General Introduction to Bitcoin

General Introduction to Bitcoin
Jérémie Dubois-Lacoste, PhD
jeremie.dl@gmail.com
Les Geeks Anonymes - Liège - 27/02/2015

A General Introduction to Bitcoin Jérémie Dubois–Lacoste jeremie.dl@gmail.com
Preliminaries
Who am I?
Post-doc researcher in Computer Science
(AI lab of ULB)
Founder & Organizer of “Bitcoin Brussels” meetup group
(250 members)
Founder & Director of ASBL/VZW “Belgian Bitcoin
Association”
Involved in Bitcoin startups
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Preliminaries
Disclaimer
I own some bitcoins
Bitcoin should (still) be seen as an experiment
The topic is often hard, because of its paradigm novelty.
Don’t be frustrated if you don’t get 100% :-)
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Outline
Outline
Bitcoin in a Nutshell
Technical Overview
Economical Overview
Business Development Overview
Conclusion
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Outline
History
What is Bitcoin?
Technical Overview
Economical Overview
Conclusion
5 / 57

History
Apparition of Bitcoin
Money based on cryptography: an old cypherpunk ideal
b-money (Wei Dai, 1999)
bitgold (2005, Nick Szabo)
Main issue with these attempts: requires a trusted third-party to
avoid “double-spending”
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History
The Tour de Force of “Satoshi Nakamoto”
Scientiﬁc Article (November 2008) :
Complete description of the concept
Introduce the idea of the blockchain
Implementation (January 2009)
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What is Bitcoin?
Outline
History
What is Bitcoin?
Technical Overview
Economical Overview
Conclusion
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What is Bitcoin?
What is Bitcoin? (1/3)
Formal Answer
Bitcoin: Information exchange protocol (like http, smtp...),
that allows the transfer of units of account; these units
behave like the money we are used to.
Durability
Portability
Fungibility
Divisibility
Relative rarety
bitcoin(s): name of the unit of account circulating on the
Bitcoin network
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What is Bitcoin?
Informal Answer - Micro Scale
A system for people to send and receive payments
Without depending on any third-party
Reasonably privately
Instantly
Reliably
Typical transaction fee today: zero or 0.03C
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What is Bitcoin?
Informal Answer - Macro Scale
Money supply policy governed by maths; known in
advance
Without border
Distributed
Open source software; community developed
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What is Bitcoin?
What is the core innovation of Bitcoin?
In the “usual” world
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What is Bitcoin?
In the “usual” world
Trusted third parties are “keeping the books”
Centralized consensus
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What is Bitcoin?
In Bitcoin world
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What is Bitcoin?
In Bitcoin world
No trusted parties, “keeping the books” is done collectively
without trust
Decentralized consensus
The mechanism to allow that is called the blockchain
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What is Bitcoin?
In Bitcoin world
Remark: Bitcoin use decentralized consensus
to determine ownership.
Much more can be done (outside the scope of this talk...)
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Technical Overview
Outline
Technical Overview
Addresses and keys
Transactions
The Blockchain
Bitcoin Mining: Blocks
Economical Overview
Conclusion
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Technical Overview
Addresses and keys
Addresses and keys
Assymetric cryptography (public/private key pair)
Bitcoins exchanged between addresses:
1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T
Everybody can see the amount associated to an address
Only owners of corresponding private key can spend them
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Technical Overview
Addresses and keys
Private keys can be stored...
On a computer
On a USB stick, a DVD-Rom
Printed or written on paper
Only in your memory: “brain-wallet”
On a speciﬁc device
In poetry
etc.
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Technical Overview
Transactions
Outline
Technical Overview
Addresses and keys
Transactions
The Blockchain
Economical Overview
Conclusion
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Technical Overview
Transactions
Transactions
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Technical Overview
Transactions
Paul received 3 BTC via 2 transactions
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Technical Overview
Transactions
Paul wants to send 3 BTC to Jacques
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Technical Overview
Transactions
Paul wants to send 3 BTC to Jacques
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Technical Overview
Transactions
Once the transaction is conﬁrmed
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Technical Overview
Transactions
How to do this without trusted third-party?
How does Jacques know that Paul really had 3 BTC
available?
How to avoid that Paul spends them again?
→ Blockchain
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Technical Overview
The Blockchain
Outline
Technical Overview
Addresses and keys
Transactions
The Blockchain
Economical Overview
Conclusion
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Technical Overview
The Blockchain
Blockchain
Contains all transactions and distributed on every node
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Technical Overview
The Blockchain
Secured by Mining
The miners “clear” transactions and secure the blockchain
by recording them in blocks
In exchange, they are rewarded with new bitcoins created
ex-nihilo (at a ﬁx rate)
Emerging behavior: the system as a whole acts honestly
as long as a large enough majority acts honestly
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Technical Overview
Outline
Technical Overview
Addresses and keys
Transactions
The Blockchain
Economical Overview
Conclusion
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Technical Overview
Hashing Algorithms
Hashing Algorithms take inputs of any size, and produce
outputs (hash) of standard sizes:
“haha” -> bcb4fe6563d225fbc7b0e90571fc670f1ee197f18ba18e52a39c2ca80672812f
“hello world” -> a948904f2f0f479b8f8197694b30184b0d2ed1c1cd2a1ec0fb85d299a192a447
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Technical Overview
Hashing Algorithms: SHA256
SHA256 State-of-the-art hashing algorithm, used for many
applications in the world, and also for bitcoin mining.
Public, many open source implementations, can be
downloaded or implemented yourself.
Typically installed on every computer.
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Technical Overview
Hashing Algorithms: SHA256
SHA256 State-of-the-art hashing algorithm, used for many
applications in the world, and also for bitcoin mining.
Public, many open source implementations, can be
downloaded or implemented yourself.
Typically installed on every computer.
Let’s play with it!
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Technical Overview
Quite chaotic
Example!
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Technical Overview
Not Reversible: Brute force!
Find the English word that produces the hash:
3dc3ae00e6d09d5e491895aca9237b14a87deabad03bfb9f5679eb49ff8b9744
Example!
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Technical Overview
Not Reversible: Brute force!
Find the English word that produces the hash:
3dc3ae00e6d09d5e491895aca9237b14a87deabad03bfb9f5679eb49ff8b9744
Example!
Must try all words in English dictionary until you try with
“zebra”
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Technical Overview
Link with bitcoin mining
Bitcoin mining is nothing else than “brute force” as we just
did.
But the goal in bitcoin mining is not to find input with
specific hash (that would be too hard).
The goal is to find input with a hash that starts with enough
’0’ at the beginning:
0000000006d09d5e491895aca9237b14a87482b6d03bfb9f5679eb49ff8b9744 -> OK
adc3ae4af8ec45b812ac2e5f6b4c5d79114d4741av1895aca9237b14a87dea78 -> not OK
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Technical Overview
Let’s be a Minner!
Our goal is to ﬁnd a hash starting with one ’0’.
Our input are the recent transactions that happened on the
bitcoin network. Here we simplify all these data to the
string of characters “block-data”:
Example!
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Technical Overview
Let’s be a Minner!
Our goal is to ﬁnd a hash starting with one ’0’.
Our input are the recent transactions that happened on the
bitcoin network. Here we simplify all these data to the
string of characters “block-data”:
Example!
Hash NOT OK
We can include an arbitrary number (“nonce”) to obtain
more hashes for our data.
So we “mine” (brute force) this:
“block-data free-number=<we_can_choose>”
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Technical Overview
Let’s be a Minner: Success!
We found a hash OK, we can conﬁrm the block and tell
everyone. They check themselves that indeed the hash is
OK
We earned 25 BTC
Bitcoin mining is nothing more complex than that
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Technical Overview
Real Bitcoin Mining: same thing but (much) harder
In reality, the (current) goal is to find hashes starting with
17 ’0’ in a row.
We did 4 trials in few seconds to mine a block starting with
one ’0’.
Miners together are doing 350 thousands of billions of
trials per second (350 Peta hashes / s) to find hashes
starting with 17 ’0’.
The difficulty adapts automatically to the network hash
rate, to keep one block confirmation every 10mn
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Technical Overview
Bitcoin total mining power
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Technical Overview
Blockchain = sequence of blocks
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Technical Overview
Blockchain = distributed consensus
The blockchain is a database that everybody can freely
read...
But it is hard to expand...
And excessively hard to “rewrite”
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Economical Overview
Outline
Technical Overview
Economical Overview
Money Supply
Number of base units
Price
Conclusion
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Economical Overview
Money Supply
Money supply of Bitcoin
Central bank, state-backed currency:
Monetary policy decided/updated regularly
Bitcoin:
Fixed since the very beginning, known in the future forever
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Economical Overview
Money Supply
Money supply of Bitcoin
Inspired from gold mining
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Economical Overview
Number of base units
Number of units
21 Millions of BTC will exist maximum, ever
Divisible up to 8 decimals (for now...)
In fact, this number has very little economic relevance!
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Economical Overview
Price
Price
The bitcoin system itself does not include any price setting
mechanism
Like any scarce resource, supply and demand determine
price wrt. things outside of the system.
Price discovery happens only at the boundaries of the
system where it meets another one (think forex)
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Outline
Technical Overview
Economical Overview
Example of Potential Market Disruption
Investments in Bitcoin Ecosystem
Conclusion
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Remittance Market
Signiﬁcant part of GDP in many countries
414bn$ sent to developing countries in 2013 (x4 amount of
2000!)
Source: World Bank
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The case of Africa
In Africa, the amount sent back by migrants is 3 times
amount of aid from developed countries
On average, an African migrant sending 200$ home will
pay 25$ (12%)
Source: World Bank
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Fees Africa <-> Africa
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Fees overall
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What when they will use Bitcoin?
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Outline
Technical Overview
Economical Overview
Conclusion
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Venture Capital Investment in Bitcoin (1/3)
Source: coindesk.com
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Similarly to Internet historical development, US dominates...
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Conclusion
Outline
Technical Overview
Economical Overview
Conclusion
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Conclusion
More info (online)
http://www.blockchain.info
http://www.bitcoin.org
https://en.bitcoin.it/wiki/
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Conclusion
More info (in real life)
http://www.bitcoinassociation.be
http://www.meetup.com/Bitcoin-Brussels
jeremie.dl@gmail.com
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Conclusion
The ﬁrst ﬁve times you think you understand bitcoin, you don’t – Dan Kaminski
I’m a big fan of Bitcoin, regulation of money supply needs to be depoliticized – Al Gore
There are 3 eras of currency: commodity based, politically based, and now, math
based – Chris Dixon
We have elected to put our money and faith in a mathematical framework that is free of
politics and human error – Tyler Winklevoss
Bitcoin is a technological tour de force – Bill Gates
This may be the purest form of democracy the world has ever known, and for one I am
thrilled to be here to watch it unfold – Paco Ahlgren
It will be everywhere, and the world will have to readjust. World governments will have
to readjust – John McAfee
Bitcoin will do to banks what email did to the postal industry – Rick Falkvinge
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Additional
Asymmetric Cryptography and Bitcoin Transactions
(A)symmetric Cryptography?
Before talking about asymmetric cryptography, what is
symmetric one:
Symmetric cryptography is simply encoding something
with a secret password that is required to decode it later.
In other words, it is just the “good old way” to encrypt and
decrypt messages.
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Additional
Asymmetric Cryptography
What’s different in Asymmetric cryptography:
Term “asymmetric”: there are two “keys” instead of a single
“secret password”.
One key is called “public” and can be shared with
everyone, one key is “private” and is kept by user.
Keys are just large numbers:
6589841676498741318947564149846542118715985245454020989874567891618907498
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Additional
Asymmetric Cryptography
What’s different in Asymmetric cryptography:
Term “asymmetric”: there are two “keys” instead of a single
“secret password”.
One key is called “public” and can be shared with
everyone, one key is “private” and is kept by user.
Keys are just large numbers:
6589841676498741318947564149846542118715985245454020989874567891618907498
Let’s use graphics instead to explain the concept
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Additional
Asymmetric Cryptography explained with Graphics
This is an asymmetric-crypto lock
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Additional
These are Filip and Chris
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Additional
This is Filip’s public key, everybody has it (Chris too)
Turn only clock-wise
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Additional
This is Filip’s private key, only him has it
Turn only counter clock-wise
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Additional
What fun stuff can we do with this lock and these two keys?
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Additional
Fun Stuff #1
(Not directly related to Bitcoin)
1. Chris puts a message in the box
2. He closes the lock using the public key of Filip.
3. Only the private key can now open the box.
→ Chris can send 100% private messages to Filip!
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Additional
Fun Stuff #2
(Directly related to Bitcoin, time to wake up!)
1. Filip puts his message in the box
2. Filip closes the lock using its private key.
3. Chris open the box with Filip’s public key and knows that
only the private key of Filip could have closed the box on
the “left” position!
→ Filip can send messages to Chris, and prove he his the
writer: called digital-signature.
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Additional
Fun Stuff #2 and Bitcoin
Instead of a message to Chris only, Filip writes to
everybody (leaving many boxes in public places).
Everybody can check he his actually the writer of the
message.
His message is for instance:
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Additional
Fun Stuff #2 and Bitcoin
We just did a bitcoin transaction! :-)
In the Bitcoin system, a public key is a bitcoin address to
receive money.
The corresponding private key is used to “spend” the coins
from that address and send them to somebody else.
Everybody can send coins to Filip just knowing his address
Only Filip can send coins associated with his address to
somebody else (spend them). People know that it is really
Filip who decides to spend them.
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General Introduction to Bitcoin

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