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From Bits to Bitcoin, Presented by Marshall Swatt Mar 2016
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Transcript of From Bits to Bitcoin, Presented by Marshall Swatt Mar 2016
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From bits to bitcoinUnderstanding the Blockchain and Digital Currencies
March 2016, by Marshall Swatt [email protected]
@marshallswatt linkedin.com/in/marshallswatt
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I. What is Bitcoin & Digital Currency? Backstory
II. State of the Industry
III. The Technology (Blockchain & P2P network)
• Q & A
• Resources
Outline
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1. What is Bitcoin & Digital Currency?
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1CC3X2gu58d6wXUWMffpuzN9JAfTUWu4Kj
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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
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1CC3X2gu58d6wXUWMffpuzN9JAfTUWu4Kj
1. Acurrency2. PeertoPeerNetwork,built-insupportforpaymentprocessing3. The“blockchain”ledger&itstechnology
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• 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
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Strengths
• Anyone,anywherecanparEcipate&use• Low/ZerotransacEoncosts,enErelymarketdriven
• micro-transacEons(.00000001BTC=a‘Satoshi’)• Nointermediaries,apartfromthenetworkitself• NoproofofidenEtyordisclosureofprivatedetails
• “pseudoanonymous”-doesnotguaranteeanonymity• SecuretransacEons(SHA-256,RSApublic/privatekey)• AlltransacEonsarepublic• Irreversible,nocharge-backslikecreditcards• ‘Complementary’currency
• No‘Goldilocks’currency(eitherinflaEonaryordeflaEonary)• ComparedtoFIAT,itisdeflaEonary.
• Rateofgrowthdeclinestozero(approx.year2140)• WidestadopEonofanydigitalcurrencytodate
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• No inherent value? The cost of the network • Apolitical, not subject to gov’t or private manipulation
Strengths
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• Solvesthe‘ByzanEneGeneral’sDilemma’• Overcomes‘ByzanEne’faultsandfailures
• TraitorousGenerals• IntercepEon,forgery• Lossofageneral• Lossofmessage
• Nodouble-spending• Open-source,open-protocol,capableofevolving• TransacEonsarerelaEvelyfast• ScriptabletransacEons
• MulE-signature(Security,Escrow,other)
Technical Features
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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
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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
E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262
5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF
or
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Wallet
address 1address 2address 3
…• Desktop, Laptop • Server • Raspberry Pi • USB Thumb Drive stored in a vault • Paper format
A Wallet is just a File
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Initiate a Transaction
Your LaptopNode Software
Your Wallet
address 1address 2address 3
…
Transaction
node
node
node
TCP
TCP
TCP
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Transaction Recorded
Node n
Block 2
block n
…
Blockchain LedgerBlock 1
your transactiontransaction
transactiontransactiontransactiontransactiontransaction
…
Transaction Pool
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node
node
node
TCP
node
node
node
TCPnode
node
node
TCP
node
node
node
TCP
Mining
ASICASIC
ASIC
ASIC
ASIC
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Pizzas and Exchanges
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Media Coverage
1. Price Growth
2. Misconduct (Frauds, Scams, Improper Behavior)
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Price
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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
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2. State of the Industry
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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)
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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)
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New Companies: 21Inc
$113MM+ raised
$400USD
bitcoin computer
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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
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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)
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Plumbing? Killer Consumer App? Decentralized Autonomous Corporations?
Further in the Future
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3. The Technology (Blockchain & P2P network)
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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
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ChoosetwodisEnctprimenumbersp=61andq=53
Computen=pXq=(61X53)=3233Computethe‘to#ent’oftheproductasφ(n)=(p−1)(q−1)
(61-1)(53-1)=3120Chooseanumber1<e<3120thatis‘coprime’to3120
Lete=17,primenumber.Checkthateisnotadivisorof3120Computed,the‘modularmul#plica#veinverse’e(modφ(n))
d=2753Thepublickeyis(n=3233,e=17)
EncrypEonfuncEon:c(m)=m17mod3233Theprivatekeyis(n=3233,d=2753)
DecrypEonfuncEon:m(c)=c2753mod3233Toencryptm=65(theASCIIcode‘A’)
c=6517mod3233=2790Todecryptc=2790
m=27902753mod3233=65
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Twolargeprimenumbers(155digitseach)
13144131834269512219260941993714669605006625743172006030529504645527800951523697620149903055663251854220067020503783524785523675819158836547734770656069477
13144131834269512219260941993714669605006625743172006030529504645527800951523697620149903055663251854220067020503783524785523675819158836547734770656069477
P
Q
Their ProductPQ161521746670640296426473658228859984306663144318152681524054709078245736590366297248377298082656939330673286493230336261991466938596691073112968626710792148904239628873374506302653492009810626437582587089465395941375496004739918498276676334238241465498030036586063929902368192004233172032080188726965600617167
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Data“Sweetaretheuses”->4ABC272B4DDData“Sweetarethebuses”->7E880092CC1
Hash Functions
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OP_RETURN <data>
• PieceofDatarepresentsanunspendableUTXO• Recordedintotheblockchain• NotstoredinthetransacEonpool• Upto40charactersinlength• Idealforstoringahashcodepointer• viewrealexamples:hsp://coinsecrets.org/
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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
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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
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Thank You
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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 [email protected]
@marshallswatt linkedin.com/in/marshallswatt