1. Cryptography Project David B. Robins March 2011

2. What are some desirable qualities? What should be used? 1.Portability 2.Durability 3.Fungibility/homogeneity 4.Divisibility 5.Anonymity 6.Rarity 7.Recognition Facilitates trade between people: eliminates barter. Store of durable value. What is currency?

3. Rare metals, minted into coins, fit the requirements But people don’t want to carry them around: paper notes invented -Precious metals and commodities stored in vaults; bearer certificates -Japanese stock trading starts with rice coupons Unfortunately, that’s not quite the end of the story. What is currency?

4. Governments decreed that only their notes be accepted as money Then they decided to stop redeeming them for silver or gold What is currency? http://www.schizoidboy.com/us-dollar-purchasing-power.html

5. Cost of physical cash: $60 billion/year in the US to move it Credit/debit cards lack anonymity Desire for a lack of central control – distributed system -Protects against political turmoil Inflation Confiscation Why digital currency?

6. DigiCash Founded by Chaum in 1980; emphasis on privacy Sold the system to several businesses and agencies in Netherlands CyberCash Founded by creators of Verifone credit card transaction system Claimed cracked by Russian hacker; Y2K bug; bankrupt 2001 Peppercoin Developed by Micali and Rivest Saw modest adoption; some technology found its way to PayPal Digital stores for and methods for trading existing state currencies Transferred existing currency; not new currencies in their own right Early attempts

7. (Or saw limited success.) People weren’t as concerned with security as digital currency folk thought They give their card to a waiter to take away; why not over the Internet? Not worried who has their card number in a database, just use Credit card companies’ chargebacks alleviate most concerns (social) Why they failed

8. Bitcoin Developed by Satoshi Nakamoto in 2009 “Bitcoin: A Peer-to-Peer Electronic Cash System” How does it work? What are the cryptographic protocols used? How do they secure it? Does it meet the requirements for currency? Recall the 7 listed earlier Why use it – does it add anything over existing forms? What’s the market like? Liquidity Volume

9. Definitions: Coin: a Bitcoin, worth approximately 1 USD lately. Abbreviated BTC or bc, e.g., 50 bc, 200 BTC. Identity: public and private key (ECDSA) used by owner to sign transactions. A single person may have multiple sets of these – one for each coin if they like. There is no link back to a name or other personally identifiable information (PII), although someone could use a digital signature to verify ownership of a particular Bitcoins (e.g., to show assets if requesting a loan). Transaction: transfer of one or more coins or parts thereof between identities using the Bitcoin protocol. Block: a series of transactions (not necessarily involving the same coins), verified with a hash that combines the block’s transactions and the previous block to create a chain. How do they work?

10. Transactions chained in the block chain: How do they work? (From “Bitcoin: A Peer-to-Peer Electronic Cash System”)

11. A “full” block must be hashed to add it to the shared chain (SHA-256) The hash must have a certain number of leading zero bits Accomplished by varying a nonce, a large integer within the block Believed to be computationally difficult Difficulty can be varied with computing power by increasing # of zeroes First successful user to find this value receives 50 bc Created by first transaction in the block being hashed This value is halved every 210,000 bc Referred to as “mining” Bitcoins: proof of work, like mining gold If there’s a tie, “longest chain wins” Nodes hold both; the chain the next block is added to becomes primary Space isn’t a problem: block chain grows by ~4.2M/year How do they work?

12. Multiplatform client: connects to network, finds (“mines”) coins

13. “Cryptocurrency” – store of value on its own How does it fit our requirements for currency? 1.Portability – carry on a USB key, phone, etc. 2.Durability – make all the backups you want; encrypt 3.Fungibility/homogeneity – one coin spends like any other 4.Divisibility – down to 8 decimal digits (currently 2 used) 5.Anonymity – create as many identities as you want 6.Rarity – hard to “mine” due to computational difficulty, which can be adjusted as necessary 7.Recognition – cryptographic verification using hashes and public keys It is “backed” by those willing to accept it, like fiat currencies. Bitcoin

14. And adds: 8.Decentralized – less susceptible to political whim or turmoil 9.Secure – hide private keys and even owner can’t give it up But requires some computational ability and (eventual, at least) network access. This access could be blocked – if the network is not public, its purpose is weakened How is double-spending countered? “A computer is a machine for copying bits; if your business model depends on preventing bits from being copied, you’re gonna die.” —Cory Doctorow/Kevin Carson Fortunately, it doesn’t: low-hashed block chain and signed transactions Paper demonstrates that the probability of being able to create a false block chain to double-spend becomes infinitesimal with only a few more blocks added Bitcoin

15. Easier to carry thanLess inflationary than “You only really own those things you can carry under both arms at a dead run.” —Robert A. Heinlein Since inception, they’ve gone from around $0.05 to about $1 (USD) Number of Bitcoins will be limited to close to 21 million Creation is at a known and steady rate (6 blocks/hour = 300 bc/hour) Why digital currency?

16. At time of writing: 113655 blocks 5.68 million BTC (worth ~$5M) Volume around 10k BTCs daily, some spikes around 60k (i.e., ~$10k/day) This is relatively illiquid: Compare: MSFT typically trades few 100k shares/day or ~$4M/day And the state currency market is huge About 10 places to trade Bitcoins for USD now Maybe 200 places that take them directly, and more will take donations The market

17. Confidence and use increasing Settling at almost par with USD The market

18. Definitely a consideration for diversifying a portfolio But don’t expect you can be paid in Bitcoins just yet … Or use them at the supermarket Cryptographically, the protocol is future-proof: Allows for changing hash algorithm (e.g., if SHA-256 was broken) The author did consider it and build it in But may require network freeze and software upgrade Number of zeroes in required hash increased with processing power Increased adoption and use; eventual “critical mass”? The future