In the last module, we explored why cryptocurrency might be useful. Here we delve more deeply into the rules and structures that enable bitcoin to operate. Note that blockchain was the technological innovation that allowed digital currencies to take off when previously so many had failed. Let's first take a little bit of a trip through the graveyard of failed online currencies. Does anyone remember CyberCash? So CyberCash was a company in the 1990s that pioneered an online currency called CyberCoin. Now, one of the features of CyberCoin is that every user needed to obtain a certificate to verify their identity, and apparently nobody really wanted to do this. So CyberCash eventually filed for bankruptcy in 2001. The technology that was part of CyberCash was eventually acquired through several steps by what is now known as PayPal. Does anyone remember DigiCash? So DigiCash also had an online currency called CyberBucks. Here clients were anonymous, so there was no cumbersome verification system. So DigiCash patented a blind signature scheme that has some similarity to bitcoin's protocol. Now, there was a divide between merchants and clients, which is very unlike bitcoin. Merchants were not anonymous, they needed to register with the bank. So it was not cumbersome for customers, but it was cumbersome for merchants. There was no user-to-user transactions. So CyberBucks failed when merchants did not want to register and then there were no clients that could trade among themselves. DigiCash filed for bankruptcy in 1998. The technology again through several steps was acquired by InfoSpace. Now, the creators of DigiCash caused some consternation when they patented the technology. So the mailing list, Cypherpunks, which was a predecessor of the mailing list from which Satoshi Nakamoto, wrote some of his earliest comments on what became bitcoin. The participants in Cypherpunks decided that they wanted to create a online currency. They weren't so worried about the patent. They created something called magic money. Another currency around this time was something called Lucre. Lucre was DigiCash, but with the attempt to get around the patent. So neither of these were associated with for profit companies, but we don't really think about them anymore. It's safe to say, that these currencies did not take off. So these are only four of many attempts to create a digital currency. So enter Satoshi Nakamoto. In a bitcoin forum, he writes, ''A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s. I hope it's obvious it was essentially controlled nature of those systems that doomed them.'' So what's interesting here, as we had a problem for which there had been multiple attempts to solve it and they'd all failed. That was probably pretty discouraging for the participants involved, and of course, one could draw the lesson of well if it's a hard problem, keep working on it. But what's also interesting is that sometimes there's insight from all of these failed attempts into what specifically went wrong, and that seems to be the case here. But actually let's discuss why this is such a hard problem. So if you have a truly decentralized currency, what that decentralized currency must achieve is a system of ownership rights. That system has to be self-enforcing because it can't rely on a state. We discussed this in the previous lecture. There's no sovereign. There's no police department. So this decentralized currency must also maintain a ledger of transactions that is secure and accurate. This maintenance must also be self-enforcing because there's no profit-making intermediary behind the scenes. In the last module, we also discussed the role of the centralized intermediary. So we need to somehow have a currency that avoids the sovereign and the centralized intermediary. Now, if that were not enough, it also must maintain trading in the currency because currencies do trade, and it has to have rules governing the supply of the currency. So we need a sovereign, we need a centralized intermediary, and we need a central bank. All of this has to be decentralized. So it is a pretty difficult problem. So I'm going to discuss in this module how bitcoin meets these challenges using cryptography and using blockchain. So here are the topics that we will be covering. First, I will discuss the digital signature, and then how bitcoin creates a tamper-proof ledger. So these two points are important for the definition of property rights within the system. They are not sufficient however. That ledger needs to be maintained and updated. That's where blockchain comes in. But even blockchain is really by itself not quite enough because of this notion of how do you decide what is the correct set of transactions, that's where we need to talk about distributed consensus. Finally, how does bitcoin become a central bank, currency supply and trade, and then what are some future challenges.
