Bitcoin - Understanding the Hype by Jay Yerxa, 2014-06-09 Silicon Mountain Meeting
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Jay Yerxa, a Bitcoin investor and developer, will explain in layman’s terms how there is much more to Bitcoin than its well-known use as a virtual currency. This new technology, which has never existed before in computer science, has received worldwide attention and is often misunderstood. Jay will explain how its use as a currency for the Internet is merely the first application of the Bitcoin technology and how the underlying block chain technology and decentralized nature of Bitcoin will form our future. In addition to speaking about the core technology of Bitcoin, Jay will discuss financial and legal matters related to Bitcoin, as well as regulations. You can learn more about Jay and Bitcoin at jasonyerxa.com. You can find us on LinkedIn and Facebook and at TahoeSiliconMountain.com or sign up for email meeting announcements here: http://bit.ly/14XGofL.
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Bitcoin - Understanding the Hype by Jay Yerxa, 2014-06-09 Silicon Mountain Meeting
- 1. Bitcoin: Understanding the Hype Jay Yerxa jayerxa@gmail.com jasonyerxa.com
- 7. confirmations Bitcoin block transaction, transaction, transaction… Bitcoin block transaction, transaction, transaction… Bitcoin block transaction, transaction, transaction… 10 minutes 10 minutes
- 10. Typical early bitcoin adopter •altruism •crypto •security Geeks •Against the FED •Hard money Libertarians •Deep web •Silk road Pseudonymous transactions •Remittances •Microtransactions People wanting to save on fees
- 11. Bitcoin Ecosystem Exchanges • USD to bitcoin Payment Processors • bitcoin to USD Miners • bitcoin creation Business accepting BTC as payment
- 12. Regulation • Federal vs State • FINCEN • IRS
- 13. Blockchain development • M of N transactions • Smart contracts • MaidSafe • Colored Coins
- 14. ♫ you say you want a revolution.. ♫
Notas do Editor
- Presented by Jay Yerxa on June 9, 2014
- Bitcoin is difficult to understand because it involves geopolitics, monetary policy, and computer science. To simplify Bitcoin, is cash for the internet. To confuse people I describe Bitcoin as a decentralized crypto-currency. What does that mean? First we break down the decentralized. A great example of a decentralized system is Napster. Napster’s network depended on users downloading the software and sharing their MP3 music files with other users. The transfer of music files were from peers on the network sending data to each other. In a decentralized system there is no single server hosting the data. This is what allowed Napster to operate for so long without being shut down. Unfortunately for Napster they were centralized in the sense that it was a single company that could be sued in court. Bitcoin, in contrast, is not owned by any single corporation, government, or person. Bitcoin is open source software and a protocol operating over the internet. Bitcoin is similar to other internet protocols such as simple mail transfer protocol (SMTP), or Hypertext Transfer Protocol (HTTP). The second term crypto comes from the word cryptography. Public key cryptography is used on the Bitcoin network by the bitcoin’s owner to secure their coins. If a person owns a bitcoin it is because they have the private key to a bitcoin. This is similar to file encryption. If you encrypt data you can only view the information if you decrypt the data with a private key. Public keys in the bitcoin network represent addresses that bitcoin can be sent to.
- Bitcoin the word represents two things: 1) Bitcoin the network and 2) bitcoin the units transferred over the network. The bitcoin network is made up of nodes running bitcoin software. The software can be reviewed and downloaded at https://github.com/bitcoin/bitcoin. Each node downloads the bitcoin ledger which keeps track of all transactions on the bitcoin network. If user A sends bitcoins to user B that transaction is captured and archived on each node in the network. This is why bitcoin is pseudonymous rather than anonymous. Transactions on the network are seen by everyone. Each node on the network storing the ledger compares transactions to gain consensus. Bitcoins the unit are sent from user to user over the bitcoin network. Bitcoins are not physical and are actually not even digital. They are represented as units of account on the public ledger. To unlock spend bitcoins a user must possess the private key to unlock the bitcoins.
- Centralized versus decentralized systems.
- United States has the most bitcoin nodes.
- Proof of work is the breakthrough that makes bitcoin so special. Proof of work 1) confirms transaction in the system are valid and 2) is responsible for bitcoin creation. Digital currencies have been around since the late 1980’s. The fundamental problem with digital currencies is making sure double spending does not happen. A centralized authority has been needed to prevent double spending. Bitcoin introduces a solution to this problem without the need for a centralize authority checking the validity of transactions. Rather than trusting a 3rd party the entire network is able to achieve consensus amongst each other.
- In addition to storing a ledger of all transactions the bitcoin nodes are competing against each other in a process called mining. Mining exists to secure the bitcoin network. When nodes mine they are each trying to solve the same puzzle. Approximately every 10 minutes a node will solve the puzzle. When a puzzle is solved it creates a bitcoin block. The blocks contain all transactions from the previous 10 minutes. Once a block is created all nodes begin working on the next puzzle creating the blockchain. The difficulty of the puzzle automatically adjusts based on the total hashing power of all nodes on the network. Each block is encrypted using the transactions inside of it. This maintains the integrity of the transactions inside it by confirming the transactions are legitimate. If a node wanted to erase a transaction to double spend a bitcoin they would need to resolve the proof of work puzzle, encrypt the block, and broadcast it out to the network. This is not feasible to do since the entire network will be working on creating the next block while the malicious node works on past blocks. The network will trust the longest chain of blocks the network.
- The second reason proof of work exists is to create bitcoin. This creates incentive for nodes to compete against each other and mine. If a node solves the puzzle they are rewarded new bitcoin. In 2009 the reward was 50 bitcoins for each block mined. The reward is halved every four years. This is how we know only 21 million bitcoin will ever exist. The last bitcoin will be mined in approximately 2140. One bitcoin can broken down to eight decimal points to the right. One millionth of a bitcoin is called a satoshi. There are just over 2 quadrillion units of account (satoshis).
- Bitcoins by themselves have no value. The value is derived from the technology bitcoin operates on. Sending bitcoin is as simple as sending an email. Two parties can transact across countries without being stopped by a 3rd party or authority. There are real world applications for bitcoin and fact that bitcoin trades shows there is a market for bitcoin. On October 5, 2009 an exchange rate for bitcoin was published at $0.0007. The first transaction on record for bitcoins for a product was on October 2010 when two pizzas were purchased for 10,000 bitcoins. Bitcoin value historically has been extremely volatile. Over time volatility has decreased, but remains much higher than traditional fiat currencies.
- There are four bitcoin early adopter groups. Geeks and nerds adopted bitcoin because they think the technology is cool and want to participate in the network. They may have heard of bitcoin because of cryptography or internet security mailing news. Libertarians favor bitcoin over traditional fiat currencies because they believe hard or precious metal backed currency. People who want to spend money with a greater level of anonymity. Examples include gambling or illegal activities. People who want to save on bank fees. Remittances via Western Union and Moneygram are approximately 7 – 10%. Bitcoin can reduce that to zero or 1%. Businesses accepting credit cards will be charged approximately 3 – 5% per transaction. Accepting bitcoin can reduce that to 1% or less. Bullet point 4 will be the reason bitcoin eventually reaches mainstream adoption.
- Exchanges transfer fiat currencies to bitcoin and vice versa. Bitcoin exchanges historically have been the weak link in security. Exchanges have been hacked losing customer bitcoins and also have acted in bad faith shutting down and stealing customer’s money. Exchanges are not a good place to store bitcoin. Payment processors such as Bitpay and Coinbase allow businesses to accept bitcoin without taking on the risk of price fluctuation. For example, when a business accepts bitcoin as payment BitPay will change the bitcoin to USD and send it to a bank account in 1 business day for 1%. As Bitcoin matures more businesses are beginning to accept the cryptocurrency.
- Bitcoin is legal in the United States. The United States is the most active government creating and enforcing laws specific to bitcoin. Bitcoin in the United States is regulated on the state and federal level. A bitcoin business exchanging bitcoin for bitcoin or dollars must be regulated as a money transmitter on the federal level. Depeding on the state they may be required to obtain a money transmitter license for the state too. Texas and New Mexico do not require money transmitter licenses. US Financial Crimes Enforcement Network (FINCEN), a bureau of the US Treasury Department ruled that bitcoin is subject to the same money transmitter laws as the traditional government currencies (http://www.fincen.gov/news_room/nr/pdf/20140130.pdf). IRS advised bitcoin is to be taxed as a property (http://www.irs.gov/pub/irs-drop/n-14-21.pdf?utm_source=3.31.2014+Tax+Alert&utm_campaign=3.31.14+Tax+Alert&utm_medium=email).
- Bitcoin is programmable money. As the protocol matures more applications will be created on top of the blockchain or using similar blockchain technology. M of N transactions builds in escrow system into bitcoin. Smart contracts allow people to make agreements via the blockchain. My favorite project using blockchain technology is MaidSafe, a decentralize internet. MaidSafe uses nodes to store information traditionally stored on centralized servers. Developers then build traditional internet apps on top of the decentralized network.
- Bitcoin will revolutionize old and outdated payment systems. Bitcoin has immediate application in countries like Argentina, Venezuela, Ukraine, Brazil, Russia, China, and Iran. Countries that face harsh currency controls or hyperinflation. Unbanked people now have a way to store value securely for free and without requiring anyone’s permission.