From Bits to Bitcoin, Presented by Marshall Swatt Mar 2016
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Have you heard of a new currency called bitcoin? Or a new technology called the blockchain? Almost $1BB has been invested into numerous startups over the past four years by prominant Venture Capital firms. Dozens of startups have been formed in Silicon Valley, New York, London, and as far away as Chile and India. And in the past year, large tech companies and banks have begun to work on new products and services that leverage this new currency and technology. Many companies across the financial services industry are concerned about bitcoin's potential to substantially disrupt their business. Yet very few people understand what bitcoin is or how it works. Even fewer are able to grasp its potential to disrupt existing financial services or transform various types of transactions, whether financial or non-financial. This talk will provide you with a basic understanding of the economics and science behind bitcoin and the blockchain. With Bitcoin you can: - Send $1 or $1MM instantly and for free anywhere in the world, to a family member or a business - Guarantee that funds are received even if you don't know or trust the recipient - Vote in a government or corporate election, with instant tallies and fully auditable, immutable and transparent voting ledgers Questions we will address include: What is bitcoin? How is it created? How do you use it? What is the blockchain? How does it work? Who can use it? How does bitcoin compare with other currencies today? what advantages does it offer? What risks? Is bitcoin secure and reliable? Is it stable as a currency? What problems can bitcoin solve? What problems is it addressing right now? Should you own bitcoin? Where will its price go over time?
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From Bits to Bitcoin, Presented by Marshall Swatt Mar 2016
- 1. From bits to bitcoin Understanding the Blockchain and Digital Currencies March 2016, by Marshall Swatt marshallswatt@gmail.com @marshallswatt linkedin.com/in/marshallswatt
- 2. I. What is Bitcoin & Digital Currency? Backstory II. State of the Industry III. The Technology (Blockchain & P2P network) • Q & A • Resources Outline
- 3. 1. What is Bitcoin & Digital Currency?
- 5. What Problems Is It Trying to Solve? • Speculation about Fiat currency’s long-term stability • Inflation • ACH, Wire transfers take several days. Why? • Financial Settlements take minimum T2. Why? • Remittances are costly and retrieving funds is often inconvenient • Person-to-person transactions require intermediaries • Feeds • Privacy • Privacy of personal data held by companies • theft of personal data held by companies
- 7. 1CC3X2gu58d6wXUWMffpuzN9JAfTUWu4Kj 1. A currency 2. Peer to Peer Network, built-in support for payment processing 3. The “blockchain” ledger & its technology
- 8. • ecache (David Chaum) • hashcash - important ‘proof-of-work’ (Adam Back) • b-money (Wei Dai) • bit gold (Nick Szabo) • RPOW (Hal Finney) Prior Experiments See https://en.wikipedia.org/wiki/History_of_Bitcoin
- 9. Strengths • Anyone, anywhere can parEcipate & use • Low/Zero transacEon costs, enErely market driven • micro-transacEons (.00000001BTC = a ‘Satoshi’) • No intermediaries, apart from the network itself • No proof of idenEty or disclosure of private details • “pseudo anonymous” - does not guarantee anonymity • Secure transacEons (SHA-256, RSA public/private key) • All transacEons are public • Irreversible, no charge-backs like credit cards • ‘Complementary’ currency • No ‘Goldilocks’ currency (either inflaEonary or deflaEonary) • Compared to FIAT, it is deflaEonary. • Rate of growth declines to zero (approx. year 2140) • Widest adopEon of any digital currency to date
- 10. • No inherent value? The cost of the network • Apolitical, not subject to gov’t or private manipulation Strengths
- 11. • Solves the ‘ByzanEne General’s Dilemma’ • Overcomes ‘ByzanEne’ faults and failures • Traitorous Generals • IntercepEon, forgery • Loss of a general • Loss of message • No double-spending • Open-source, open-protocol, capable of evolving • TransacEons are relaEvely fast • Scriptable transacEons • MulE-signature (Security, Escrow, other) Technical Features
- 12. Weaknesses • Governance • problem: the blocksize debate • solved: “Transaction Malleability” • User-Friendliness • Small Market Size • Price Volatility • Gov’t Resistance • Banking Resistance • Incompatible Legal/Regulatory Framework • Irreversible • 51% Attack • Supply Limitations • Loss (of private key) • Miner self-underpayment • Willful destruction
- 13. Public Key (address) - receives funds and has a balance publicly recorded on the ledger Private Key - used to transact and move funds from the corresponding public key to another public key 1CC3X2gu58d6wXUWMffpuzN9JAfTUWu4Kj E9 87 3D 79 C6 D8 7D C0 FB 6A 57 78 63 33 89 F4 45 32 13 30 3D A6 1F 20 BD 67 FC 23 3A A3 32 62 5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF or
- 14. Wallet address 1 address 2 address 3 … • Desktop, Laptop • Server • Raspberry Pi • USB Thumb Drive stored in a vault • Paper format A Wallet is just a File
- 15. Initiate a Transaction Your Laptop Node Software Your Wallet address 1 address 2 address 3 … Transaction node node node TCP TCP TCP
- 16. Transaction Recorded Node n Block 2 block n … Blockchain Ledger Block 1 your transaction transaction transaction transaction transaction transaction transaction … Transaction Pool
- 20. Media Coverage 1. Price Growth 2. Misconduct (Frauds, Scams, Improper Behavior)
- 21. Price
- 23. Media Coverage Losses, Frauds, Scams &/or Incompetence • Hard drive thrown out with $7.5MM bitcoin • Disreputable Exchanges (Mt. Gox) • Black Markets for illegal goods (Silk Road) • Disreputable Mining Hardware, Cloud Mining • Disreputable Mining Pools • Disreputable Wallet Vendors, software vendors
- 25. 2. State of the Industry
- 26. Regulation & Integration • Gov’t regulations • restrict growth and innovation • prohibitively expensive hurdles for startups • Resistance in some countries • federal clarity, confusion (IRS, FinCen, Treasury, CFTC, SEC, …) • MT state level licensing/bonding (NY BitLicense, NJ, CA) • Lack of Bank Support of bitcoin businesses • Severely restricts growth and innovation • (Risk/Compliance, Understanding)
- 28. 2010-2013 Exchanges, Wallet Vendors, Payment Providers, Mining Hardware Manufacturers Very early stage businesses (Core Infrastructure) 2015 ATMs, Micropayment, remittances, gambling, prediction markets, payroll processing, basic lending/margin Next Stage Businesses (leveraging Infrastructure)
- 29. New Companies: 21Inc $113MM+ raised $400USD bitcoin computer
- 30. Around the Corner Remittance Growth Transparent Voting Systems Transparent Accounting/Auditing Systems T0 Settlement of Financial Transactions Digital Identity (individuals and businesses) Internet of Things (IOT) Proof of ownership
- 31. Other Digital Currencies Ethereum’s Ether (Smart Contracts) $10 Ripple’s XRP (faster transactions) $.008 Doge, Litecoin (traction) $.0002, $3.30 Side chains (augment bitcoin)
- 32. Plumbing? Killer Consumer App? Decentralized Autonomous Corporations? Further in the Future
- 33. 3. The Technology (Blockchain & P2P network)
- 34. Standards SSL/TLS, HTTPS, SSH MD5, DES, SHA, AES DSS/DSA, RSA, PGP X.509 WEP,WPA • Caesar Cipher (Substitution) • Dictionary Code Cipher • Enigma • One-Time Pad • RSA Public/Private Key (Asymmetric) • Undergirds almost all modern encryption Symmetric vs. Asymmetric Encryption
- 37. Data “Sweet are the uses” -> 4ABC272B4DD Data “Sweet are the buses” -> 7E880092CC1 Hash Functions
- 38. OP_RETURN <data> • Piece of Data represents an unspendable UTXO • Recorded into the blockchain • Not stored in the transacEon pool • Up to 40 characters in length • Ideal for storing a hash code pointer • view real examples: hsp://coinsecrets.org/
- 40. Security • Bitcoin has not been ‘hacked’ • Media reports of ‘hack,’ ‘theft,’ fraud, etc. all due in specific business misconduct • Integer Factoring • Quantum Computers (Shor’s Algorithm) • Threatens much more than Bitcoin • Security of wallets and funds held by third parties
- 41. Practical Wallet Security (not so simple) • Encrypted Wallet, long random wallet passphrase • password manager • Use Hierarchical Deterministic Wallet • Multi-Signature Wallet Transactions (Begins with ‘3’ in the address) • Multiple Backups (Digital and paper) • MofN format digital & paper (Shamir’s Secret Sharing) • Third party wallet vendors w/ Insurance • *Most exchanges are not adequately insured* • Theft: Hacking of your wallet passphrase, private key • Loss: wallet file, wallet key, send to invalid address
- 42. Thank You
- 43. Q & A, Resources• “Bitcoin: A Peer-to-Peer Electronic Cash System” - introductory Whitepaper by Satoshi Nakamoto (https://bitcoin.org/en/bitcoin-paper) • “Why Bitcoin Matters” - NYTimes article by Marc Andreessen of Andreessen Horowitz Venture Capital. (http://dealbook.nytimes.com/2014/01/21/why- bitcoin-matters/) • “Morgan Spurlock Inside Man” - episode Feb 19th 2015 (http://www.cnn.com/ shows/inside-man) • Khan Academy - video series (https://www.khanacademy.org/economics- finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it) • Mastering Bitcoin - Andreas Antonopoulous (amazon.com) • www.CoinDesk.com - Reporting and News Coverage about Bitcoin & Digital Currency • www.blockchain.info - data and analysis of bitcoin • BitcoinWiki - information resource, including technical • US Exchanges: Coinbase, Gemini • Wallet Vendors: BlockChain, Xapo, Armory, Various US Exchanges, others Contact marshallswatt@gmail.com @marshallswatt linkedin.com/in/marshallswatt