Trick or Treat? Bitcoin for Non-Believers, Cryptocurrencies for Cypherpunks

David EvansUniversity of Virginiawww.cs.virginia.edu/evansbitcoin-class.org

DC Area Crypto DayAll Hallows’ Eve2

Johns Hopkins University

Plan

Tutorial Introduction to Bitcoin

Hype vs. Reality in Bitcoin Today

Scaling Bitcoin

Ombuds (Nick Skelsey)

1

What is money?

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3

Aristotle’s Politics 350 BCE

Fiat Currency

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With a strong enough army, anything can be a fiat currency

Centralized Digital Currency

6Trusted Bank

Account No. Owner’s Identify Value

3022493 Alice 2033.23

3022494 Bob 85733.03

3022495 Colleen 24331.77

3022496 Dave 0.01

7

Communications of the ACMOctober 1985

8

Communications of the ACMOctober 1985

First Wave Cryptocurrency

9David Chaum

First Wave Cryptocurrency

10David Chaum

Bankrupt, 1998

Decentralized CurrencyCurrency without trust

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Double Spending Challenge

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M = transfer X to Bob SignKRA[H(M)]

Bob wants to verify:1. Alice owns X2. Alice hasn’t transferred X3. The coin will be valuable for Bob

Double Spending Challenge

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M = transfer X to Bob SignKRA[H(M)]

Bob wants to verify:1. Alice owns X2. Alice hasn’t transferred X3. The coin will be valuable for Bob

Node CNode A Node B

txb

txb

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M = transfer X to Bob SignKRA[H(M)]

Bob wants to verify:1. Alice owns X2. Alice hasn’t transferred X3. The coin will be valuable for Bob

Node CNode A Node B

txb

txb

M = transfer X to Coleen SignKRA[H(M)]

txc

15

M = transfer X to Bob SignKRA[H(M)]

Bob wants to verify:1. Alice owns X2. Alice hasn’t transferred X3. The coin will be valuable for Bob

Node CNode A Node B

txb

txb

M = transfer X to Coleen SignKRA[H(M)]

txc

16

M = transfer X to Bob SignKRA[H(M)]

Bob wants to verify:1. Alice owns X2. Alice hasn’t transferred X3. The coin will be valuable for Bob

Node CNode A Node B

txb

txb

M = transfer X to Coleen SignKRA[H(M)]

txc

Node E

Node D

Satoshi’s Solution

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Blockchain

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B0H(B0) Nonce

Transactions

H(B1) Nonce

Transactions

H(B2) Nonce

Transactions

Distributed ledger maintained by network of untrusted nodesBlocks added require proof-of-workNode’s agree to consensus: longest (most difficult) chain

Incentives designed to encourage network nodes to:Validate and record transactionsSpend effort on extending consensus chain

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BitcoinTransaction

Input 1: v1, a1

Input 2: v2, a2

…

Output 1: x1, d1

Output 2: x2, d2

…

transaction fees = sum(input values) – sum(output values)(must be non-negative for valid transaction)

Bitcoin Script

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OP_DATA <public key>OP_CHECKSIG

Lock

ing

Scri

pt

OP_DATA <signature>

Un

lock

ing

Scri

pt

Transactio

na0

b6

ea…

..

Input 1: v1, a1

Output 1: x1, d1

Output 2: x2, d2

…

Transactio

nd

87

30

d…

Locking Script

Unlocking Script

If B

itco

in A

dd

ress

wer

e ju

st p

ub

lic k

ey

Bitcoin Script

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OP_DUPOP_HASH160OP_DATA <bitcoin address>OP_EQUALVERIFY OP_CHECKSIGLock

ing

Scri

pt

OP_DATA <signature>OP_DATA <public key>

Un

lock

ing

Scri

pt

Transactio

na0

b6

ea…

..

Input 1: v1, a1

Output 1: x1, d1

Output 2: x2, d2

…

Transactio

nd

87

30

d…

Locking Script

Unlocking Script

Bit

coin

Ad

dre

ss =

H(p

ub

lic k

ey)

OP_RETURN (until July 2010)

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https://github.com/bitcoin/bitcoin/blob/v0.1.5/script.cpp#L170

Universal Unlocking Script!OP_DATA 1OP_RETURN

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Example Transaction

Fees are optional…

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Exhibit B

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BitcoinTransaction

Input 1: v1, a1

Input 2: v2, a2

…

Output 1: x1, d1

Output 2: x2, d2

…

transaction fees = sum(input values) – sum(output values)(must be non-negative for valid transaction)

How is new bitcoin created?

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CoinbaseTransaction

Output 1: x1, d1

Output 2: x2, d2

…

sum(output values) ≤ sum(transaction fees) + mining reward

mining reward = 50 BTC 2floor(block number / 210,000)

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Bitcoin’s Proof-of-Work

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B0H(B0) Nonce

Transactions

H(B1) Nonce

Transactions

H(B2) Nonce

Transactions

Find a nonce x such that: SHA-256(SHA-256(r || x)) < T/d

r = header includes H(previous block)root of Merkle tree of transactions

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difficulty = 62,253,982,450expected hashes = 2.67 * 1020 ~ 268

“number of grains of sand on earth”

Actual Bitcoin Block

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https://en.bitcoin.it/wiki/Protocol_documentation#Block_Headers

Mining32

(General-Purpose)Computers are Useless

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XOR two 32-bit values in CPU XOR two 32-bit values in ASIC

4 transistors XOR design

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https://en.bitcoin.it/wiki/Mining_hardware_comparison

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Fire at mining facility in Thailand, 14 Oct 2014Photo credit: www.thairath.co.th

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Entire bitcoin network: 1/10th Lake Anna Power Station

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Bitcoin Hype!

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William Mougayar, The Global Landscape of Blockchain Companies in Financial Services

44

Google Trends

Renminbi

BitcoinDec 2013

45

Bitcoin “Hype”

Bitcoin MarketPrice (US$)

Reality Check

46

Bitcoin “Market Capitalization” = Number of Bitcoins ✕ Market Price

= 14,777,800 ✕ $314 = $4.64B

What does a $4.64B Market Cap company look like?

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NASDAQ: WOOFMarket Cap: $4.4BAverage daily trading: $35M

BitcoinMarket Cap: $4.6BAverage daily transactions: $50M (?)Average daily US$ exchange value: $3M

Can Bitcoin Scale?

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https://github.com/bitcoin/bitcoin/blob/master/src/consensus/consensus.h

51https://github.com/bitcoin/bitcoin/blob/master/src/main.cpp

52https://github.com/bitcoin/bitcoin/blob/master/src/main.cpp

Scale Today

53

Block Size = 1MBTypical transaction size ~ 500 BytesMaximum of ~2000 transactions per block / 10 minutesSo, about 3-4 transactions per second

Scale Today

54

Cost to control bitcoin (assuming other miners are “rational”):value per block-minute = $7500/10 minutes ~ $750/minute ~ $1M/dayto increase to $1B/day with current transaction rate:

$3472 fee per transaction (without losing transactions)or 33 Billion transactions per day (with current $0.03 fee)

Block Size = 1MBTypical transaction size ~ 500 BytesMaximum of ~2000 transactions per block / 10 minutesSo, about 3-4 transactions per second

$1B / day =

Scale Today

55

Cost to control bitcoin (assuming other miners are “rational”):value per block-minute = $7500/10 minutes ~ $750/minute ~ $1M/dayto increase to $1B/day with current transaction rate:

$3472 fee per transaction (without losing transactions)or 33 Billion transactions per day (with current $0.03 fee)

Block Size = 1MBTypical transaction size ~ 500 BytesMaximum of ~2000 transactions per block / 10 minutesSo, about 3-4 transactions per second

Transactions per DayVISA: 300MInterbank: 100M

Scale Today

56

Cost to control bitcoin (assuming other miners are “rational”):value per block-minute = $7500/10 minutes ~ $750/minute ~ $1M/dayto increase to $1B/day with current transaction rate:

$3472 fee per transaction (without losing transactions)or 33 Billion transactions per day (with current $0.03 fee)

Block Size = 1MBTypical transaction size ~ 500 BytesMaximum of ~2000 transactions per block / 10 minutesSo, about 3-4 transactions per second

Transactions per DayVISA: 300MInterbank: 100MCash: 20B?

Scale Today

57

Cost to control bitcoin (assuming other miners are “rational”):value per block-minute = $7500/10 minutes ~ $750/minute ~ $1M/dayto increase to $1B/day with current transaction rate:

$3472 fee per transaction (without losing transactions)or 33 Billion transactions per day (with current $0.03 fee)

Block Size = 1MBTypical transaction size ~ 500 BytesMaximum of ~2000 transactions per block / 10 minutesSo, about 3-4 transactions per second

Transactions per DayVISA: 300MInterbank: 100MCash: 20B?Facebook Likes: 4.5BSMS Messages: 25BWhatsApp Msg: 50B

Distributed microblogging

58Nick Skelsey – Cofounder @ Soapbox Systems