Key concepts and key words to understand Bitcoin

1. 1
BITCOIN
101
key
concepts
and
key
words
to
understand
Bitcoin
1

2. 2
Do
you
know…
Just
read
the
following
slides
to
understand
all
Bitcoin
key
concepts
2
What
is
the
NONCE?
What
DAO
stands
for?
What
is
a
MERKEL
TREE?
What
UTO
stands
for?
How
much
is
worth
1
SATOSHI?

3. 3
DISCLAIMER
Bitcoin
is
a
very
complex
topic,
merging
economy,
mathemaPcs
and
IT.
This
presentaPon
aims
at
providing
a
high
level
overview,
and
might
not
be
as
accurate
nor
precise
as
the
reality
would
be.
It
somePmes
oversimplified
explanaPon
for
the
sake
of
clarity.
3

4. 4
What
problem
is
Bitcoin
solving?
InternaPonal
Payments
and
Money
Transfer
are
complex,
expensive
and
take
Pme
4

5. 5
5
BANKS
RELY
ON
INTERMEDIARIES
(CLEARINGHOUSES,
CORRESPONDENTS)
TO
SETTLE
PAYMENTS.
THERE
ARE
AT
LEAST
TWO
AREAS
OF
IMPROVEMENT.
BILATERAL
SETTLEMENT
WILL
ELIMINATES
INTERMEDIARIES,
MIDPOINT
FAILURE,
DELAYS,
LIFTING
FEES
REAL-­‐TIME
FUNDING
WILL
MINIMIZES
EXCHANGE
SPREADS,
CREDIT
RISK,
COLLATERAL
COSTS
Source:
Ripple
Labs
(h3ps://ripple.com/solu7ons/execu7ve-­‐summary-­‐for-­‐financial-­‐ins7tu7ons/)
Sending
bank
Receiving
correspondent
Receiving
bank
Sending
correspondent
/
liquidity
provider
Central
counterparty
Central
counterparty
USD
USD
USD
à
EUR
EUR
EUR
Libing
fees
Libing
fees
FX
cost:
$$$

6. 6
What
is
Bitcoin?
Bitcoin
is
both
a
protocol
and
a
cryptocurrency,
created
in
2009
by
Satoshi
Nakamoto
6

7. 7
BITCOIN
REMOVES
THE
MIDDLE
MAN
BY
CREATING
A
TRUSTFUL
ENVIRONMENT
BETWEEN
PEOPLE/ENTITIES
WHO
DON’T
KNOW
THEMSELVES,
WITHOUT
A
CENTRAL
THIRD-­‐PARTY
BITCOIN
IS
BOTH
AN
INFRASTRUCTURE
(PROTOCOL
AND
ALGORITHM)
AND
A
CRYPTOCURRENCY
BITCOIN
AS
A
CRYPTOCURRENCY
CAN
BE
USED
TO
PAY
(LIKE
MONEY)
OR
INVEST
(LIKE
GOLD)
7

8. 8
BITCOIN
TRANSACTIONS
ARE
IMMUTABLE
AND
NON-­‐REVERSIBLE,
THEY
CANNOT
BE
CHANGED
BITCOINT
TRANSACTION
ARE
CENSORLESS,
THEY
CANNOT
BE
CENSORED
AND
REFUSED
BY
THE
NETWORK
BITCOIN
CAN
BE
DIVIDED
IN
SATOSHI,
EQUIVALENT
TO
1/100
MILLION
BITCOIN.
TRANSACTIONS
CAN
HARDLY
BE
BELOW
500
SATOSHIS
FOR
COST
EFFICIENCY
8

9. 9
Where
does
it
come
from?
Bitcoin
combines
different
field
studies,
with
recent
development
enabling
powerful
soluPons
9

10. 10
NAPSTER
WAS
ONE
OF
THE
FIRST
P2P
DISTRIBUTED
NETWORK
WITH
NO
THIRD-­‐PARTY
INVOLVED
BITCOIN
IS
AN
OPEN
SOURCE
SOFTWARE
MANAGED
BY
THE
BITCOIN
FUNDATION
GAME
THEORY:
MEMBERS
PLAYING
BY
THE
RULES
IS
A
NASH
EQUILIBRIUM
BITCOIN
USES
CRYPTOGRAPHY
TO
SECURE
TRANSACTIONS
(ELLIPTIC
CURVE
AND
HASH
FUNCTION)
DIGICASH
WAS
ONE
OF
THE
FIRST
DIGITAL
MONEY
FOUNDED
IN
1990
10

11. 11
How
does
the
bitcoin
currency
works?
Bitcoin
does
not
transfer
value,
but
ownership
11

12. 12
WITH
BITCOIN,
YOU
TRANSFER
OWNERSHIP.
BITCOINS
ARE
NON
FUNGIBLE.
IT
IS
LIKE
A
PHYSICAL
ASSET
A
TRANSACTION
USUALLY
PRODUCES
2
OUTPUT:
THE
ONE
SENT
TO
THE
RECEIVER,
AND
THE
ONE
REMAINING
TO
THE
SENDER:
UTO
(UNSPENT
TRANSACTION
OUTPUT).
TRANSFERING
PART
OF
OWNERSHIP
CREATES
AN
ADDITIONAL
TRANSACTION
WITH
THE
LEFT
OVER
BITCOIN
12
TransacPon
N-­‐1
TransacPon
N
1BTC
0.35
BTC
0.65
BTC
WANTS
TO
TRANSFER
0.35
BTC
TO
GENERATE
2
TRANSACTIONS
EACH
TRANSACTION
IS
VALID
ONLY
IF
IT
REFERS
TO
THE
PREVIOUS
ONE
WHICH
PROVES
OWNERSHIP

13. 13
THE
CRYPTOCURRENCY
IS
MINTED
EACH
TIME
A
TRANSACTION
IS
COMPLETED,
AND
IT
CANNOT
BE
MORE
THAN
21
MILLIONS
OF
BITCOINS.
BITCOIN
AS
A
CRYPTOCURRENCY
IS
A
SCARCE
RESSOURCE
BITCOINS
ARE
NOT
STORED,
THE
BALANCE
IS
THE
SUM
OF
PREVIOUS
TRANSACTIONS
13
BITCOIN
RECORDS
TRANSACTIONS
AND
NOT
BALANCE

14. 14
TRANSACTIONS
ARE
SIGNED
WITH
PUBLIC
(address)
/
PRIVATE
KEYS
(password),
WITH
A
VERY
HIGH
LEVEL
OF
SECURITY
WHICH
CANNOT
BE
BROKEN
TO
PREVENT
FRAUD
(DOUBLE
SPENDING),
TRANSACTIONS
ARE
RECOREDED
IN
THE
RIGHT
ORDER,
WITH
A
DISTRIBUTED
TIMESTAMP
14
BITCOIN
IS
PSEUDONIMOUS
(USE
OF
A
PUBLIC
KEY
TO
TRANSACT).
BITCOIN
DOES
NOT
GUARANTEE
THE
ANONYMITY,
PSEUDONYMS
CAN
BE
TRANSLATED
TO
REAL
NAME

15. 15
How
is
bitcoin
different
from
fiat
currency
and
physical
asset?
Bitcoin
is
not
backed
or
controlled
by
any
central
authority
15

16. 16
16
USD
Gold
Bitcoin
Support
Paper
Metal
Digital
Scarcity
No
Yes
Yes
/
Limited
to
21
millions
CreaYon
Minted
/
Printed
Mining
Mining
Value
Defined
by
government
Defined
by
market
Defined
by
market
FuncYons
of
Money
Medium
of
Exchange
Yes
ParPal
Yes
Unit
of
Account
Yes
Yes
Yes
Store
of
Value
Yes
Yes
Yes
CharacterisYcs
of
Money
Durability
Yes
Yes
Yes
Portability
Yes
Yes
Yes
Divisibility
Yes
Limited
Yes
Uniformity
Yes
Yes
Yes
Limited
supply
Depending
on
Government
Yes
Yes
/
Limited
to
21
millions
Acceptability
Yes
ParPal
Limited

17. 17
How
does
the
Bitcoin
protocol
work?
The
Bitcoin
protocol
leverages
a
lot
cryptography
17

18. 18
WALLETS
STORE
THE
PRIVATE
KEY,
SIGN
THE
TRANSACTION
AND
SEND
IT
TO
THE
NETWORK.
THE
PUBLIC
KEY
AND
IS
USED
TO
SEND
/
RECEIVE
BITCOIN
NODES
CHECK
THE
VALIDITY
OF
THE
TRANSACTION
(FORMAT
AND
RIGHT
TO
SPEND,
ie
REFERS
TO
A
PREVIOUS
TRANSACTION)
AND
FORWARD
THE
TRANSACTION
TO
THE
NEXT
NODE
MINERS
RECORD
THE
TRANSACTION,
BY
VALIDATING
THE
TIME
AND
ORDER
OF
THE
TRANSACTIONS
(TO
PREVENT
DOUBLE
SPENDING)
miner
miner
node
node
node
node
wallet
18

19. 19
TRANSACTIONS
ARE
RECORDED
IN
THE
BLOCKCHAIN,
A
DISTRIBUTED
DATABASE
THAT
CONTAINS
ALL
TRANSACTION
FROM
GENESIS
19
TRANSACTIONS
ARE
SIGNED
WITH
CRYPTOGRAPHY
AND
TURN
THE
SIGNED
TRANSACTION
INTO
A
SECURE
256-­‐BIT
OUTPUT
SIZE
USING
THE
HASH
FUCTION
(SHA-­‐256
PROTOCOL).
THIS
GUARANTEES
THAT
THE
TRANSACTIONS
ARE
FULLY
SECURED
THROUGH
ENCRYPTION,
LIKE
HIDDEN
IN
A
SEALED
ENVELOP
TO
RECORD
TRANSACTIONS,
MINERS
MUST
PROVE
THAT
THEY
HAVE
SPENT
ENOUGH
EFFORT:
THIS
IS
CALLED
PROOF
OF
WORK,
AND
MAKES
THE
BENEFIT
OF
CHEATING
(CREATING
FALSE
TRANSACTION)
LOWER
THAN
THE
EFFORT
NEEDED
Private
key
Public
key
Encrypted
TransacPon
ellipPc
curve
Hash

20. 20
TO
PROVE
THEIR
WORK,
MINERS
HAVE
TO
SOLVE
COMPLEX
MATHS
PROBLEMS.
SOLUTION
IS
HARD
TO
FIND
BUT
VERY
EASY
TO
CHECK
20
IT
IS
LIKE
MAKING
A
PUZZLE,
CALLED
A
MERKLE
TREE,
WITHOUT
KNOWING
THE
EXACT
PIECES.
MINERS
HAVE
TO
TRY
DIFFERENT
COMBINATIONS
OF
CURRENT
TRANSACTIONS,
WITH
A
RANDOM
FACTOR
CALLED
THE
NONCE
THE
SOLUTION
IS
A
BLOCK,
AND
CONTAINS
ALL
TRANSACTIONS
PART
OF
THE
MERKLE
TREE
T5
T9
Nonce
T8
T6
T5
T9
T3
Previous
Block

21. 21
ONCE
THE
SOLUTION
IS
VALIDATED
BY
THE
MAJORITY
OF
RESSOURCES
(CONSENSUS),
THE
NEW
BLOCK
IS
ADDED
TO
THE
BLOCKCHAIN,
WITH
ALWAYS
A
REFERENCE
TO
THE
PREVIOUS
BLOCK
21
TO
FORGE
THE
BLOCKCHAIN,
A
HACKER
WOULD
HAVE
TO
FAKE
ALL
LINKS
BETWEEN
THE
DIFFERENT
TRANSACTIONS
(BLOCKS),
WHICH
IS
TOO
MUCH
WORK
COMPARED
TO
BENEFITS
MINERS
ARE
INCENTIVIZED
TO
RECORD
THE
TRANSACTIONS
BY
RECEIVING
NEW
BITCOINS
AND
TRANSACTION
FEES
THE
FIRST
TRANSACTION
OF
A
BLOCK
IS
THE
COINBASE
AND
IS
ABOUT
THE
BITCOINS
THE
MINER
IS
GOINT
TO
GET
FOR
MINING
Block
N-­‐2
Block
N-­‐1
Block
N

22. 22
Is
Bitcoin
limited
to
money
transfer?
Bitcoin
has
been
designed
first
for
payment
but
coins
can
carry
addiPonal
informaPon

23. 23
COINS
ARE
ACTUALLY
LIKE
TOKENS,
CARRYING
ATTRIBUTES.
AS
BITCOINS
ARE
NOT
FUNGIBLE,
THEY
CAN
BE
COLORED
TO
BE
TRACKED
AND
TO
REPRESENT
OTHER
ASSETS
(EQUITY
FOR
INSTANCE)
WALLETS
CAN
BE
SMART,
WITH
COMPUTATION
OF
CONDITIONS
AND
AUTOMATIC
EXECUTION
OF
CONTRACTS,
WITH
INSIDE
OR
OUTSIDE
EVENTS,
TO
BECOME
SMART
CONTRACTS
When
1
bitcoin
is
received,
then
send
the
digital
key
to
open
the
door
(eg
for
P2P
lodging
services
like
AirBnB)

24. 24
BASED
ON
THE
BITCOIN
INFRASTRUCTURE,
SERVICES
CAN
NOW
BE
PROVIDED
WITHOUT
A
CENTRALIZED
PARTY
AS
DECENTRALIZED
AUTONOMOUS
ORGANIZATION
(DAO)
WHEN
NEED,
ORACLE
ARE
USED
TO
PROVIDE
EXTERNAL
DATA
TO
AUTOMATE
CONTRACT
EXECUTION,
AS
FOR
INSTANCE
INSURANCE
ON
TRAVEL
DELAYS
(USING
DATA
ON
DELAYS)
AS
BITCOIN
WAS
FIRST
DESIGNED
TO
MANAGE
CRYPTOCURRENCY,
AND
TO
NOT
INTERFERE
OR
TO
GET
MORE
FLEXIBILITY,
SOME
OTHER
BLOCKCHAINS
ARE
MOVING
TO
A
SEPARATE
FORK
(DEDICATED
INSTANCE
OF
BITCOIN)
TO
MANAGE
SPECIFIC
ASSETS
manages
DNS
entry
on
the
web

25. 25
How
to
get
bitcoins?
It
is
now
very
easy
to
get
bitcoins,
it
is
no
longer
reserved
to
geeks
25

26. 26
26
THERE
ARE
2
KIND
OF
WALLETS
TO
STORE
BITCOINS:
HOT
WALLETS
AND
COLD
WALLETS.
COLD
WALLETS
ARE
MORE
SECURE
AND
PHYSICALLY
STORE
THE
COINS
ON
A
HARDWARE
(USB
KEYS,
PC,
ETC.)
OR
A
PAPER
(PRIVATE
KEY)
WITHOUT
BEING
CONNECTED
TO
INTERNET
HOT
WALLETS
ARE
WEB-­‐HOSTED
(CLOUD)
AND
ARE
EASILY
MANAGED.
THEY
STORE
THE
PRIVATE
KEY
AND
ARE
PROTECTED
BY
A
MORE
TRADITIONAL
PASSWORD
TO
GET
BITCOINS,
YOU
CAN
EASIER
GET
THEM
FROM
AN
EXISTING
USER,
OR
CONVERT
FIAT
CURRENCY
INTO
BITCOINS
USING
A
BITCOIN
GATEWAY

27. 27
Can
Bitcoin
the
protocol
live
without
bitcoin
the
currency?
Bitcoin
opens
the
road
to
distributed
consensus
and
lots
of
applicaPons
27

28. 28
BITCOIN
THE
CURRENCY
IS
THE
INCENTIVE
TO
PARTICIPATE
TO
THE
P2P
NETWORK
BITCOIN
AND
IS
PART
OF
THE
BUSINESS
MODEL
OF
MINERS
28
THE
ONLY
WAY
TO
WORK
WITHOUT
A
CURRENCY
IS
TO
WORK
IN
CLOSE
LOOP,
REMOVING
THE
PROOF
OF
WORK
REQUIREMENT,
WITH
PERMISSIONED
BLOCKCHAIN
(VS
PERMISSIONLESS
AS
IS
BITCOIN),
ACCESSIBLE
ONLY
TO
AUTHORIZED
MEMBERS,
SUCH
AS
BANKS
R3CEV
IS
AN
EXAMPLE
OF
PERMISSIONED
BLOCKCHAIN,
TRYING
TO
SET
UP
A
NEW
STANDARD
FOR
DISTRIBUTED
LEDGER,
IN
DIRECT
COMPETITION
WITH
SWIFT
THE
COST
OF
MINING
IS
INCREASING,
REQUIRING
MORE
AND
MORE
CPU
(ENERGY).
IT
BECOMES
VERY
HARD
TO
MAKE
MONEY
WITH
MINING.
MINERS
REGROUP
THEMSELVES
INTO
MINING
POOL,
IN
ORDER
TO
MUTUALIZE
COSTS

29. 29
29
AS
MINING
GETS
MORE
AND
MORE
EXPENSIVE,
THE
OTHER
BLOCKCHAINS
CANNOT
ALL
AFFORD
TO
MOTIVATE
MINERS,
AND
THEREFORE
TEND
TO
USE
BITCOIN
MINING
AND
INCENTIVE
AS
WELL
THE
2
WAY
PEG
PROTOCOL
ENABLE
DOUBLE
MINING
FOR
2
DIFFERENT
BLOCKCHAINS
AND
SHOULD
REINFORCE
THE
LEADERSHIP
OF
BITCOIN
AS
THE
LEADING
CRYPTOCURRENCY
THE
DIFFERENT
BLOCKCHAINS
GET
LINKED,
BITCOIN
BEING
THE
CORNER
STONE
WITH
SOME
EXTENSIONS
TOWARDS
THE
OTHERS
AS
SIDECHAINS
BITCOIN
SIDECHAINS
Security
management
Property
Registry
management
Birth
cerPficates
Smart
Contracts

30. 30
What
is
the
future
of
Bitcoin?
Bitcoin
opens
the
road
to
distributed
consensus
and
lots
of
applicaPons
30

31. 31
MINING
POOLS
CAN
BECOME
OVERWEIGHED,
AND
CAN
REPRESENT
MORE
THAN
50%
OF
THE
AVAILABLE
RESOURCES,
BECOMING
ABLE
TO
TWIST
CONSENSUS.
CURRENTLY,
CHINESE
MINERS
REPRESENT
MORE
THAN
50%
OF
MINING
RESOURCES
31
PROOF
OF
WORK
MIGHT
NOT
BE
THE
BEST
PROTOCOL,
PROOF
OF
STAKE
FOR
INSTANCE
IS
BASED
ON
THE
ACTUAL
OWNERSHIP
OF
VALUE.
NEW
BLOCKCHAINS
ARE
EMERGING,
LIKE
ETHEREUM,
WITH
ITS
OWN
CURRENCY
ETHER
STANDARDIZATION
IS
COMPLEX,
CHANGES
IN
THE
BITCOIN
SOFTWARE
REQUIRES
A
CONSENSUS
WITHIN
CORE
DEVELOPERS
WHICH
IS
SOMETIMES
DIFFICULT
TO
ACHIEVE
BITCOIN
AS
A
CURRENCY
MIGHT
NOT
SURVIVE,
BUT
BITCOIN
AS
A
PROTOCOL
HAS
BEEN
LEADING
THE
PATH
TO
THE
INTERNET
OF
VALUE,
A
NEW
ORGANIZATION
WITHOUT
THIRD-­‐PARTY