June 2017 ● Survey of the rise of Bitcoin, origins, development, controversy, possible futures

1. Bitcoin and the Rise
of the Block Chains

2. What Is Bitcoin?
• Several key technologies that together define a cryptocurrency
• Transactions are fundamental, not money as such. Money is a pile of
receipts, a result of transactions, starting with the first bitcoin in 2009.
• Problem of trust replaced by consensus of rules-based verification of
transactions (“proof-of-work” algorithm).
• Prevents theft of BTC (if thief lacks keys) and double-spending. Past transactions
virtually impossible to roll back, once verified.
• All verified transactions are recorded in a chronological tower of linked
“blocks,” called the block chain = distributed, anonymous ledger.
• Bitcoin is publicly shared, decentralized, automated, and secure.
• Distributed peer-to-peer network operating over the Internet with
BTC protocol

3. Important facts about Bitcoin
• Culmination of decades of work in:
• Public key cryptography (PKE), starting in 1970s (asymmetric keys)
• Digital currencies, starting in 1980s
• Units of BTC: one bitcoin (currently about US $2400) =
108 satoshi, smallest BTC denomination.
• Over 16M BTC in BTC circulating today, about US $40B.
• Only crude estimates, but probably 3 – 6 million unique users
• In addition to earning fees, miners create new bitcoin at ever-slowing
rate, by solving sequence ever-more-difficult double hashing problems.
• Progressing difficulty pre-programmed into Bitcoin system.
New bitcoin creation stops at 21M bitcoin, and supply forever limited.

4. What is a block chain?
• Tower of blocks and a key innovation of Bitcoin
• Anonymous, distributed, public ledger of bitcoin transactions
• Database of chronologically ordered and linked records
• Block = bundle of bitcoin transactions, plus some metadata
• Genetic relationship: Block N+1 contains hash of Block N, all the way
back to first block. Practically impossible to change after the fact.
• Rapidly growing interest in block chain idea for many applications
not connected to Bitcoin
• Powerful alternative to centralized verification authority for any transaction in a
network that needs to be tamper-proof and announced to everybody

5. Elementary Bitcoin transactions
• Exchange of bitcoin for goods and services between wallets.
Transactions generate scripts. Valid scripts & keys → valid signature.
• URI bitcoin:bitcoinaddress specifies destination of some BTC amount.
• Ownership of bitcoin ≡ knowledge of private key
• Finished but unverified transactions constitute a separate pool.
• Bitcoin clients: personal address, one generated for each new
transaction.
• Bitcoin exchanges: where you can buy BTC with conventional
currencies

7. How Bitcoin validates and verifies transactions
• Transaction generated and transmitted to all nodes on network
• Transaction itself validated or rejected by first node encountered
• About every 10 minutes, miners on network collect and assemble bundles
of valid transactions into blocks.
• Miners compete to validate candidate block of transactions against
previous block, check presence of funds, and detect “double-spend.”
• Winning miner = miner to first find proof-of-work result of double-hashing
problem and announce solution to network. Network verifies solution.
• Winning miner forms new block, child block of previous block, containing
transactions and a hash of previous block in header. Broadcast to all nodes.
• Each block has one parent. “Tip” of chain block temporarily has multiple
children, until single winning new block is formed.
• Miner rewarded with transactions fees and new bitcoins.

8. Block Chain and Mining
• Creates consensus on network, like a geological formation: first few blocks
down might be changed. But older ones essentially impossible to change.
• Recomputing a block requires recomputing its parent, whose hash is in its
header. And so on, down the chain, back to the first block. Practically, will
never happen.
• New bitcoin mined through double hashing problems. Solving hard and gets
harder with time.
• Requires ASICs – now > 1020 computations to solve – lots of electricity = $200M/yr.
• Solution is hard. Verifying solution is easy. “Proof of work” allows
verification of double hash solution by network and validates miner’s award
of new bitcoin and transaction fees.
• To be accepted by the rest of the network, a new block must contain a
proof-of-work: Winning miner must find the nonce such that, when the
block content is double-hashed by SHA-256 along with the nonce, result is
numerically smaller than the network's current difficulty target.

9. • For a constant reward, the target range of possible solutions of
the double-hashing problem becomes progressively smaller.
Difficulty target window shrinks about every two weeks.
• For a constant difficulty, the reward becomes progressively
smaller, until it falls below 1 satoshi, smallest denomination.
Bitcoin mining then ceases, at 21M bitcoins, and network pays
its way thenceforth with transaction fees only.
Estimated cessation of new BTC production in 2140.
• New bitcoin created at ever-slowing rate. Reward halves
every 4 years. In 2017, current rate is 12.5 BTC per block.

10. You are here!

11. Propagation through network
• Full Satoshi, or reference, client available from bitcoin.org since 2010
• Full node contains a copy of whole block chain, over whole network, all
the way back to Jan 2009, when first BTC block was mined.
• Lightweight nodes contain block chain subset and rely on full nodes in
network for other blocks.
• Storage demands: Big for full nodes. Full blockchain big, 8 years old and
constantly growing. About 100 GB now, not including indexes.
• Processing demands: Big for miners, modest for other nodes
• While nodes have different roles, all equally peers. No hierarchy or
central servers. Every node is a client and a server simultaneously.

12. P2P network consists of …
Full nodes … lightweight nodes … wallet-only nodes
Occasional
miner!

13. New model for transactions in a network
• Conventional model: Permanent record and authentication →
“root of trust” = one or a few centralized “fortresses.”
• Obvious target for thieves and hackers
• Open to political manipulation and breakdowns
• In monetary matters, “fortresses” authorized to issue valid currency, and/or
validate/clear transactions. Inevitably depends on centralized information.
• Block chain: Very different model: Distributed public ledger
• Public (not secret)
• Secure transactions
• Anonymous (no way to identify who’s who in real world)
• Decentralized (no root-of-trust)
• Rules-based consensus
• “Triple-entry bookkeeping,” with network as third party

14. WordPress.com
Overstock.com
Subway
Microsoft
Reddit
Virgin Galactic
OkCupid
Tigerdirect
CheapAir.com
Expedia.com
Gyft
Newegg.com
1-800-FLOWERS.COM
Mozilla Foundation
Democracy Now!
Wikimedia Foundation
Fiverr.com
Dell
Wikipedia
Steam
The Internet Archive
Bitcoin.Travel
Zynga – Mobile gaming
Tesla
Etsy Vendors – 93 of them
PizzaForCoins.com – Domino’s Pizza
Whole Foods – by purchasing gift card from Gyft
Bitcoincoffee.com
Chomps Paleo Snacks
Electronic Frontier Foundation
Greenpeace
Free Software Foundation
Anyone taking Bitcoin?
Etc., etc. … now more than 100,000 places

15. Number of BTC transactions per month (semi-log plot)

16. History and Controversy
• Original Bitcoin paper released in 2008. In late 2008, bitcoin.org
domain registered and software appeared on SourceForge.
• Creator(s) = ? Nom de web: Satoshi Nakamoto
• Bitcoin network operating since 3 Jan 2009,
“genesis block” of transaction 0, mined with
a reward of 50 BTC, by Satoshi Nakamoto.
• Big boost from contemporary Great Financial Crisis and growing mistrust of
central banks and large commercial banks
• Continued boost from negative interest rates, cash bans, and capital controls.
But less and less likely to become true currency – too volatile and high
transactions fees – more like an asset.

17. Controversy and Volatility
• Governments and banks have been both dismissive and worried about
BTC: threat to national monetary systems and conventional banking
services. But big opportunities in block chain technology too.
• Facilitates crime through anonymity. Public keys are anonymous.
• With public BTC exchanges, “know-your-customer” laws apply – they’re
handling national currencies. ›› But decentralized peer-to-peer network
outside national systems much harder to keep within the law. ‹‹
• Bitcoin: Asset? Or currency? Courts not yet consistent. For IRS, it’s
an asset or financial security.
• Not big enough to act like a “real” currency and may never act as one.
DM vs EM split? Developed world: asset – Emerging markets: quasi-currency ?
• Initial phase very price volatile and probably headed much higher.

19. Vulnerabilities of Bitcoin
• The BTC network itself is effectively invulnerable, as long as:
• Public key encryption and hashing remain safe.
• < 50% of network is controlled by any one actor.
• Real vulnerabilities:
• Forking of chain – Several since 2010, after unexpected problems. No contention.
More recently, threats of groups breaking off to form new forks, especially in China,
which has plurality of miners.
• Compromise or loss of identities that connect real people to anonymous BTC
address.
Estimated 10-25% of BTC are “zombies,” associated with lost credentials.
• Solve: Off-network digital and physical wallets. Best: print and physically
secure physical BTC notes or coins that contain holographs of bitcoin
identity. Scanners and 3D printers. Popular QR technology.
• Mix: keep large amounts of BTC in physical notes, with a small amount in
digital wallet.

21. The future legacy: Block chains everywhere!
• Block chain is the key new technology and will be the major legacy of Bitcoin
in the long run. Potent combination with networks and mobile devices.
• Apparently, the sky is the limit: everyone piling on to create their own block
chains for various purposes, totally unrelated to Bitcoin.
• Global Blockchain Forum (2016), initiative of the Chamber of Digital Commerce
• Wall Street Block Chain Alliance (WSBCA, 2017)
• Physical asset tracking – Tagged with microdevices, objects become part of
the Internet of Things, tracked by GPS and Irridium, actions confirmed and
recorded by a block chain-like public ledger.
• Revolutionizes logistics and tracking of physical objects.
• Symbolic assets – Legal and medical records, wills, contracts, and other
symbolic assets – information, not physical objects – these can also be
regulated in a tamper-proof way by dedicated block chains.
• Automated digital businesses … of which Bitcoin was just the first. B2B, also
retail B2C, C2C: monetary and nonmonetary transactions, “sharing economy,”
digital “smart contracts” (Ethereum) ….

22. • The Internet of (Wild) Things – Open to hacking without a
way of securing transmitted and received signals – PKE
and block chain do that. PKE enables secure bilateral
communication. Block chain enables global consensus
over network of what happened to whom, when.
Major technology leaders now in pursuit: GE, IBM,
Maersk, Walmart, and smaller players

25. • Banks – To each, its own block chain or chains. Merge to create a
hierarchical tree of block chains, with branches.
• Why? The standard SWIFT system (1974) is increasingly vulnerable to hackers
(swift.com). Large institutions now have “fintech” research groups addressing
this and related problems, including SWIFT itself.
In US, 42 largest banks now pursuing proprietary or shared block chains.
In China, Postal Savings Bank has proprietary chain.
• Finance – Bank2Bank, Fed2Bank (fedcoin), cryptocurrency funded
and denominated credit cards. BTC and main competitor, Ethereum.

26. I say to you againe, doe not call up Any that you cannot put downe ….
- H. P. Lovecraft, The Case of Charles Dexter Ward (1927/1941)

27. Some resources
• A. Antonopoulos, Mastering Bitcoin: Unlocking Digital Cryptocurrencies
• Prypto, Bitcoin for Dummies
• bitcoin.org – Official Bitcoin site, including original 2008 paper (PDF)
• blockchain.info – Major bitcoin block chain explorer
• coinbase.com – Major US/USD bitcoin exchange
• coindesk.com – Major trade publication
• bitcoin.stackexchange.com – Major user forum
• L. Lessig, Code and Other Laws of Cyberspace (1999)
• Bloomberg Markets, LiveINSIGHTS Web Conferences Series,
Blockchain Revolution, 22 Jun 2016
• M. Iansiti, K. R. Lakhani, “The Truth About Blockchain,”
Harvard Business Review, Jan 2017, 118-127 (HBR R1701J)