"Bitcoin" by dinosaur

what is money?

  • money is something used as a medium of exchange between equal values of work and resources.
    • store of value
    • transaction medium

barter

example: a chicken for a bundle of lumber

limitations

  • both people involved need to have what the other wants
  • absence of common measure of value
  • not all items are divisible
  • perishable items depreciate in value quickly

commodities

allow for single medium of exchange

  • cattle (cows, camels, goats, ...)
  • shells
  • tools
  • tobacco
  • cotton
  • copper
  • silver
  • gold

...

precious metals

preferred because of their physical properties

  • scarce
  • durable
  • divisible
  • has distinct look and sound
  • homogeneous
  • malleable
  • beautiful

paper placeholders

instead of carrying physical commodities, people started using paper notes, token coins, credit cards, and electronic bank accounts to act as placeholders for actual money

fiat value

instead of 1:1 relationship between paper notes and physical commodities, banks began to simply declare by government decree that the paper notes have value.

unbounded supply

fiat money allows banks to create more placeholder money at will.

compare with Bitcoin

mathematically finite money supply

transactional friction

  • high fees, not possible to pay on weekends
  • making payments today requires trusting a 3rd-party
    • bank, credit union, credit card company, ...
  • these 3rd-parties mediate disputes through non-reversible transactions (chargebacks)
    • increases costs and limits minimum transaction size
    • with possibility of reversal, need for trust spreads

compare with Bitcoin

"What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party"
  • irreversible transactions protect merchants from fraud
  • escrow protects buyers

how does Bitcoin work?

Satoshi Nakamoto's original whitepaper

what is a bitcoin?

"We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership."

a bitcoin is defined as a chain of transactions.

double-spend problem

"The problem of course is the payee can't verify that one of the owners did not double-spend the coin."
  • common solution is to introduce a trusted central authority
    • after each transaction, return coin to mint
    • mint checks transaction and issues new coin
    • but then entire money system relies on this central authority...
  • is there a decentralized solution?

timestamp server

"The solution we propose begins with a timestamp server. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash... The timestamp proves that the data must have existed at the time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it."

to prevent double spends, we must know every transaction of every coin.

  • transactions are stored in "blocks"

proof-of-work

"To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system... The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash."
  • generating a valid block requires solving an exponentially difficult computational problem
  • this proof-of-work makes it possible to reach consensus on transaction history
    • consensus is represented by the longest chain of blocks, which has the greatest proof-of-work effort invested in it
    • "one-CPU-one-vote"

decentralized trust

possible to manipulate consensus?

  • to modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes
    • probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added
  • if a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains
  • why would someone want to be an honest node?

incentive to "miners"

"By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them."
  • coins are given to those who "mine" (generate) blocks
  • network periodically updates proof-of-work difficulty to keep rate of blocks roughly constant at 1 block every 10 minutes
  • new coin creation starts at an initial rate of 50 coins per block
    • this rate halves roughly every 210,000 blocks (~4 years)
  • optional transaction fees also incentivize miners

decentralized supply

practical use of Bitcoin

wallets

to start using bitcoin, you need a bitcoin wallet.

fiat => bitcoin

to acquire bitcoins, you need someone willing to trade bitcoins.

bitcoin transactions

high-level recap

  • instant for unconfirmed
  • ~10 minutes per confirmation (block)
  • available 24/7
  • < 1% fees
  • irreversible
  • public to everyone on the blockchain
  • traced to pseudonyms
  • can be truly anonymous with tor and coin mixing services, or proposed zerocoin extension

who accepts bitcoin?

more than you think

misc info

questions?

comments?

find me at https://dinosaur.io

bitcoin:16q9Qm5wpaNmeuFd1UwdsWyJ1ndMPKq5uA

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