What is BITCOIN?

 

Internet-Money


Max Kaye

What does money do?



  • Medium of Exchange

  • Store of Value

  • Unit of Account

Medium of exchange


"I can give Alice some value."


Alice --(house)--> Max

Max --(money)--> Alice


Alice --(money)--> Bob

Bob --(apples)--> Alice


Store of value


"I can hold it and it doesn't go away."

Alice --(house)--> Max

Max --(money)--> Alice


Alice --(money)--> Bob

Bob --(apples)--> Alice


Unit of account


"I can price both houses and apples"


Alice --(house)--> Max

Max --(money)--> Alice


Alice --(money)--> Bob

Bob --(apples)--> Alice

Properties OF Money


  • Fungible (units are alike)

  • Divisible (can represent big or small values)

  • Portable

  • Durable 

  • Recognisable

  • Scarce

  • Non-consumable

Money is an agreement



Australian Dollar → Legal Foundation


Bitcoin → Mathematical Foundation


Both Money

What is BitcoIN?

3-and-a-bit answers:


  • The 'coin' - economic (abstract)

  • The network - software/hardware (implementation)

  • The protocol - data structure (theoretical)

  • The network (again)

Economics - The Bitcoin

Exchange Rate



Currently: ~$590 USD


Doubling time: ~4 months



(August 2014)

Payment Processor Comparisons


Name Volume # Transactions
Western Union 4x 10x
Paypal 10x 100x
Visa 300x 3000x


Doubling time (# transactions):
~11 months

(August 2014)

Merchants

Name # Merchants
Bitpay 35,000+
Coinbase 35,000+

Doubling Time: ~5-6 months 

New Adopters:


(August 2014)

Users



Name # Users
Blockchain 2,000,000
Coinbase 1,500,000


Doubling Time: ~6 months


(August 2014)

SOFTWARE & Hardware - The Network


Demo Transaction


  • Addresses and Wallets

  • Transactions

  • Double Spends

  • Global Tx Ledger

Addresses


An address looks like 157AGN5ztnE8ZXZFDX6iaAiHptWBvNFrSa


A wallet is a collection of addresses

Privacy comes from
using unique addresses
for every transaction

Transactions


Simply a description, not a movement


"Bob sends 9.95000000 XBT to Alice"


... with addresses:

1PGo2Yx9FSNAUqLGhBZijeCoyrLRsPtrY4
sends 9.95000000 XBT to
1NFdNzV9R8YfVV3ferjpRywZkfcXy783pj 

Double Spends


If transactions are just descriptions...

Why can't I lie?

Blockchain - Global Ledger


Answer:

Everyone knows EVERY transaction


Updated (approximately) every 10 minutes with a new 'block'


(block: a list of transactions)


PROTOCOL


Data Structures:

  • Transactions

  • Blocks

  • The Blockchain

Transactions





Next: Send to self and split three ways

TRANSACTIONS





Next: Send to Alice

Transactions


Blocks


Contain a list of transactions

(and a little metadata)


Also require a special
'coinbase' transaction


This is how new coins are introduced

The Blockchain

Proof of work

Idea:

  • try one thing

  • many times

  • until a 'special' solution is found


Because the solution is random,
if a 'special' solution can be found,
the number of attempts can be estimated.

The Blockchain

Proof of Work


Each block has a proof of work attached

(dependant on the contents of that block)


Quick to validate

Hard to generate

No Short-cuts

The Blockchain

Each block points to the previous block

Which creates a chain:

... ← b30 ← b31 ← b32 ← b33 ← b34 ← ... ← b315300


Able to estimate how many attempts
in the ENTIRE chain


Consensus rule:
pick the chain with the most attempts

The Blockchain


Self regulating production time


Constant production rate
(predictable inflation)


Set the number of attempts needed
via the 'difficulty'

Back to the network


(Time for game theory)

Network - Miners (Auditors)




Low difficulty / high price creates profit potential

More miners

Faster blocks

Difficulty increase

Profit potential decreases

Network - Miners (Auditors)

Bitcoin reward and price at equilibrium

Price increase

Higher profit potential from mining

More miners

Reward and price at new equilibrium

Network - Miners (Auditors)


No profit potential with current hardware

Design & produce new custom hardware

More attempts for same cost

New profit potential

Network - Miners (Auditors)


Approaching current limits of technology

Cannot make smaller, faster chips

Market will respond by making chips cheaper and more accessible

Difficulty Reaction


Date Difficulty
May 2013 12 million
August 2014 19 billion

Doubling Period: ~1.5 months

Difficulty and Hashrate (linear)

Difficulty and Hashrate (Log)

Comparison (For Sha256)


10 THash/s for $10,000

Equivalent to 25,000 GPUs


$10,000 buys you:

S1: 500,000 word dictionary with 2,000 permutations per word

S2: All 10 character alpha-numeric combinations

Medium S1 S2
GPU 0.15s 1,200 days
ASIC 0.0001s 0.97 days

Thanks

Questions

bitcoin-intro-internet-money

By Max Kaye

bitcoin-intro-internet-money

A brief intro to bitcoin

  • 1,220