Bitcoin and Blockchain Technology An Introduction

Ferdinando M. Ametrano

Gruppo Giovani Imprenditori, Unione Industriali Pordenone, December 5, 2016

ferdinando@ametrano.net

https://twitter.com/Ferdinando1970

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The Information Economy

• Data is transferred with zero marginal cost

• Why pay a fee to move bytes representing wealth?

• Why only 9-5, Monday-Friday?

• Who (and when) will gift humanity with a global instantaneous free p2p payment network?

BANK

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• Decentralized digital currency • Not backed by any government or organization • Instantaneous peer-to-peer transactions • No need for trusted third party • Cryptographic security • Low-cost banking for everybody everywhere

https://bitcoin.org/en/faq http://www.coindesk.com/information/

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Bitcoin: Money For The Information Economy

• Decentralized: no authority • Permissionless: no regulator • Censorship resistant: no frozen funds • Open-access: no discrimination, no amount limits, 24/7, 365 days • Free: negligible transaction costs • Borderless: no geographic limits • Transnational: no specific jurisdiction applies • Secure: non falsifiable, non repudiable transactions • Resilient: nothing has been able to stop it or break it

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Investment Landscape

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A Blockchain Transaction https://blockchain.info/tx/8f1d3a8ef6b2d4a25d2f499279e01518b4770819ccbc39a765c4c326170c61b3

About $83M transacted with $0.04 fee

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Bitcoin Economy http://bitcoincharts.com/charts/bitstampUSD#tgWzm1g10zm2g25zv

• Total number of BTC is about 14M

• BTC Market Cap: about $3-14B (USD M0 is about $1,200B)

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October 2013: Silk Road Shut-down • Online market, operated as a Tor hidden service • Online users were able to buy illicit goodies using bitcoins,

while browsing it anonymously and securely without potential traffic monitoring

• Launched in February 2011, shut down in October 2013 • Ross William Ulbricht, alleged to be the owner of Silk Road,

arrested in San Francisco, sentenced to life in prison • Other black markets have filled in as successors

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December 2013: China Crackdown • People’s Bank of China crackdown:

– prohibits financial institutions from trading, underwriting, or offering insurance in bitcoins or any other digital currency

– Bitcoin is not to be considered a currency – owning bitcoins is not outlawed or prohibited

• As of December 2013 BTC China was world's largest Bitcoin exchange by volume

• Alibaba, China's top Internet retailer, stopped using bitcoins as of January 19 2014

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February 2014: Mt Gox Bankruptcy • As of January 2014 Mt Gox was world's largest Bitcoin

exchange by volume • In February 2014 it filed for bankruptcy protection

from creditors • It announced that around 850,000 bitcoins belonging

to customers and the company were missing and likely stolen, an amount valued at more than $450 million at the time

• Fraud or theft?

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Bitcoin resilience • Is there anything else in financial world: • Just 7 years old • Without government or corporation backing • That can lose its main (China) market • With fraud/theft at its main reference exchange (Mt

Gox) • With such a bad reputation (Silk Road) • That could be still alive and kicking?

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The announcement From: Satoshi Nakamoto <satoshi <at> vistomail.com> Subject: Bitcoin P2P e-cash paper Newsgroups: gmane.comp.encryption.general Date: 2008-10-31 18:10:00 GMT

I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. The paper is available at: http://www.bitcoin.org/bitcoin.pdf The main properties: Double-spending is prevented with a peer-to-peer network. No mint or other trusted parties. Participants can be anonymous. New coins are made from Hashcash style proof-of-work. The proof-of-work for new coin generation also powers the network to prevent double-spending.

Bitcoin: A Peer-to-Peer Electronic Cash System Abstract. A purely peer-to-peer version of electronic cash […]

Satoshi Nakamoto --------------------------------------- The Cryptography Mailing List 12/27

Satoshi Nakamoto • Unknown identity: pseudonymous person or group? • Worked on Bitcoin since probably 2007 • Published the paper in 2008 • Released the code in January 2009 • Stopped involvement mid-2010 • Entrusted the project and a copy of the alert key to Gavin Andresen,

effectively his successor • He owns about 1M bitcoins, never spent

http://mag.newsweek.com/2014/03/14/bitcoin-satoshi-nakamoto.html https://www.wired.com/2016/05/craig-wright-privately-proved-hes-bitcoins-creator/

http://www.bbc.com/news/technology-36168863

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Bitcoin: a currency and a protocol • Bitcoin: protocol, software, and community • bitcoins: units of the currency

bitcoins are sent using Bitcoin

• bitcoins are the first powerful protocol application: a digital property created inside the Bitcoin protocol

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Bitcoin the protocol • Distributed public ledger of transactions: • shared with peer-to-peer technology • allows to transfer a unique digital token • the token can be exchanged, but not duplicated • keeps records of each and every transaction forever

• It can replace any processing central authority • with decentralized peer-to-peer cryptographically secure

equivalent

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The bitcoin currency • Not to be found anywhere, they only exist as public ledger documented

transactions • A bitcoin wallet is a public address • 1FEz167JCVgBvhJBahpzmrsTNewhiwgWVG

• the bitcoin public ledger (aka blockchain) certifies for everybody how many bitcoins are associated to the wallet

http://blockexplorer.com/address/1FEz167JCVgBvhJBahpzmrsTNewhiwgWVG

It is mine; you are REALLY

encouraged to tip

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Pseudonymity, Anonymity • Bitcoin is really pseudonymous, not anonymous: • The public key does not provide direct information about

the private key owner • All transactions are transparent to everybody’s inspection. • Perfect persistent public account history: the public ledger

is forever

https://blockchain.info/ http://blockexplorer.com/

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Bitcoin’s public ledger: the block chain

• Transactions are bundled in blocks, sequentially chained, about one block every 10 minutes

• The block chain is a history of transactions resilient to network attackers

• The cryptographic link between blocks requires large amount of computing power, so the block chain cannot be altered without huge resources

• Computing power is measured in hash/s, hash being the basic operation needed for validation

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Network hash rate Specialized non-generic hardware, with hashing capacity thousands times that of the combined 500 largest supercomputers

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Mining • Miners are the nodes of the network providing the computing

power for: – processing and validating transactions (avoiding double spending) – securing the network – synchronizing the nodes

• Miners compete to process a new block of transactions. The winner provides a proof-of-work and is rewarded with the issue of new bitcoins.

• Seigniorage revenues subsidize the network, making transaction almost free

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Validation Process: Block Generation The proof-of-work difficulty is adapted to the overall available computing power to ensure an average of one block every ten minutes

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Bitcoin Monetary Rule

• 2009: 50BTC every 10 minutes – halving every 4Y

• This is the only way new bitcoins are released

• It is called mining because of its similarity with the progressive scarcity of gold extraction

digital cash supply free of discretionary intervention

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Inelastic Money Supply Deterministic Decreasing Rate

2029: issued

96.88% of all BTC

2141: issued last

0.00000001 BTC

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Bitcoin as (Digital) Gold in the History of (Crypto)Money

gold • Its adoption was not centrally

planned

• For centuries it has been the most successful form of money

• It has bootstrapped all monetary systems we know of

• It has been surpassed by other kind of money without becoming obsolete

bitcoin • Its adoption has not been

centrally planned • It is the most successful form of

cryptocurrency • It will bootstrap new monetary

systems • It might be surpassed by more

advanced type of cryptocurrencies without becoming obsolete

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Friedrich August von Hayek - Denationalisation of Money

• history of coinage is an almost uninterrupted story of debasements; history is largely a history of inflation engineered by governments for their gain

• why government monopoly of the provision of money is regarded as indispensable? It deprived public of the opportunity to discover and use a better reliable money

Blessed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their

own interest

A Free-Market Monetary System, Gold and Monetary Conference, New Orleans, Nov. 1977, https://mises.org/daily/3204

Hayek, F. A., Denationalisation of Money, The Institute of Economic Affairs,http://www.mises.org/books/denationalisation.pdf

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Explain Money To An Alien fiat money

• No intrinsic value (legal tender, social contract)

• Currency based on paper/ink security

• Discretionary governance

• Wicksellian interest-rate approach

bitcoin

• No intrinsic value (digital gold)

• Currency based on math/cryptographic security

• Algorithmic governance

• Deterministic supply

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Bibliography • https://www.youtube.com/watch?v=Gc2en3nHxA4&hl=it&fs=1 • Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”

(2008). https://bitcoin.org/bitcoin.pdf

• Ferdinando M. Ametrano, “Hayek Money: The Cryptocurrency Price Stability Solution” (2014). Chapters 1, 2, and 3. http://ssrn.com/abstract=2425270

• Alla scoperta del Bitcoin https://www.youtube.com/watch?v=3UzHB8EfqWk&list=PLrVvuryXHYTfX6dg884fSGYLbLJgX6vAQ&index=1

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