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.
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!
What is money?
Money is a proxy
Money buys beer
Cost of Beer over time
USD Purchasing Power vs. Circulation Total CA$1,003m CA$802m CA$602m CA$401m CA$201m1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
Fiat CurrencyFiat 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.
And really, it’s run by men like these:Mark Carney - Bank of CanadaBen Bernanke - US Federal Reserve
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
Satoshi NakamotoSatoshi Nakamoto - creator of Bitcoin in 2009Vanishes in 2010 leaving Gavin Andreeson and others to continueWho is he?
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
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 6Bob’s transaction is broadcast to peers, and propagates through the network
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 6collectively 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
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 6every txn ever - exists in the chainpresents scalability problems - but many feel these can be addressed
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 TXblocks consist of a collection of txns, a crypto-hash to make forgeries/changes too hard, and a random numbercalled a nonce.bitcoins are not stored on your hard-drive, usb stick, iPhone - but in this shared chain
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 6miners work to incorporate transactions the see into blocks of transactionsthis is done both as a way of introducing new BTC and securing the network
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
what is mining?Yatzee!Similar to Yatzee computers attempt to generate a new block using a predictable amount oftrial and error.
Ref nonce ID Ref nonce ID Ref nonce ID MinerTX TX TX TX TX TX TX TX TX miners working to discover next block listening to txns and incorporating into this next block
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 transactions2^256115 quattuorvigintillion115792089237316195423570985008687907853269984665640564039457584007913129639936
Ref nonce ID Miner SHA-256 TX TX TX Current Difﬁculty800+ Mhash/secdifficulty adjusts to ensure 1 block / 10 mintues
Ref 0 ID MinerTX TX TX Current Difﬁculty
Ref 1 ID MinerTX TX TX Current Difﬁculty
Ref 2 ID MinerTX TX TX Current Difﬁculty
Ref 4 ID MinerTX TX TX Current Difﬁculty We have a winner...
ef nonce ID Ref nonce ID Ref nonce ID Ref 4 ID MinerX TX TX TX TX TX TX TX TX TX TX TX Newly minted block
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.
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
Mining Reward v. Total Volume ฿50 ฿21million ฿40 ฿17million ฿30 ฿13million ฿20 ฿8million ฿10 ฿4million ฿0 ฿0million 2009 2013 2017 2021 2025 2029 2033There 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
Total TX Fees Paid to Miners
Total Revenue to MinersGeneral 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.
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 inﬂationbitcoin is cool.
Governance is the byproduct of government monetary policyBut 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
How is it doing?A+ • Increase security while simplifying infrastructure overheadA • Reduce transaction costsA • Make transactions as fast as the internetC+ • Remove government from money supply? • Cap money supply to address inﬂation
caping money supply is an interesting idea ...
... but, inﬂation and money supply are not real problems
The human brain is the problem
Humans are predisposed to growthhumans like growthsocial evolutionary theory: hunter-gather to agrarian; shift value from quantity to quality
Our economy is built on growtheconomy 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
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 2009isn’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.
The real story is about standard of livingno.add currency to compensate for growth; ensure that earning power doesn’t decreasethe 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
Humans again are the problem: emotionally drivenSupply 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
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
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 2010Over 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)
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 inﬂationFor this reason, I think bitcoin is ﬂawed.caping the money supply will be the undoing of bitcoin
฿ 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
Predictions & PrognosticationsColinTechnology is coolideology is ﬂawedquestions about scalabilityBanking could beneﬁt from the algorithmsZachReminds 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
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