Bitcoin: What is it?

Brad WheelerModerator, Bitcoin Foundation

Member Forums

TBM@AUFebruary 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

– It also describes a unit of account of the Bitcoin cryptocurrency, like “internet cash”

Bitcoin is NOT a physical token! The key

on the sticker is analogous to a spending PIN.

Bitcoin’s Origins

Development History• The White Paper was published November, 2008 by

Satoshi Nakamoto

• 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

“Bitcoin: A Peer- to-Peer Electronic Cash System” @ bitcoin.org/bitcoin.pdf

Network Stats

• The network was “started” January 3, 2009 with the Genesis Block

• 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

“Bitcoin: 285 Bytes that Changed the World” @ james.lab6.com

• 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 WorksSlightly 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!

Cheap, expendable, easy to produce “Bank Account Number” “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

Triple Entry Ledger: 1. Receipt of Payment msg. 2. Receipt of Entry into Ledger

Consensus:Network settles on longest chain

Transaction fees suggested for: • large (size in kb) transactions• spending same coins quickly• sending small, precise amounts

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!

} Handled automatically by most wallet software

The Heartbeat: Cryptographic Hashing

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”)

Block Hashing Algorithm: https://en.bitcoin.it/wiki/Block_hashing_algorithm

To win: SHA256(SHA256(Ver+PrevBlock+MerkleRoot+Time+Target+ Nonce )) < Target Target is a very small 256 bit number – i.e. many leading zeroes

SHA256("The quick brown fox jumps over the lazy dog"): d7a8fbb307d7809469ca9abcb0082e4f8d5651e46d3cdb762d02d0bf37c9e592SHA256("The quick brown fox jumps over the lazy dog."): ef537f25c895bfa782526529a9b63d97aa631564d5d789c2b765448c8635fb6c

Block creation is algorithmic, based on SHA-256 hashing of input data

3.125 Bitcoins6.25 Bitcoins

12.5 Bitcoins 2016

25 Bitcoins 2012

50 Bitcoins per block 2009

Reward and Money SupplyMoney 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 Bitcoin era” lasted 3 Years, 10 Months, 24 Days

Network is Self-Regulating:• Blocks are mined 10 min. apart, on average• More hashing power quicker blocks difficulty increases next period

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 servicesBitcoin 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 ChartBitcoin/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

Charity/ Non-Profit

Social Media / DigitalGoods/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

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