UNC, September 2016

Bitcoin and Blockchain (fiction, fallacy, fact, fun

and future)Bebo White

SLAC National Accelerator Laboratory/Stanford University

bebo@slac.stanford.edu

UNC, September 2016

A few observations

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Bitcoin/cybercurrency• Is not science fiction

• Is not a computer science fantasy

• Is not strictly the domain of criminals and hackers

• Is a global empowering tool for 21st century society OR

• “Bitcoin and blockchain are a flawed solution to a problem that does not exist” (Izabella Kaminska, FT Alphaville)

• It frightens some or threatens the status quo

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Who owns bitcoin?

Why?/Why Not?

bitcoin is everywhere

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UNC, September 2016

Does this suggestlegitimacy?

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What is Bitcoin?• “Bitcoin” is the protocol; “bitcoins” are the units (BTC)

• Designed for an “Internet Society” using Internet technologies

• Decentralized and independent of “state currencies”

• Can be used for anonymous transactions like “hard currency” (i.e., unlike credit cards)

• Potential to revolutionize E-Commerce - online exchange, no specific currency, micro payments

• Easily convertible to “state currencies”

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It all started with• 2008

• Defined a protocol for generating, validating, and exchanging cybercurrency

• Implemented in publicly available, open source software

• Described a technology platform that goes far beyond its original purpose (the blockchain)

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Remember what this paper started…

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People are using it…

• Not just for illegal activities (e.g., Silk Road)

• Some financial analysts advise portfolio diversification with BTC

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• wordpress.com

• overstock.com

• Subway

• Tesla

• Bitcoin.Travel

• Zynga

• Paypal/Ebay

• The Sacramento Kings

• Zappos

• Whole Foods

• PizzaForCoins.com

• etc,etc,etc.

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UNC, September 2016

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UNC, September 2016

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First, a very quick look at money…

UNC, September 2016

Token Money

• Represented by a physical object (token) such as a banknote, coin, traveler’s check, etc.

• Without that token, the value is lost

• No intermediary is required for spending

• BUT - requires faith in the ISSUER, usually a government or a bank

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Notational Money

• Represented by a notation in a ledger, passbook or database (e.g., a bank account)

• Notational money cannot be lost

• BUT - requires an intermediary (bank or clearing house) for spending

• ALSO - requires faith in the MAINTAINER of the ledger

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Hybrid Money

• Requires BOTH a token AND a ledger account (e.g., personal check, stored value or gift card)

• Can be lost AND requires faith in the ISSUER

• AND requires an intermediary (bank or clearing house) for spending

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Virtual Money (?)• No token

• No ledger

• No issuer, no government backing (or supervision)

• No intermediary required for spending

• Is this even possible?

• Who creates the money? Why is it money?

• Without a token or ledger, how do you know how much you have? What is its value?

• How do you know the spender is the owner?

• What prevents spending the same money twice?

BUT

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Another reason to backup…

• Your money is just a string of bytes (data) on your device

• Device failure means your money is gone

• Device intrusion means your money can be stolen

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UNC, September 2016

Analogy: real estate• Land ownership is defined by a “chain of title,” a sequence of deeds

leading from the original owner to the present owner

• Deeds are recorded in the Land Registry

• Ownership determined by searching the Registry

• The Land Registry is, in effect, a ledger holder

• If the Registry is altered, ownership can be lost

• Double-selling is prevented by timestamps

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Distributed Registry/Ledger• Suppose we broadcast ALL deeds to thousands of nodes

of a de-centralized public network?

• IF the deeds are genuine AND the network members agree on the chain of title, THEN we can tell who owns a piece of property

• Ask the network and count the responses - if a majority say that someone is the owner, then they are

• There must be enough honest members that false responses cannot dominate (or they have some incentive)

• The registry is NOT under government control

REMEMBER THIS CONCEPT!

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A Little Math - Hash Functions

• A “hash” is a short function of a message

• BUT: a hash is not uniquely reversible

• Hash function H produces a fixed size hash of message M, usually 128-512 bits

• h = H(M)

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One-way hash functions

• Hashes are easy (fast) to compute but computationally difficult to invert

• Should not be able to find any message corresponding to a given hash

• Bitcoin uses a well-known published hash function SHA-256, which produces 256 bit hashes

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A little more math/CS - asymmetric encryption• Same as public-private key encryption

• Provides the security in PKI/certificates, HTTPS, secure e-mail, digital signatures, etc.

• Everyone has a public key (which they openly share) and a private key (which they protect) that are linked by very complex mathematics

• Insures end-to-end security, non-repudiation, etc.

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What is Bitcoin really?• No physical object, not even a character string

• “A chain of digitally signed transaction records leading from the original owner to the current holder” - similar to a chain of land deeds

• The transaction records contain

• Hashes that are difficult to find AND

• Virtual/anonymous owner IDs (addresses)

• There is NO bitcoin registry, NO centralization

• Bitcoin blockchains are broadcast to everyone; anyone can verify them; they encompass all the past and the present transactions

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Bitcoin Addresses• Bitcoin software generates bitcoin addresses of 25-44

characters for users

• Sample address: 1BBsbEq8Q29JpQr4jygjPof7F7uphqyUCQ

• The address is actually an elliptic curve public key; a 44 character key is as secure as a 7000-bit RSA key

• To send bitcoins, user specifies a receiving address and amount then clicks “send”

• To receive bitcoins, just tell the sender your public address!

• Addresses are not registered to users. A user can have a different address for every transaction

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(https://www.ft.com/content/eb1f8256-7b4b-11e5-a1fe-567b37f80b64#axzz3qe4rV5dH)

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What is happening here?

• The security, privacy, trust, and immutability that has come from centralized or third-party systems is being replaced by

• Strong encryption technologies

• De-centralized peer-to-peer consensus

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If I can’t remember my public key…

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How do you get bitcoin?

• Sell something for BTC

• Salary (legal ramifications?)

• Donation/gift?

• Use a bitcoin exchange (including bitcoin ATMs)

• Games, rewards, gambling

• Bitcoin mining (least likely)

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Bitcoin mining (1/5)

• Bitcoin blockchain begins with data “mined” by using a large number of hash function computations

• “Mining” software is run on mining machines

• A “miner” tries many different (e.g., 10^15) numbers, trying to find one whose hash value is less than a given threshold (A); a “brute force” computation

• Verified success is rewarded with a number of bitcoins (N)

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Bitcoin mining (2/5)x = blockchainy= proposed added blockn = additional number (nonce)A = threshold valueN = miner’s reward

find n such that:H(x,y,n) < A

Miner includes N BTC in “y” for themselves

Miner broadcasts solutionto network for

verification

N began at 50 andis halved every210,000 blocks

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Bitcoin mining (3/5)

• Example: problem or “proof of work”

• Find a number (nonce) so that the cryptographic hash of the block and the nonce starts with some required number of binary zeros (e.g., 40)

• Once solved the miner transmits the block to the network for verification, collects reward, and starts on new block

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Bitcoin mining (4/5)• The threshold (A) adjusted every 2 weeks (to

establish rate of 6 blocks/hour)

• Therefore, bitcoin hashes are progressively more difficult to find (i.e., finding “n” more difficult); part of finding “n” involves verifying that no bitcoin transacted in block “y” has already been spent in blockchain “x” (Merkle trees)

• There will never be more than 21 million BTC. (2*50*210,000); divisible into units as small as 1/100 millionth of a BTC (satoshi)

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Controlled bitcoin inflation

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Bitcoin mining (5/5)

• Miner’s reward (N) halves after 210,000 blocks (~4 years)

• Era 1 = 50 BTC

• Era 2 = 25 BTC

• Era 3 = 12.5 BTC

• …….

• Era 33 = 1 satoshi

July 2016

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Why is mining so difficult?

• Because of bitcoin’s “public” structure, it needs a defense against malicious attacks

• Uses POW to make it computationally difficult to add a block

• Has created a cost (equipment + running) of mining and therefor a need for incentivization

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Transaction fees are meant to replace block rewards

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Supply of bitcoins

• Current maximum number of bitcoins = 21*10^6

• Current maximum number of satoshis = 2.1*10^15

• Amount of $US in the world = 10^12

• As value of BTC increases, most transactions are likely to be in satoshis

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Is this really different from stock market, currency market,

commodities market fluctuations?

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Bad things do happen because of value

• Silk Road and black market crime

• Ransomware and blackmail enablement

• Hacks and embezzlement

• MT Gox (2011, 2013,2014)

• Bitfinex

• Bitstamp

• Poloniex

• BTC-E

• BitcoinTalk

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Possible vulnerabilities• No way to reverse a transaction without the

payee’s cooperation

• Software bugs

• Bank robbery by hackers

• Malware attacks against wallets

• Government attempts to control

• Competing cybercurrencies easy to make (forks) - imitation is flattery

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Summary - the 5 elements of cybercurrency

• Currency - send units of value, convertible, divisible

• Commodity - scarcity stores wealth, market fluctuates with speculation

• Brand - marketing message, community and sharing knowledge

• Protocol - decentralized trust on the block chain

• Technology - services and solutions implemented and integrated

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Possible future of Bitcoin/cybercurrencies (social)• For the world’s unbanked, there is no choice

• For small businesses, freelancers and startups in developing nations, there is no choice

• When you have choice, it is hard to imagine those without

• New generation growing up with instant expectations, who are or will be disillusioned by huge economic bailouts

• From stones to precious metals to paper to bytes

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Possible future of Bitcoin/cybercurrencies (economic/political)

• A future with digital currencies and decentralized stores is guaranteed - people trust math over people

• National adoption of decentralized currencies would bring political transparency and economic neutrality

• Developing nations seeking to curb corruption and break free of economic dependence on other countries could see potential in these technologies

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UNC, September 2016

Possible future of Bitcoin/cybercurrencies (impact)• Bitcoin itself may well not be relevant in the future

(though won’t/can’t disappear?), but

• The discussion has been started

• Cybercurrencies will be a part of the future with features that Bitcoin lacks (e.g., Ethereum); links to actual resources (e.g., Colored Coins), or different schemes for POW or POS

• Bitcoin’s biggest legacy will likely be the Blockchain/DLT

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Blockchain common elements

• Is digitally distributed across computer network in almost real-time

• Uses many participants in the network to reach consensus

• Uses cryptography and digital signatures to prove identity

• Has mechanisms to make it almost impossible to change historical records

• Is time-stamped

• Is programmable

• Blockchain is independent of Bitcoin

Is a platform!

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Can blockchain help drive the next important tech eras?

• Or is it the next important tech era after mainframe, PC, Internet/Web, cloud, mobile?

• Internet: transfer of information; Blockchain: transfer ownership

• De-centralized systems vs. centralized systems

• Public, private, parallel/forking, and intersecting blockchains

• Potential role in

• Commerce/business/shared economies

• Internet of Things

• etc,etc,etc.

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UNC, September 2016

(Melanie Swan)

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“Blockchain is the new quantum physics:A really, really hard science that no oneunderstands, ambushed by clowns likeDeepak Chopra looking to make a quickbuck on solutionist nonsense”——-Chris DeRose (TED talk)

“Blockchain does nothingbut circumvent the ruleswe have imposed onbanks to keep them honest”——-Izabella Kaminska (FT Alphaville)

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Blockcom• A company formed and functioning on blockchain

technologies; for example

• Lighthouse - peer-to-peer crowdfunding

• Factom - distributed registry

• Gems - decentralized messaging

• Maidsafe - decentralized applications

• Storj - distributed cloud

• Tezos - decentralized voting

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Summary and conclusions (IMHOs)

• Bitcoin and blockchain

• are significant disruptive technologies based upon established principles that is likely to impact many fields and society in general

• will evolve and spawn/fork exciting new variations

• provides a powerful development platform comparable to that of the Internet

• will continue to raise non-trivial issues surrounding adoption and regulation

• defines a rich area for innovative research

• requires a new wave of SMEs and developers

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I encourage you to get onboard - your ideas are needed!

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Thank You!Questions? Comments?

Want the slides?

bebo@slac.stanford.edu