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Bitcoin _Can we make sending money as easy as sending email? (Or SMS?)

Jacob Eliosoff, Sep 2014jacob.eliosoff@gmail.com

http://users.openface.ca/~cobe/

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Example: donating $5 worth of bitcoin to Wikipedia

worth about…

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Motivation: if we were inventing e-cash from scratch, how would we do it? Want a way to send money peer-to-peer – no middleman (decentralized)

Crude solution: scan a dollar bill, email to friend, she prints it out, done!

Problem: now you both have it, and can spend it... And what if you sent it to 10 friends?

Fix the “double-spend” problem by maintaining a single, authoritative record of who currently owns each dollar: Jill owns bill #9371, Hal owns #6283, etc. Update it whenever money changes hands.

Problem: centralized. Who maintains the record? What if they go offline? Can they be bribed?

Decentralize the record by keeping copies of it on many computers (owned by different people), and only update it – process a spend transaction – when a majority of them agree that the transaction is valid.

This is basically what Bitcoin does. The record, copied across many computers, is called Bitcoin’s blockchain. (A constantly growing chain of “blocks”, where each added block is the latest batch of transactions.)

1 Not legal advice

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How it works: a brief look at the Bitcoin networkBut we’ll mostly leave the guts for another time…

The bitcoin (BTC) is a currency, like USD, EUR, ETB. Its value is determined by the market (and is very volatile!).

The blockchain tracks how many bitcoins each Bitcoin address owns. Addresses are like bank accounts: each address holds some # of bitcoins.

Bitcoins are subdivisible down to 0.00000001 BTC (1 “satoshi”), so an address can own a tiny fraction of a BTC.

Creating a new address, with its own “private key” (password), is easy and free: https://www.bitaddress.org/. The blockchain makes public how many BTCs each address owns – but not which person owns the address!

A user typically manages his addresses using a wallet app. Bitcoin wallets are available for smartphones as shown here, or on the web, or you can even print one out (a “paper wallet”).

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How it works: a brief look at the Bitcoin networkBut we’ll mostly leave the guts for another time…

When you spend some BTC, the transaction goes out on the Internet to the Bitcoin network for confirmation.

Every ~10 minutes, thousands of “miners” – computers running the open-source Bitcoin client – race to solve a simple but CPU-intensive math problem (resembling finding a large prime number). The miner that wins:

adds a new block of confirmed transactions to the blockchain,

collects the transaction fees included bythe senders of those transactions, and

earns an additional “miner’s fee”,currently 25 BTC per block.

In this way, new bitcoins aregenerated (“mined”) at a steadyrate. As of Sep 2014 there are13.3m bitcoins in existence: the“miner’s fee” will diminish so thatthis total never exceeds 21m.

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History: a lot of drama for only 6 years 2008: “Satoshi Nakamoto” (?) publishes the original

https://bitcoin.org/bitcoin.pdf paper. (7 pages, read it!)

2009: Satoshi releases version 0.1.0 of the Bitcoin client. The first block is mined, beginning the blockchain.

2010: Still mostly known to hardcore geeks only. Early transactions include purchase of 2 pizzas for 10,000 BTC (only $25, then…).

2011: Time and Wired magazines write Bitcoin profiles. Price briefly surges to $30 before dropping back to $3. Satoshi drops out of sight (“moved on to other things”).

2012: Beginning of popularization. Subject of an episode of the TV drama “The Good Wife”. Blogging site WordPress becomes largest mainstream business to accept payments in Bitcoin.

Img source: https://bitcointalk.org/index.php?topic=80844.0

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History: a lot of drama for only 6 years

Numerous “altcoins” (alternative cryptocurrencies) emerge: Litecoin, Dogecoin, Ripple, Ethereum, … A few more mainstream companies start accepting Bitcoin: Reddit, OKCupid, …

2014: Mt Gox, best-known Bitcoin exchange, spectacularly collapses with $300m+ (!) of customer holdings. Price drops back below $400, raining on the parade somewhat. More companies accept Bitcoin: Overstock, Newegg, Expedia, Dell. Governments (Switzerland, New York state, …) start to roll out serious Bitcoin-specific regulations.

2013: Price skyrockets to $250, back below $100, then to $1,200, leading to major media and public interest. Silk Road, anonymous website selling drugs for bitcoins, grows popular, then is shut down by the FBI. Many other Bitcoin exchanges and companies spring up: several get hacked or go bust. Mining becomes a major industry, with $10,000+ custom hardware dominating block rewards.

Img sources: http://www.thecoinsman.com/2014/08/bitcoin/inside-chinese-bitcoin-mine/, http://bitstickers.net/, http://cointelegraph.com/news/11803/ceo_mark_karpeles_resigns_while_mt_gox_covers_up_traces_in_twitter

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Potential uses Mining: “free money” – but not anymore

Online commerce: low fees (<1% rather than 3+%), fast, global

Remittances: after fees and exchange rates, averagecost to send money to sub-Saharan Africa is >11%

Investment asset: alternative to gold, esp forcountries with high inflation

Micropayments

Money laundering, tax evasion, ransomware, theft

“Bitcoin 2.0”: altcoins like Ethereum use theblockchain (or new blockchains) to recordownership of more than just money, eg, realestate titles, vehicles, financial derivatives

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Promising research areas Improvements to Bitcoin:

Speed up 10-minute confirmation time: alternativesto CPU-intensive (slow) “proof-of-work”

More safeguards against “51% attack”

Inflation policy: should the total number of bitcoinsbe allowed to grow?

“Side chains”: how to migrate coins from oneBitcoin version/altcoin to another, without dilutingthe pool of value?

Applications: Bitcoin payment processing, sending via SMS, open-source projects (remittances tool?), …

Analyzing the blockchain: lots of interesting transaction statistics

Macroeconomic implications: inflation policy, lack of money supply management, micropayments, …

Possible future Bitcoin replacements (faster, lightweight, more anonymous, …): NXT, Ripple, Stellar

“Bitcoin 2.0” projects: Ethereum (programmable money), MaidSafe (distributed data storage), …

Img source: http://bitcoinintro.com/bitcoin-overview/