bitcoins and cryptocurrencies · blockchain is a 21st-century a transaction ledger – to determine...
TRANSCRIPT
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Requirement: Unlearn many things that you thought you were very certain about.Have an open mind.
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Covered topics
● Bitcoin And Cryptocurrencies
● How Does It Work?
● Introduction To The Economics Of Bitcoin
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Money and Currency
● Something that is generally accepted
● Currency– Store of value: an asset that can be used now or tomorrow
– Unit of account: allows a value to be expressed in an understandable way, and allows value of items to be compared
– Medium of exchange: allows good or services to be traded without barter system
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Crypto Currency
● Cryptocurrency– A digital asset designed to work as a medium of exchange
using cryptography to secure the transactions, & to control the creation of additional units of the currency
– N.B. Does not rely on trust to work; Limited supply
● Virtual Currency (as per BSP Circular 944)– Any type of digital unit that is used as a medium of exchange
or a form of digitally stored value created by agreement within the community of Virtual Currency users.
– Virtual Currencies are not issued nor guaranteed by any jurisdiction and do not have legal tender status.
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Bitcoin
● Releases as open-source software in 2009
● A unit of a cryptocurrency– Peer-to-peer system, without intermediary
– First decentralized digital currency;
others: Litecoin, Ethereum, Monero
– Renders PCI DSS obsolete
– Revolutionary, just like the Internet
or BitTorrent or Wikipedia or Linux
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Bitcoin
● A digital payment system– Open-source design
– World-wide payments
– Cheap processing fees
– Accounting transparency; yet
pseudonymous; Privacy by design
– Transactions are verified by network
nodes; recorded in a public distributed
ledger called blockchain
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General Acceptance
● Merchants– PayPal
– Microsoft
– Dell
– Newegg
– Overstock
– TigerDirect
– Time Inc
– Virgin Galactic
– Sacramento Kings
● Non-Profits– Mozilla Foundation
– Electronic Frontier Foundation
– Greenpeace
– Free Software Foundation
– Against Malaria Foundation
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Bitcoin Value, 201711071 BTC = 1 XBT = US$ 7,424.24 = PhP 380,216.95
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Stock of Narrow Money
PH PesoUS$ 66.03B
BTC or XBT US$ 123.74B= BTC 16,667
Value of total quantity of currency in circulation
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Fiat vs Crypto Currency
● Fiat money– Does not have intrinsic value
– Value comes from being declared as legal tender by the government of the issuing country
– Governments can take it away (e.g. India, 2016)
– Susceptible to inflation (e.g. government prints more)
– Expensive to produce and regulate
– Much easier to steal
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Utility of Bitcoin
● Cheaper remittance fees– No 3rd party intermediary
● Serve those without bank access– ~71M Filipinos (from World
Bank's Global Findex Database)
– Coinciding with National Broadband Plan of DICT
– Anti-poverty tool
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Fundamentals of Bitcoin
● Blockchain– Shared public ledger
– All confirmed transactions are included here and for public viewing
● Address (Wallet)– Stores info / credentials
necessary for transactions
– Similar to bank accounts
● Transactions– Transfer of value between
Bitcoin wallets
– Payee verifies signature to verify chain of ownership
● Mining– Record-keeping service
– Awards Bitcoins and transaction fees to Miner
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Bitcoin Address
3JpQhaaz2CGbtZuz8TyWKq3RCH7AXZ5zC3
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● Can be software, online, or physical XBT wallets
● Stores credentials for Bitcoin holdings– Uses public-key cryptography (ECDSA)
– Stores a collection of public and private keys● Private Key - unsigned 256-bit integer● Public Key - derived from Private Key,
but not in reverse - used to determine if a Signature is authentic
● Signature - proves that a signing
operation took place– 1.461501637×10 possible wallets ⁴⁸
Bitcoin Address
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● Blockchain is a 21st-century a transaction ledger– to determine ownership, establish valuations or delineate liabilities
– to track & chronologically journal any transaction that involves the exchange of value between parties
● whether that value is rooted in monetary funds, stocks, bonds, real estate or commodities such as corn, rice or even pork bellies
– to record birth and death certificates to provide an attestable record of these bookends of life events
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Blockchain
● Decentralized DB
of transactions,
visible to public● 140+ GB now,
growing every 10m● Cryptographic
nature allows for
verified trust, not
inherent trust
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Blockchain vs Bank Ledger
https://www.YouTube.com/user/CuriousInventor
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Transactions
● English: Transfer of value between Bitcoin wallets
● Geek: wallets reassign the Bitcoins, from one owner to another, by adding a transaction to public ledger
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Transaction Process
● To simplify:
1. Payer learns Bitcoin address of Payee (i.e. Public Key)
2. Payer broadcasts to network that he will give Payee, 1 BTC
3. Payer uses own Bitcoin wallet, signing transaction with own
Private Key, then is propagated & validated by the network
4. Miners process the transaction, each verifies intent of Payer
(using his Public Key), & a Confirmation is given after success
5. Updated Blockchain (i.e. public ledger) gets propagated
6. Payee is now assured that Payer has given payment of 1 BTC
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Transactions
● Input: identify Bitcoins are being spent; from Payer
● Output: assigns Bitcoins to new owners; to Payee– Unspent Output: used as Input for future transactions
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Transaction Chain
● Stored history of ownership in a list
● Record of all transactions between different Bitcoin wallets (i.e. Bitcoin addresses) since the beginning– There are no records of Accounts And Balances
– Instead, ownership of funds is verified through links to previous transactions
– Validity of each new transaction is dependent on validity of each previous transaction
● Stored in blockchain
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Transaction
● Each transaction can only be used once as Input– Prevents “double-spending” attack
● Verified by:– checking if Input is from Payor
– funds of Payor are equal or more than the intended payment for Payee
– Input transactions are unspent, or new
– checking the Bitcoin address, or wallet, of Payee
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Transaction Order
● Prevents “double-spending” fraud
● Transactions are grouped together in blocks, then linked together called the Block Chain
● Each block of transactions is a reference to the previous block
● Transactions in each block are considered to have happened in the same time– Transactions not in a block are Unconfirmed, or unordered
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Transaction Order
● Any node on network can collect any set of Unconfirmed transactions, and put them in a block– Then broadcasts this on network as suggestion to be next for
Confirmation, or included in blockchain
● Blocks are not chained by order of time
● Miners calculate new (SHA256) hash values based on combination of previous hash value, the new transaction block, and a random number – Easy to verify, but extremely time-consuming to generate
– A success is called a Confirmation of a transaction block, happens every 10 minutes because of all world computers
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Transaction Fees
● Fees: optional, but note that Miners can prioritize transactions that pay higher fees– better payout than Money Market!
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Unit Of Account
● Bitcoin: Symbol can be BTC, or XBT, or
● Satoshi: smallest amount, 0.00000001 BTC
● mBTC: 0.001 BTC
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Bitcoin Mining
● Bitcoins are rewarded to Miners every time they find a new block (with proof-of-work)
● Total amount to be mined is only 21,000,000 coins
● Record-keeping service
● Maintains consistency of blockchain, complete, and tamper proof
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Supply
● A successful Miner finding the new block is rewarded with new Bitcoins and transaction fees– Rewards get harder to get every 210,000 blocks, or 4 years
– Estimated that by year 2140, all 21 million BTCs are mined● Satoshi Nakamoto set monetary policy to be based on scarcity
● Coinbase transaction– First transaction in a block, always created by a Miner
– All BTCs started in a coinbase transaction
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Bitcoin Mining Pools
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Bitcoin Mining Pools
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Ownership
● Bitcoin users can spend funds associated with a specific Bitcoin wallet– Payer must digitally sign a transaction using his Private Key
– The network verifies the signature of Payer using the Payer's Public Key
● Loss of Private Key, means loss of ownership– Payer can only accept funds, but not spend it, ever.
– Loss can be due to irrecoverable password, forgotten wallets, damaged hard disk drive or USB flash drive, or death of person
– Computationally improbable, or effectively impossible,to recover lost Private Keys
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Ownership
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Privacy
● Bitcoins are pseudonymous– Bitcoin owners are not explicitly identified, but all transactions
on the blockchain are public
– Regulators can unveil Bitcoin wallet owners through KYC controls
– Transactions that spend coins from multiple inputs may indicate one owner
● Privacy is increased by generating new Bitcoin address for each transaction
● Mixers aggregate multiple Bitcoins and output to new addresses increase privacy
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Governance
● Originally led by Satoshi Nakamoto, then Gavin Andresen, then Bitcoin Core for the reference implementation– Proposed various governance and blocksize standard
alternatives are Bitcoin XT, Bitcoin Classic, and Bitcoin Unlimited
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Buying and Selling
● https://www.BloomRemit.net
● https://www.BuyBitcoin.ph
● https://CoinATMradar.com/bitcoin_atm/475/bitcoin-atm-genesis-coin-makati-sunette-towers/
● https://www.Coins.ph
● https://LocalBitcoins.com
● https://www.Rebit.ph
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Pricing
● Determined by the market in which it trades– Supply versus demand
– Traded like ForEx, or commodities
● Crypto currency trading platforms– https://www.Bitfinex.com
– https://www.Bitstamp.net
– https://CEX.IO
– https://www.Coinbase.com
– https://www.itBit.com/
– https://www.Luno.com
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PH Regulation for Bitcoin
● BSP Circular 649 (E-Money)– Also dated 2009, just like start of Bitcoin
– Differentiated against crypto currencies
● BSP Circular 944 (Virtual Currency Exchanges)– Dated 06 February 2017 (Monday)
– Doesn't endorse Bitcoin as currency
– Regulates Virtual Currency when used for delivery of financial services, particularly payments and remittances
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Bitcoin
LAGGUI AND ASSOCIATES, INC.
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PH Regulation for Bitcoin
● BSP Circular 944 (Virtual Currency Exchanges)– Very welcome development
– Impact is yet to be understood, as everyone, including a regular person, is to be treated as a remittance company
● Brings to mind fees to be paid, as well as controls required, reporting requirements
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Exercise: Create BTC Wallet
https://Coins.PH/invite/nzvlpk
● Receive Bitcoin, now