Understanding Bitcoin: A Concise Overview of How the Digital Currency Works
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Bitcoin is an experimental digital currency that operates on a decentralized peer-to-peer network. It was created in 2009 by the pseudonymous developer Satoshi Nakamoto. The presentation provided an overview of how bitcoin works, including how transactions are broadcast on the network and incorporated into blocks, how miners compete to validate transactions and are incentivized with bitcoin rewards, and how the blockchain records and stores all transactions. While bitcoin aims to increase security, reduce costs and remove governments from money supply, the presentation noted flaws in capping the money supply and lack of governance could undermine it. Predictions were made that technology and adoption will continue to evolve but governments may intervene and deflation is not a problem if used alongside fiat currencies
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Understanding Bitcoin: A Concise Overview of How the Digital Currency Works
- 1. ฿ bitcoin /ˈbɪtkɔɪn/ colin@bendell.ca zach@zachscott.ca
- 2. FBI 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. With any talk that involves money, a warning is always apt.
- 3. FBI 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. Zach: I have my own warning too!
- 5. Money is a proxy
- 7. Cost of Beer over time
- 8. USD Purchasing Power vs. Circulation Total CA$1,003m CA$802m CA$602m CA$401m CA$201m 1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
- 9. Fiat Currency Fiat Currency is issued by governments to pay taxes Worth 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.
- 10. And really, it’s run by men like these: Mark Carney - Bank of Canada Ben Bernanke - US Federal Reserve
- 11. 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
- 12. Satoshi Nakamoto Satoshi Nakamoto - creator of Bitcoin in 2009 Vanishes in 2010 leaving Gavin Andreeson and others to continue Who is he?
- 13. 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
- 14. CA$30.00 BTC:USD CA$24.00 CA$18.00 CA$12.00 CA$6.00 CA$0 7 1 5 0 4 8 2 9 3 8 8 2 6 1 5 0 3 9 3 8 2 7 1 5 7/1 /08/2 /09/2 /10/3 /12/0 /01/0 /02/1 /03/1 /04/2 /05/2 /07/0 /08/1 /09/1 /10/2 /11/2 /12/3 /02/0 /03/0 /04/1 /05/1 /06/2 /07/2 /08/3 /10/0 1 0/0 10 10 10 10 11 11 11 11 11 11 11 11 11 11 11 12 12 12 12 12 12 12 12 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
- 15. How does it work?
- 16. Bob: I wants beer [I think he’s high]
- 17. Alice: 5 dollars please =$5.00
- 18. nurff nomm nomm beer bitcoin ?
- 19. Sure, just scan this QR code
- 21. mmmmm... beer Thank you
- 22. The bitcoin P2P Network
- 23. Transactions are broadcast on the P2P Network TX Node 4 TX Node 2 TX TX TX message Amount: 2 Node 1 Node 5 To: 175tWpb8… TX Node 3 TX Node 6 Bob’s transaction is broadcast to peers, and propagates through the network
- 24. TXs are rolled together into blocks originating from a miner •••• Node 4 •••• Node 2 •••• •••• TX message Amount: 2 Node 1 Node 5 To: 175tWpb8… •••• Node 3 •••• •••• Miner 1 Node 6 collectively miners generate new block roughly every 10 minutes A txn is harder to reverse once incorporated into a block (because it’s hard) miners are incentivized bt reward
- 25. Each node has the entire chain of blocks •••• •••• •••• Node 4 •••• •••• •••• Node 2 •••• •••• •••• •••• •••• •••• TX message Amount: 2 Node 1 Node 5 To: 175tWpb8… •••• •••• •••• •••• •••• Node 3 •••• •••• •••• •••• Miner 1 Node 6 every txn ever - exists in the chain presents scalability problems - but many feel these can be addressed
- 26. The Block Chain Ref nonce ID Ref nonce ID Ref nonce ID Ref nonce ID TX TX TX TX TX TX TX TX TX TX TX TX 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
- 27. Miners compete to “find” new blocks and transmit to nodes •••• •••• •••• •••• •••• •••• Node 4 Miner 4 •••• •••• •••• Node 2 •••• •••• •••• •••• •••• •••• TX message Amount: 2 Node 1 Node 5 To: 175tWpb8… •••• •••• •••• Node 3 •••• •••• •••• •• ••••• •••• Miner 1 Miner 2 Miner 3 Node 6 miners work to incorporate transactions the see into blocks of transactions this is done both as a way of introducing new BTC and securing the network
- 28. this is what mining hardware looks like... mining is performed by powerful computers incentives to be the fastest miner have driven efficiency enhancements from CPU to GPU to FPGA and soon ASIC
- 29. what is mining? Yatzee! Similar to Yatzee computers attempt to generate a new block using a predictable amount of trial and error.
- 30. Ref nonce ID Ref nonce ID Ref nonce ID Miner TX TX TX TX TX TX TX TX TX miners working to discover next block listening to txns and incorporating into this next block
- 31. Ref nonce ID Miner SHA-256 TX TX TX 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 2^256 115 quattuorvigintillion 115792089237316195423570985008687907853269984665640564039457584007913129639936
- 32. Ref nonce ID Miner SHA-256 TX TX TX Current Difficulty 800+ Mhash/sec difficulty adjusts to ensure 1 block / 10 mintues
- 33. Ref 0 ID Miner TX TX TX Current Difficulty
- 34. Ref 1 ID Miner TX TX TX Current Difficulty
- 35. Ref 2 ID Miner TX TX TX Current Difficulty
- 36. Ref 4 ID Miner TX TX TX Current Difficulty We have a winner...
- 37. ef nonce ID Ref nonce ID Ref nonce ID Ref 4 ID Miner X TX TX TX TX TX TX TX TX TX TX TX Newly minted block
- 38. 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.
- 39. 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
- 40. Mining Reward v. Total Volume ฿50 ฿21million ฿40 ฿17million ฿30 ฿13million ฿20 ฿8million ฿10 ฿4million ฿0 ฿0million 2009 2013 2017 2021 2025 2029 2033 There is a cap to the amount of bitcoin currency in the system The reward for mining will go down over time; revenue to be augmented by transaction volume
- 41. Total TX Fees Paid to Miners
- 42. 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.
- 43. How is it doing? A+ • Increase security while simplifying infrastructure overhead A • Reduce transaction costs A • Make transactions as fast as the internet • Remove government from money supply • Cap money supply to address inflation bitcoin is cool.
- 44. 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
- 45. How is it doing? A+ • Increase security while simplifying infrastructure overhead A • Reduce transaction costs A • Make transactions as fast as the internet C+ • Remove government from money supply ? • Cap money supply to address inflation
- 46. caping money supply is an interesting idea ...
- 47. ... but, inflation and money supply are not real problems
- 48. The human brain is the problem
- 49. Humans are predisposed to growth humans like growth social evolutionary theory: hunter-gather to agrarian; shift value from quantity to quality
- 50. Our economy is built on growth economy is built on the assumption of growth. “buy low, sell high” mantra Growth leads to efficiencies and inc. productivity Fueled by growth of the population, growth in efficiencies and growth of earning power
- 51. USD Purchasing Power vs. Circulation Total CA$1,003m CA$802m CA$602m CA$401m CA$201m 1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 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.
- 52. 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’ing To compensate: add money supply added at a steady rate while also encourage monetary liquidity No one wants their buying power to go down No one wants their wages to go down
- 53. Humans again are the problem: emotionally driven Supply can be pumped in consumer 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
- 54. GDP = C + I + G + (X-M) + + + formulas that will kill the mood at a dinner party 4 big levers usually used to keep liquidity; ensure price increases don’t rise too quickly: spend your own money give the banks so they can invest; government spends (eg: ‘new deal’) to artificially cause liquidity more imports > exports; what about a global economy cf: 2008
- 55. Last 30 years of data: inflation is under control 20% 16% 12% 8% 4% 0% % Change CPI -4% -8% -12% -16% 1914 1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 Over the last 30 years we’ve figured this thing out this experiment economics is like flying an airplane using the rear-view mirror. Overall, we know how to adjust the right levers (G vs. i vs. C)
- 56. How is it doing? A+ • Increase security while simplifying infrastructure overhead A • Reduce transaction costs A • Make transactions as fast as the internet F • Remove government from money supply F • Cap money supply to address inflation For this reason, I think bitcoin is flawed. caping the money supply will be the undoing of bitcoin
- 57. ฿ 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
- 58. Predictions & Prognostications Colin Technology is cool ideology is flawed questions about scalability Banking could benefit from the algorithms Zach Reminds me of early days of internet (Hype + Skepticism = both were right + evolution) Will see volatile prices for a while Expect governments to intervene good? bad? - some governance okay Needs its Mosaic/Netscape moment - current apps work but have terrible UX If this happens... expect $100/BTC within 5 years Deflation is not a problem - don’t expect BTC to replace Fiat - ebooks didn’t replace paper Gold 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
- 59. How to get involved Exchanges: http://sourceforge.net/projects/bitcoin/files/Bitcoin/bitcoin-0.7.1/ * bitinstant.com * cavirtex.com Bitcoin clients * Bitcoin-Qt (original) - bitcoin.org Online Wallets / Merchant Tools: * MultiBit - multibit.org * blockchain.info * Armory - bitcoinarmory.com * coinbase.com * Electrum - electrum-desktop.com * bitpay.com * Bitcoin Wallet (Andriod) * paysius.com Free Resources * bitcoin.org Economics stuff: * bitcointalk.org Money Supply and Purchasing Power * bitcoincharts.com Bitcoin Collusion problems * Bitcoin Block Explorer - blockexplorer.com * Bitcoin Monitor - bitcoinmonitor.com Other talks: * Bitcoin Wiki - https://en.bitcoin.it/ http://www.youtube.com/watch?v=SvZGjF1aJhM&feature=relmfu * weusecoins.com Bitcoin merchants * VPN Services - privateinternetaccess.com
- 60. 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
- 61. ฿ bitcoin /ˈbɪtkɔɪn/ Thank You! colin@bendell.ca zach@zachscott.ca
Notas do Editor
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- Issued by governments\nWorth 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.\n
- And really, itsrun by men like these\nMark Carney - Bank of Canada\nBen Bernanke - US Federal Reserve \n
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- Mr. Miyagi teacher of karate and creator of Bitcoin\nCreated in 2009\nVanishes in 2010 leaving Gavin Andreeson and others to continue\n
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- Bob’s transaction is broadcast to peers, and propagates through the network\n
- collectively miners gen new block roughly every 10 minutes\nA txn is harder to reverse once incorporated into a block (because it’s hard)\nminers are incentivized bt reward\n
- every txn ever - exists in the chain\npresents scalability problems - but many feel these can be addressed\n\n\n
- blocks consist of a collection of txns, a crypto-hash to make forgeries/changes too hard, and a random number called a nonce.\nbitcoins are not stored on your hard-drive, usb stick, iPhone - but in this shared chain\n\n\n
- miners work to incorporate transactions the see into blocks of transactions\nthis is done both as a way of introducing new BTC and securing the network\n\n
- this is what mining hardware looks like...\nmining is performed by powerful computers\nincentives to be the fastest miner have driven efficiency enhancements\nfrom CPU to GPU to FPGA and soon ASIC\n\n\n
- what is mining?\nYatzee! \nSimilar to Yatzee computers attempt to generate a new block using a predictable amount of \ntrial and error.\n\n
- miners working to discover next block\nlistening to txns and incorporating into this next block\n
- How?\nMining hardware builds new block ‘attempt’\nincludes reference to prev block, random number and transactions\n\n2^256\n115 quattuorvigintillion\n115792089237316195423570985008687907853269984665640564039457584007913129639936\n
- 800+ Mhash/sec\ndifficulty adjusts to ensure 1 block / 10 mintues\n\n
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- @ 800 Mhash/sec -> $80/mo\n\n
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- Russian Business Network\nMoney Laundering\nPonzi schemes - Bernard Madoff\nSilk Road - gray area\n
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- humans like growth\nsocial evolutionary theory: hunter-gather to agrarian; value from quantity to quality\n\n
- Growth of the population; growth of earning power\nbuy low, sell high\nGrowth leads to efficiencies and inc. productivity\n\n
- isn’t that artificial because we are pumping money in the system?\nexample: community of 10 people; 10 bitcoins each; grows 2x; prices go down.\n
- no. \nadd currency to compensate for growth; ensure that earning power doesn’t decrease \nthe truth: earning power is going up;\nThe Achilles heal of the system: limited money supply scarcity, hoarding, mattress’ing\nTo compensate: add money supply added at a steady rate while also encourage monetary liquidity\nNo one wants their buying power to go down\nNo one wants their wages to go down\n
- Supply can be pumped in\nconsumer spending is a purely emotionally driven function \n* the happier we feel\n* the more we spend\n* the more liquidity in the market\n* the less inflation (monetary devaluation)\nAchilles heal: no spending; example: small town\n
- formulas that will kill the mood at a dinner party\n4 big levers usually used to keep liquidity; ensure price increases don’t rise too quickly:\nspend your own money\ngive the banks so they can invest;\ngovernment spends (eg: ‘new deal’) to artificially cause liquidity\nmore imports > exports; what about a global economy\ncf: 2008\n
- flying an airplane using the rear-view mirror\nOver the last 30 years we’ve figured this thing out this experiment\n
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- Colin\nTechnology is cool\nideology is flawed\nquestions about scalability\nBanking could benefit from the algorithms\n\nZach\nReminds me of early days of internet (Hype + Skepticism = both were right + evolution)\nWill see volatile prices for a while\nExpect governments to intervene good? bad? - some governance okay\nNeeds its Mosaic/Netscape moment - current apps work but have terrible UX\nIf this happens... expect $100/BTC within 5 years\nDeflation is not a problem - don’t expect BTC to replace Fiat - ebooks didn’t replace paper\nGold is hoarded, therefor deflationary, you can exchange gold for USD, no problems right?\nExpect more rapid adoption in 3rd world accompanied by cell phone growth / lack of infrastructure.\nReduced friction in moving money around = more global collaboration / distributed ventures => GOOD\n\n
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