From bits to bitcoinUnderstanding the Blockchain and Digital Currencies

March 2016, by Marshall Swatt marshallswatt@gmail.com

@marshallswatt linkedin.com/in/marshallswatt

I. What is Bitcoin & Digital Currency? Backstory

II. State of the Industry

III. The Technology (Blockchain & P2P network)

• Q & A

• Resources

Outline

1. What is Bitcoin & Digital Currency?

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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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1. Acurrency2. PeertoPeerNetwork,built-insupportforpaymentprocessing3. The“blockchain”ledger&itstechnology

• 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

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

• No inherent value? The cost of the network • Apolitical, not subject to gov’t or private manipulation

Strengths

• 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

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

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

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or

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

Initiate a Transaction

Your LaptopNode Software

Your Wallet

address 1address 2address 3

…

Transaction

node

node

node

TCP

TCP

TCP

Transaction Recorded

Node n

Block 2

block n

…

Blockchain LedgerBlock 1

your transactiontransaction

transactiontransactiontransactiontransactiontransaction

…

Transaction Pool

node

node

node

TCP

node

node

node

TCPnode

node

node

TCP

node

node

node

TCP

Mining

ASICASIC

ASIC

ASIC

ASIC

Pizzas and Exchanges

Media Coverage

1. Price Growth

2. Misconduct (Frauds, Scams, Improper Behavior)

Price

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

2. State of the Industry

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)

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)

New Companies: 21Inc

$113MM+ raised

$400USD

bitcoin computer

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

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)

Plumbing? Killer Consumer App? Decentralized Autonomous Corporations?

Further in the Future

3. The Technology (Blockchain & P2P network)

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

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

Twolargeprimenumbers(155digitseach)

13144131834269512219260941993714669605006625743172006030529504645527800951523697620149903055663251854220067020503783524785523675819158836547734770656069477

13144131834269512219260941993714669605006625743172006030529504645527800951523697620149903055663251854220067020503783524785523675819158836547734770656069477

P

Q

Their ProductPQ161521746670640296426473658228859984306663144318152681524054709078245736590366297248377298082656939330673286493230336261991466938596691073112968626710792148904239628873374506302653492009810626437582587089465395941375496004739918498276676334238241465498030036586063929902368192004233172032080188726965600617167

Data“Sweetaretheuses”->4ABC272B4DDData“Sweetarethebuses”->7E880092CC1

Hash Functions

OP_RETURN <data>

• PieceofDatarepresentsanunspendableUTXO• Recordedintotheblockchain• NotstoredinthetransacEonpool• Upto40charactersinlength• Idealforstoringahashcodepointer• viewrealexamples:hsp://coinsecrets.org/

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

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

Thank You

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