Transcript Bitcoin - Triangle Bitcoin Meetup

Bitcoin: What is it?
Brad Wheeler
Moderator, Bitcoin Foundation
Member Forums
TBM@AU
February 18, 2014
Bitcoin in a nutshell
• What is Bitcoin?
– A decentralized, peer to peer file
sharing network
– First widely distributed triple
ledger accounting system, using a
database known as the block
chain
– It’s a protocol - rules for validating
transactions, commits to the block
chain
Bitcoin is NOT a physical
– It also describes a unit of account
token! The key on the
of the Bitcoin cryptocurrency, like
sticker is analogous to a
“internet cash”
spending PIN.
Bitcoin’s Origins
Development History
• The White Paper was published November,
2008 by Satoshi Nakamoto
“Bitcoin: A Peer- to-Peer Electronic Cash System” @ bitcoin.org/bitcoin.pdf
• An Open Source Project, with developer
mailing list and github repositories
• Satoshi remained a visible member of the
community until December, 2010 before
disappearing
• Satoshi handed over development to Gavin
Andresen, current lead developer
• Core development team maintains the
reference client Bitcoin-QT (GUI) / bitcoind
Network Stats
• The network was “started” January 3, 2009
with the Genesis Block
“Bitcoin: 285 Bytes that Changed the World” @ james.lab6.com
•
•
•
•
Bitcoin v0.1 was released January 9, 2009
Currently at version 0.8.6 (Bitcoin-QT)
>286,000 – Ledger updates / Blocks Mined
12.4 million Bitcoins – 60% of total BTC that
will ever be produced
• Registered 501(c)6 organization (Trade Group)
• Committed to standardizing, protecting, and
promoting Bitcoin
– Pay the salary of Gavin Andresen (Lead Core Dev) to
work full time on Bitcoin
– Grants to development projects
– Interface with regulators
– Education and Regulatory Affairs Committees
• Annual membership is $25; Lifetime Membership
is $250 – payable in Bitcoin
How Bitcoin Works
Slightly Technical
How it Works, Briefly
• Users connect to the Bitcoin Network
• Client “wallet” (key management module) generates
public/private key pairs based off of random number
stream
– Key pairs use Elliptic Curve Cryptography (ECDSA)
• Public key is encoded into a 27-34 character address
string that can be shared to receive payments
• Private key is used to spend coins by digitally signing
transaction messages that reference specific deposits
sent to it
Keypairs managed in
Bitcoin Wallet Software
2^160 possible addresses!
“Bank Account Number”
Cheap, expendable, easy to produce
“Signing Key”
Transaction Verification / “Mining”
• Wallets send payments from one address to another by broadcasting a signed
transaction to the network
– Payment Instructions + Cryptographic Signature(Payment Instructions)
– Easily checked by anyone
– Transaction becomes “permanent” when it’s acknowledged in the ledger
• The shared transaction ledger is known as the block chain
– Consists of units called blocks
– Blocks reference one or more transactions, including new bitcoins awarded to the
miner (this is how the money supply is increased) – 1 block / 10 minutes, on average.
– Each block contains a proof of work - difficult to produce; easy to check
Consensus:
Network settles
on longest
chain
Triple Entry Ledger:
1. Receipt of Payment msg.
2. Receipt of Entry into Ledger
Transaction Processing by Miners
• Transaction verification consists of
– Digital signature verification (no forgeries allowed)
– Consult local copy of block chain to ensure inputs have
sufficient balance (no overdrafts)
• “Miners” perform this verification and build out the
block chain by publishing blocks with verified
transactions
– They compete in a process similar to Bingo
– The result is distributed bookkeeping
• Miners are rewarded with a coin payout and any
transaction fees (built-in incentive)
– Most transactions do not require a transaction fee!
Transaction fees suggested for:
• large (size in kb) transactions
• spending same coins quickly
• sending small, precise amounts
}
Handled automatically by
most wallet software
The Heartbeat: Cryptographic Hashing
Block creation is algorithmic, based on SHA-256 hashing of input data
SHA256("The quick brown fox jumps over the lazy dog"):
d7a8fbb307d7809469ca9abcb0082e4f8d5651e46d3cdb762d02d0bf37c9e592
SHA256("The quick brown fox jumps over the lazy dog."):
ef537f25c895bfa782526529a9b63d97aa631564d5d789c2b765448c8635fb6c
The first miner to provide a valid 80-byte block hash (header) containing:
•
•
•
•
Hash of Previous Block Header (256 bits)
“Root hash” of tree of hashed transactions (256 bits)
Software Version (32 bits), Timestamp (32 bits), Target (32 bits)
Nonce (32 bits) – a random number
– Awarded a set of Bitcoins (itself a transaction created by the
Miner that gets hashed into the “root hash”)
To win: SHA256(SHA256(Ver+PrevBlock+MerkleRoot+Time+Target+ Nonce )) < Target
Target is a very small 256 bit number – i.e. many leading zeroes
Block Hashing Algorithm: https://en.bitcoin.it/wiki/Block_hashing_algorithm
Reward and Money Supply
Network is Self-Regulating:
• Blocks are mined 10 min. apart, on average
• More hashing power  quicker blocks 
difficulty increases next period
3.125 Bitcoins
6.25 Bitcoins
12.5 Bitcoins
2016
25 Bitcoins
2012
Money Supply
-Based on Block Count
-21 Million Bitcoin Cap
-Deflation in prices
Halving Events
- Award halves every 210,000
Blocks ( ~4 Years at 10 min. /
block)
-33 Projected “Halving Events”
-First Halving event was
November 28, 2012
50 Bitcoins per block
2009
-“50 Bitcoin era” lasted 3 Years,
10 Months, 24 Days
How Bitcoin Is Used
Interesting Phenomena… Pushing
Boundaries
• Internet Gambling and Games of Chance
– Satoshi Dice – provably fair internet dice game
• Inputs of “dice roll” come from Hash of (Bitcoin Tx ID + Nonce);
• Nonce published daily
– Other casino games, including lotteries, poker, betting
– Challenges Federal Unlawful Internet Gambling Enforcement
Act of 2006
• Bitcoin Denominated Securities / Equities
– ASICMiner is a Chinese manufacturer and operator of Bitcoin
Mining equipment.
– Tradable directly or on stock exchange websites
– Issues weekly dividends of mined bitcoins + hardware sales
• Underground Marketplaces
– Silk Road – A TOR hidden service which listed illicit products
• Hosted bitcoin mixer
• Featured escrow (funds released upon delivery), seller rating system,
sellers had to purchase fidelity bond to gain entrance
– Others (Atlantis, Black Flag, Sheep) closing in a “fly by night”,
taking customer bitcoins
Potential Promises
• Remittances and banking for the unbanked and
“underbanked”
– Payments across borders between networks established
partners for nearly instant settlements
– Digital wallets for the underbanked – Kipochi Wallet
• Using the Block Chain as a General Purpose Ledger
– Notarization and time-stamped proof of existence
– Asset title registry, voting, IOUs, and virtual currencies can be
registered in the ledger (colored coins)
• Digital Contracts & Programmable Money Transfer beyond
Simple Payments
– Notarized contracts with verifiable inputs = predictable outputs
– Humans do not need to hold the keys or send the payments.
Beyond Simple Payments: Examples
• Multisignature Transactions
– Escrow-like arrangements (bitrated.com)
– Digital Wills (disbursement valid upon m-of-n combination of keys)
– Bank-like security is acheivable!
• Assurance Contracts (i.e. Kickstarter – conditional funding)
– Pay funds upon sum of bitcoin inputs reaching a pre-set limit
– Arbitrarily complex – additional verifiable conditions could be added
as conditions for funding
• Digital Contracts & Smart Property
– Bind ownership/access of physical assets to provable payments
– Locks that verify that a mortgage was paid – oh my!
• Autonomous Agents / Decentralized Autonomous Corporations
– When marketplaces for goods and services are denominated in BTC:
– Computer program buys inputs (space, advertising) as necessary
– First examples may be wifi and cloud storage services
Bitcoin could become the TCP/IP of Value Transfer – atomic and stackable
Speedbumps
• Regulatory uncertainty!
– Variability in legal treatment across jurisdictions
• Trading Bitcoins for USD is considered money transmission by the US Treasury
– requiring anti-money laundering processes
• Money transmission has a complicated, state-based licensing framework
• Bitcoin businesses predicted to move to “least onerous” home
– Taxation!
• Bitcoin gains would be difficult to tax in a world where the internet has
traditionally been “tax free” zone.
• May 2013 GAO report recommended newb-friendly tax guidance
• No formal tax guidance from the IRS – yet.
– Banking system
• Traditionally risk averse when dealing with money services businesses
• Businesses with “bitcoin” in title have been denied bank accounts
• Floating exchange value is unpredictable over time, with critics
questioning how it can be considered a currency at all!
How unpredictable is price?
Linear Scale Chart
Bitcoin/USD
MtGox Exchange
Log Scale Chart
Anonymity, Psuedonymity,
Identity Management?
• Frequently cited as “anonymous,” - however this is
misleading!
• It can be easy to self-identify or generate trackable patterns
• All confirmed transactions are part of history
• Any time bitcoins are transferred, old coins turn into new
coins, linking addresses and relationships
• Analysis possible with network graph tools
Satoshi Nakamoto (psuedonymous creator of Bitcoin)
was an expert in identity management. He (she/they)
would likely out himself today if any of the bitcoin
associated with him were spent. Many speculate his
keys were deliberately sacrificed/lost to limit exposure.
How to Acquire Bitcoin
• Buying from an exchange
– Bank Transfer: Coinbase (ACH), Bitstamp (wire)
– In person: LocalBitcoins (cash)
– In/out of altcoins: Cryptsy
• Selling Goods and Services for Bitcoins
– r/bitcoinjobs (tech services)
• Writing good content for tips
– Reddit and Twitter tipping bots
• Mine it yourself
– Purchase an ASIC machine
– Mine an altcoin, trade it for Bitcoin
– Purchase a “cloud” mining contract
Places to Spend Bitcoin
Social Media / Digital
Charity/ Non-Profit
Goods/Services
Local Businesses
How to Accept Bitcoins
Individuals:
Set up a wallet (stay tuned later today)
Share your address with others
Businesses:
Use a merchant
services company to
accept payments
Next Day Settlement in USD
Exchange Rate Stability
Can be cheaper than Credit
Card payments!
Niche Coins and Metacoins
Thanks to an open codebase, Bitcoin has
younger sisters and cousins
CoinMarketCap currently
tracks 112 independent
coin projects
Build (buy) your own at coingen.io !
Which one of you made bullcitycoin ??
Thank You
Go to bitcoin.org to learn more
Join the Triangle Bitcoin
Meetup Group @ meetup.com
Subscribe to podcasts from the
“Let’s Talk Bitcoin Network”