PowerPoint Presentation

THE GLOBAL CURRENCYBitcoinGlobal currency (symbol BTC)Very different from fiat currenciesAround since January of 2009Not issued by any entityPeer-to-peer / decentralizedTrading over the internetProtocol is open sourceProtected by strong encryption (CryptoCurrency)People who transmit transactions are called minersThe maximum number of Bitcoins will be about 21 millionA bitcoin is a unit of measurementNot completely illegal yetNot a scam or get-rich-quick schemeMay change money forever

The Basic MechanismTransactions are published to the Bitcoin P2P networkMiners (computers) compete to solve a proof-of-work problem on average every 10 minutesThe winning miner publishes a summary of recent transactions in a blockMiners are rewarded with new coins for having published a valid blockBlocks are linked to previous blocks, creating a block chainThe value of every account is evident on the blockchainEveryone is expected to know the whole blockchain

Genesis StoryThe 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 project.Nobody knows who Satoshi really is, but his English is really good as well as his programmingSatoshi owns nearly 1M bitcoinsHe/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 freeThere are Core DevelopersThe developers who wrote the core Bitcoin-QT program are still mostly working on the softwareThey are passionate about BitcoinThere are many other developers and tools that emulate protocolHigher-security walletsMinersExchangesCurrency exchangers/transmittersNobody is really in control but some people have a lot more influence than othersIt is possible for developers to alienate themselves and become irrelevantThere is a Bitcoin FoundationTries to represent BitcoinNon-profitModeled after Linux FoundationFragile coalition of interested partiesPays the developersSmall disagreements have led to calls for a new organizationBitcoin WalletsThe term Bitcoin wallet refers to a file that contains the number or numbers of accounts that hold moneyThere is also wallet software for managing accounts and transactionsSince Bitcoins are valuable, wallets should be encryptedThe secret numbers can be printed, generally as a barcodePrinted Bitcoin values may beLocked up for securitys sakeHeld as a backup to an electronic walletUsed as paper money

Features of BitcoinAll-electronicProvable valueFast transactionsLow-cost transactionsDivisible down to 0.00000001 BTCNo third-party trust requiredUncontrollable (Decentralized)Irreversible tradesNo double-spendingSome anonymity (pseudonymity)Inflation resistantDeflationary (Maximum of 21M issued)InternationalWidely accepted as a currency

Uses For BitcoinConvenient online purchasesTips and donationsMicro-paymentsTransactions that must be irreversibleWhen information is transferredWhen an irreversible action is performedEmbarrassing transactionsBlack-market transactionsA store of valueInvestmentA place to hide moneyGamblingRansomEscape currencies that are in troubleInternational transactions and financingBuying foreign goods (currency lingua franca)Paying foreign employees

Comparison to Indian RupeeIndian Rupee (Cash)Backed by India?Controlled by IndiaPrimarily Indian Subcontinent onlyCreated by governmentSupply controlled by politicsEasy to steal by thievesHard to steal by hackersHard to transmitHard to traceNon-refundableUsed for crime

BitcoinBacked only by other usersControlled by usersInternationalCreated based on work doneFixed number issuedHard to steal by muggersEasier to steal by hackersEasy to transmitHard to traceNon-refundableUsed for crimeComparison to GoldGoldBacked by itself?Internationally acceptedSupply controlled by minersDifficult/expensive to storeNot easy to divideDifficult to use for transactionsCan make jewelry out of itEasy to steal by muggers/invadersHard to steal by hackersHard to traceNon-refundable

BitcoinBacked only by other usersInternationally acceptedSupply is fixedEasy to storeEasy to divideEasy to use for transactionsEasy to make backupsHard to steal by muggers/invadersEasy to steal by hackersHard to traceNon-refundableDivisibility1000 MilliBits = 1 BTCMilliBits is abbreviated mBTCFor the time being, kaapis are likely to be priced in millibitIf Bitcoin are eventually worth $1,000,000, the lowest amount of money you will be able to transact is $0.01 worthIrreversible Transactions Bitcoin transactions are all irreversibleBut, for some transactions, people dont want the baggage of the government oversightIf you use banknotes or coins, you are familiar with irreversibility

Silk Road WebsiteA black market website that began on the TOR network starting in February of 2011Transactions are paid for with BitcoinUses an escrow system to reduce abuseLooks like eBay, but most things are illegalmost notably, drugsShut 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 people all over the world, even if they broke no lawsOn 11/6/2013 the website re-opened as 2.0, apparently with new management, but he calls himself DPRSilk Road is only the most successful marketplace for black market goods. There are othersThe Technology Behind BTCHashing (double-SHA256, RIPEMD-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)HashingHashing is applying an algorithm to find a short number (digest) of a block of dataA checksum is an example hashing algorithmEvery time you apply a hash to some data, you get the same hash numberHashes 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 dataChecksum (type of hash)Add up numbersTake the least significant digitsExample:

7734259006 43 Checksum as HashChecksums are a bad (but easy to do) hashSHA256 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 numbersWith SHA256, any tiny change to the data being hashed will completely change the output hash valueProof-of-WorkHashcash algorithm designed to prevent spamA hash is an apparently random set of 256 bitsEvery time you change something being hashed (for example, with a nonce) the hash completely changesThere is a 50% chance the first bit might be 0If you change the thing-to-be-hashed a little bit, you could try a few times and get one with the first bit of 0First 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 BitcoinsDual-key EncryptionFundamental to understanding virtual currenciesEncrypting with a password is single-keyDual-key encryption uses two keysIf one key is used to encrypt, the other key can be used to decryptAnd vice-versaThe key that encrypted CANNOT decryptSingle Key EncryptionA key (like a password) can encrypt dataKeyUnencrypted dataSingle Key EncryptionUse the key to encrypt some dataKeyUnencrypted dataEncrypted dataSingle Key EncryptionUse the same key to unencrypt

But, I have to give away the keyAnd, I have to transmit that keyKeyUnencrypted dataEncrypted dataDual-key EncryptionThere are two keys (like special passwords)Key 1Key 2Unencrypted dataThese keys are big numbersDual-key EncryptionKeys are generated in pairs. They go together

One key cant be used to find the otherKey 1Key 2Unencrypted dataDual-key EncryptionEncrypt with Key 1Key 1Key 2Unencrypted dataEncrypted dataDual-key EncryptionDecrypt with Key 2Key 1Key 2Unencrypted dataEncrypted dataDual-key EncryptionEncrypt with Key 2Key 1Key 2Encrypted dataUnencrypted dataDual-key EncryptionDecrypt with Key 1Key 1Key 2EncryptedUnencryptedDual-key EncryptionIf you only have one key, you cant unencrypt your own data.Key 1EncryptedUnencryptedPrivate and Public KeysAlthough keys are symmetrical, usually one key is kept private, while the other one is considered public.Key 1Key 2Private

Private and Public KeysIf you want someone to sent you an encrypted file, tell them to 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 1Key 2Private

Private and Public KeysAnd, 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 website even.Key 1Key 2Private

Peer-to-PeerBitcoin originally used Internet Relay ChatWhen a peer starts up, they get a list of other peers and go looking for a few peers who arent so busyPeers share information about recent transactions and historical blocksBitcoin TransactionVendor creates brand new keypairVendor shows customer barcode asking for price to be send to the new addressCustomer scans barcode with wallet software (on a smartphone) Wallet software asks if it is okay to send the requested amount. Customer approvesPassword is supplied to unlock private keyTransaction message is sent to bitcoin networkVendor receives transaction notification on bitcoin networkVendor optionally waits for block confirmationCustomer is informed that transaction is completeThreats to BitcoinCompeting currencies (Network effects)Blockchain forking due to philosophical conflictsGovernment attacksDenial of service attacks (Probably temporary)Hackers stealing currencyUnrecoverable bug in the protocolCryptography breakthrough (quantum computers?)Loss of confidence due to volatilityEarly adopters dumpingRedlistingProcessing power takeoverPressure from Visa/MasterCardPressure from Internet providersCrushing increase in volumeSelfish Miners problemMutable transactionsByzantine Generals ProblemMaybe lack of regulation really is badMaybe free markets/capitalism just dont work

Regulation of BitcoinA lack of regulation is preventing big institutions from entering the marketBitcoin is a distributed peer-to-peer system (hard to seize)Bitcoins arent even tied to its current network protocolBitcoin is mostly not in the India there are no major exchanges in the IndiaTo stop bitcoin trading, the country will have to be ON your computerIndia has an established network of drug dealersPaying for drugs with bitcoin makes a lot of senseAccepting bitcoins for drugs makes a lot of senseDrug dealers are probably going to have Bitcoin for saleOrganized 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 bitcoin criminalsBitcoin can adapt around regulationAmerica already has $1.5 Trillion cash overseas. How did it get there?Pandoras box is already openVirtual currencies pose a credible threat to the ability of sovereign nations to governBitcoin is hard to regulatebecause it is:DecentralizedGlobalFlexiblePopularMiningByproduct of publishing the blockchainThis is the way new Bitcoins are createdMiners publish blocks on the blockchainAs a reward for publishing blocks, they get to keep Bitcoins. (50 for the first 4 years, 25 now, halving every four years)Miners also get transaction feesRace to find a conforming hash every 10 minutesDont do it (unless you have cash, time, and an underutilized electrical engineering skill)Incredibly competitiveRiskyHigh upfront investmentTechnology is changing rapidlyNow requires specialized hardware (ASIC chip)Miners reasonably must join a guildThe combined computing power of the miners is thousands of times more powerful than the most powerful super computers in the world

Mining

MiningHow Bitcoins are CreatedEvery 10 minutes (average), miners try to solve a proof-of-work problemThe first one to solve the problem publishes a block on the blockchain that includes all transactions from the last 10 minutesIn 2009, the reward for publishing a block was 50 Bitcoins. Now it is 25. In 2016 it will be 12.5 BitcoinsWith the constant halving, eventually there will only be about 21 million BitcoinsBlockchainMiners publish a block of recent transactions every 10 minutes on averageEach block is provably related to the previous Every transaction ever is stored in the blockchainIf there are disagreements about valid blocks, the blockchain can forkMiners add to the longest good chainSearching the blockchain can reveal interesting thingsBitcoin Wallet SecurityKeep keys offline if you canEncrypt your walletMake backup copies of your walletIf you are going to keep your savings at home, put them on a computer you ONLY use for bitcoinsKeep multiple walletsAlways receive money to a new addressOnline wallets: use 2-factor authenticationDont spend from your savings address(es)Dont brag about how many coins you have or where you stash themDoom and GloomSome people say Bitcoin is not a currency and is doomed to failAlmost everyone predicting the downfall of Bitcoin doesnt really understand bitcoinThe arguments generally fall into the following categoriesBitcoins have No Intrinsic Value?What is the intrinsic value of a Indian Rupee?What is the intrinsic value of gold? Does jewelry and electrical contacts give it its value?Classic chicken/egg problemMost currency has value because people value itWhat is the intrinsic value of eBay? None because they dont sell anything themselves?Doesnt the merits of the protocol have intrinsic value?

Bitcoin is Too ComplicatedThe Credit Default Swap market was complicated: $62.2 Trillion at peakThe Eurodollar market is $20+TrillionGold is a very simple system, but you probably never buy anything in gold

Bitcoin Prices are Too VolatileBitcoin is a very young technology and is very likely to stabilizeGold prices are volatileYou dont see it, but USD is pretty volatile compared with other currencies and commoditiesThe price is volatile because people are buying and selling itBitcoin is attractive to traders because it is volatile

Bitcoin Mining is WastefulThe Hashcash algorithm is almost useless except for within BitcoinMust show that work was doneMust be based on the previous blockMust be easily checkableIf the algorithm is useful to someone, that someone probably has an advantageChanging the algorithm would be very disruptive to BitcoinSome altcoins attempt to solve this problem, but open vulnerabilities to do soNobody has found an acceptable alternativeBitcoin Wont Work Because it is DeflationaryCrack Cocaine wont become popular because it is too addictive.Deflation is when prices for goods become less expensive over time.Deflation is also when the value of money goes up over time.If people dont desire to have Bitcoins, it wont be deflationaryPeople will likely be able to choose among currencies, and will likely set prices in the most stable currencyTight money supply isnt the only reason for deflation

Sigmoid Adoption PatternWhen new things are adopted, the normal pattern is:Slow initial growthRapid adoption periodTapering offS-curves happen with:New technologiesDiseasesGene propagationIntroduction of invasive species (rats on islands)Etc.The first part of the S-curve looks a lot like an asset bubbleThe curves are never actually smooth

Technology Adoption LifecycleVisionariesInnovatorsEarly AdoptersThe ChasmPragmatistsEarly Majority (are we here yet?)Late MajorityLaggards

Chalkboard Coins 1.0We need a money supplyThe only thing we have in the room is a chalkboardJim writes up on the board what each person has, so everybody knows who has whatIf there is a transaction, the old owner is crossed off and the new owner is written in

Coin Owner1Jim2Jim3Jim4Jim5Jim6JimCoinOwner7Jim8Jim9Jim10Jim11Jim12JimChalkboard Coins 1.0We need a money supplyThe only thing we have in the room is a chalkboardJim writes up on the board what each person has, so everybody knows who has whatIf there is a transaction, the old owner is crossed off and the new owner is written in

Coin Owner1Jim Alice2Jim3Jim4Jim5Jim6JimCoinOwner7Jim8Jim9Jim10Jim11Jim12JimChalkboard Coins 2.0Rather than writing things on the chalkboard right away, we just shout out the trade, and everyone remembersAt the end of the day, someone writes down the transactions for the dayAs a reward for writing everything down, the scribe gets some Chalkboard Coins. This is the only way Chalkboard Coins can be created.Chalkboard Coins 2.0There is no reason for the scribe to re-write everything, so only changes are written downIf the scribe gets it wrong, someone ELSE writes it down correctly and gets the coinsNobody pays attention to scribes who get it wrong. So it is important to be right

Coin Owner1Jim-----Tuesday-----Coin 1 Jim->BobNew coin:2Scribe1Chalkboard Coins 3.0Nobody uses their real name. People only shout out a public key to own each chalkboard CoinTo claim a Chalkboard Coin, you must sign the transaction with your private key

Coin Owner11zKB543fJGRP075HGDm0Q-----Tuesday-----Coin 1 1zKB543fJGRP075HGDm0Q -> 1XPM77H5Z2vdD976BVISDNew coin:21JC53YQ0L4LGMN3MN2IYVChalkboard Coins versus BitcoinsInstead of shouting, people publish on a peer-to-peer networkThere is no board at all. The transactions as well as the confirmations are published on the network and rememberedConfirmations are called blocks, and sent out every 10 minutes, not every nightIf someone forgets (or is new), they ask their peers for old blocksThe scribes are actually minersWill Bitcoins Last?I dont know.Is there a demand for digital currency?Prepaid credit cards ($77 billion/year)Western Union ($5 billion/year revenue)MoneyGram (in trouble with feds)e-gold (grabbed by feds)e-Bullion (grabbed by feds)WebMoney (grabbed by Ukrainians)DigiCash/eCash (bankrupt)Tencent QQ Qcoins (in trouble with Chinese)Liberty Reserve (grabbed by feds)Paypal ($5.6 billion/year revenue)High feesClose government scrutinyMany others from historyIs there room for many? Or, can there be only one?

Famous People and BitcoinsSir Richard Branson will sell you a ticket to space on (Virgin Galactic)The Winklevoss Twins (Facebook fame) have 108,000 BTC and want to start a ETFMany venture capitalists are backing startupsBen Bernake may hold long-term promiseMarc Andreessen (Netscape founder) Bitcoin offers a sweeping vista of opportunityJamie Dimon (CEO JPM) Bitcoin is a terrible store of value.David Woo (BofA/ML) As a medium of exchange, Bitcoin has clear potential for growth, in our view.Goldman Sachs Bitcoin may emerge as the reigning standard [of natively digital transactions]Al Gore Im a big fan of BitcoinDavid Marcus (Pres of PayPal) I really like Bitcoin. I own bitcoins.Jim Cramer (Mad Money) said that without a central bank Bitcoin is not a currency and the Treasury should have shut down BitcoinThe Washington Post: Bitcoin is ludicrousThe New York Times: How can bitcoin be anything but a passing fad?Paul Krugman (Nobel winning Keynsian Economist) Bitcoin is Evil

How to Get BitcoinsCoinbaseBitstampLocalbitcoinsProposed Chicago Bitcoin ATM coming in MarchBitcoin ExchangesMt. Gox Tokyo, JapanBitstamp - SloveniaBTC-e Bulgaria?Bitfinex Hong KongCampBx Atlanta, Georgia, USAKracken San Francisco/Germany?BTCChina Shanghai, PRCHuobi Hong Kong?Bitcoin.de - Germany