1、Bitcoins!,Jim Coman, Not licensed to give financial advice; There is no financial advice contained herein Not a lawyer; There is no legal or tax advice herein Nothing here is designed to help you avoid paying taxes I do not represent my company; these opinions are my own I own some Bitcoin so I hav
2、e a vested interested in Bitcoin Undergrad: Purdue Computer Science Graduate: Northwestern Kellogg MBA: Finance Programming professionally since 1989: Unix and Windows Banking experience Hedge fund experience Derivatives (equities) trading experience Bond trading experience Asset backed and structur
3、ed securities experience Start-up experience Currently managing software developers making banking software (11 products) Advisory board member New Money Systems Board of the Lifeboat Foundation,Bitcoin,Is a global currency (symbol BTC) Very different from fiat currencies Around since January of 200
4、9 Not issued by any entity Peer-to-peer / decentralized Trading over the internet Protocol is open source Somewhat anonymous Protected by strong encryption (cryptoCurrency) If you know the secret “account number” the coins are yours People who transmit transactions are called miners The maximum numb
5、er of Bitcoins will be about 21 million A bitcoin is a unit of measurement Not completely illegal yet Not a scam or get-rich-quick scheme May change money forever,The Basic Mechanism,Transactions are published to the Bitcoin P2P network Miners (computers) compete to solve a proof-of-work problem on
6、average every 10 minutes The winning miner publishes a summary of recent transactions in a block Miners are rewarded with new coins for having published a valid block Blocks are linked to previous blocks, creating a block chain The value of every account is evident on the blockchain Everyone is expe
7、cted to know the whole blockchain,Genesis Story,The original version of the Bitcoin-QT program was apparently written and published by a person going by the name Satoshi Nakamoto. Some time after starting up the software, Mr. Nakamoto stopped communicating with the developers who took over the proje
8、ct. Nobody knows who Satoshi really is, but his English is really good as well as his programming Satoshi owns nearly 1M bitcoins He/she delivered the Bitcoin software with some incredibly insightful design decisions, but has so far declined to take credit. The software is open source and royalty fr
9、ee,There are Core Developers,The developers who wrote the core Bitcoin-QT program are still mostly working on the software They are passionate about Bitcoin There are many other developers and tools that emulate protocol Higher-security wallets Miners Exchanges Currency exchangers/transmitters Nobod
10、y is really “in control” but some people have a lot more influence than others It is possible for developers to alienate themselves and become irrelevant,There is a Bitcoin Foundation,Tries to represent Bitcoin Non-profit Modeled after Linux Foundation Fragile coalition of interested parties Pays th
11、e developers Small disagreements have led to calls for a new organization Way too cozy with the US government One member has been arrested so far (Silk Road),Physical Coins,You may have seen pictures Some of the pictures are of just play money They are not “real Bitcoins” but Casascius coins are sup
12、posed to be tradable for Bitcoins They are not a good way to hold Bitcoins Some guy in Utah makes them (Casascius) They have a number inside! The US Government (FinCEN) shut Casascius down,Bitcoin Wallets,The term Bitcoin wallet refers to a file that contains the number or numbers of accounts that h
13、old money There is also wallet software for managing accounts and transactions Since Bitcoins are valuable, wallets should be encrypted The secret numbers can be printed, generally as a barcode Printed Bitcoin values may be Locked up for securitys sake Held as a backup to an electronic wallet Used a
14、s paper money,Features of Bitcoin,All-electronic Provable value Fast transactions Low-cost transactions Divisible down to 0.00000001 BTC No third-party trust required Uncontrollable (Decentralized) Irreversible trades No double-spending Some anonymity (pseudonymity) Inflation resistant Deflationary
15、(Maximum of 21M issued) International Widely accepted as a currency,Uses For Bitcoin,Convenient online purchases Tips and donations Micro-payments Transactions that must be irreversible When information is transferred When an irreversible action is performed Embarrassing transactions Black-market tr
16、ansactions A store of value Investment A place to hide money Gambling Ransom Escape currencies that are in trouble International transactions and financing Buying foreign goods (currency lingua franca) Paying foreign employees,Comparison to US Dollar,US Dollar (Cash),Backed by United States? Control
17、led by US Primarily US-only Created by government Supply controlled by politics Easy to steal by muggers Hard to steal by hackers Hard to transmit Hard to trace Non-refundable Used for crime,Bitcoin,Backed only by other users Controlled by users International Created based on work done Fixed number
18、issued Hard to steal by muggers Easier to steal by hackers Easy to transmit Hard to trace Non-refundable Used for crime,Comparison to Gold,Gold,Backed by itself? Internationally accepted Supply controlled by miners Difficult/expensive to store Not easy to divide Difficult to use for transactions Can
19、 make jewelry out of it Easy to steal by muggers/invaders Hard to steal by hackers Hard to trace Non-refundable,Bitcoin,Backed only by other users Internationally accepted Supply is fixed Easy to store Easy to divide Easy to use for transactions Easy to make backups Hard to steal by muggers/invaders
20、 Easy to steal by hackers Hard to trace Non-refundable,Money Supply,Divisibility,1000 MilliBits = 1 BTC MilliBits is abbreviated mBTC For the time being, sandwiches are likely to be priced in millibit If Bitcoin are eventually worth $1,000,000, the lowest amount of money you will be able to transact
21、 is $0.01 worth,Reversible Transactions are Good,Take the form of chargebacks Reversibility “protects consumers” by allowing for an authority (ultimately the government) to mediate transactions Protection from unscrupulous vendors Recovery from identity theft Accidental transfers can be fixed Althou
22、gh they are expensive, most people demand reversible transactions from their governments The US government thinks chargebacks are important In the US, nearly all non-cash transactions are reversible,Reversible Transactions are Bad,They allow vendors to get scammed, increasing costs for everyone Requ
23、ire extensive work by vendors to coordinate Require extensive government oversight Obviates the need for extensive consumer data collection for credit checking Expensive and slow Prevents micro-payments Locks the poor out of many credit transactions,Irreversible Transactions,Bitcoin transactions are
24、 all irreversible But, for some transactions, people dont want the baggage of the government oversight If you use banknotes or coins, you are familiar with irreversibility,Anonymity,Bitcoin provides some anonymity (pseudonymity) Bitcoin addresses are like numbered bank accounts with a password The f
25、low of money from address to address is completely public You can try to deny that you “have” BTC You can try to deny knowing where BTC went There are ways to increase anonymity,Silk Road Website,A black market website that began on the TOR network starting in February of 2011 Bitcoin predates Silk
26、Road Transactions are paid for with Bitcoin Uses an escrow system to reduce abuse Looks like eBay, but most things are illegalmost notably, drugs Shut down by the FBI on 10/2/2013 and a suspected leader (Dread Pirate Roberts) was arrested Many millions of dollars worth of BTC were confiscated from p
27、eople all over the world, even if they broke no laws On 11/6/2013 the website re-opened as 2.0, apparently with new management, but he calls himself DPR Silk Road is only the most successful marketplace for black market goods. There are others,The Technology Behind BTC,Hashing (double-SHA256, RIPEMD
28、-160) Proof-of-work (hashcash proof) Dual key encryption (Elliptical Curve Digital Signature Algorithm, Merkle Trees ) Peer-To-Peer Networking (similar to IRC Internet Relay Chat),Hashing,Hashing is applying an algorithm to find a short number (digest) of a block of data A checksum is an example has
29、hing algorithm Every time you apply a hash to some data, you get the same hash number Hashes are one-way. If you have the data, you can find the hash. But, if you have the hash, you cant figure out the data. Hashes are useful for verifying data,Checksum (type of hash),Add up numbers Take the least s
30、ignificant digits Example:,7 7 3 4 2 5 9 0 0 6 43,Checksum as Hash,Checksums are a bad (but easy to do) hash SHA256 is a “secure hashing algorithm” that produces 256 bits of output (equivalent to a 78-digit number) A checksum doesnt care about the order of the numbers With SHA256, any tiny change to
31、 the data being hashed will completely change the output hash value,Proof-of-Work,Hashcash algorithm designed to prevent spam A hash is an apparently random set of 256 bits Every time you change something being hashed (for example, with a nonce) the hash completely changes There is a 50% chance the
32、first bit might be 0 If you change the thing-to-be-hashed a little bit, you could try a few times and get one with the first bit of 0 First 2 bits: 25% First 10 bits: 0.0977% Find a hash with the first 63 bits as 0 (0.00000000000000001%), and you can publish a block and win 25 Bitcoins,Dual-key Encr
33、yption,Fundamental to understanding virtual currencies Encrypting with a password is single-key Dual-key encryption uses two keys If one key is used to encrypt, the other key can be used to decrypt And vice-versa The key that encrypted CANNOT decrypt,Single Key Encryption,A key (like a password) can
34、 encrypt data,Key,Unencrypted data,Single Key Encryption,Use the key to encrypt some data,Key,Unencrypted data,Encrypted data,Single Key Encryption,Use the same key to unencryptBut, I have to give away the key And, I have to transmit that key,Key,Unencrypted data,Encrypted data,Dual-key Encryption,T
35、here are two keys (like special passwords),Key 1,Key 2,Unencrypted data,These keys are big numbers,Dual-key Encryption,Keys are generated in pairs. They go togetherOne key cant be used to find the other,Key 1,Key 2,Unencrypted data,Dual-key Encryption,Encrypt with Key 1,Key 1,Key 2,Unencrypted data,
36、Encrypted data,Dual-key Encryption,Decrypt with Key 2,Key 1,Key 2,Unencrypted data,Encrypted data,Dual-key Encryption,Encrypt with Key 2,Key 1,Key 2,Encrypted data,Unencrypted data,Dual-key Encryption,Decrypt with Key 1,Key 1,Key 2,Encrypted,Unencrypted,Dual-key Encryption,If you only have one key,
37、you cant unencrypt your own data.,Key 1,Encrypted,Unencrypted,Private and Public Keys,Although keys are symmetrical, usually one key is kept private, while the other one is considered public.,Key 1,Key 2,Private,Private and Public Keys,If you want someone to sent you an encrypted file, tell them to
38、use your public key to encrypt it. That way, nobody (not even the person who encrypted it) can read the encrypted data, except you.,Key 1,Key 2,Private,Private and Public Keys,And, if you want to send someone a file so only they can read it, you can just use their public key. Its probably on their w
39、ebsite even.,Key 1,Key 2,Private,Digital Signing,Digital signatures prove that data came from the person with the private key For me to sign some text Do a hash of the text Encrypt the hash with my private key Send the encrypted hash with the text To prove that I signed it Do a hash of the text (sam
40、e as I did) Unencrypt the encrypted hash with my public key Check that it matches the calculated value,What If I Lose My Key?,The blockchain will store your address forever in case you later find it Ask Buddha for help The real number of Bitcoins will be less than 21 million because some of them are
41、 already lost,Peer-to-Peer,Bitcoin originally used Internet Relay Chat When a peer starts up, they get a list of other peers and go looking for a few peers who arent so busy Peers share information about recent transactions and historical blocks Blocks are verified with Merkle tree signature,Threats
42、 to Bitcoin,Competing currencies (Network effects) Blockchain forking due to philosophical conflicts Government attacks Denial of service attacks (Probably temporary) Hackers stealing currency Unrecoverable bug in the protocol Cryptography breakthrough (quantum computers?) Loss of confidence due to
43、volatility Early adopters dumping Redlisting Processing power takeover Pressure from Visa/MasterCard Pressure from Internet providers Crushing increase in volume Selfish Miners problem Mutable transactions Byzantine Generals Problem Maybe lack of regulation really is bad Maybe free markets/capitalis
44、m just dont work,Regulation of Bitcoin,A lack of regulation is preventing big institutions from entering the market Bitcoin is a distributed peer-to-peer system (hard to seize) Bitcoins arent even tied to its current network protocol Bitcoin is mostly not in the US there are no major exchanges in th
45、e US To stop bitcoin trading, the US will have to be ON your computer Blocking the US from Bitcoins will hinder our participation in a possible technology revolution; American companies will lose contracts America has an established network of drug dealers Paying for drugs with bitcoin makes a lot o
46、f sense Accepting bitcoins for drugs makes a lot of sense Drug dealers are probably going to have Bitcoin for sale Organized crime wouldnt turn down a new way to make money (Bitcoin trade) It is possible to curtail legal usage of Bitcoin within dedicated countries, but very difficult to catch bitcoi
47、n criminals Bitcoin can adapt around regulation America already has $1.5 Trillion cash overseas. How did it get there? Pandoras box is already open Virtual currencies pose a credible threat to the ability of sovereign nations to govern,Bitcoin is hard to regulate because it is:,Decentralized Global
48、Flexible Popular,The Peoples Republic of China,Like some Americans, some Chinese have a desire to hide some of their wealth The Chinese government probably wont ban BitcoinsAre Bitcoins worse than USD to them? Like the US, the regulatory environment in China is ambiguous Chinese people (possibly mor
49、eso than Americans) like to gamble Chinese citizens are already moving into Bitcoins in a big way Some of the biggest exchanges are in China Chinese exchanges publish fake trading information More full nodes are running in China than any other country Chinese people can buy Bitcoins with Renminbi or
50、 USD Chinese people hold a LOT of USD China wont have much sympathy if the US bans bitcoins,Mining,Byproduct of publishing the blockchain This is the way new Bitcoins are created Miners publish blocks on the blockchain As a reward for publishing blocks, they get to keep Bitcoins. (50 for the first 4
51、 years, 25 now, halving every four years) Miners also get transaction fees Race to find a conforming hash every 10 minutes Dont do it (unless you have cash, time, and an underutilized electrical engineering skill) Incredibly competitive Risky High upfront investment Technology is changing rapidly Now requires specialized hardware (ASIC chip) Miners reasonably must join a guild The combined computing power of the miners is thousands of times more powerful than the most powerful super computers in the world,
