[MUSIC] In these lessons, we'll look at seven design principles underlying blockchain. Our first principle is networked integrity. On the blockchain, trust doesn't come from an outside source. That means that the four values of integrity (honesty, consideration, accountability, and transparency) are coded into the blockchain. They're baked into decision rights, incentive structures and operations. Integrity is distributed among nodes, not vested in a single member. That means acting without integrity is either impossible or it costs far too much time, money, energy, and reputation. Cheaters never prosper. To make sure this works, we need to first understand the problem with integrity online. On the Internet, people haven't been able to do business directly because money and other assets aren't like the other things you can share online. If you send a selfie to a friend, you can still share it with another. But you can't give your friend a dollar you've already given to someone else. The money must leave your account to go into your friend's. It can't exist in two places at once. If the Internet treated money just like information, there would be a risk if you're spending the same money twice. That's called the double-spend problem. That's good for fraudsters, but its bad for people who deserve to be paid. It's also bad for your reputation online. Traditionally, the double-spend problem has been solved by clearing every transaction through a third party. This could be a bank, money transfer service, credit card company, government, or an online payment platform. This means giving all of your information to someone else. It also means payments are settled on their schedule, not on yours. Well, a blockchain breakthrough changes that. Using an existing, distributed peer-to-peer network and a bit of clever cryptography, Satoshi Nakamoto found a way to solve this double-spend problem without a thrid party. On the Bitcoin blockchain, the network timestamps that first transaction where the owner spends a particular coin. It rejects any more spends of the coin, eliminating a double spend. Miners, people who run Bitcoin nodes, gather up the recent transactions, order the them in to a block of data and add it to the chain. Each block must refer to the previous one to be valid. And since the blockchain is public, Bitcoin is more traceable than cash. When the network reaches consensus about what happened, it records it on the blockchain. How the network reaches consensus is a critical factor. The Bitcoin network relies on what is called a proof of work. Because we can't rely on the identity of the miners to select who creates the next block, the network instead creates a puzzle. Miners use their resources, namely computing hardware and electricity, to solve the puzzle by finding the right hash. Remember a hash is a unique fingerprint for the text or the data file. This puzzle requires a lot of computing to solve. But when someone solves it, everyone else can check the work quickly. Whoever solves the problem first gets to create the next block. And for each block a miner creates, he or she receives bitcoin as a reward. There are no shortcuts to solving the problem, so when the rest of the network sees the answer, everyone trusts a lot of work went into producing it. On average, a miner finds a hash meeting the target every ten minutes. Sometimes it takes longer, sometimes it doesn't take much time at all. Now there are other consensus mechanisms. The developers of Ethereum 1.1, expect to replace proof of work with a different mechanism, called proof of stake. Proof of stake requires validators to invest in and hang on to a native token of the blockchain, whether it's Peercoin, NXT, or something else. They needn't spend energy to vote. Blockchains such as Ripple and Stellar rely on social networks for consensus. They might require new nodes to generate a unique list of at least 100 nodes they can trust in voting on an update. This type of proof is biased. Newcomers need social intelligence and reputation to participate. There's also proof of activity, combining proof of work and proof of stake. There's also proof of capacity requiring miners to devote a lot of hard drive space to mining. A similar concept, proof of storage, requires miners to share their disk space in a distributed cloud. The platform Cosmos uses something called byzantine fault tolerance. And yes, while that one is rather byzantine as a formulation, it could be a breakthrough. Storage does matter too. Data on blockchains are different from data on the Internet, and in one important way in particular. On the Internet most of the information is malleable and fleeting. The exact date and time of its publication isn't critical to past or future information. On a blockchain, the truth of the present relies on the details of the past. Bitcoins moving across the network have been permanently stamped from the moment of their coinage. For a bitcoin to be valid, it must reference its own history and the history of the blockchain. It's kind of like a digital wax seal. Therefore the blockchain must be preserved in its entirety. Regardless of the consensus mechanism, the blockchain ensures integrity through clever code rather than through human beings. So, what are the implications of this? Well, rather than trusting big companies and governments to verify people's identities and vouch for their reputation, we can trust the network. The history will be all there. It's checkable and it's unchangeable. The platform ensures trust in transactions and recorded information no matter how the other party acts. And this has enormous implications for social, political, and economic activity. It's not just about recording who married whom, who voted for whom, who paid whom. It's about any endeavor requiring trusted records and assured transactions. It can tell you who owns what, regardless of whether the property is physical or intellectual. Who graduated from medical school? Who bought which gun? Who made this pair of Nike shoes, Apple device, or this baby formula? Where did these diamonds come from? Is this fish really Halibut? Which farm provided this Romaine lettuce? With the help of blockchain, we'll soon be able to verify all these things without question.
