Bitcoin - the Basics

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My talk as visiting lecturer at Aalto University on 21th March 2013.

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Bitcoin - the Basics

  1. 1. Bitcoin http://www.flickr.com/photos/31119160@N06/8007585111/Vesa Linja-aho — T-76.5753 Law in Network Society
  2. 2. About me Vesa Linja-aho, M. Sc. in electrical and electronics engineering. Professional background:  7 years at Aalto university (research and teaching)  1 year in Computerworld Finland magazine (editor)  3 years at Metropolia, senior lecturer  Electronics and electric safety  Accounting and economics  Open educational resources  Everything new   http://www.google.com/#q=vesa+linja-aho 2
  3. 3. Bitcoin = open source cryptocurrency Bitcoin = distributed accounting system  No central authority -> does not depend on trust to single or couple of institutions. Like cash, but for the internet 1 bitcoin = 50 euros (20th of Mar 2013). Created by pseudonym Satoshi Nakamoto Based on a peer-to-peer network of computers running the bitcoin software.  The transactions are verified by proof-of- work system of computers running a mining software. 3
  4. 4. Pros No unpredictable inflation by ”printing more money” by political decision. Transactions travel instantly  Send money in seconds to anyone with internet access – with zero transaction costs. Highly anonymous, in certain conditions  Every transaction is public, though! If you memorize your private key, the only way to steal your bitcoins (even for the authorities) is to torture you (or spy or hack your computer). Easy to use  You can choose the tool (usability / security) 4
  5. 5. Cons Bitcoin is rather new and its still in marginal use -> high volatility.  BTC money supply: 500,000,000 €  EUR money supply: 5,000,000,000,000 € It’s currency for the internet – take down the internet, and you cannot use bitcoins.  Perhaps not suitable for any country’s official currency. Lose your private key -> lose your bitcoins.  No means to cancel the transaction! 5
  6. 6. Someone’s pro is someone’s con! 6
  7. 7. Stupid arguments against bitcoin People buy guns and drugs with it!  But it proves it works!  And people use plain cash for the same. Early adopters benefit too much  Is it really a problem? Bitcoin has actually no value  Same applies to euros and dollars.  They only have value because people believe they have value. 7
  8. 8. Good or at least considerable argumentsagainst bitcoin The value is unstable. There might be a bubble! Bitcoin can be replaced with a similar product. The government can shut it down.  Or at least try to, by making it illegal to use bitcoins. The slowness of transaction verification (about 10 minutes per block). The scalability: the current version can not handle the transactions if everyone in the world used bitcoins. MtGox handles most of the trade -> raid it -> ? 8
  9. 9. Is there a bubble? Media attention will inspire people to buy bitcoins Media attention will inspire companies to accept bitcoins (and vice versa) The price of bitcoins rise -> media attention The circle is ready. As long as the price rises together with the use of bitcoin, there is (probably) no bubble.  I emphasize the word probably. The circulation speed of bitcoin is low if compared to regular money. 9
  10. 10. How it works Every ”account” consists of the public key (= bitcoin address) and the private key. Anyone who knows your public key, can send you bitcoins. To spend bitcoins, you have to know the private key.  The transaction is broadcasted to the bitcoin network.  The miners confirm the transactions 10
  11. 11. The addresses An example of a bitcoin address:  14nRKoXJAUpKYYbzw6Yrqh9gW2p26zerpW  2 160 (about 10 48)possible addresses The corresponding private key:  5HuEupX3DNFJ7UypjFtXDTm4BVuAwZtAgY f94sMALPyakgafVnU  256 bits  About 10 77 possible private keys 11
  12. 12. Confirmations In the process called mining, all transactions are collected in a block. A new block is mined in about every 10 minutes. For small payments or with payments with trusted peer, 0 confirmations is usually ok. For large amounts, 6 confirmations is considered safe. 12
  13. 13. Double spend elimination Because bitcoin has no central authority, one of the main security problems is eliminating a double spend fraud (wherein the same money is spent twice). The main innovation in bitcoin is the blockchain. Each full node (= computer running the bitcoin program) in the network has a copy of all mined blocks. Disrupting the system would need enormous computing power. 13
  14. 14. Anonymity Understand how bitcoin works  Every transaction from address to address is public.  How much and when = public, who owns the address = not public (can be analyzed, though). Create a new address for every transaction Use mixing services The larger the transactions, the easier it is to carry out traffic analysis 14
  15. 15. Who accepts bitcoins? Namecheap Wordpress Many nonprofits accept bitcoin donations  Archive.org Bitpay (= simple interface for merchants) Bitspend.net (order anything with bitcoins) 15
  16. 16. 16
  17. 17. Legal stuff In Finland, the Board of Accounting recognizes bitcoin:  treated like stocks  or if selling and buying bitcoins is the core business of the company, they are put in the current assets. Its completely legal to use bitcoins as money (as it is legal to use potatoes or gold as money) Anti-terrorism and money laundering law: selling bitcoins for > 15 000 € -> ask for ID. 17
  18. 18. Bitcoin and taxes I asked the tax authorities about bitcoin: we have a group of experts working on it’. Currently, VAT 24% is imposed on selling bitcoins. Exchanging bitcoins for a customer is VAT 0%  That is, the dealer buys the bitcoins for the customer. 18
  19. 19. Bitcoin and taxes? 19
  20. 20. Worth reading http://www.reddit.com/r/Bitcoin http://bitcoin.it/ https://blockchain.info/tx/8b555a4399797c78 4033863dda38abef7b8adcaf6748e9519dcb1 75fb1d04ee0 http://krugman.blogs.nytimes.com/2011/09/07 /golden-cyberfetters/ https://twitter.com/carsonj/status/314382483 468713984 20
  21. 21. Tools for beginners (and everyone) http://easywallet.org http://blockchain.info/ https://www.bitaddress.org/ 21

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