Bitcoin: What is it? Brad Wheeler Moderator, Bitcoin Foundation Member Forums TBM@AU February 18, 2014
Bitcoin in a nutshell • What isBitcoin? • Adecentralized, peer to peerfile sharing network • First widely distributed triple ledger accounting system, using a database known asthe block chain • It’s a protocol-rules for validating transactions, commits to the block chain • It also describes a unit of account of the Bitcoincryptocurrency, like “internet cash” Bitcoin is NOT a physical token! The key on the sticker is analogous to a spending PIN.
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 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 BitcoinWallet 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 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 valid80-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 Money Supply -Based on Block Count -21 Million Bitcoin Cap -Deflation in prices 3.125 Bitcoins 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 6.25 Bitcoins 12.5 Bitcoins 2016 25 Bitcoins 2012 50 Bitcoins per block 2009
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 (BitcoinTx 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 (psuedonymouscreator 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 Goods/Services Local Businesses Charity/ Non-Profit
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 CoinMarketCapcurrently 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”