Welcome to Lecture 7. In this lecture, we'll talk about all the ways that the world of BitCoin and the technology touches the world of people. We'll talk the community. We'll talk about politics within BitCoin, and the way that BitCoin interacts with politics. And we'll talk about law enforcement and regulation issues. In Lecture 7.1 we'll talk about consensus in BitCoin, the way that the operation of BitCoin relies on the formation of consensus among people. Now, there are really three kinds of consensus that have to operate for BitCoin to be successful. The first kind is a consensus about the rules. This is a consensus about things like what is it that makes a transaction valid? How can you tell a valid transaction from an invalid one? Second, what makes a block in the block chain valid? Which block should be accepted and which block should be rejected? Third, how the nodes in the P2P network should behave, how they should interact with each other and what kind of protocol they should use to discuss with each other? And more generally, all the protocols and data formats that are involved in making BitCoin work. You need to have a consensus about these things so that all the different participants in the system can talk to each other and agree on what's happening. So the first form of consensus that goes into BitCoin is just a consensus about what these rules should be in order for the system to go forward. The second form of consensus in BitCoin is consensus about the history. That is a consensus about what's in the block chain and what's not in the block chain. And therefore, a consensus about which transactions have occurred. And once you have a consensus about which transactions have occurred, what follows from that is of course a consensus about which coins, which unspent outputs exist and who owns them. And so, this consensus obviously flows from the processes that we've talked about in earlier lectures. By which the blockchain is built and by which nodes come to a consensus. The processes that we hope push BitCoin toward a consensus about the contents of the blockchain. So that consensus about what's in the blockchain and therefore what the history is, is the second important form of consensus that BitCoin relies on. The third form of consensus that BitCoin relies on is just the consensus that coins are valuable. That is the general agreement that BitCoins are valuable, that BitCoins are good thing to have, and in particular, the consensus that if somebody gives you a BitCoin today, that tomorrow you'll be able to redeem or trade that for something that is of value. Any currency needs this, whether it's a fiat currency like the dollar or a crypto currency like BitCoin, you need a consensus that the thing has value. That is, you need people to generally accepts that it's exchangeable for something of value, now and in the future. And, so that's the third kind of thing that BitCoin needs. Now this form of consensus, unlike the others, can be viewed as a little bit circular. In other words, my belief that the BitCoins I'm receiving today are of value depends on my expectation that tomorrow other people will believe the same thing. So consensus on value relies on believing that consensus on value will continue. And this is sometimes called the Tinkerbell Effect by analogy to Peter Pan, where it's said that Tinkerbell exists because you believe in her. The same thing is kind of true here. That the consensus that BitCoins have value exists because of the consensus that BitCoins have value. So, circular or not, it's a thing that seems to exist, and it's important for BitCoin to operate. Now what's important about all three forms of consensus is the way that they're intertwined with each other. And this diagram shows a little bit about what I mean when I say that. First of all the consensus about the rules and the consensus about history go together. Because it's the rules that determine which kinds of transactions can go into a block. And which kinds of blocks can come into existence. If you agree on the rules, that is which blocks are valid, then it's possible to build a consensus about the block chain and about history. Whereas without a consensus about the rules, then people are going to disagree about what's in the history and you won't be able to come to consensus in that way. So consensus about rules and consensus about history are tied together. In a similar way, consensus about history and a consensus that coins are valuable are also tied together. Consensus about history means that we agree on who owns which coins. And agreeing on who owns which coins is a necessary prerequisite for believing that the coins have value. Because if there's not a consensus that I own a particular coin, then I'm not going to have any expectation that people will accept that coin from me in payment in the future. So consensus about history is a prerequisite for consensus that coins are valuable. But in the same way, the consensus that coins are valuable is needed to make the consensus about history work. And we heard about this in the earlier lecture when we talked about the incentive arguments. The ways in which the block reward that is built into the mining process creates an incentive for people to follow the expectations about mining. So the consensus that coins are valuable is what creates the incentives that allows us to get to a consensus about history. And so we have all three forms of consensus here which are tied together. Such that if any of them failed then the other ones would all apart as well. And in a sense, the genius of BitCoin, the genius in BitCoin's original design, was in recognizing that it would be very difficult to get any one of these forms of consensus by itself. Consensus about the rules in a worldwide decentralized environment where there's no strong notion of identity. That's just not the kind of thing that's likely to happen. Consensus about a history, similarly, that is a very difficult distributed consensus data structure problem which is not likely to be solvable on its own. And a consensus that some kind of crypto currency has value was also a very difficult thing to put together. What the designer of BitCoin and the continued operation of BitCoin show is that even if you can't build any one of these forms of consensus by itself, you can somehow stand up all three of them together and get them to operate in an interdependent way. And so when we talk about how things operate within the BitCoin community, we have to bear in mind that BitCoin relies on consensus, it relies on agreement by the participants and that that consensus is a fragile and interdependent thing.
