bitcoin - yxe barcamp 2012

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฿ bitcoin /ˈbɪtkɔɪn/ [email protected] [email protected]

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Page 2: Bitcoin - YXE Barcamp 2012

WARNING

The following presentation should be considered ฿ullshit. The presenters are not financial advisers. Please consult a professional before investing your money in Bitcoin or any other money laundering scheme.

FBI

With any talk that involves money, a warning is always apt.

Page 3: Bitcoin - YXE Barcamp 2012

WARNING

One of the presenters is a hardcore capitalist and doesn’t like change, the other is more reasonable.

I’ll be presenting the facts and Colin will be presenting the ฿ullshit.

FBI

Zach: I have my own warning too!

Page 4: Bitcoin - YXE Barcamp 2012

What is money?

Page 5: Bitcoin - YXE Barcamp 2012

Money is a proxy

Page 6: Bitcoin - YXE Barcamp 2012

Money buys beer

Page 7: Bitcoin - YXE Barcamp 2012

Cost of Beer over time

Page 8: Bitcoin - YXE Barcamp 2012

USD Purchasing Power vs.Circulation Total

1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

CA$201m

CA$401m

CA$602m

CA$802m

CA$1,003m

Page 9: Bitcoin - YXE Barcamp 2012

Fiat Currency

Fiat Currency is issued by governments to pay taxesWorth something because, by law, it must be accepted as a payment of debt. Therefore people trust that if they have money, by law, they can trade it for goods.

Page 10: Bitcoin - YXE Barcamp 2012

And really, it’s run by men like these:Mark Carney - Bank of CanadaBen Bernanke - US Federal Reserve

Page 11: Bitcoin - YXE Barcamp 2012

bitcoin: We can do better

• Increase security while simplifying infrastructure overhead

• Reduce transaction costs

• Make transactions as fast as the internet

• Remove government from money supply

• Stabilize money supply to address inflation

Page 12: Bitcoin - YXE Barcamp 2012

Satoshi Nakamoto

Satoshi Nakamoto - creator of Bitcoin in 2009Vanishes in 2010 leaving Gavin Andreeson and others to continueWho is he?

Page 13: Bitcoin - YXE Barcamp 2012

bitcoin Quick Facts

• ~10million BTC in existence

• Market Price: $11.72 USD

• Market Cap: $110 million USD

• Transaction Volume: $2,800,000 USD / day

• Total miners revenue: $80,000 USD / day

Page 14: Bitcoin - YXE Barcamp 2012

BTC:USD

CA$0

CA$6.00

CA$12.00

CA$18.00

CA$24.00

CA$30.00

2010/0

7/17

2010/0

8/21

2010/0

9/25

2010/1

0/30

2010/1

2/04

2011/0

1/08

2011/0

2/12

2011/0

3/19

2011/0

4/23

2011/0

5/28

2011/0

7/08

2011/0

8/12

2011/0

9/16

2011/1

0/21

2011/1

1/25

2011/1

2/30

2012/0

2/03

2012/0

3/09

2012/0

4/13

2012/0

5/18

2012/0

6/22

2012/0

7/27

2012/0

8/31

2012/1

0/05

Page 15: Bitcoin - YXE Barcamp 2012

How does it work?

Page 16: Bitcoin - YXE Barcamp 2012

Bob: I wants beer

[I think he’s high]

Page 17: Bitcoin - YXE Barcamp 2012

Alice: 5 dollars please

=$5.00

Page 18: Bitcoin - YXE Barcamp 2012

nurff nomm nomm beer bitcoin

?

Page 19: Bitcoin - YXE Barcamp 2012

Sure, just scan this QR code

Page 20: Bitcoin - YXE Barcamp 2012
Page 21: Bitcoin - YXE Barcamp 2012

mmmmm... beer

Thank you

Page 22: Bitcoin - YXE Barcamp 2012

The bitcoin P2P Network

Page 23: Bitcoin - YXE Barcamp 2012

Transactions are broadcast on the P2P Network

TX messageAmount: 2

To: 175tWpb8…Node 1

Node 2

Node 3

Node 5

Node 4

Node 6

TX

TX

TX

TX

TX

TX

Bob’s transaction is broadcast to peers, and propagates through the network

Page 24: Bitcoin - YXE Barcamp 2012

TX messageAmount: 2

To: 175tWpb8…Node 1

Node 2

Node 3

Node 5

Node 4

Node 6

••••

Miner 1

••••

••••

••••

••••

••••

••••

TXs are rolled together into blocks originating from a miner

collectively miners generate new block roughly every 10 minutesA txn is harder to reverse once incorporated into a block (because it’s hard)miners are incentivized bt reward

Page 25: Bitcoin - YXE Barcamp 2012

TX messageAmount: 2

To: 175tWpb8…Node 1

Node 2

Node 3

Node 5

Node 4

Node 6Miner 1

Each node has the entire chain of blocks

••••••••••••

••••••••••••

••••••••••••

••••••••••••

••••••••••••

••••••••••••

••••••••••••

every txn ever - exists in the chainpresents scalability problems - but many feel these can be addressed

Page 26: Bitcoin - YXE Barcamp 2012

The Block Chain

TXTXTX

Ref IDnonce

TXTXTX

Ref IDnonce

TXTXTX

Ref IDnonce

TXTXTX

Ref IDnonce

blocks consist of a collection of txns, a crypto-hash to make forgeries/changes too hard, and a random number called a nonce.bitcoins are not stored on your hard-drive, usb stick, iPhone - but in this shared chain

Page 27: Bitcoin - YXE Barcamp 2012

TX messageAmount: 2

To: 175tWpb8…Node 1

Node 2

Node 3

Node 5

Node 4

Node 6Miner 1

Miners compete to “find” new blocks and transmit to nodes

••••••••••••

••••••••••••

••••••••••••

••••••••••••

••••••••••••

••••••••••••

••

Miner 2

•••••

Miner 3

••••

Miner 4

••••••••••••

miners work to incorporate transactions the see into blocks of transactionsthis is done both as a way of introducing new BTC and securing the network

Page 28: Bitcoin - YXE Barcamp 2012

this is what mining hardware looks like...mining is performed by powerful computersincentives to be the fastest miner have driven efficiency enhancementsfrom CPU to GPU to FPGA and soon ASIC

Page 29: Bitcoin - YXE Barcamp 2012

what is mining?Yatzee! Similar to Yatzee computers attempt to generate a new block using a predictable amount of trial and error.

Page 30: Bitcoin - YXE Barcamp 2012

MinerTXTXTX

Ref IDnonce

TXTXTX

Ref IDnonce

TXTXTX

Ref IDnonce

miners working to discover next blocklistening to txns and incorporating into this next block

Page 31: Bitcoin - YXE Barcamp 2012

Miner SHA-256TXTXTX

Ref IDnonce

hash = sha256[sha256(version id + previous hash reference+ sha256(transaction list) + nonce)]

How?Mining hardware builds new block ‘attempt’includes reference to prev block, random number and transactions

2^256115 quattuorvigintillion115792089237316195423570985008687907853269984665640564039457584007913129639936

Page 32: Bitcoin - YXE Barcamp 2012

Current Difficulty

Miner SHA-256TXTXTX

Ref IDnonce

800+ Mhash/secdifficulty adjusts to ensure 1 block / 10 mintues

Page 33: Bitcoin - YXE Barcamp 2012

MinerTXTXTX

Ref ID0

Current Difficulty

Page 34: Bitcoin - YXE Barcamp 2012

MinerTXTXTX

Ref ID1

Current Difficulty

Page 35: Bitcoin - YXE Barcamp 2012

MinerTXTXTX

Ref ID2

Current Difficulty

Page 36: Bitcoin - YXE Barcamp 2012

MinerTXTXTX

Ref ID4

Current Difficulty

We have a winner...

Page 37: Bitcoin - YXE Barcamp 2012

MinerTXTXTX

Ref ID4

TXTXTX

Ref IDnonce

TXTXTX

Ref IDnonce

TXTXTX

Ref IDnonce

Newly minted block

Page 38: Bitcoin - YXE Barcamp 2012

Why mining?

• The only way new BTC enter circulation

• Difficulty is adjusted to ensure 1 block / 10 minutes

• Confirms transactions

• Prevents double spending

• Nakamoto compared this process to gold miners expending resources to add gold to circulation.

Page 39: Bitcoin - YXE Barcamp 2012

What’s in it for miners?

• 50 BTCs for each discovered block (declining over time)

• Transaction fees paid by users

@ 800 Mhash/sec -> $80/mo

Page 40: Bitcoin - YXE Barcamp 2012

Mining Reward v. Total Volume

฿0

฿10

฿20

฿30

฿40

฿50

2009 2013 2017 2021 2025 2029 2033฿0million

฿4million

฿8million

฿13million

฿17million

฿21million

There is a cap to the amount of bitcoin currency in the systemThe reward for mining will go down over time; revenue to be augmented by transaction volume

Page 41: Bitcoin - YXE Barcamp 2012

Total TX Fees Paid to Miners

Page 42: Bitcoin - YXE Barcamp 2012

Total Revenue to Miners

General trend is that miners are making more money each day. consider that there is a rate limit of max 1 block every 10 min, the overall gross revenue for each block is going up.

Page 43: Bitcoin - YXE Barcamp 2012

How is it doing?

• Increase security while simplifying infrastructure overhead

• Reduce transaction costs

• Make transactions as fast as the internet

• Remove government from money supply

• Cap money supply to address inflation

A+AA

bitcoin is cool.

Page 44: Bitcoin - YXE Barcamp 2012

Governance is the byproduct of government monetary policy

But there are some dark sides of bitcoin: the lack of governance* allows extortion from organizations like Russian Business Network* allows Money Laundering* and Ponzi schemes (Bernard Madoff shown here)* and also allows the grayer areas like Silk Road

Page 45: Bitcoin - YXE Barcamp 2012

How is it doing?

• Increase security while simplifying infrastructure overhead

• Reduce transaction costs

• Make transactions as fast as the internet

• Remove government from money supply

• Cap money supply to address inflation

A+AAC+?

Page 46: Bitcoin - YXE Barcamp 2012

caping money supply is an interesting idea ...

Page 47: Bitcoin - YXE Barcamp 2012

... but, inflation and money supply are not real problems

Page 48: Bitcoin - YXE Barcamp 2012

The human brain is the problem

Page 49: Bitcoin - YXE Barcamp 2012

Humans are predisposed to growthhumans like growthsocial evolutionary theory: hunter-gather to agrarian; shift value from quantity to quality

Page 50: Bitcoin - YXE Barcamp 2012

Our economy is built on growth

economy is built on the assumption of growth.“buy low, sell high” mantraGrowth leads to efficiencies and inc. productivityFueled by growth of the population, growth in efficiencies and growth of earning power

Page 51: Bitcoin - YXE Barcamp 2012

USD Purchasing Power vs.Circulation Total

1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

CA$201m

CA$401m

CA$602m

CA$802m

CA$1,003m

isn’t the economic growth artificial because we are pumping money in the system?No.example: community of 10 people; 10 bitcoins each (100 total); community grows 2x but still only 100 bitcoins in circulation; prices have to go down.

Page 52: Bitcoin - YXE Barcamp 2012

The real story is about standard of living

no. add currency to compensate for growth; ensure that earning power doesn’t decrease the truth: earning power is going up;The Achilles heal of the system: limited money supply scarcity, hoarding, mattress’ingTo compensate: add money supply added at a steady rate while also encourage monetary liquidityNo one wants their buying power to go downNo one wants their wages to go down

Page 53: Bitcoin - YXE Barcamp 2012

Humans again are the problem:

emotionally driven

Supply can be pumped inconsumer spending is a purely emotionally driven function * the happier we feel* the more we spend* the more liquidity in the market* the less inflation (monetary devaluation)Achilles heal: no spending; example: small town

Page 54: Bitcoin - YXE Barcamp 2012

GDP = C + I + G + (X-M)

+ ++

formulas that will kill the mood at a dinner party4 big levers usually used to keep liquidity; ensure price increases don’t rise too quickly:spend your own moneygive the banks so they can invest;government spends (eg: ‘new deal’) to artificially cause liquiditymore imports > exports; what about a global economycf: 2008

Page 55: Bitcoin - YXE Barcamp 2012

Last 30 years of data: inflation is under control

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

1914 1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010

% Change CPI

Over the last 30 years we’ve figured this thing out this experimenteconomics is like flying an airplane using the rear-view mirror.Overall, we know how to adjust the right levers (G vs. i vs. C)

Page 56: Bitcoin - YXE Barcamp 2012

How is it doing?

• Increase security while simplifying infrastructure overhead

• Reduce transaction costs

• Make transactions as fast as the internet

• Remove government from money supply

• Cap money supply to address inflation

A+AAFF

For this reason, I think bitcoin is flawed. caping the money supply will be the undoing of bitcoin

Page 57: Bitcoin - YXE Barcamp 2012

฿ bitcoin: crossing the chasm

• Growth: uncapped potential for money supply

• Governance: don’t let the bad guys win

• Government: or algorithms that can stimulate a currency

• Greenback: technology for daily adoption

Early Adopters Pragmatists Conservatives Laggards

Page 58: Bitcoin - YXE Barcamp 2012

Predictions & Prognostications

ColinTechnology is coolideology is flawedquestions about scalabilityBanking could benefit from the algorithms

ZachReminds me of early days of internet (Hype + Skepticism = both were right + evolution)Will see volatile prices for a whileExpect governments to intervene good? bad? - some governance okayNeeds its Mosaic/Netscape moment - current apps work but have terrible UXIf this happens... expect $100/BTC within 5 yearsDeflation is not a problem - don’t expect BTC to replace Fiat - ebooks didn’t replace paperGold is hoarded, therefor deflationary, you can exchange gold for USD, no problems right?Expect more rapid adoption in 3rd world accompanied by cell phone growth / lack of infrastructure.Reduced friction in moving money around = more global collaboration / distributed ventures => GOOD

Page 59: Bitcoin - YXE Barcamp 2012

How to get involvedhttp://sourceforge.net/projects/bitcoin/files/Bitcoin/bitcoin-0.7.1/

Bitcoin clients* Bitcoin-Qt (original) - bitcoin.org* MultiBit - multibit.org* Armory - bitcoinarmory.com* Electrum - electrum-desktop.com* Bitcoin Wallet (Andriod)

Free Resources* bitcoin.org* bitcointalk.org * bitcoincharts.com* Bitcoin Block Explorer - blockexplorer.com* Bitcoin Monitor - bitcoinmonitor.com* Bitcoin Wiki - https://en.bitcoin.it/* weusecoins.com

Bitcoin merchants* VPN Services - privateinternetaccess.com

Exchanges:* bitinstant.com* cavirtex.com

Online Wallets / Merchant Tools:* blockchain.info* coinbase.com* bitpay.com* paysius.com

Economics stuff: Money Supply and Purchasing PowerBitcoin Collusion problems

Other talks:http://www.youtube.com/watch?v=SvZGjF1aJhM&feature=relmfu

Page 60: Bitcoin - YXE Barcamp 2012

How do I get my own bitcoins?

• Mine them yourself

• Buy them at an exchange:

• http://bitcoincharts.com/ - 50+ active markets

• I use https://www.cavirtex.com/

• Buy them at Wallmart, 7-11 !

• 700,000 locations - bitinstant.com/cashpayment.com