The Evolution of E-Money

The Evolution of E-MoneyJon MatonisLydia Group

Quest for the Cashless Society • Goals of the Cashless Society – No messy paper cash and bulky coins – No anonymous transactions above a certain limit – No untraceable transactions – No parallel or ‘grey’ economy – No cash production and handling costs – No missing tax revenue 2

Quest for the Cashless Society • Scary Aspects of the Cashless Society – Full traceability of all personal transactions – Dependence on electronic networks and gadgets – Full unit of account control to the monetary sovereign – Total elimination of the informal shadow economy – Near absolute efficiency in tax collection 3

History of Digital Cash • E-Money is not regular payments going online • Means of exchange vs. store of value • Nomenclature of digital cash • Concept of digital bearer instrument • Centralised issuing mint schemes – DigiCash (1990-1998) – eCache (1999-2008) – Voucher-Safe (2010-present) 4

The Story of Bitcoin • Bitcoin is a decentralised electronic cash system using peer-to-peer networking, digital signatures and cryptographic proof to enable irreversible payments between parties without relying on trust. • Bitcoin is a reaction to 3 separate developments – Centralised monetary authority – Diminishing financial privacy – Dominant legacy infrastructure • Launched in January 2009 by Satoshi Nakamoto • Open source built on cryptographic primitives – Elliptic Curve DSA and keypairs – RPOW – SHA-256 Hash (incorporating distributed block chain) 5

Precursors to Bitcoin • Adam Back Hashcash (1997) – Proof-of-work system to limit email spam – SHA-1 hash of the header • Wei Dai B-money (1998) – Public keys identify pseudonyms – Broadcast solution to computational problem – Arbitrator and fine schedule – Broadcasted subset account servers with bail • Nick Szabo BitGold (2001-2005) – Public challenge string of bits – Client puzzle functions – Securely timestamped – Distributed property title registry 6

Bitcoin Statistics • Exchange Rate ~ 5.00 USD • Size of Economy $43.7 million • Total Bitcoin Mined 8,802,250 • Maximum Potential Bitcoin 21,000,000 • Total Block Count 176,044 • Average Blocks per Hour 6.0 • Host Node Distribution (last 24h) – United States 7,535 – Germany 1,373 – Russia Federation 1,136 – Canada 1,004 – United Kingdom 969 7

Total hosts connected in previous 24hours 8

Exchange Volume Distribution 9

Primary Bitcoin Apps • Wallets – Local client wallets – Lightweight wallets – Web-based online wallets • Merchant Processing – BitPay – Bitcoin 24/7 – Paysius • Mining Pools – Deepbit – BTC Guild – Slush 10

Merchant Deposit Alternatives 11

Bitcoin Mining Rigs (or de-centralbanks) 12

Hashrate Distribution • An estimation of hashrate distribution amongst the largest mining pools 13

Security Issues • For bitcoin users: – Wallet.dat attack vector – Online wallets – Backups (USB stick, offline computer) • For bitcoin companies: – Recent Linode incident – Deterministic wallets – Multi-signature capability – Offline backups – Policies and procedures 14

Watch bitcoin robbery in slow motion 15

Regulatory Issues • No direct legislation (similar to air guitars) • Variance in jurisdictional approaches • Decentralised nature inhibits third party shutdown • Exchanges will be a focal point of government scrutiny • Pressure on larger merchants 16

Future Prospects • Bitcoin has the required currency attributes – Two-way convertibility – Independent floating exchange rate – Nonpolitical unit of account • Opportunities for current financial institutions – Payment processing – Foreign exchange conversion – Escrow services – Surrogate ‘green addressing’ – Enable mobile bitcoin transactions 17

Future Prospects “Digital cash is to legal tender as BitTorrents are to copyrights” 18

Thank You - Questions?Follow me on Twitter @ jonmatonisEmail me at matonis@ hushmail.com

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The Evolution of E-Money

by Jon Matonis

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