Coin Center Director of Research, Peter Van Valkenburgh, discusses Bitcoin at the EU Parliament Science and Technology Options Assessment Meeting Jan 25, 2015
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Please visit us at
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full access to our
research.
4. Bitcoin: Network and Asset
Bitcoin is both a network protocol and a new
scarce asset that can be ‘owned.’
qua network
Bitcoin
qua asset
bitcoin
5. Bitcoin: Network
Like the Internet there is no single institution or company
that controls bitcoin. It is made up of several thousand
computers working
together and speaking the same
language or “protocol.”
6. Bitcoin: Network
Individuals or companies can join the network merely by
running free software on an Internet-connected machine.
7. Bitcoin: Network
There is are many versions of Bitcoin software, however a
group of developers, called “core devs,” build and maintain
a “reference client.”
Lead core dev,
Gavin Andresen
8. Bitcoin: Network
Anyone can build their own software based on the
reference client, and as long as it follows certain
“consensus rules” it will be compatible
with the larger Bitcoin network.
9. Bitcoin: Asset
A bitcoin is a chain of digital signatures stored in a public
ledger called the blockchain. One owns a bitcoin rather like
one owns a house.
10. The ‘owner’ of the house is whoever is
listed on the final deed in a chain of
deeds held by a public registry.
That person can sign her deed over to
someone else, transferring ownership.
11. The ‘owner’ of a bitcoin is whoever is referenced, by a pseudonym, in
the most recent digital signature in a chain of signatures.
These signatures are held in a public ledger, called the blockchain.
That person is the only person who can sign her bitcoin over to
someone else, transferring ownership. The network would reject any
other signature because it would violate the software’s consensus
rules.
13. How the ledger, or blockchain is created and updated.
Special members of the network, called miners, compete to solve a
difficult but open ended math problem. Think of it like a bunch of
schoolkids racing to see who can be the first to flip a coin heads-up
ten times in a row.
14. The first one to solve the problem can write a new block in the
blockchain, recording all of the transfers that were requested of the
miner in the last ~10 minutes. As a reward, they can also write a
transaction to themselves for 25 new bitcoins.
A3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
How the ledger, or blockchain is created and updated.
15. How does the network agree?
When a miner announces to the network that she solved a block,
the other miners check to see if it is “valid” according to the
consensus rules of the software.
A3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
Did these addresses have enough Bitcoin to fund the transfer?
Did the miner give herself the appropriate reward?
16. What happens next?
If the block looks good, miners will begin working on solving the next block (so that
they can get the next reward). The next block is built on top of the last one by
incorporating it, as an input, into the next math problem to be solved. This is why the
ledger is called the blockchain.
G3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
A3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
43R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
H3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
17. Why is this secure?
Recall that solving one block was difficult, like flipping a coin and it landing on heads 10 times in
a row. Therefore for a person to try and rewrite the transaction history going back 10 blocks
they’d have flip a coin heads-up 100 times. The odds are so bad, that it’s effectively impossible.
This means that a transaction recorded more than a few blocks back is indelible.
G3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
A3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
43R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
H3R34AF sent 4 bitcoins to SF345L
FS399G0 sent 2 bitcoins to 39VB09
CI6LE863 sent 3 bitcoins to MD39N3
Winner of this block sends 25 bitcoins to
himself, VV1658D
18. One can interact with the bitcoin network with
local software, or through a business that
specializes in:
Bitcoin Businesses
Storing and Securing
Your Bitcoins.
Converting fiat currency into
bitcoins and vice versa.
Helping Merchants accept
Bitcoin as payment.
19. Only need:
Free software.
Internet connection.
Why is Bitcoin useful?
Any other form of electronic money transfer involves trusted intermediaries. For the transfer to work,
both parties must have a relationship with the same intermediary, or multiple intermediaries must
have relationships with each other. Any of those intermediaries may charge fees.
Bitcoin works even for those who don’t have access to a banking relationship. Also, with no
intermediaries fees are lower.
20. Why this useful: Remittances
“The current fee charged by the Bitcoin network can be as little
as zero, but also has a fixed maximum fee of 0.0001 bitcoin per
transaction, or about 4 US cents. With smartphones in emerging
markets selling for as little as $35 US, this means that even very
poor citizens in developing nations can receive bitcoins directly
from their relatives working abroad without paying the fees
associated with traditional money transmitter businesses.”
Attorney and Coin Center Contributor Brock Cusick
21. Why this useful: ID Theft.
“By substantially reducing the number of parties that the
consumer must trust, Bitcoin can mitigate the danger of identity
theft and fraudulent charges.”
Executive Architect for Innovation at IBM UK and Coin Center
Contributor Richard Gendal Brown
22. Why this useful: Smart Contracts
“By using a smart contract, parties commit themselves to be bound
by the rules and determinations of the underlying code. Doing so in
principle removes the potential for parties to have a dispute: both
parties are held to whatever outcome the smart contract determines.
In his seminal 1997 article, legal scholar and technologist Nick
Szabo described what may happen to someone that breaches a smart
car lease: ‘if the owner fails to make payments, the smart contract
invokes the lien protocol, which [automatically] returns control of
the car keys to the bank.’”
Professor of law at NYLS and Coin Center Fellow Houman Shadab
23. ● Licensing
● AML / KYC
● Consumer Protection
● Securities Law
Regulatory Issues
24. ● In countries and states where money
services businesses must be licensed. Do
bitcoin businesses need a license?
● What about non-financial uses of Bitcoin?
Licensing
25. ● Is Bitcoin anonymous? Not really.
● How can Bitcoin businesses fulfill their
recordkeeping obligations when they may
deal primarily with pseudonyms?
AML/KYC
26. ● How do we stop another exchange from
disappearing with customer funds (Mt. Gox).
● How can technologies inherent to bitcoin,
like multi-sig transactions, and cold storage
help protect consumer funds?
Consumer Protection
27. ● As a means to creating an authoritative
record of ownership, Bitcoin or other
blockchain technologies can build digital
clearinghouses.
● If a company promises to redeem a bitcoin
or other crypto-token for equity, do securities
regulations apply?
Securities Law
There are no physical bitcoins, nor are bitcoins software files like .mp3 music files or Word documents. Instead, a bitcoin, or some fraction of a bitcoin, is a chain of digital signatures stored in a public ledger called the blockchain. The final digital signature in a given chain will be that of the current holder of a bitcoin amount and she will be recognized by the network by a random but unique string of characters, the user’s public address. Possession and control over a particular bitcoin holding is synonymous with having knowledge of one or more private keys that are mathematically linked to one or more public addresses. If those addresses have been sent some quantity of bitcoin in the past, as noted by the public record, the user holding the private keys is the only person capable of sending them on to another address.
There are no physical bitcoins, nor are bitcoins software files like .mp3 music files or Word documents. Instead, a bitcoin, or some fraction of a bitcoin, is a chain of digital signatures stored in a public ledger called the blockchain. The final digital signature in a given chain will be that of the current holder of a bitcoin amount and she will be recognized by the network by a random but unique string of characters, the user’s public address. Possession and control over a particular bitcoin holding is synonymous with having knowledge of one or more private keys that are mathematically linked to one or more public addresses. If those addresses have been sent some quantity of bitcoin in the past, as noted by the public record, the user holding the private keys is the only person capable of sending them on to another address.
There are no physical bitcoins, nor are bitcoins software files like .mp3 music files or Word documents. Instead, a bitcoin, or some fraction of a bitcoin, is a chain of digital signatures stored in a public ledger called the blockchain. The final digital signature in a given chain will be that of the current holder of a bitcoin amount and she will be recognized by the network by a random but unique string of characters, the user’s public address. Possession and control over a particular bitcoin holding is synonymous with having knowledge of one or more private keys that are mathematically linked to one or more public addresses. If those addresses have been sent some quantity of bitcoin in the past, as noted by the public record, the user holding the private keys is the only person capable of sending them on to another address.
