the Ethereum network, 0:21:45.119 --> 0:21:47.679 and all those computers will agree about what happens on 0:21:47.720 --> 0:21:50.879 that network, who sent money to whom, and what computer 0:21:50.960 --> 0:21:55.280 instructions executed when. The fact that Ethereum is a distributed 0:21:55.520 --> 0:21:59.120 virtual computer means that all those actual computers can come 0:21:59.160 --> 0:22:03.320 to a consensus is about what operations executed when. And 0:22:03.359 --> 0:22:06.280 the reason this was possible is that Bitcoin showed how 0:22:06.320 --> 0:22:10.359 a decentralized computer network could reach consensus. The stuff with 0:22:10.400 --> 0:22:12.480 the hashing and the mining and the nonsens and the 0:22:12.480 --> 0:22:18.080 electricity that is Bitcoin's consensus mechanism, proof of work, or POW. 0:22:19.480 --> 0:22:23.080 Until last month it was also Ethereums. There were some 0:22:23.160 --> 0:22:27.200 technical differences, but the basic mechanics were pretty similar. Miners 0:22:27.280 --> 0:22:29.560 did a bunch of hashes of block data, and whoever 0:22:29.600 --> 0:22:32.240 found the right hash first mined the block and got 0:22:32.240 --> 0:22:35.640 a reward. Because this was expensive and wasted a lot 0:22:35.680 --> 0:22:40.280 of resources, it demonstrated a commitment to the Ethereum ecosystem, 0:22:40.280 --> 0:22:44.520 but the waste itself was bad, and so on September, 0:22:45.200 --> 0:22:50.200 after years of planning, Ethereum switched to a new consensus mechanism. 0:22:50.320 --> 0:22:54.960 Ethereum now uses something called proof of steak or POS. 0:22:55.240 --> 0:22:58.919 The basic ideas remained the same. People do transactions and 0:22:58.960 --> 0:23:02.800 broadcast them to the Ethereum network. A bunch of computers. 0:23:02.840 --> 0:23:07.400 In POW they're called miners. In POS, they're called validators 0:23:07.760 --> 0:23:11.280 work to compile these transactions into an official ordered list 0:23:11.520 --> 0:23:14.600 called the blockchain. Anyone with a computer can be a 0:23:14.640 --> 0:23:19.360 minor validator. The protocol is open to everyone, but the miners. 0:23:19.520 --> 0:23:22.159 Validators have to prove their commitment to the system to 0:23:22.359 --> 0:23:26.000 mine or validate blocks in POW. The way you prove 0:23:26.040 --> 0:23:28.159 that is by using a lot of electricity to do 0:23:28.320 --> 0:23:31.360 hashes in pos The way you prove that is by 0:23:31.480 --> 0:23:35.080 having a lot of ether oversimplifying a bit. The general 0:23:35.119 --> 0:23:39.240 mechanics are one. Anyone can volunteer to be a validator 0:23:39.280 --> 0:23:42.920 by staking some of the network's currency depositing it into 0:23:42.960 --> 0:23:46.840 a special smart contract. The staked currency can't be withdrawn 0:23:46.920 --> 0:23:49.960 for some period on ethereum. You need to stake thirty 0:23:49.960 --> 0:23:54.040 two ether currently forty dollars or so to be a validator. 0:23:54.480 --> 0:23:58.200 Two Validators get transactions as they come in and compile 0:23:58.280 --> 0:24:01.720 them into blocks. No. In fact, there is a division 0:24:01.720 --> 0:24:04.640 of labor in ethereum, where there are specialized companies called 0:24:04.680 --> 0:24:09.639 block builders that compile blocks for validators to validate. Three 0:24:09.880 --> 0:24:14.080 at fixed intervals, say every twelve seconds, one validator is 0:24:14.160 --> 0:24:17.120 randomly chosen to propose a block, and some other set 0:24:17.119 --> 0:24:19.760 of validators is chosen to review the proposed block and 0:24:19.880 --> 0:24:24.040 vote on it. Four, the randomly chosen validators agree on 0:24:24.119 --> 0:24:26.760 whether to add the block to the chain. If everyone 0:24:26.840 --> 0:24:30.640 is doing their job honestly and conscientiously, they'll mostly agree 0:24:30.920 --> 0:24:34.560 and the block will be added. Five the validators get 0:24:34.560 --> 0:24:39.400 paid fees in ether. Six If a validator acts dishonestly 0:24:39.600 --> 0:24:43.000 or lazily, if it proposes wrong blocks, or if it 0:24:43.040 --> 0:24:45.760 fails to propose or vote on blocks, or if someone 0:24:45.800 --> 0:24:48.719 turns off the computer running the validator, it can have 0:24:48.800 --> 0:24:52.080 some or all of its stake taken away as a penalty. 0:24:52.680 --> 0:24:55.359 I mean, that's the concept, but when I write it 0:24:55.400 --> 0:24:57.679 out like that, it sounds more manual than it is. 0:24:58.359 --> 0:25:02.080 Nobody is sitting around reviewing retransaction and agonizing over whether 0:25:02.119 --> 0:25:05.520 it's legitimate. The validators are just running the official open 0:25:05.560 --> 0:25:09.600 source Ethereum software. It is all pretty automatic, and you 0:25:09.600 --> 0:25:11.879 can run it on a laptop with good backup power 0:25:11.920 --> 0:25:15.639 and a solid Internet connection. The big outlay maybe forty 0:25:16.040 --> 0:25:18.960