Blockchain & Money: Sessions 1 & 2: Introduction and Money, Ledgers & Bitcoin by M.I.T. Sloan School of Management with Professor Gary Gensler

There’s a great course available for free about Blockchain & Money. The semester long course is taught by Professor Gary Gensler (yes, the S.E.C. Gary Gensler), offered by M.I.T.’s Sloan School of Management, and, freely available via video-lecture.

I pored over the videos and studiously took notes as I watched.

The course is for students wishing to explore blockchain technology’s potential use–by entrepreneurs & incumbents–to change the world of money and finance.

The course goes through a review of the technology’s initial application, the cryptocurrency Bitcoin, and then lays an understanding of the commercial, technical and public policy fundamentals of blockchain technology, distributed ledgers and smart contracts in both open sourced and private applications.

The course turns to current and potential blockchain applications in the financial sector, including reviews of potential use cases for payment systems, central banking, venture, capital, secondary market trading, trade finance, commercial banking, post trade possessing and digital ID. The course also dives into the markets and regulatory landscape for cryptocurrencies, initial coin offerings, other tokens and crypto derivatives.

Below are the first two videos:

1. Introduction for 15.S12 Blockchain and Money, Fall 2018, and
2. Money, Ledgers, and Bitcoin

The first intro video is an overview of the entire course and does a great job of laying the groundwork for what to expect over the coming sessions of this course.

• Session 1: Study Questions
  • What is blockchain technology and why might it be a catalyst for change for the financial sector?
  • What do you as a student wish to learn from this course, ‘Blockchain and Money’?

• Session 1: Readings
  • ‘The blockchain catalyst for change‘, Vox (July 16, 2018)

The second video, “Session 2: Money, Ledgers, and Bitcoin” gets down to the nitty, gritty of it!

An overview of Session 2: Money, Ledgers, and Bitcoin:

1. History of Money
2. Ledgers
3. Fiat Currency
4. Central Banking & Credit Cards,
5. Role of Money,
6. Early Cryptographic Digital Money,
7. Digital & Mobile Payments,
8. The Riddle Remained

• Session 2: Study Questions
  • What do the roles (medium of exchange, store of value, & unit of account) and characteristics (durable, portable, divisible, uniform, acceptable & stable) of money mean historically and in today’s digital economy?
  • What is fiat currency, what are its ledgers and how it fits within the history of money?
  • How does Bitcoin fit within the history of money, the emergence of the Internet and failed attempts of cryptographic payment systems?
• Session 2: Readings
  • ‘Conflict reigns over the history and origins of money’, Science News.
  • ‘A Brief History of Money’, IEEE Spectrum.
  • ‘What is Money? An Artist’s Make and Take’, Wall Street Journal video.
  • ‘A Brief History of Ledgers’, LLFOURN, Medium.
  • ‘Bitcoin and Cryptocurrency Technologies, Preface–The Long Road to Bitcoin’, Clark (pages 3-21)
  • ‘Bitcoin P2P e-cash paper’, Nakamoto.

Lawrence Lessig’s “pathetic dot theory” or “the New Chicago School theory” introduced this concept of lives of individuals (the pathetic dots in question) are regulared by “4 Force’s”:

1. the Law,
2. Social Norms,
3. Business (the Market), and
4. Technology (Code/Architecture/Technical Infrastructure).

These forces tend to grind up against each other in many areas of life. This begs the questions: What are the commercial realities (the markets)?, What’s the technology? (Even past technologies like the car replacing the horse & carriage had significant impact across these forces), How does the government put it into a set of standards that are required?

Ledger–a way to record economic activity, or social relationships or financial relationships.

Both a way to record economic activity and its a system of recording financial relationships.

Because it’s so fundamental to society to be able to record various economic transactions or to record the financial relationships amongst AND between members of a community (whether a small village or larger).

Types of money:

1. Non-metal Money–Ex.’s: Salt Bars (Ethiopia); Cowire Shells (Nigeria); Rai Stones (Yap); Tally Sticks (England).
2. Metal Money–Ex.’s: Bronze Aes Rude (Latin, “rough bronze”) (Rome); Copper Plates (Sweden); Bronze Spade (China).
3. Minted Money–Ex.’s: Bronze Yuan (China); Silver Dekadrachm (Greece); Gold Aureus (Rome). (Note that mined money was distinguished with an official emblem on a scarce resource.)
4. Paper Money–Ex.’s: Jiaozi Promissory Note (China); 5 Pound Note (England), Continental Note (U.S.)

Ledgers: were the Principal Recordings of Accounts: –Economic Activity –Financial Relationships

Types of Ledgers:

1. Transaction vs Balance–Transaction-based ledger (Bitcoin) as opposed to a Balance-based ledger (Etherium)
2. General vs. Supporting or Sub
3. Single Entry vs. Double Entry

Characteristics of Good Ledgers:

1. Immutable, Consistency
2. Timestamped
3. Ownership
4. Accuracy
5. Description of Transaction

Payment Systems–A method to amend & record changes in ledgers for money.

Fiat Currency Characteristics:

1. Social & Economic Consensus
2. Represented by a Central Bank. Liabilities & Commercial Bank Deposits
3. Relies upon system of ledgers; Integrated into Fractional Banking System
4. Accepted for Taxes
5. Notes & Coins are legal tender for all debts public and private
6. Unique tax treatment

Role of Money–a medium of exchange, a store of value, and a unit of currency.

Characteristics of Money:

1. Durable
2. Portable
3. Divisible
4. Uniform/Fungible (read about Crawfurd vs Royal Bank 1749 for more!)
5. Acceptable
6. Stable–Limited supply; hard to counterfeit.

Design of Money:

1. Token vs. Account Based
2. Physical vs. Digital
3. Private Sector vs. Central Bank
4. Widely Accessible vs. Wholesale

Early Cryptographic Digital Currencies…(All failed, btw):

1. DigiCash (David Chaum)–1989
2. Mondex (National Westminster Bank)–1993
3. CyberCash (Lynch, Melton, Crocker & Wilson)–1994
4. E-gold (Gold & Silver Reserve)–1996
5. HashCash (Adam Back)–1997
6. Bit Gold (Nick Szabo)–1998
7. b-money (Wei Dai)–1998
8. Lucre (Ben Laurie)–1999

Why did early digital currencies fail?

1. Merchant adoption
2. Centralization
3. Double Spending
4. Consensus

Digital & Mobile Payments: Paypal (1998), Ericsson/Telenor (1999); Alipay (2003); M. Pesa/Safaricom(using mobile minutes as a form of currency) (2007); Starbucks mobile app (2011); Google Wallet (2011); WeChat Pay (2013); Apple Pay (2014).

One question to ask when it comes to mobile money is, “Where is the stored value?”. Is a certain service storing the value, or are they just a processing provider to move change & amend other ledgers??? (More on Payment Systems in Seesion 13.)

Is the app/service storing the value?, or is it just an application (computer code) to move the ledger somewhere else???

Still, the riddle remained…How to move value peer-to-peer without any trusted central intermediary, or central authority?

Enter Bitcoin: A Peer-to-Peer Electronic Cash System.

Satoshi Nakamoto’s whitepaper released in 2008.

A new layer? Programmable transactions?

Ethernet (1974) –> TCP/IP (1974)–> HTTP (1990) –> SSL/TLS (1996) –> Bitcoin (2008)

3com (1979) –> Cisco (1984) –> Amazon (1995) –> PayPal (1998) –> ???

Biblio:

Gary Gensler. 15.S12 Blockchain and Money. Fall 2018. Massachusetts Institute of Technology: MIT OpenCourseWare, https://ocw.mit.edu. License: Creative Commons BY-NC-SA.