Welcome and introduction

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In January 2009 we witnessed the birth of the first viable digital currency. Called bitcoin,
his new form of money was born on the Internet. What an incredible and provocative
idea, a currency without the need for traditional banks and not beholden to any central
authority. In fact, bitcoin is absent of any governance and oversight, seamlessly
traversing the Internet with little delay and only managed through the consensus of all
users of the currency. 
Now, powering the seemingly magical new form of money, the mechanism that makes it
work is also an innovative new idea. It's a novel way to store, validate, authorize and
move digital transactions across the Internet. It's called a blockchain and it has the
potential to be a highly disruptive technology, not just in the world of digital
currency but in a vast number of organizational contexts. 
The potential of the blockchain is so significant that anyone who wants to understand
the future of the Internet needs to understand it, what it is enabling and may enable and
the industries it may disrupt both positively and negatively. 
Hi, I'm Jonathan Reichental and this is my Blockchain Basics course. What makes this
course unusual is that while we will cover the mechanics of how the blockchain
works and the problems it can solve we will also explore a world of uses that have yet to
be realized. We will discuss a speculative future where traditional ways of doing
things are challenged and reimagined. I've made the content easy to follow for
anyone so that we can stay focused on the big picture, we'll have some fun exploring
current uses of the blockchain and also imagining the possibilities. Let's get started.

Risk and security challenges with using the Internet today

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Let's be blunt about this, the internet is amazing, and it's changing the world. While
recognizing that we still have 50% of the world's population to connect, the internet has
fundamentally touched almost all aspects of life for half our planet and, undoubtedly,
has impacts on the other 50% too. The internet plays a role in how we work,
learn, communicate, play, and so much more. It has significantly impacted industries like
newspapers and brick-and-mortar retail, reinvented others like how we manage our
money, and created new industries such as social media and online dating. You get it,
the internet has been a big deal and continues to be. In fact, the most disruptive days of
the internet may still be ahead of us. Some have said that we're still in the opening
act. Of course, it's easy to focus on all the positives of the internet, such as low-cost
communications anywhere in the world, low barriers to setting up and running a global
online business, and new ways to access healthcare information and services. We'd be
kidding ourselves if we didn't recognize that the vast network of networks didn't have
some stubborn problems associated with it. Beyond some of the obvious, social media
trolling, software viruses, online fraud, fake news, and criminal hacking, the internet
often struggles with the fundamental challenges of trust. We face ongoing questions
such as is the person you are doing business with online really who they say they are? Is
a service real? And are only authorized people granted access to private systems? Of
course, we could all think of hundreds of other examples of trust on the
internet. Healthy ecosystems rely on trust. Now, this being said, we've done
wonders with existing technology. In addition to usernames and passwords, we now use
two-factor authentication, which requires more effort to validate an identity for an
individual. For example, after entering a username and password on a laptop
computer, a user may be asked to enter another code that is sent separately to the
person's mobile phone. We have firewalls and intrusion detection systems, hardware
installed for that works to block bad internet traffic, we have biometrics, such as using
your fingerprint for access, and CAPTCHAs, those online boxes that require you to type
in letters and numbers from a photograph to prove you're not a computer. With these
mechanisms for security and trust, we've come a long way, and yet we still get
hacked. Our systems and databases are compromised, made unavailable, money and
identities are stolen, and our confidence to innovate even further using the internet is
stifled and, at worst, impeded. If we want ironclad online voting, workable digital
currencies, confidence in machines talking to machines, self-driving cars that securely
negotiate with each other, improved and seamless methods to authenticate
identity, and more, we're going to need a more secure and trustworthy internet. To
enable Bitcoin, the world's most successful online currency, in a topic we'll explore in
detail later, a new mechanism for establishing trust was required. This was the
blockchain. And while the blockchain may change the game in security and trust, it may
enable a lot more. If we're going to enter the next chapter of innovation and positive
disruption using the internet, it may well be the blockchain that opens the door.

Rethinking the traditional database

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- In order to understand the blockchain and how, for example, it enables Bitcoin, we first
need to cover the basics of a database. If you already know what a traditional relational
database is, you might consider skipping this video. However, I think everyone might
enjoy a primer on the topic. Fundamentally, a database is a place where we store and
manage many aspects of data for a computer system. We can store data in a structured
way or an unstructured way. Let's first look at a structured database. 
Let's use the example of a contacts database, a place where we might store people's
names and phone numbers. To find a person and their phone number in this
database, we would use solver code to search the database, so that it finds and returns
the right result to us. A well-designed database powered by good hardware is very
efficient, being able to search among millions of records and return a correct
result, often in less than a second. In a traditional database, the data is stored in an
organized and structured way. Imagine for a moment, columns and rows. In each row is
a different person's first and last name and their phone number, with each distinct piece
of data in its own column, respectively. A traditional telephone book might be easiest to
visualize, but in a tabular format, much like a spreadsheet you're likely already familiar
with. In technical terms, we call this a database table. Entries in one table in a
database may reference another table or even another database. This is powerful
because it enables us to do things like reduce duplication of data. It's much more
efficient to only include a person's name and phone number once in a system and
simply refer to it, rather than creating that data every time there is a need for it or it has
to be updated. Imagine a database that stores invoices. Each time an invoice is
generated for the same person, it simply references the name, rather than recreating it
many times. It might seem trivial on the surface, but it creates real efficiencies when
there are high volumes of transactions. Let's now look at an unstructured database. It's
basically the opposite of a structured database in that no structure exists. Remarkably,
most of the data in the world, just in sheer scale, is now in an unstructured format. Some
say it's as high as 80% of all data. Think of the data that is collected and stored in social
media or an email or online documents. Unlike the predictability of a structured contact
database with first name, last name, and phone number in rows and columns, these
unstructured systems have to manage people's online posts, for example in
Facebook, which are undefined in length and can contain more than just text, such as
photos and music. Fortunately, a healthy ecosystem of providers has created tools for
managing unstructured data really well. Both structured and unstructured databases are
the foundation of almost all servers and online systems in place today. Whether it's the
internal systems of a business for say, financial accounting, email, or customer contact
information, and for popular commercial services like Amazon, Google, and
Facebook, or even your online banking, it's databases that store and manage all the
content for each one of these. Now let's talk about access and security with these
databases. The databases I've described typically reside on a server computer, one that
lives in a data center at a business or a systems provider. Now I'm going to illustrate that
with some blocks today. I'm going to take these blue blocks, which are going to
represent data on a server at the center here in a database. And these other blocks
here, they're not this color for any particular reason, just random colors, these are the
clients, these are the computers that access this database here in the center. These
could be PCs or Apple computers, they could be smartphones or tablets, and they
access this database in the center. This is a centralized database structure. Now a
decentralized structure is different in that the data then is removed from the center and
is distributed among lots of computers on the network. This can improve performance
really well and for the users of the system, they are not aware that this is
actually physically designed differently. It's just a different design. In all instances, there
are one or more mechanisms for allowing certain people to have access privileges. For
example, one type of user might be able to just look up information in the
database, while another user might be able to have the right to add or delete data. In
every instance where rights are granted to a user, there is an authority that provides
those rights. Now this is an essential point that I want you to make special note
of. Someone or something has to provide rights to a user. In many organizations, this is
a designated system administrator. This person has been authorized with the right to
grant certain rights. In some cases, a system can provide rights if certain conditions are
met. However, in all instances there remains some overall governance to administer
those rights. This simplified explanation of security generally serves organizations
well, but has some limitations. For example, what happens if someone who is not
authorized attains certain rights and gains access to a database? What happens if
someone is able to bypass security measures and alter the data in the database? The
traditional databases I've described in this video are generally serving our organizations
well and providing enormous value across the global economy. But, as I've also
described, they have clear limitations that have created and maintained risks for
organizations. These challenges continue to be difficult to resolve, perhaps, until
now. The blockchain is a new type of database and it just might offer some solutions to
today's challenges, while also providing radical new opportunities. It's time to rethink
the traditional database.

What problems does the blockchain solve?

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- We've discussed that a core characteristic of a traditional database is that it
typically has a central authority that governs it. For instance, all rights to a database are
owned by the organization that creates it. They can decide who has access and what
type of access that they can have. They decide what is stored in it, what is deleted, and
what is archived. However, this has at least two potential flaws to it. 
First, if a system relies on a central database, this can result in a single point of failure. In
other words, if either the central authority is compromised or a backdoor is exposed, the
database can be subject to all manner of risk. The second major flaw is that all power is
held by the central authority. Now, in general this is okay. For example, if you run an e-
commerce website, you probably want total control over it. Your own central authority,
perhaps you as CEO, gets to decide all aspects of that environment, including shutting it
down if that's what you want. What central power can do, however, is create control that
limits access, say by being cost-restrictive or requiring special skills, by creating onerous
human checks and balances, like approval workflows. In most cases, by extension,
humans remain the final arbiter of the validity of a transaction. We see this in most
contract work. A contract between two entities completed over the Internet still requires
one or more central authority to validate data. For example, with a mortgage, banks
must validate savings and approve loans. Title companies must validate properties. And
legal professionals must validate signatures and other contractual requirements. Each
one of these central authorities has unique power that levies considerable overhead in a
mortgage transaction. The transactions in the very databases all take time to process,
cost money, are vulnerable to hacking, provide limited participation from those
involved, require special skills, and can be error prone. Up until now, we've generally
been okay with this. The blockchain however solves almost all of these challenges. Let's
discuss how it does this. The blockchain is a new type of database. Instead of a
centralized or decentralized database on one or more servers, a blockchain database is
installed on individual computers used by the people who use the database. In fact, a
copy of the same database is installed on every computer of every user who uses that
database. As I've already demonstrated, in a central database we have the database on
one server in the center. In the decentralized database, it is spread out among several
servers. However, a distributed blockchain database is copied to every client computer
on this network. There are no database servers. Now, let's walk through what
happens when a transaction takes place in this distributed database. To keep things
really simple, we'll use our earlier example of a contacts database that has names and
phone numbers, our electronic phone book. Let's start with creating a rule for our
phone book. In it, we have decided we only want the owner of a phone number to be
able to modify it. This rule is now codified into our software. Okay, so I've just received
my new smartphone and I need to update my phone number in this electronic phone
book. First I make the change in the phone book database that's on my computer. Next,
my database transmits this transaction to every identical database on the distributed
network over the Internet. At this point, all of the individual computers where the
database resides have to agree that I have the permission to change my phone
number. Since all the distributed databases already know this rule, that is, only the
owner can change the phone number, they allow my change. We can think of as
consensus-based permission because computers on the network have to reach
agreement before a change is allowed. Each database then appends a new block of
data in the database that contains my new phone number. I'm going to demonstrate
that using some blocks right here. And so this represents some data. I've got a new
entry. In this case, we could imagine this to be my new phone number. And then we go
ahead and cap that off. Now, we talked about the fact that this entry then gets
replicated across all the participants in the blockchain database. Here I have three
examples on a normal blockchain database. This will probably be thousands of
computers. Now, we're going to go ahead and add another entry to this database. This
could be perhaps another person's phone number. And now this phone number gets
appended to all the other databases. It should be identical. The database itself has
agreed that this is allowable. And now we have a chain of blocks, we call it the
blockchain, that has identical information in all of the different databases that are
distributed throughout. Now, what makes this really interesting is that if somebody
wanted to hack this, perhaps they wanted to change this block here by replacing it, say,
with a blue block, the blockchain database is not going to permit this. And the reason
for that is because each row in this database right here relies on the identical row in
each database previous to it. So any changes wouldn't permit this to exist, so the
integrity of the database would be broken. This is a really important quality. Blocks are
only added and never deleted. All changes are simply captured as new blocks. We call
this characteristic immutability. Put another way, a blockchain database is an immutable
database. We can think of the blockchain database as keeping track of changes, like an
accounting ledger where financial transactions are recorded. For this reason, the
blockchain is often referred to as a distributed ledger. Let's go a little deeper on this
example to reveal just how transformative it is. First, there is no central authority. The
power is now distributed across the entire network of users of the database. No single
person or system can approve or deny my phone number change in the electronic
phone book. Power has been decentralized. It requires the consensus of all participating
computers. Since the distributed database knows that I am the only person allowed to
change my own phone number, it is almost hack-proof. We are able to create these
immutable transactions. A hacker would need to change the information on hundreds
and likely thousands of computers in order to get the authority to make the
change. This quality then ensures integrity to the database creates inherent trust. It's
why the blockchain is sometimes referred to as the trust protocol. Next, when I made
the change to my phone number, the change was accepted and reflected almost
immediately. A small delay does exist, only because participating requests for changes
to the blockchain are queued up and processed in order. We'll also discover in a later
video that there is some mathematical processing required by some computers that
creates some delay too. While simplified, these are the basics of the blockchain
database. To summarize, this new model has no central database. A blockchain database
is installed on all the computers that use the database. Any transaction in that database
must be validated by all the participating members. It has the power to be almost hack-
proof. It eliminates central authorities, significantly reduces transaction costs. It quickly
processes complex transactions and more. To fully understand the blockchain requires
us to understand its origin story, and it begins with Bitcoin.

The birth of the blockchain in bitcoin

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- Let's talk about the origin of the blockchain. The fact that the blockchain emerges as
the essential supporting mechanism for a new digital currency will play an important
role in our understanding of this technology. The first mention of Bitcoin, a new form of
peer-to-peer electronic cash, showed up in a paper written by someone called Satoshi
Nakamoto in 2008. Turns out, this is not a real person's name. Speculation is that it was
a group of writers who used a pseudonym. The mystery of who was behind it
continued with the emergence of Bitcoin in 2009 as open-source software, a type of
software license which allows anyone to inspect, modify, and enhance it. The Bitcoin
software enabled a digital currency that could be used without any intermediaries or
governing authority. This means that currency could pass from person to person without
the need for a bank or any other financial intermediary. In this way, it's the opposite of
all other forms of typical currency we know and use. Bitcoin is called
cryptocurrency because the existence in history of a transaction can be seen by
everyone, but the contents are only known to the people making and receiving each
individual transaction. What cannot be seen by others is called encrypted and what can
be seen is unencrypted. Thus, the crypto or cryptography part of the word
cryptocurrency. As a currency, it does not exist in a physical form. There are no coins or
notes. It lives natively on the internet. When a transaction takes place, participants who
use Bitcoin, their computers specifically, validate the transaction, and it is recorded in a
distributed ledger. What's that ledger's name? Yes, it's the blockchain. How can a digital
currency possibly have value? To have value, typically, something must be relatively
scarce and it must be accepted by others for payment. Gold, silver, diamonds, and oil,
for example, all derive their value from being both scarce and expensive to mine. How
might that translate to a digital currency? The first characteristic is that there is only a
limited amount of bitcoins available. The original creator stipulated that there would
only be 21 million bitcoins. It's not known why this volume was chosen. The second
characteristic is how a person or organization can acquire a bitcoin. Like gold, acquiring
a new bitcoin, in contrast to an existing tradable bitcoin, requires a unique type of
mining. New bitcoins are provided as rewards to blockchain participants that solve
increasingly complex math puzzles every time a blockchain transaction takes
place. People who choose to solve these math problems are called miners. They require
considerable computing power. In other words, the cost of mining new bitcoins is
high. You need a lot of processors and electrical power. When a puzzle is solved, the
miner is rewarded with a bitcoin. He can now trade that bitcoin openly on the global
bitcoin exchange. The value thereafter is calculated similar to any currency, by supply
and demand. If demand for bitcoin is high, its value increases. Less demand, price
drops. You might think that we'd run out of bitcoins to mine pretty quickly. However,
the math problems are getting harder and the speed of awarding them is slowing over
time. It is predicted, with a little uncertainty, that the last bitcoin will be mined in
2140. To spend and receive bitcoins, users must have an electronic wallet on their
computer. This can be as simple as an app on a smartphone. A user can purchase
bitcoins from a seller and then use the wallet to send and receive payments to other
users or organizations. You don't need to be a bitcoin miner to acquire a bitcoin, you
just need to buy some on a bitcoin currency exchange. That is, you provide dollars, or
your local currency, and get bitcoin in return. The currency market also enables you to
get dollars for your bitcoin. A transaction that is initiated from the wallet is added to a
queue, validated by all the other bitcoin users, and, if approved, added as a block to the
distributed ledger, the blockchain. As an additional important detail, adding a block
requires the activity of miners. This creates a form of validation to the transactions. That
is, requiring miners in the transaction means we almost eliminate fraudulent activity. A
hacker would need to fake all the processing and electrical power of the miners to
fraudulently add a block to the blockchain. Having miners solve math problems to
validate adding blocks is called proof of work. Watching all this unfold, all financial
institutions can do is be bystanders as digital money moves around the internet without
any central authority, without friction, and largely without cost. Better yet, nobody owns
the Bitcoin universe or public blockchain database. It's remarkably secure, transactions
are anonymous, and it's fast. The other quality of a currency we discussed is that it must
be accepted as a form of payment. Can bitcoin be used to buy anything? Certainly. Wide
acceptance is foundational to its success. After all, if it was not accepted, it would be
worthless. Of course, as you can imagine, given its decentralized, private, and
untraceable characteristics, Bitcoin has found a role in all manner of illegal
activities. However, with legitimate currency conversion taking place all the time, Bitcoin
enjoys plenty of aboveboard use too. Major brands such as Dell, Microsoft, Expedia,
Subway, Overstock.com, Whole Foods, and many more accept Bitcoin as
payment. Bitcoin is certainly not perfect and is largely considered a work in
progress. The sulfur is still being developed and maturing. We'll look at some limitations
and risks later. It has also inspired other digital currencies such as Ether, that we'll
discuss too. Bitcoin is a revolutionary new currency. It breaks the financial status
quo and raises a whole host of challenges around governance, regulation, legalities, and
so much more. Most importantly, for the purposes of this course, it has given birth to
the blockchain, a technology which now has the opportunity to be as transformative as
the emergence of the internet itself.
What new opportunities does the blockchain enable?
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- As the origin story of blockchain describes, this distributed ledger supports immutable
transactions, currency movements in the case of Bitcoin, that are secure, frictionless,
undisputed, without central authority, and only modifiable by agreement from all
participants. By extension, a whole range of financial transactions can take place over a
blockchain. Following the same concepts as Bitcoin, stock trades, bonds, and other
financial assets can be managed this way. Financial institutions are taking note, and it's a
business sector that is exploring and experimenting with the blockchain. However, with
our knowledge of the advantages of the blockchain as a backdrop, what other situations
beyond financial transactions might this type of model be useful to support? This is
where it gets really interesting. Let's take a simple example of the challenges of proving
ownership of a digital product. While digital products such as photos and music have
made it really easy to acquire, store, and move across devices, the same advantage
makes it really easy to copy them, and dare I say it, steal them. Artists and media
organizations have had to largely accept this fate, resulting in the loss of billions of
dollars of lost value. If you are a valid owner of a digital product, it's hard to prove that
you are. If we could register our creation and ownership of digital products in a
blockchain, it's possible we could attain immutable proof. For example, if you are a
professional photographer and you register your photographs on a blockchain, it would
be difficult for someone else to claim that they took the picture. Your ownership record
will be stored on the blockchain, and it will be near impossible to change that fact. The
blockchain would also enable a more trustworthy mechanism to support transfer of
digital ownership. Let's discuss another more complex use. In ports all over the
world, ships drop off products and they load up products. This is done quite
fast. Putting massive containers on a ship for export moves quickly. After all, with fruit,
any time lost means the product can spoil. However, where the shipping business loses
time is with significant volumes of paperwork. A container of fruit might have
paperwork that needs to be signed and stamped by around 30 people: customs, tax
officials, and health inspectors, for example. Added to this burden, this paperwork can
be tampered with, allowing criminals to siphon off product or mislabel to exact a higher
price. Now, instead of using paperwork, let's make all the transactions digital and make
all changes on the blockchain. Suddenly, it becomes near impossible to tamper with. All
signatures can be more efficiently managed, and there is an immutable history of every
step of the journey of the fruit. It solves a lot of problems. IBM and Maersk, the
container shipping company, have been piloting just such a system. And a bold
proposal for the port of Dubai in the United Arab Emirates challenges all of the
transactions to be conducted on the blockchain within just a few short years. Whether
they can pull it off is yet to be seen. An emerging theme with the blockchain is that it
provides trust in cases where establishing trust is difficult. Let's look at identity. The
internet today relies heavily on identity, but continues to be a challenging space. So
often, we establish identity on a system with a username and a password. Sadly, we
know all too well, that our passwords can be stolen and our identities
compromised. Might it be possible to store our identity on a blockchain, and have it
universally accepted for all manners of authentication. We could imagine all our
credentials such as system passwords, credit ratings, driver's licenses, birth and marriage
certificates, property titles and more stored confidently and tamper-proof in this
system. We'd even eliminate many of the traditional authorities that make access and
updates to our own documents so difficult and often so costly. Many will be happy
about this, and some will have reservations. Finally, having a trustworthy online
identity could allow us to fulfill the dream of online voting, enabling more citizens to
vote in elections from their smartphones. When we begin to imagine these types of
uses, we quickly recognize how transformational the blockchain could become. But it's
still early. We're speculating here, and at best, there is a lot of interesting
experimentation underway. Let's take a look at some real examples in the next video.

Examples of the blockchain in action today

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- The possibilities of blockchain are staggering but they are also relatively
speculative. Let's take a look at actual real-world uses that extend beyond its original
use for bitcoin. Here's the first example. There continues to be a great interest in
technologies to help track stolen diamonds, in addition to knowing whether a
diamond is associated with a conflict zone. A startup called Everledger has begun to use
blockchain to store information on almost one million diamonds. Each diamond is
scanned to glean 40 unique points that are then condensed into a digital footprint. This
is then entered into the blockchain. Each time a diamond moves say from a seller to a
buyer, a new block is created and over time a full, secure digital trail of ownership is
established. The adoption of this solution is growing and Everledger is attracting
attention from investors. Beyond diamonds, the same tool may soon be expanded to
manage and track art, expensive watches, luxury cars, and other unique items of
value. This blockchain solution potentially solves a longstanding intractable
challenge. For the next example, how about a venture capital firm without essential
owner, where funding decisions are made by shareholders not VC's. The DAO which
stands for decentralized autonomous organization, raised $168 million from
cryptocurrency and is entirely run by those that are invested in it. Its governance is
completely transparent unlike traditional VC's where functions and rules are private and
opaque. The DAO has not been without serious challenges including several security
breaches. Not necessarily dispelling the security promise of blockchain, but more a
reflection on its particular implementation. It's fair to say the bonus of innovation
exhibited by the DAO is subject to the same teething problems that introducing any
new high risk product and service experiences. And then to these such as the DAO raises
the stunning possibility of autonomous organizations; businesses without
leaders, without a primary geographic location, and not beholden to any government
laws. Now whether this can be sustained, only time will tell. For the final example we'll
look at voting on the blockchain. In 2016, Colombians voted on a peace treaty between
the government and FARC, the Revolutionary Armed Forces of Colombia. There were a
variety of limitations on enabling the six million Colombians living abroad to participate
in the vote. So an organization called Democracy Earth experimented with the
blockchain to capture their voices online. As we discussed earlier, the inherent
challenges of online voting in any context is proving an identity to be true. Using this
new technology enabled authenticating votes. In addition, to push voting
innovation, Democracy Earth gave citizens more than a no and yes choice to the peace
treaty. They were given sub-themes to indicate by vote the relative importance of each
one. While the votes could not be added to the official ballot, this voting experience did
give a voice to a larger group of Colombians and has triggered a rigorous debate in
Colombia about the use of online voting in the future. The experiences and results are
being studied by many around the world. If you're like me, it's hard not to be
impressed by these first attempts to innovate using the blockchain. In each of these
instances, historically big and difficult problems are finding a fresh and innovative
solution. As with any new emerging technology, these first movers are taking risks and
laying the groundwork for everyone else who follows.

Thinking about the future of blockchain innovation

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- The blockchain is a work in progress. Being open sourced, it is continually being
updated. In addition, how the blockchain is being applied continues to evolve in
surprising and compelling ways. Here are just a few of the innovations that the
blockchain is enabling. Up until now we've been talking about discrete data
being stored in blocks in this distributed database or distributed ledger as we prefer to
call it. But what happens if instead of simply data, a block contains some
instructions that under certain circumstances are executed? In this way when a certain
blockchain transaction takes place, some set of actions are triggered. This is one of the
most exciting areas of the blockchain and we call it Smart contracts. While a Smart
contract actually is software code executed on the blockchain, the terminology use of
the word contract indicates that the code enforces some form of governance or rule. We
should think of this as the general concept since many argue that the use of the term
Smart contract is also misleading. What might be a simple example of a Smart
contract in action on the blockchain? Let's return to a previous example of
managing digital products online. Specifically, as the authentic owner as of say a
photograph you took, you may want to use the blockchain to sell that photo to
buyers. Since the blockchain already confirms you as the rightful owner, let's look at a
Smart contract to sell a copy. We'll use the blockchain as the platform for the entire
transaction. First, you're established as owning the copyright. Then a buyer submits
payment for a copy of the photo. Once you receive payment and it is confirmed, a Smart
contract executes and then delivers a copy of the photo to the buyer. The transaction is
recorded in the blockchain and each step is stored forever as proof of what has
happened. In this example, the Smart contract was code that ensured that all the
conditions were met for this purchase and even delivered the photo through some form
of online transfer. While this is a simple example, you can imagine really complex
transactions taking place in the blockchain that are enforced by Smart contracts. Think
about all matter of financial transactions or real estate or legal agreements, and even
agreements between machines like self-driving cars negotiating around each other in
traffic. It's easy to see that a smart contract takes the capabilities of the blockchain up a
few notches and makes it a platform for complex action. One of the most exciting
innovations in this blockchain space is called Ethereum. This software platform uses the
blockchain and Smart contracts to enable the building of complex decentralized
software applications. It's an ambitious project that is still in its infancy. However, the
promise of Ethereum is to enable the development of software tools that can build
solutions that don't require the traditional commanding control hierarchies that exist
today. In other words, these are applications that don't have an all powerful single
owner to make and enforce the rules. Some of the initial solutions on Ethereum have
included an alternate digital currency called Ether, an online identity management
system called uPort, land title transfers and online system for managing digital
signatures. And an entire suite of banking services developed by consulting firm
DeLoitte and the blockchain firm ConsenSys. In the final example, I'd like to discuss how
one innovative organization is connecting the blockchain to the physical world. The
solution is from a German team called Slock.it, and its first goal was to enable apps to
unlock things but have now since grown to have much greater application. It works by
using Ethereum and Smart contracts. Slock.it gives connected objects an identity, the
ability to receive payments and the capability to enter complex agreements. It effectively
eliminates the need for a middle man when executing software on one device to trigger
a physical action in another. This makes interaction almost immediate and significantly
reduces the cost. For example, let's say we use a smartphone to unlock the lock on a
bicycle. The authority to allow the opening of the lock no longer resides with a central
authority but rather only between the smartphone and the lock itself. It makes a lot of
sense for example when you want to rent a bike and want to receive payment. A person
who purchases the rental executes a transaction that includes identity, payment, and the
unlock process directly with the bicycle. Slock.it enforces the transaction, it's remarkably
efficient and secure. The innovations described in this video gives a tease of what may
be to come. We know we're in the early stages of blockchain because already many
innovations have failed. This is common as a new technology emerges. Making bets
right now is risky, but as these innovations illustrate, when success does come, it will
likely be transformational.

The potential obstacles to blockchain adoption

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- There is no doubt that the future of Blockchain contains many uncertainties and
challenges. While it's here to stay, how it eventually matures, how it is widely used and
under what circumstances it gets adopted are all questions to be answered in the
future. For this video, we'll discuss several near-term obstacles to broad Blockchain
adoption. These challenges are not in any particular order. The first challenge is simply
that most people have no idea what the Blockchain is and have never been exposed to
it. Building on that, even those that have heard about it struggle to understand it. In a
2016 survey of business executives by Deloitte, a Big Four consulting firm, 40% had little
or no knowledge of it. Of those that had some understanding, many didn't understand
its potential. When a new technology emerges, the first obstacle is knowledge and
understanding. With the Blockchain, a much more complex concept than many, it's
going to be a while before a critical mass of appreciation is reached. We'll need to get
there before we see more rapid innovation and adoption. The second challenge is
technical. Simply said, the Blockchain is new. It requires time to mature. There are
currently issues with transaction speed, verification, data management. Remember, a lot
of data is generated and needs to be stored on the Blockchain. And despite a promise
of high security, there are still security and privacy challenges. We'll also need to
overcome the complexities of integration. If Blockchain is going to coexist with other
technologies in organizations, which I suggest will be necessary, a lot of innovation will
need to emerge to make that happen. Integration will also require a way for different
distributed ledgers to talk to each other. We'll need a set of standards, that is uniform
engineering or technical criteria, methods, processes and practices, a prerequisite for
any global adoption of new technology. We don't yet have them for the Blockchain, but
initial standardization work is now underway, particularly by the ISO or International
Organization for Standardization. Associated with technical limitations today is the large
energy required for transactions, specifically in a Bitcoin-driven Blockchain. You'll recall
that every transaction requires some participating computers to solve complex
mathematical problems. At scale, there is significant cost to this. Blockchain transactions
are also anonymous and irreversible, two important concepts that challenge basic
technological requirements in systems today. It's not that we can't overcome these, we
just have to figure out how to manage them. Finally, in the technical space, the
Blockchain is complex to develop and use. Specialized skills are needed for example, to
program on Ethereum or Slock.it. Even managing a smartphone wallet with
Bitcoin, requires some technology savvy. These technical challenges are not trivial. The
third and final challenge is a category that includes cultural adoption, regulatory
acceptance, and resistance to change. Looking only at the financial industry, it's clear
that both digital currencies in general, and the Blockchain in particular, have the
potential to seriously upset the status quo. For example, without the need for banks and
financial oversight, sending Bitcoin directly to individuals and organizations is a notable
disruption. Financial organizations may need to accept something that ultimately
reduces their value. Adopting digital currencies means changing regulations, laws,
policies, treaties, and agreements, not only between organizations and within
countries, but also between countries at an international scale. Add Blockchain to the
mix and we are creating serious challenges to the very nature of how organizations are
managed and how they trade with each other. At the extreme, new Blockchain
entities could exist without any authority and oversight, in effect nullifying every control
that exists today to support an ecosystem of global trade. Finally, societal and
organizational culture will struggle with adopting the radical nature of the disruption
that the Blockchain can bring. There may be reluctance to accept the degree of change
needed by many organizations. I suspect many will only evolve kicking and
screaming, or will ultimately fail as others move quickly, forward into a different
future. It's sobering to be exposed to these challenges, as none of them are easy to
overcome. As Kevin Kelly notes in his 2016 book, The Inevitable, when executives were
first introduced to the promise of the Internet in the 1990s, many discounted it. They
said that consumers would never trust it for buying products or doing online
banking. Many thought that content would remain the domain of powerful media
companies. They could not see the disruption that was coming and focused on what
they believed were insurmountable obstacles to adoption. We might be there
again. There are a lot of reasons to believe the Blockchain will have a difficult time being
adopted, but there are a serious number of reasons it might just be bigger than the
Internet itself.

Risks to existing solutions and enterprises

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- Let's take a deeper look at some of the potential obstacles to widespread adoption of
blockchain technology and why they may present risks to existing enterprises. In the
near term, it's financial organizations that are grappling with the disruptive nature of
digital currencies. Let's face it, banks for example, make huge profits on financial
transactions. They are motivated to exert control. There's little incentive for massive and
disruptive innovation. Financial organizations also have huge investments in their
technology infrastructure so there's less appetite for more investment that could make
their systems obsolete. It's not an easy sell to convince all the many millions of
stakeholders in the global financial ecosystem to upend what they do and worse yet
make much less money doing it. Financial firms must also tread carefully around some
of the most robust regulations and laws. So even innovating carries risk. However, major
risk lies with doing nothing. Standing by and hoping that digital currencies such as
Bitcoin or the blockchain itself will pass as a novel fad could be fatal. This is why
financial organizations are researching the blockchain and keeping it on their
agenda. Some like Wells Fargo, the Commonwealth Bank of Australia, Goldman Sachs,
Bank of America, and Mastercard are already exploring active blockchain projects. For
them it seems it is better to participate than to stand idle and face the risk of
obsolescence. More likely, over the long term, financial organizations will evolve and
embrace blockchain innovation. They will find a way to work with it and prosper rather
than avoiding it. Already we see the emergence of interesting new ideas and blockchain
partners such as Ripple and the Interledger Protocol. They are ready to enhance and
improve existing payment systems rather than destroy them. If we step back from
financial services and simply look at the risk of blockchain in general, we identify a few
key areas. First are the risks of either doing nothing or doing something. In a world of
rapidly changing technology and consumer expectations, doing nothing regarding any
technology and particularly in an era of rapid digital transformation, could make a
business obsolete. The emergence of the gig economy, for example new start-ups like
Uber and Airbnb, have already disrupted major businesses. Doing no research,
education and experimentation has a potential to limit an organization's ability to
compete in the future. However, doing something also carries risk. For example, if a
business commits limited available funds to building a prototype solution only to see it
fail, it risks loss of capital. What might it mean to your existing customers and
partners? Might you break some law regarding tax obligations using digital currency or
on reporting requirements of a publicly traded company? And what about
insurance? Will you be covered for blockchain transaction losses? Doing business over
the blockchain has privacy risk issues too. While there is encryption as part of the basic
design, the blockchain itself is open to everyone. It's a quality and a liability. And even
though I've touted security as a benefit of the blockchain, there still remains some
vulnerability to hackers and fraud. The risks of doing nothing or doing something with
any new innovations are similar, but they are magnified with blockchain given what it
does and how it does it. Inherently, the art of innovating is a risk. For any business
though, it's the price of doing business. In the 21st century, the ability to be agile on
how and what is delivered will be a defining quality of those that succeed and those that
fail.

Next steps
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- Barely eight years ago, a new digital currency appeared. Open sourced and without any
traditional governance, this new currency, Bitcoin, has captured our imaginations. A currency
existing entirely on the internet, completely unobligated to regulations and governance. A way to
pay each other and organizations immediately and securely and without financial
intermediaries such as banks. Its implications continue to confound and its long-term impact still
to be determined, but underneath it, powering this new digital currency is something even more
intriguing and potentially game changing, a new distributed database called a blockchain, a
technology so disruptive to have the potential to be more impactful in the long run than the
internet itself. But as we've discussed, the blockchain has many obstacles to overcome, but none
seem insurmountable. Following the money shows that venture capitalists, VCs, are investing
heavily and making big bets on the ideas that the blockchain will power and the wealth it might
create. In this course I've presented the basics of the blockchain. You should have an
introductory understanding of the technology, the way it's been applied, its possible future and
some of the risks and issues currently associated with it. What should you do next? I recommend
exploring some of the new organizations we've discussed. In particular, learn about Ethereum
and Smart contracts. Learn about the Hyperledger and the organizations that support it. Along
the way you might even consider buying and using a few dollars of Bitcoin. Take a look at what
a few financial organizations are doing like Bank of America and Goldman Sachs. I'd also
recommend learning about how regulators and governments are responding. The blockchain
presents us with an exciting and intriguing future. A future where distributed
autonomous organizations might exist. Organizations without leadership or location, entities and
systems that need power, smart cities and the internet of things. It might enable accurate voting
in elections from a smartphone. And we may finally securely protect the intellectual property of
digital things. Regardless of where we go from here, the blockchain has expanded our minds and
helped us to imagine greater possibilities. That's exciting and that's worth learning more
about. Thank you.