Bitcoin Talk at Rainbow

Intro to Bitcoin
or Distributed Cryptocurrencies for Fun and Profit

Presented by Bennett Hoffman
At the Rainbow Mansion, Cupertino, CA
On this 10th of March, 2013

What is Bitcoin?
Bitcoin is an experimental new digital currency that
enables instant payments to anyone, anywhere in the
world. Bitcoin uses peer-to-peer technology to operate
with no central authority: managing transactions and
issuing money are carried out collectively by the
network. Bitcoin is also the name of the open source
software which enables the use of this currency.
Bitcoin.org

What is Bitcoin?
Bitcoin is an experimental new digital currency that
enables instant payments to anyone, anywhere in the
world. Bitcoin uses peer-to-peer technology to operate
with no central authority: managing transactions and
issuing money are carried out collectively by the
network. Bitcoin is also the name of the open source
software which enables the use of this currency.

Why should I care?
● Investment
– In theory, bitcoin should act as a hedge against
inflation, much like gold. In practice, still volatile.
– Futures, options, etc.
● Entrepreneurship
– Bitcoin has large disruptive potential
– Still a very new technology
● Politics
– Competes with central banks

Why shouldn't I care?
(officially)

● Wikileaks
● Drugs
● Gambling
● Money laundering

If any of these sound like you, then take a look
at TOR. You didn't hear it from me.

So how do I get some?
● Exchanges
– MtGox
– AurumXchange
– CoinBase
● OTC
– Feels like being a spy
● Mining
● Nice friends

Where does it go?
● Bitcoins addresses are cryptographic strings
which look something like this
31uEbMgunupShBVTewXjtqbBv5MndwfXhb
● Managed by a Bitcoin client
● Stored in a “wallet” on your computer
● Make backups!

Mining 101
● How can you “mine” a digital currency?
● Transactions depend on the network solving
computationally difficult problems
● Each time a solution is found, the machine that
found it gets a reward (currently 25 BTC)
● If you control X% of the total Bitcoin network,
then you have an X% chance of solving the
next problem

Mining 102: Pools
● Mining hardware is progressing rapidly
– CPU -> GPU -> FPGA -> ASIC
● It's very unlikely for an individual with a home
computer to complete a bitcoin block
● Mining pools offer a way to participate
● Revenue split among pool members
proportional to contributed processing
● Some fees (~3%)

Can I actually spend this stuff?
(without feeling like a criminal)
● Bitmit.net
● Reddit gold
● Tech services
● Locally
– Cups and Cakes Bakery
– 20Mission
● Gift/prepaid cards
Huge list at: http://bitcoin.it/wiki/Trade

Staying Anonymous
If you want to help Iranian protesters without
the risk of being watched by the CIA:
● Buy OTC with cash (never use PayPal etc.)
● Never reuse a wallet address
● Alway use TOR when working discretely
● Use a tumbler/eWallet service
● Make sure numbers don't line up
● Encrypt all communications (GPG, etc.)

Threats
(civilized)
● Policy
– Money laundering, drug dealing, and terrorism are
already illegal
– See gun control
– Outlawing the currency won't work, but a great
firewall might
● Propaganda
– FUD
– Market manipulation

Threats
(Economic)
● Limited supply
● Irrevocably lost Bitcoins
● Deflationary spiral
– Bitcoins aren't a debt instrument
– Currently not used as reserves against other
instruments
● Alternative cryptocurrencies
– Litecoin

Threats
(technical)
● The infamous 51% attack
– Increasingly difficult to pull off
– Limited effectiveness
– Costly to sustain
– Network recovers normal operation afterwards
● Quantum computing
● Flaws in the Bitcoin protocol

Getting Technical
Foundations
● Public key cryptography (ECDSA)
– A transaction is signing a message and attaching
the new owner's public key
● One-way hashing with SHA-256
● Hashcash proof-of-work function
– Must produce a “small enough” hash value
– Underlies time and difficulty elements of Bitcoin

Transaction Limitations
● Can't prevent double spending
● Avoiding a centralized “Mint”
● We need some way to verify order
● Now we have a centralized “Timeserver”

Proof-of-Work
● Uses a Hashcash like algorithm
● Must find a hash for the new block which
“beats” a target value
● The target value, or difficulty, changes every
2016 blocks
● Difficulty targets 1 block solved every 10
minutes

Network Operation
● New transactions are broadcast to all nodes.
● Each node collects new transactions into a block.
● Each node works on finding a difficult proof-of-work for its block.
● When a node finds a proof-of-work, it broadcasts the block to all
nodes.
● Nodes accept the block only if all transactions in it are valid and
not already spent.
● Nodes express their acceptance of the block by working on
creating the next block in the chain, using the hash of the
accepted block as the previous hash.

Bitcoin Talk at Rainbow

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