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Intro to Bitcoin


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Intro to Bitcoin on GDG March 2013

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Intro to Bitcoin

  1. 1. The world’s first decentralized digital currency Ron Gross Adapted from slides by Meni Rosenfeld 1
  2. 2. Adoption (March 2013) “Market capitalization”: $500M Users: ~ 150-200K Bitcoin-accepting businesses: > 3000, including    Namecheap  … Donations: Wikileaks, Internet Archive, xkcd… Academic research: WIS (Adi Shamir), Microsoft, Cornell, ETH Zurich… Reports: FBI, European Central Bank… 2
  3. 3. Bitcoin is a currency Facilitates the trade of one good for another Has all properties of a currency Does not need to have “intrinsic” value The value is determined by supply and demand 3
  4. 4. Bitcoin is digital Ownership of bitcoins is digital information Typically used on the internet  But not only (e.g. smartphones / physical bitcoins) Based on cryptography 4
  5. 5. Bitcoin is decentralized No company “Bitcoin Ltd.” No central issuer or controller Based on a public protocol A p2p network of nodes running open source software Multiple parties are each “doing their own thing” 5
  6. 6. Bitcoin is the first! Plenty of physical currencies (commodities)  Gold, silver, seashells, rocks … Plenty of centralized digital currencies  PayPal, WebMoney, e-gold, WoW gold, Second Life, … Bitcoin is the first decentralized digital currency Invented in 2008 by “Satoshi Nakamoto” 6
  7. 7. How to use? Install one of the open-source clients Client generates “addresses”, which are like bank accounts e.g. 1BBsbEq8Q29JpQr4jygjPof7F7uphqyUCQ To receive bitcoins, let the sender know your address To send bitcoins, specify receiving address and amount, and click “send” 7
  8. 8. Why? No need for 3rd party Easy to send and receive money Almost no fees No single point of failure 8
  9. 9. Why? Limited supply – no arbitrary printing of money No chargebacks International Pseudonymous 9
  10. 10. Numbers Max money supply = 21 million BTC  Currently, 11 million Each bitcoin is currently worth roughly $45 Bitcoins can be specified with 8 decimal places  2.1 1015 atomic units (“satoshis”)  0.003 BTC per person alive today Monetary inflation rate is decaying exponent 10
  11. 11. Inflation schedule 11
  12. 12. Historic price chart 12
  13. 13. How does Bitcoin work? 13
  14. 14. Public key cryptography Every user has a private key and a public key Public key is uniquely determined by the private key Virtually impossible to compute private key from public key Can be used for encryption and digital signatures 14
  15. 15. Digital signatures User wants to send a message and prove that he wrote it Gets (message, private key) and computes a signature Recipient verifies the signature using the known public key Only the user who possesses the private key can sign Examples: RSA, ECDSA 15
  16. 16. Hash functions Example: SHA-256 Transforms any data to a 256-bit number  Any input change significantly alters the output  Very hard to reverse The hash output behaves like a random function 16
  17. 17. Bitcoin system components A transaction structure for managing ownership A p2p network for propagating, verifying and storing transaction data A proof-of-work system (hashing, “mining”) for:  Synchronizing transactions  Determining initial distribution of coins 17
  18. 18. Coins The fundamental building block of Bitcoin is a “coin” A coin is characterized by:  Unique ID  Quantity (denomination) – arbitrary number with 8 decimal places  Owner 6.3 2.4 18
  19. 19. Coins Coins can be split and merged If Alice wants to send bitcoins to Bob, she will merge some of her coins and split the result between her and Bob 6 2 2.5 8.5 1.5 7 19
  20. 20. Transactions The owner of a coin is identified by an “address” Each address is associated with a private key To send a coin, the owner signs a message “this coin now belongs to address XYZ” The process is is called a “transaction” 20
  21. 21. Transaction structure Transaction Input #1 Output ref.; signature Output #1 Receiving address; amount Input #2 Output ref.; signature Output #2 Receiving address; amount Input #3 Output ref.; signature 21
  22. 22. Transaction rules Inputs are “unspent outputs” of previous TX Total coins in <= Total coins out Voluntary TX fee = Coins In – Coins Out Miners include a special “generating TX” 22
  23. 23. The Network 23
  24. 24. Problem: Double spending Using the same coin to pay 2 different recipients  No agreement on who is the “true” recipient  One recipient will be out of his coins  Some way to enforce ordering is needed Traditional solution: Central authority Prior decentralized solutions have vulnerabilities The first working decentralized solution is the blockchain 24
  25. 25. Preventing double spends Suppose there was just one coin Two conflicting transactions: Only one transaction will be accepted Doesn’t matter which one (if everyone agree eventually) 25
  26. 26. Solution: The blockchain Transactions are grouped into blocks Blocks are confirmed with proof of work (= hashing) A transaction is final if it is included in a block Each block references a previous block to form a chain In case of conflict: the TX with more confirms wins 26
  27. 27. The Blockchain Block Block Block Block Block Block Block 208364 Nonce Prev. block hash Metadata Transactions: Tx Tx Tx Tx Tx Tx Tx Tx 27
  28. 28. Conflicts4/2/2013 Written by Meni Rosenfeld 28
  29. 29. Evolution of MiningCPU FPGA ASIC GPU 29
  30. 30. Possible Futures 30
  31. 31. Failure Bitcoin is hacked Bitcoin is outlawed / over-regulated People lose interest… Value drops close to $0 31
  32. 32. Stagnation Usage remains at current levels / drops Remains “the geek currency” Value stabilizes somewhere in $1-100 32
  33. 33. Bitcoin Wins! Network effect keeps Bitcoin in the lead More business and users accept it Fiat currencies inflate to zero value Bitcoin becomes 1-100% of the world’s market 1 BTC > $10,000-100,000 33
  34. 34. Questions? 34
  35. 35. Thank you Meni Rosenfeld    1DdrvajpK221W9dTzo5cLoxMnaxu859QN6 Ron Gross    1dTGdZcckzX5cdjigZBzwFtuWmio2jtWa 35