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?

I Post-doc researcher in Computer Science(AI lab of ULB)

I Founder & Organizer of “Bitcoin Brussels” meetup group(250 members)

I Founder & Director of ASBL/VZW “Belgian BitcoinAssociation”

I Involved in Bitcoin startups

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Preliminaries

Disclaimer

I I own some bitcoins

I Bitcoin should (still) be seen as an experiment

I 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

Bitcoin in a Nutshell

Technical Overview

Economical Overview

Business Development Overview

Conclusion

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Outline

Bitcoin in a NutshellHistoryWhat is Bitcoin?

Technical Overview

Economical Overview

Conclusion

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History

Apparition of Bitcoin

I Money based on cryptography: an old cypherpunk ideal

I b-money (Wei Dai, 1999)

I bitgold (2005, Nick Szabo)

Main issue with these attempts: requires a trusted third-party toavoid “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

Bitcoin in a NutshellHistoryWhat is Bitcoin?

Technical Overview

Economical Overview

Conclusion

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What is Bitcoin?

What is Bitcoin? (1/3)Formal Answer

I Bitcoin: Information exchange protocol (like http, smtp...),that allows the transfer of units of account; these unitsbehave like the money we are used to.

I DurabilityI PortabilityI FungibilityI DivisibilityI Relative rarety

I bitcoin(s): name of the unit of account circulating on theBitcoin network

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What is Bitcoin?

What is Bitcoin? (2/3)Informal Answer - Micro Scale

A system for people to send and receive payments

I Without depending on any third-party

I Reasonably privately

I Instantly

I Reliably

I Typical transaction fee today: zero or 0.03C

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What is Bitcoin?

What is Bitcoin? (3/3)Informal Answer - Macro Scale

I Money supply policy governed by maths; known inadvance

I Without border

I Distributed

I 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?

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What is Bitcoin?

I Trusted third parties are “keeping the books”

I Centralized consensus

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What is Bitcoin?

What is the core innovation of Bitcoin?In Bitcoin world

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What is Bitcoin?

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What is Bitcoin?

I No trusted parties, “keeping the books” is done collectivelywithout trust

I Decentralized consensus

I The mechanism to allow that is called the blockchain

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What is Bitcoin?

Remark: Bitcoin use decentralized consensusto determine ownership.

Much more can be done (outside the scope of this talk...)

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Technical Overview

Outline

Technical OverviewAddresses and keysTransactionsThe BlockchainBitcoin Mining: Blocks

Economical Overview

Conclusion14 / 57

Technical Overview

Addresses and keys

I Assymetric cryptography (public/private key pair)

I Bitcoins exchanged between addresses:1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T

I Everybody can see the amount associated to an address

I Only owners of corresponding private key can spend them

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Technical Overview

Addresses and keys

Private keys can be stored...

I On a computerI On a USB stick, a DVD-RomI Printed or written on paperI Only in your memory: “brain-wallet”I On a specific deviceI In poetryI etc.

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Technical Overview

Transactions

Outline

Economical Overview

Conclusion17 / 57

Technical Overview

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?

I How does Jacques know that Paul really had 3 BTCavailable?

I How to avoid that Paul spends them again?

→ Blockchain

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Technical Overview

The Blockchain

Outline

Economical Overview

Conclusion24 / 57

Technical Overview

The Blockchain

Blockchain

Contains all transactions and distributed on every node

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Technical Overview

The Blockchain

Secured by Mining

I The miners “clear” transactions and secure the blockchainby recording them in blocks

I In exchange, they are rewarded with new bitcoins createdex-nihilo (at a fix rate)

I Emerging behavior: the system as a whole acts honestlyas long as a large enough majority acts honestly

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Technical Overview

Bitcoin Mining: Blocks

Outline

Economical Overview

Conclusion27 / 57

Technical Overview

Hashing Algorithms

Hashing Algorithms take inputs of any size, and produceoutputs (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 manyapplications in the world, and also for bitcoin mining.

I Public, many open source implementations, can bedownloaded or implemented yourself.

I Typically installed on every computer.

I Let’s play with it!

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Technical Overview

Hashing Algorithms: SHA256

SHA256 State-of-the-art hashing algorithm, used for manyapplications in the world, and also for bitcoin mining.

I Public, many open source implementations, can bedownloaded or implemented yourself.

I Typically installed on every computer.

I 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!

I Must try all words in English dictionary until you try with“zebra”

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Technical Overview

Not Reversible: Brute force!

Find the English word that produces the hash:3dc3ae00e6d09d5e491895aca9237b14a87deabad03bfb9f5679eb49ff8b9744

Example!

I Must try all words in English dictionary until you try with“zebra”

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Technical Overview

Link with bitcoin mining

I Bitcoin mining is nothing else than “brute force” as we justdid.

I But the goal in bitcoin mining is not to find input withspecific hash (that would be too hard).

I 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!

I Our goal is to find a hash starting with one ’0’.

I Our input are the recent transactions that happened on thebitcoin network. Here we simplify all these data to thestring of characters “block-data”:

Example!

I Hash NOT OK

I We can include an arbitrary number (“nonce”) to obtainmore 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!

I Our goal is to find a hash starting with one ’0’.

I Our input are the recent transactions that happened on thebitcoin network. Here we simplify all these data to thestring of characters “block-data”:

Example!

I Hash NOT OK

I We can include an arbitrary number (“nonce”) to obtainmore 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!

I We found a hash OK, we can confirm the block and telleveryone. They check themselves that indeed the hash isOK

I We earned 25 BTC

I Bitcoin mining is nothing more complex than that

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Technical Overview

Real Bitcoin Mining: same thing but (much) harder

I In reality, the (current) goal is to find hashes starting with17 ’0’ in a row.

I We did 4 trials in few seconds to mine a block starting withone ’0’.

I Miners together are doing 350 thousands of billions oftrials per second (350 Peta hashes / s) to find hashesstarting with 17 ’0’.

I The difficulty adapts automatically to the network hashrate, 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

I The blockchain is a database that everybody can freelyread...

I But it is hard to expand...

I And excessively hard to “rewrite”

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Economical Overview

Outline

Technical Overview

Economical OverviewMoney SupplyNumber of base unitsPrice

Conclusion

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Economical Overview

Money Supply

Money supply of Bitcoin

I Central bank, state-backed currency:Monetary policy decided/updated regularly

I Bitcoin:Fixed since the very beginning, known in the future forever

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Economical Overview

Money Supply

Money supply of BitcoinInspired from gold mining

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Economical Overview

Number of base units

Number of units

I 21 Millions of BTC will exist maximum, ever

I Divisible up to 8 decimals (for now...)

I In fact, this number has very little economic relevance!

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Economical Overview

I The bitcoin system itself does not include any price settingmechanism

I Like any scarce resource, supply and demand determineprice wrt. things outside of the system.Price discovery happens only at the boundaries of thesystem where it meets another one (think forex)

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Outline

Technical Overview

Economical Overview

Business Development OverviewExample of Potential Market DisruptionInvestments in Bitcoin Ecosystem

Conclusion

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Example of Potential Market Disruption

Remittance Market

I Significant part of GDP in many countries

I 414bn$ sent to developing countries in 2013 (x4 amount of2000!)

Source: World Bank

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The case of Africa

I In Africa, the amount sent back by migrants is 3 timesamount of aid from developed countries

I On average, an African migrant sending 200$ home willpay 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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Investments in Bitcoin Ecosystem

Outline

Technical Overview

Economical Overview

Business Development OverviewExample of Potential Market DisruptionInvestments in Bitcoin Ecosystem

Conclusion

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Venture Capital Investment in Bitcoin (1/3)

Source: coindesk.com

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Venture Capital Investment in Bitcoin (2/3)

Source: coindesk.com

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Venture Capital Investment in Bitcoin (3/3)Similarly to Internet historical development, US dominates...

Source: coindesk.com53 / 57

Conclusion

Outline

Technical Overview

Economical Overview

Conclusion

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Conclusion

More info (online)

I http://www.blockchain.info

I http://www.bitcoin.org

I https://en.bitcoin.it/wiki/

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Conclusion

More info (in real life)

I http://www.bitcoinassociation.be

I http://www.meetup.com/Bitcoin-Brussels

I 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 issymmetric one:

I Symmetric cryptography is simply encoding somethingwith a secret password that is required to decode it later.

I In other words, it is just the “good old way” to encrypt anddecrypt messages.

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Additional

Asymmetric Cryptography

What’s different in Asymmetric cryptography:

I Term “asymmetric”: there are two “keys” instead of a single“secret password”.

I One key is called “public” and can be shared witheveryone, one key is “private” and is kept by user.

I Keys are just large numbers:6589841676498741318947564149846542118715985245454020989874567891618907498

I Let’s use graphics instead to explain the concept

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Additional

Asymmetric Cryptography

What’s different in Asymmetric cryptography:

I Term “asymmetric”: there are two “keys” instead of a single“secret password”.

I One key is called “public” and can be shared witheveryone, one key is “private” and is kept by user.

I Keys are just large numbers:6589841676498741318947564149846542118715985245454020989874567891618907498

I Let’s use graphics instead to explain the concept

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Additional

Asymmetric Cryptography explained with GraphicsThis is an asymmetric-crypto lock

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Additional

Asymmetric Cryptography explained with GraphicsThese are Filip and Chris

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Additional

Asymmetric Cryptography explained with GraphicsThis is Filip’s public key, everybody has it (Chris too)

Turn only clock-wise

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Additional

Asymmetric Cryptography explained with GraphicsThis is Filip’s private key, only him has it

Turn only counter clock-wise

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Additional

Asymmetric Cryptography explained with Graphics

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 thatonly the private key of Filip could have closed the box onthe “left” position!

→ Filip can send messages to Chris, and prove he his thewriter: called digital-signature.

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Additional

Fun Stuff #2 and Bitcoin

I Instead of a message to Chris only, Filip writes toeverybody (leaving many boxes in public places).

I Everybody can check he his actually the writer of themessage.

I His message is for instance:

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Additional

Fun Stuff #2 and Bitcoin

We just did a bitcoin transaction! :-)

I In the Bitcoin system, a public key is a bitcoin address toreceive money.

I The corresponding private key is used to “spend” the coinsfrom that address and send them to somebody else.

I Everybody can send coins to Filip just knowing his address

I Only Filip can send coins associated with his address tosomebody else (spend them). People know that it is reallyFilip who decides to spend them.

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General Introduction to Bitcoin

Documents

Introduction to Bitcoin & Blockchain @ darefest16

Introduction to Bitcoin and ECDSA

Introduction to Bitcoin for programmers

Bitcoin & the Blockchain—an Introduction

Introduction à la blockchain - Bitcoin : la genèse

Bitcoin: introduction for programmers - Pecha Kucha

BitIodine: Extracting Intelligence from the Bitcoin Network · Keywords: Bitcoin, ﬁnancial forensics, blockchain analysis 1 Introduction Bitcoin is a decentralized monetary system

Introduction to Bitcoin Mining - Carnegie Mellon Universityeuro.ecom.cmu.edu/.../epay/IntroductiontoBitcoinMiningSterry.pdf · Introduction to Bitcoin Mining a helpful resource as

How Bitcoin Works: A Non-Technical Introduction · How Bitcoin Works: A Non-Technical Introduction ... and amount, and clicks “send ... BTC CHINA BITCOIN EXCHANGE STOPS

An Introduction to BitCoin and Cryptocurrency Ecosystem

Introduction to Bitcoin - SciTech Connectscitechconnect.elsevier.com/.../2016/07/Introduction-to-Bitcoin.pdf · Introduction to Bitcoin Lam Pak Nian, David LEE Kuo Chuen Sim Kee Boon

DFIN-511 Introduction to Digital Currencies · Introduction to Digital Currencies Bitcoin-Qt 6 Bitcoin-Qt (now known as Bitcoin Core) is the third Bitcoin client, developed by Wladimir

Introduction to Bitcoin

Bitcoin 101 - General Audience

Bitcoin Blockchain Dynamics: the Selﬁsh-Mine Strategy in ... · Keywords— Bitcoin, blockchain, block hiding strategies, honest mining, selﬁsh-mine. I. INTRODUCTION Bitcoin is

Bitcoin A General Overview

Bitcoin and Blockchain Technology: An Introduction

Introduction to Veeting.com - General Assembly 2014 of Bitcoin Association Switzerland

Bitcoin. General information

Introduction of Bitcoin