Bitcoin is a digital currency, created by an unknown person, controlled by no one. It's as mysterious as it is popular. But what is it really. I gave this presentation both to a group of venture capitalists and at the Intro2 Meetup in Silicon Valley. If you have any questions or comments, I'd love to hear from you.

1. BITCOIN EXPLAINED
December 3, 2015
Alex Sousa, Esq.
attorney@pobox.com
408-431-5962

2. Types of Money
• Commodity Money*:
Money whose value comes from a commodity of which it is made (i.e., gold
coins).
• Fiat Currency**:
Currency that a government has declared to be legal tender, but is not backed by
a physical commodity.
• Crypto-currency***:
Currency is that it is not issued by any central authority, rendering it theoretically
immune to government interference or manipulation.
December 25, 2015 2
*https://en.wikipedia.org/wiki/Commodity_money
**http://www.investopedia.com/terms/f/fiatmoney.asp
***http://www.investopedia.com/terms/c/cryptocurrency.asp

3. What is Bitcoin?*
Bitcoin is a crypto-currency implemented
entirely with open source specifications and
software which relies entirely on a peer-to-
peer (decentralized) network for both
transaction processing and validation.
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*http://www.howtogeek.com/141374/htg-explains-whatis-bitcoin-and-how-does-it-work/

4. Who invented Bitcoin?
• Bitcoin was invented by Satoshi Nakamoto, who
published the invention in 2008 in a research
paper called "Bitcoin: A Peer-to-Peer Electronic
Cash system”.
• It was later implemented as open source code in
2009.
• Bitcoin is often called the first crypto-currency
although is more correctly described as the first
decentralized digital currency.
• It has not been confirmed if Nakamoto is a real
person.
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https://en.wikipedia.org/wiki/Bitcoin

5. transaction volume / day
2009-2014
Lecture 7: Community, Politics, and Regulation (https://piazza.com/princeton/spring2015/btctech/home)
How Big is Bitcoin?
December 25, 2015 5

6. Bitcoin is a Peer-to-Peer System
When Alice wants to pay Bob:
she broadcasts the transaction to all Bitcoin nodes
Pay to pkBob : H( )
signed by Alice
Lecture 2: How Bitcoin Achieves Decentralization (https://piazza.com/princeton/spring2015/btctech/home)
December 25, 2015 6

7. What is a Bitcoin Node?
• A Bitcoin node is a computer or set of computers
that validate transactions and blocks (called
“mining”), and then relay that information to other
full nodes.
• Any individual can run a full node by using the
Core client (Bitcoin Core).
December 25, 2015 7
https://bitcoinmagazine.com/articles/bitnodes-project-issues-first-incentives-node-operators-1426544155

8. Bitcoin in Operation
1. New transactions are broadcast to all nodes, where they are
collected into a block which includes a hash (link) to the preceding
valid block.
2. Each node then competes to be the first to complete a
proof-of-work on all the data in the block, in order to have it
accepted by other participants and thus be awarded a payment
(currently 25 new bitcoins).
3. Other nodes express their acceptance of the block (i.e., achieve
consensus) by working on creating the next block in the chain,
using the hash (link) of the accepted block as the previous hash
(link).
December 25, 2015 8
https://community.coinbase.com/t/how-does-proof-of-work-prevent-fraud/1590/2

9. Hash
• A hash function is any function that can be
used to map data of arbitrary size to data of
fixed size.
• Because in Bitcoin, hashes are always
unique, they are used as pointers to
previous blocks, creating the “block chain.”
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https://en.wikipedia.org/wiki/Hash_function

10. Proof of Work
• A proof-of-work (POW) is an economic measure to deter denial of service
attacks and other service abuses such as spam on a network by
requiring some work from the service requester, usually meaning
processing time by a computer.
• For Bitcoin, it is a piece of data which is difficult (costly, time-consuming)
to produce but easy for others to verify and which satisfies certain
requirements. It ensures the integrity of the Bitcoin system.
• Because the proof-of-work includes all the data in the block,
tampering with any data, including the hash to the previous valid
block, invalidates the block, precluding the double spending of funds.
• The difficulty of the POW is adjusted so as to limit the rate at which new
blocks can be generated by the network to one every 10 minutes.
December 25, 2015 10
https://en.bitcoin.it/wiki/Proof_of_work
https://en.wikipedia.org/wiki/Proof-of-work_system

11. Mining uncertainty
Probabilitydensity
14
months
Time to find first block
# blocks found
in one year
probability
(Poisson dist.)
0 42.4%
1 36.4%
2 15.6%
3+ 5.6%
Lecture 5: Bitcoin mining (https://piazza.com/princeton/spring2015/btctech/home)

12. Simplified Bitcoin Transaction
(only one transaction per block)
Inputs: Ø
Outputs: 25.0→Alice
Inputs: 1[0]
Outputs: 17.0→Bob, 8.0→Alice
SIGNED(Alice)
time
finite scan to
check for
validity
Inputs: 2[0]
Outputs: 8.0→Carol, 9.0→Bob
SIGNED(Bob)
Inputs: 2[1]
Outputs: 6.0→David, 2.0→Alice
SIGNED(Alice)
1
2
3
4
Lecture 3: Mechanics of Bitcoin (https://piazza.com/princeton/spring2015/btctech/home)

13. The Real Deal: a Bitcoin Transaction
{
"hash":"5a42590fbe0a90ee8e8747244d6c84f0db1a3a24e8f1b95b10c9e050990b8b6b",
"ver":1,
"vin_sz":2,
"vout_sz":1,
"lock_time":0,
"size":404,
"in":[
{
"prev_out":{
"hash":"3be4ac9728a0823cf5e2deb2e86fc0bd2aa503a91d307b42ba76117d79280260",
"n":0
},
"scriptSig":"30440....3f3a4ce81"
},
{
"prev_out":{
"hash":"7508e6ab259b4df0fd5147bab0c949d81473db4518f81afc5c3f52f91ff6b34e",
"n":0
},
"scriptSig":"304602210....3f3a4ce81"
}
],
"out":[
{
"value":"10.12287097",
"scriptPubKey":"OP_DUP OP_HASH160 69e02e18b5705a05dd6b28ed517716c894b3d42e OP_EQUALVERIFY OP_CHECKSIG
}
]
}
input(s)
metadata
output(s)

14. Buying/Selling a Bitcoin
• By direct trade with another person, an intermediary facilitating
the connection (ex. Coinbase, LocalBitcoins, BitBargain,
Bittylicious).
• Through an online exchange, where a trade is with the
exchange rather than another individual (ex., Mt. Gox [before it
went bankrupt], Cicle, Kraken, Bitstamp).
• Through peer-to-peer trading marketplaces that allow bitcoin
owners to obtain discounted goods with their bitcoin via others
that want to obtain the cryptocurrency with credit/debit cards
(ex. Bitcoin Shop, BTER, CoinCorner, Cryptsy).
http://www.coindesk.com/information/sell-bitcoin/

15. Finite Supply of Bitcoins
December 25, 2015 15
Block reward is how
new bitcoins are created
Runs out in 2040. No new
bitcoins unless rules change
Year
Totalbitcoinsincirculation
First inflection point:
reward halved from 50BTC to 25BTC
Total supply: 21 million
Lecture 2: How Bitcoin Achieves Decentralization (https://piazza.com/princeton/spring2015/btctech/home)

16. Bitcoin Issues
•Bad Actors
•Centralization
•Reactionary Regulation
•Volatility
December 25, 2015 16

17. Bitcoin Issue: Bad Actors
• Although Bitcoin solved the double-spending
issue, it did not address mistakes, theft, fraud, &
other illegal activities.
• Since 2009, there have been more than 35
Bitcoin scams and thefts:
• Mt. Gox (2014): $430 million missing
• NEO & Bee (2014): 9,400 BTC missing and CEO on the
run
• MyCoin (2014): $10 million missing
December 25, 2015 17
http://www.journalgazette.net/article/20140216/BIZ/302169971/1031/BIZ
http://www.coinbuzz.com/2015/04/01/top-bitcoin-scams-past-year/
http://www.coindesk.com/five-biggest-threats-facing-bitcoin/

19. Silk Road
(operated February 2011 to October 2013)
December 25, 2015 19

20. Bitcoin Issue: Centralization
• Bitcoin designed as peer-to-peer (decentralized)
network for both transaction processing and
validation.
• However, there is little incentive to run a node
anymore because powerful expensive computers
specifically designed for generating the proof-of-
work limit mining to only the very few who can
afford it.
December 25, 2015 20
http://www.coindesk.com/five-biggest-threats-facing-bitcoin/

21. Evolution of Bitcoin Mining
CPU GPU FPGA ASIC
Lecture 5: Bitcoin mining (https://piazza.com/princeton/spring2015/btctech/home)

22. Bitcoin Issue: Reactionary Regulation
• According to CoinDesk’s 2014 Q1 State of Bitcoin Report,
12% of the 73 countries have taken some regulatory
action on bitcoin.
• Examples:
• CFTC Ruling Defines Bitcoin and Digital Currencies as Commodities
http://www.coindesk.com/cftc-ruling-defines-bitcoin-and-digital-currencies-as-commodities/
• Mexico's Payment Restrictions Now Cover Bitcoin
http://www.coindesk.com/mexicos-payment-restrictions-now-cover-bitcoin/
• European Banking Federation Recommends Bitcoin Regulation
http://www.coindesk.com/european-banking-federation-bitcoin-regulation/
• Bitcoin flounders in Australia as regulatory worries bite
http://venturebeat.com/2015/10/04/bitcoin-flounders-in-australia-as-regulatory-worries-bite/
http://www.coindesk.com/five-biggest-threats-facing-bitcoin/

23. Bitcoin Issue: Volatility

24. Additional Questions?
attorney@pobox.com
408-431-5962
December 25, 2015 24