Bitcoin presentation

Understanding Bitcoin

Francis Pouliot Co-founder of Satoshi Counter, physical Bitcoin exchange and brokerage office

Co-founder and CEO of Satoshi Portal, online cryptocurrency financial services and software

Director of Public Affairs at the Bitcoin Embassy, advocacy and education

President of the Bitcoin Foundation Canada, lobbying and industry relations

and rethinking money

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Cryptography

Money?

Peer-to-peer networking

Computer protocols

Distributed computing

Cryptocurrency… what?« Isin’t that the thing they use on Silk Road? Can’t be, it went bankrup after its CEO died like 2 years ago »

Tearing down the old, rebuilding the newWriting a new chapter in the history of money

Asking questions about the status quo

Offering an alternative to status quo(without compromising on the modern standards of living of a free-market economy)

What’s the point?Observation 1

« In any monetary or financial system, certain tasks need to becompleted for the system to work »

1. Keeping track of assets: being able to associate assets to people- Performed mostly by banks and various financial institutions via private ledgers

2. Safeguarding assets: making sure that only rightful owners can access the assets- Performed banks, payment processors (like Visa), numerous middle-men

3. Clearing and settlement: ensuring the exchange of funds between parties- They are middlemen between banks and financial institutions

4. Processing payments: coordinating transfer of funds between people and businesses- Credit and debit cards (Interac, Visa)

5. Issuing money and preventing counterfitting: creating the units that will be used as medium of exchange- Created by private banks, central banks (private and public)

What’s the point?Observation 2

« All these tasks are centralized in the hands of a few middlemen »

Disproportionate power over our lives

Cannot be bypassed to secure wealth

Too big to fail

We are their clients – we pay them!

Highly inefficiant

Central points of failures

Absolute control over all transactions

*

Access to our information

Can be censored at any time

Supported by governments – influences governments

What’s the point?Observation 3

« Money creation is forbidden knowledge »

Some facts about money• All fiat money is created by debt• 97% of money is created by banks• Money is only backed by:

- Ability to repay loan (revenue)- Enforcing demand

• Not enough « real » money to repay loans• Continuous inflation is not natural• A « for-profit » system• Recent trends are radical modern experiments

- Interest rates at zero, never been done before- Quantitative easing

A crucial premise of economics is wrong« Banks do not simply act as intermediaries betwensavers and borrowers. They create money and usesavers’ deposits as leverage, making a profit. »

Ambiguous ownershipThe monetary system is so complex and rules change so often,that it is not at all clear how ownership of money is established.

See: Greece, Cyprus

Money creation in the USA – long story short

To infinity and beyond!

Quantitative easingBank bail-outs

John Maynard Keynes « By continuing a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens »

Fiat money: a system based on trust

Why do you accept paper as a paycheck?You trust it will be accepted and it will have value

Why does it have value?It is useful because it will be accepted for goods

------14 % People who trust their govermentsSource: Edelman 2014

Technology

“Bitcoin is a collection of concepts and technologies that form the basis of a decentralized transaction network and monetary system”

•The bitcoin protocol: decentralized peer-to-peer network

•The blockchain: public transaction ledger

•Distributed mining: decentralized mathematical currency issuance

•Transaction script: decentralized transaction verification system

Some important concepts

•Electronic cash: “anonymous” push-payment mechanism

•Incentive strucutre: all behavior is voluntary, no action is coherced

•Distributed consensus / crypto-economics: proof-of-work

•Smart contracts: self-enforcing and programmable

Technology = transaction network = currency

Satoshi Nakamoto and the origins of Bitcoin

Two persons may exchange messages, conduct business, and negotiate electronic contracts without ever knowing the TrueName, or legal identity, of the other (…) The methods are based upon public-key encryption, zero-knowledge interactiveproof systems, and various software protocols for interaction, authentication, and verification (…) the next ten years willbring enough additional (computer) speed to make the ideas economically feasible and essentially unstoppable.– Timothy C. May, 1992

Understanding Bitcoin

Open-source software

• Not « owned » by anyone• All code is public• Anybody can participate in upgrades• Who is Satoshi? Doesn’t matter!

Understanding Bitcoin

Bitcoin: a peer-to-peer network architecture on top of the Internet.

Peer-to-peer Client-server

• Open to any participant• All participants are:

- Consumers of ressources- Creators of ressources

• All participants are « equal »• Tasks required for the network are fulfilled

collectively by participants• Participants coordinated without central entity,

but with a protocol and set of rules they agree upon• To become a participant: download the software

Understanding Bitcoin

Understanding Bitcoin

What does this mean?

1. Broadcasting transactions2. Validation transactions

(authentification)3. Timestamping transactions

into the blockchain (mining)4. Creating new bitcoins (mining) 5. Storing the database of transactions

(the blockchain)

Functions of the participants

1. All tasks are performed collectivelyby the network

2. There is no central authority3. There is redenduancy4. Efficiancy is optimal5. Participants are coordinated by voluntarily

following a set up rules because it is in theirself-interest to do so

Understanding Bitcoin

Understanding Bitcoin

Math is crucial!

Public key cryptography

• Branch of mathematics developped mostly since the 1970’s

• Type of algorythm consisting of a public key and private key (pieces of data)

• Private keys are randomly generated

• Private keys and public keys are mathematically linked

- Public keys are derived from private keys

- Messages (including transactions) can be broadcast from public keys

- Messages (including transactions) can be signed by private keys

- Anybody can verify that a message broadcast from a public key was signed by someone in posession of the private key without knowledge of the private key

• Public keys are used to encrypt messages and verify digital signatures

• Private keys are used to decrypt messages or perform digital signatures

Why is math important?

Understanding Bitcoin

Applications that allow people to interac over the Bitcoin network

Understanding BitcoinBitcoin wallet software

They are « key chains »: they manage pairs of public and private keys-Exemple of Bitcoin address : 1HAtLEmtudEZy6SP6hLoGRSQCCTCa9ySAT-Exemple of private key : 5KGks44v4oyBeFhjpK8v3A6dA8MLJL5KPCoKgYzKMxm3P6rkWiJThey can generate private keysThey can construct transactionsThey can use private keys to sign transactionsThey can broadcast transactions to the networkThey can consult the blockchain to obtain balances

Understanding BitcoinThe Blockchain

• A registry (ledger) that contains the entire transaction log• It contains all the Bitcoin addresses and their balances• It is hosted on the computers of all the participants• It is 100% public and searcheable

Step-by-step

• User selects and amount and specifies a destination address

• The wallet will transform this data into a « transaction message» using the Bitcoin protocol’s specific transaction script

• The wallet will sign the transaction with the private key

• The wallet will broadcast the transaciont to all the other nodes

• The other nodes will verify the transaction

• If valid, the other nodes will propagate the transaction

• Each node updates its copy of the blockchain to reflect the transaction

Understanding BitcoinBitcoin transactions and the Blockchain

What’s the point?Observation 2

« All these tasks are centralized in the hands of a few middlemen »

Understanding BitcoinBitcoin transactions and the Blockchain

Understanding BitcoinWhat problem does the blockchain solve?

the Byzantine General’s problem, is

a thought experiment meant to illustrate

the pitfalls and design challenges of

attempting to coordinate an action by

communicating over an unreliable link.

• Type of algorithm which will create a random « digest » from a data input

• Any modification of input leads to randomchanges in the digest

• Impossible to reconstruct input from thedigest, so it’s a « one-way » function

• The one in questions is SHA-256

Understanding BitcoinCryptographic hash functions and Mining

Objective: establish consensus on the content on the blockchain (one « master » copy of the blockchain)

Concept: miners will permanently record « blocks » of transactions into the blockchain

How it works:

- Miners will collect transacitons broadcasted into the Bitcoin Network

- They group these transactions in « blocks » which include other data such as the previous block’s « hash value » and a random number (nonce)

- They apply a cryptographic hash function on these blocks of transactions

- They are trying to randomly find a specific value using these inputs of data (e.g., solve a math question)

For example: they are trying to find a number which is 256 numbers long and which starts with 20 consecutive zeroes

- Once a miner finds this number, he will broadcast his finding to the entire network

- The peers in the network will recognize his finding as valid by checking the hash value against the input

- The other miners will use this hash value as the starting point in the next block of transactions ans start mining the new block ASAP. The transactions included in the block which was « solved » by the miner are included in the blockchain.

The blockchain’s golden rule: the longest chain is the valid chain, since it is the one which has the longest « proof-of-work »

In order to cheat honest miners, bad actors would need to provide more « proof-of-work » than the rest of the network

Understanding BitcoinMining

Mining is difficult and expensive. So why do it?

• A miner which « solves » a Block of transactions is, according to the rules of Bitcoin, entitled to a reward of bitcoins that the entire network will recognize as beingrightfully his.

• This reward is thus introduced in the Bitcoin economy as new monteray units, whichinflate the total supply of bitcoins in the system.

• Since the likelihood of solving a block is proportional to the efforts of the miner, the new monetary units are distributed in an objective, just and efficient manner.

• Satoshi Nakamoto: « 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. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended»

Understanding BitcoinMining reward

… hence the name « Blockchain »

Understanding BitcoinMining economics

Understanding BitcoinMining economics

What is the value of Bitcoin?

Where do we go from here?Rebooting the financial industry

Where do we go from here?Where can’t we do?

Smart contractsDecentralized e-commerce platformsInstant settlement betweenfinancial institutions

Global remittance networkDecentralize autonomous corporationsP2P data trading + mesh networkingBitTorrent + BitcoinPeer-to-peer lendingReplace likes with tips

Make people pay for upvotes and downvotes

Cryptographic assets and cryptopropertyMicropayment chanelsEquity crowdfundingMachine-to-machine payments

Smart IoT integrationPrediction marketsToken-based voting and liquid democracyDecentralized notariesDigital wills

When no permission isrequired to innovate and the

technology works, imagination is the only limit

Buy and Sell BitcoinsSatoshicounter.com

Pay all your bills with BitcoinBylls.com

Bitcoinembassy.ca

Questions?