1. Digital Currencies
Modified from Murtuza Jadliwala, Ivan Rubinić, David V Duccini, Amir Houmansadr, Sascha Boehme, Jason Madden

2. Introduction: What is Money?
Physical or Electronic Tokens or Commodities that can be have the following properties:
Unit of Account  defined value
Medium of Exchange  acceptability
Store of Value  non-perishable

3. What is Electronic Money?
Narrow View of Term:
Tokens of Exchange transacted only electronically
Examples: Facebook Gold, Digital Gold Currency, BitCoin, and other electronic currencies
Broad Usage of Term includes Both:
Electronic Payment Authorization  Credit cards
Value Holding Electronic Tokens
A currency has value by it being widely used.
Bitcoin is a startup currency with a deflationary bootstrapping economy

4. Overview: Early Money Early Intermediary Tokens of Exchange
Commodities or Objects of Perceived Worth
Minted Coins  standardized units of metal
Code of Hammurabi: legal debt payment
Trade Bills  credit certificate for production
Led to Local Merchant Banks for redemption
Goldsmiths  demand deposits & promissory notes

5. Beginnings of Modern Money
Private Bank Notes
Loans based on deposits on account
Beginning of Fractional Banking
National Currencies
from Central Reserve Banks
backed by Gold or Silver
Legal Tender for Payments

6. Electronic Currency by Jason Madden
Saturday, April 27, 2019
Modern Fiat Money
World War 1 & End of Gold Standard
Scarcity of Gold Reserves with Enlarging Circulation
Bank Notes no longer redeemable for gold
Floating value in exchange market
Money by Decree of Government
Backed by issuers ability to repay debts
Susceptible to public distrust
Possible uncontrolled inflation or deflation

7. Types of Electronic Money
Private Currency  free banking
Community Currency local acceptability
World Currency  trade reference
Hard Currency  non-reversible
Soft Currency  allows payment disputes

8. Private Currency Free Banking  No Central Reserve Bank
Free Entry into Banking Industry
Freedom to Issue Notes, Accept Deposits, and Collect Checks for Payment
Freedom to Borrow Money on Term Deposit
Freedom to Lend Money & Invest Assets

9. Community Currency Ithaca HOURS BerkShares Toronto Dollar Ithaca, NY
BerkShares
Berkshire, MS
Toronto Dollar
Toronto, Ontario

10. World Currency Global Trade Reference
Gold, British Pound, US Dollar, Euro, Yen
Private Complementary Currency efforts
International Monetary Fund (IMF)
Special Drawing Rights (SDR)
Supplementary Reserve Assets

11. What are CryptoCurrencies?
According to Merriam-Webster dictionary:

12. A cryptocurrency is based on
Derives trust from
NOT from legal tender statutes
NOT from chemical/physical properties
mathematical properties
based on established, trusted, cryptographic principles
cryptographic hashing
digital signatures
public key infrastructure

13. E-Cash Crypto Protocols
Chaum82: blind signatures for e-cash
Chaum88: retroactive double spender identification
Brandis95: restricted blind signatures
Camenisch05: compact offline e-cash
Various practical issues:
Need for trusted central party
Computationally expensive
Etc.

14. Some requirements for online cash
Protection against double-spending
Should work in an offline fashion
Free-floating that acquires real value
Anonymity (for both spender and recipient)
Decentralized
Bootstrapping an online cash (currency) that satisfies some or all of these requirements will require a clever amalgamation of well-known cryptographic primitives and computing paradigms!
Thus the name: Crypto + Currencies

15. Cryptocurrency: Challenges
Creation of a virtual coin/note
How is it created in the first place?
How do you prevent inflation? (What prevents anyone from creating lots of coins?)
Validation
Is the coin legit? (proof-of-work)
How do you prevent a coin from double-spending?
Buyer and Seller protection in online transactions
Buyer pays, but the seller doesn’t deliver
Seller delivers, buyer pays, but the buyer makes a claim.
Trust on third-parties
Rely on proof instead of trust
Verifiable by everyone
No central bank or clearing house

16. Security in Cryptocurrency
Authentication
Am I paying the right person? Not some other impersonator?
Integrity
Is the coin double-spent?
Can an attacker reverse or change transactions?
Availability
Can I make a transaction anytime I want?
Confidentiality
Are my transactions private? Anonymous?

17. Security in Cryptocurrency
Authentication  Public Key Crypto: Digital Signatures
Am I paying the right person? Not some other impersonator?
Integrity  Digital Signatures and Cryptographic Hash
Is the coin double-spent?
Can an attacker reverse or change transactions?
Availability Broadcast messages to the P2P network
Can I make a transaction anytime I want?
Confidentiality Pseudonymity
Are my transactions private? Anonymous?

18. Cryptocurrency Validation Creation of a virtual coin/note
Is the coin legit? (proof-of-work)  Use of Cryptographic Hashes
How do you prevent a coin from double-spending?  Broadcast to all nodes
Creation of a virtual coin/note
How is it created in the first place?  Provide incentives for miners
How do you prevent inflation? (What prevents anyone from creating lots of coins?)  Limit the creation rate of the BitCoins

19. Bitcoin terminology Bitcoin The protocol / technology bitcoins
The currency / coin / unit of account
Transaction
Transfer of a coin from one owner to the next, signed cryptographically
Public/Private key
The receiver’s public key is his Bitcoin address
The sender’s private key is used to digitally sign the transaction
Block
Validated collection of transactions over 10 minutes, created through mining
Mining
Generates a block and validates transactions through proof-of-work, creating new bitcoins in the process
Blockchain
Timestamped sequence of linked blocks
The public ledger

20. Distributed Consensus
What are Blockchains?
Blockchain is a Distributed, Secure, Logfile … …… ……
Distributed Consensus
All parties participate in the blockchain (consensus) protocol. Everybody has a local view of the blockchain.
Maintained/generated by a blockchain protocol which is run jointly by many parties. The goal of all parties is to maintain a globally consistent ordered set of records. (A blockchain protocol is a distributed consensus protocol.) …… …… ……

21. to connect to previous block
What are Blockchains? …… ……
A blockchain is basically an ordered sequence of blocks, where each block contains some information/record.
Maintained/generated by a blockchain protocol which is run jointly by many parties. The goal of all parties is to maintain a globally consistent ordered set of records. (A blockchain protocol is a distributed consensus protocol.)
“Header”
“Records”
to connect to previous block

22. Applications: Cryptocurrencies
Decentralized, no trusted server
A digital currency is the first demonstrable use of blockchain
Central Trusted
Authority
Public
Ledger
Traditionally, for establishing a currency, we assume existence of a central authority which can be trusted to provide paper currency, keep records and authenticate digital transfers.

23. Applications: Cryptocurrencies
“Stake”
“A transfers 2 coins to B.”
In cryptocurrencies, each party has a non-negative stake/balance, and records are simply transactions between parties (which are verified by signatures).
SKA ……
“Records”

24. How to Generate New Blocks?
Block generation is like election/ puzzle-solving race
Different ideologies
Proof-Of-Work (POW)
Proof-Of-Stake (POS) …
Solve moderately hard “puzzles”
Vote ∝ compute
power
One could visualize it as randomized leader election process.
Vote ∝ stake

25. Chain Properties
Chain Consistency: Honest parties agree on all but last ℓ blocks
Chain Quality: # of blocks mined by honest parties ∝ to their voting power (any ℓ consecutive blocks) ……
Last ≤ ℓ inconsistent ……

26. Bitcoin Whitepaper –

27. BitCoin
It is simply a means of sending and receiving numbers to and from "addresses"
Described by Satoshi Nakamoto in 2008
Introduced as open-source software in 2009
An Open-Source Peer-To-Peer Payment Network
Payments are recorded in a public ledger
Using Digital Signatures & Encryption
decentralization is the basis for Bitcoin's security and freedom

28. Bitcoin
A protocol that supports a decentralized, pseudo-anonymous, peer-to-peer digital currency
A publicly disclosed linked ledger of transactions stored in a blockchain
A reward driven system for achieving consensus (mining) based on “Proofs of Work” for helping to secure the network
A “scare token” economy with an eventual cap of about 21M bitcoins

29. Bitcoin
Governance - an open source community of developers backed by the Bitcoin Foundation.
Democratic - if you don't like one of the changes, you are more than welcome to fork the chain and implement your own rules
Money Creation - is given to the people, not to the central bankers.
Deflationary by design - money supply cannot be manipulated and is fixed at 21 million coins, each divisible up to 8 decimal

30. Features of Bitcoin
Is “deflationary” – the reward is cut in half every four years, and tokens can be irrevocably destroyed
Nearly infinitely divisible currency units supporting eight decimal places (known as a Satoshi)
Nominal transaction fee’s paid to the network
Same cost to send $.01 as $1,000,000
Consensus driven – no central authority
Counterfeit resilient
Cannot add coins arbitrarily
Cannot be double-spent
No recourse and no one to appeal to return sent tokens

31. Brief history of bitcoin
Bitcoin is registered
Bitcoin design paper published
The Genesis Block is mined (18:15:05 GMT)
First Bitcoin transaction
An exchange rate is established
A currency exchange is born
MtGox is established
A vulnerability in the system is exploited to generate 184 billion Bitcoins
First collective mining starts
Another exploit discovered
First short sale
2011
Silk Road opens for business
25% of total Bitcoins generated
Bitcoin reaches parity with USD (1:1)
First put option sold
25,000 BTC theft reported
Major breach at MtGox
Creation of physical Bitcoins
Second largest Bitcoin exchange shuts down
Market cap reaches $ 1 billion
Gaming company caught secretly mining Bitcoins from customer computers
First Bitcoin ATM (San Diego)
Bitcoin ruled currency by Texas judge
FBI shuts down Silk Road (3.6 milllion USD seized)
Bitcoin goes above $ 1000

32. Number of Transactions per Day

33. Hash Rate

34. Market Price

35. Transaction Fees

36. The Bitcoin Startup Ecosystem: Six Different Bitcoin Company Categories
Exchanges
Wallets
Universal
Payment Processing
Financial Services
Mining

37. Legality of Bitcoin by country

38. Why Bitcoin became the pioneer in virtual currency
Financial crisis caused meltdown of the economy in
Caused a transfer of assets form real-estate and financial sphere to investment into commodities that are traditionally considered as a stable store of values
Historically, Gold is best known commodity of that type because quantity of this metal is limited and, therefore, it is great way how to hedge your portfolio in times when usage of expansive monetary policy is highly likely
Bitcoin is similar to gold (except there is no intrinsic value) and when the value of gold started to decrease due to the price roof that it had reached and partial recovery of financial market, value of bitcoin soared because it was cleverly designed financial product with finite quantity

39. How it works
The block chain is the fundamental data structure of the Bitcoin protocol
It's a single data file participants pass around to each other
It allows them to know who owns what
Anyone can change it to send money to someone else
Other users mathematically verify the transaction to ensure it's validity

40. How It Works It's essentially an accounting ledger:
3/3/13 Sally found : $15.00
3/3/13 Sally -> Bob : $10.00
3/4/13 Bob -> Jimmy : $4.00
3/4/13 Sally -> Barb : $4.00
3/4/13 Jimmy -> Sally : $2.00
How much money does Sally have in her wallet?
Sally had $15, then gave $10 to Bob, then $4 to Barb, then was given $2 from Jimmy. Sally has $3 as of right now.

41. Decentralized The “digital wallet” operates in a peer to peer mode
When it starts it bootstraps to find other wallets
Originally it used the Internet Relay Chat (IRC) network
Now based on DNS and “seed nodes”
The wallet will synchronize with the network by downloading ALL of the transactions starting from the GENESIS block if necessary
572,061 blocks at time of slide prep
Over 210 GB
Using a “gossip protocol” the wallets share all transaction information with their peers

42. Coins flow from Inputs to Outputs
A coin owner transfers coins by digitally signing (via ECDSA) a hash digest of the previous transaction and the public key of the next owner. This signature is then appended to the end of the coin.

43. Transactions Input contains
1) A public key that belongs to the redeemer of the output transaction.
2) An ECDSA hash over a hash of the transaction.
Output contains
1) The actual amount being sent to the recipient.
2) The change amount being sent back to the original sender (if any) 3) The voluntary transaction fee attached to the output (if any).
The block chain prevents the double spend attack by giving other nodes the power to verify that transaction inputs were not already spent somewhere else.

44. Pseudo Anonymous
Using public key cryptography, specifically Elliptic Curve Cryptography due to its key strength and shorter keys
Transactions are sent to public key “addresses”
1AjYPi8qryPCJu6xgdJuQzVnWFXLmxq9s3
1Give4dbry2pyJihnpqV6Urq2SGEhpz3K

45. Addresses are like Accounts
The wallet listens for transactions addressed to any of its public keys and in theory is the only node that is able to decrypt and accept the transfer
“Coins” are “sent” by broadcasting the transaction to the network which are verified to be viable and then added to a block
Keys can represent a MULTI-SIG address that requires a N of M private keys in order to decrypt the message

46. Arriving at Consensus
Although the accepted chain can be considered a list, the block chain is best represented with a tree
The longest path represents the accepted chain
A participant choosing to extend an existing path in the block chain indicates a vote towards consensus on that path
The longer the path, the more computation was expended building it

47. Consensus Process = Mining
Originally the digital wallet could also participate in the consensus process by attempting to secure the network directly
This process is known as “mining”
Mining involves attempting to find a numerical value, known as a “nonce” that when combined with all open transactions can be “hashed” into a value that satisfies a certain “difficulty”
Custom, purpose built-hardware has long since replaced the function such that its no longer productive for simple CPU based systems to compete in the mining process, and thus it was removed

48. Mining
Miners collect the transactions on the network into large bundles called blocks
like "Alice pays Karim 10 bitcoins" and "Liam pays Sofia 8.3 bitcoins".
These blocks are strung together into one continuous, authoritative record called the block chain,
which doesn't permit any conflicting transactions.
lets you know for sure exactly which transactions count and can be trusted (no double spending!).

49. Block Chain
Bitcoin makes sure there is only one block chain by making blocks really hard to produce
miners have to compute a cryptographic hash of the block that meets certain criteria
difficulty of the criteria for the hash is adjusted based on how frequently blocks are appearing
also carefully validate all the transactions that go into their blocks
Successful miners are rewarded some bitcoins according to a preset schedule

50. Fraud prevention
Users can trust the block chain that was most difficult to produce
longest chain wins
If there was a "fake" blockchain competing with the real ones the fraudster would have to do as much work as the rest of the network to make their block chain look as trustworthy
intense work that goes into finding blocks through hashing secures the network against fraud

51. BitCoin Mining Collects transactions from the network
Validates them, and doesn't allow conflicting ones
Puts them into large bundles called blocks
Computes cryptographic hashes over and over until if finds one "good enough to count"
Then submits the block to the network, adding it to the block chain and earning a reward in return

52. Bitcoin Security An attacker with > 50% of hash power can
Bitcoin addresses are RACE Integrity Primitives Evaluation Message Digest RIPEMD-160 of SHA-256 of an Elliptic Curve Digital Signature Algorithm public key
any vulnerabilities in the algorithms would constitute a vulnerability in bitcoin itself
An attacker with > 50% of hash power can
Double spend: Reverse transactions that he sends while he's in control
Prevent some or all transactions from gaining any confirmations
Prevent some or all other generators from getting any generations

53. Alternates to Bitcoin aka Altcoins
“Good artists copy. Great artists steal.”
The first alternate blockchain was Namecoin
Early attempts to “re-level the playing field” were made by changing the hashing function from SHA256 to SCRYPT
SCRYPT is a “memory intensive” function that was thought to be resistant to customized hardware (false)

54. Alternates to Bitcoin aka Altcoins
Changes to the block emit time target were also changed from Bitcoins 10 minutes to 2.5 minutes to increase the velocity
Newer ALTS incorporate every escalating hash functions, chained together in novel ways to resist giving purpose built hardware an advantage over CPU based mining

55. A Babel of Altcoins Now well over 2,000 “alternate” coins to Bitcoin
99.99% of them are simply brands / clones
Most tinker with:
the total coin supply
the hashing functions (SHA256, SCRYPT, X11 et al)
block emit time targets
Proof of Something (Proof of Work, Proof of Stake)
Ethereum, Ripple, Bitcoin Cash, EOS, Litecoin, …
Total Market Cap: $ 177 billion (Bitcoin is 92.7B)

56. Issues against bitcoin usage
New and uninvestigated financial product
History is full of illegal and questionable activity
Absence of relevant theoretical background
Highly volatile value and an unknown issuer
Undefined legal status
Unregulated commodity and absence of consumer protection
Anonymity and blurry taxation status
Illegal or undefined in most countries of the world

57. Bad Uses for Good Technology
Bitcoin has had its fair share of “bad press”
Silk Road
An online anonymous marketplace for “censorship-free” commerce
Bitinstant
Charlie Shrem plead guilty to aiding money laundering
MT-GOX
aka “Magic The Gathering Online eXchange”
700,000 coins “missing”

58. The Silk Road case
Silk Road had an estimated $200 million in sales. 95% of which for drugs.
In October 2013 Silk Road was shut down

59. The Mt. Gox case
Mt.Gox was the worst scandal in Bitcoin history and precipitated the burst of the bubble in early An estimated $500 million in bitcoins were lost.

60. Price of bitcoin has fluctuated wildly
Extreme volatility deters the mainstream from holding bitcoins as a store of value
And makes it unsuitable as a unit of account
Merchants instantly exchange bitcoins for fiat

61. USD/Bitcoin Weighted Price (Volatility)
China restricted Bitcoin exchange for local RMB
Russia defined Bitcoin as dubios activity
MtGox filed for bankruptcy (theft of 477 million USD in BTC)
Soaring caused by wide acceptance of Bitcoin

62. Bitcoin Concerns Wallet Vulnerable To Theft Tracing a coin's history
Packet sniffing
Sybil attack (cancer nodes)
No authentication for IP transfers
This attack is likely if you're using VPN/Tor
Denial of Service (DoS) attacks
Illegal content in the block chain
Energy Consumption

64. Hashcash (Or How to Pay a Byzantine Generals Salary)
Like many great ideas to become realized, it takes a confluence of other great ideas
Based on the idea of HashCash, a Proof of Work concept invented by Adam Back in 1997 (
Originally proposed as an anti-spam throttling mechanism
The core idea is that before accepting a transaction, the sender must first demonstrate a “cost” via a computationally “hard” problem that can simultaneously be easily verified.
This generally referred to as a “Proof of Work”

65. “The Quick Brown Fox Jumped Over the Lazy Dog”
The Role of Hashing
A hash function is any function that can be used to map digital data of arbitrary size to digital data of fixed size, with slight differences in input data producing very big differences in output data.
MD5, SHA1, SHA256
For example, the MD5 hashes of ‘abc’ compared to ‘abC’
abc
0bee89b07a248e27c83fc3d c1
abC
2217c53a2f88ebadd9b3c1a79cde2638
“The Quick Brown Fox Jumped Over the Lazy Dog”
2dfd ed3b4c893141f9ab37cf

66. Proof of Work
A publicly auditable cost-function can be efficiently verified by any third party without access to any trapdoor or secret information.
A fixed cost cost-function takes a fixed amount of resources to compute. The fastest algorithm to mint a fixed cost token is a deterministic algorithm.
A probabilistic cost cost-function is one where the cost to the client of minting a token has a predictable expected time, but a random actual time as the client can most efficiently compute the cost-function by starting at a random start value. Sometimes the client will get lucky and start close to the solution.

67. The Hash Lottery Hashing is straightforward, but not challenging
Unless the goal is to say, find me a hash value that satisfies a certain level of “difficulty”
For example, let’s say the challenge is find a hash-value that begins with a number of zeros, for a given input
The Proof of Work comes from finding a number (known as a NONCE) that when added to the input changes the output of the hash value to satisfy the difficulty.
In the Bitcoin world this is what “mining” is and in effect is little more than a lot of hash-power spent on guessing winning lottery numbers that satisfy the difficulty of the problem in order to obtain the reward from the network

68. The Payout
The node that finds the best solution to the challenge is provisionally granted a reward
Originally in Bitcoin it was 50 new coins
Competing solutions are evaluated based on which node offers the higher number of transactions included in the candidate block as well as the level of over-satisfying the difficulty.
For example, if two nodes offer a solution to the challenge and both have the same number of transactions, the reward will go to the node that found a NONCE that beat the challenge
E.G. Find a hash that begins with 4 zeros
The node that supplies a hash that has 5 zeros beats the node that only finds the minimum

69. Transaction Confirmation
Having a transaction provisionally accepted into a candidate block signals that the network has verified that the inputs were viable
Every new block accepted into the chain after the transaction was accepted is considered a confirmation
Coins are not considered mature until there have been 6 confirmations (basically an hour assuming a 10 minute block cadence)
New Coins created by the mining process are not valid until about 120 confirmations
This is to assure that a node with more than 51% of the total hash-power does not pull off fraudulent transactions

70. Why 51% Matters “When does 1 + 1 = 3 ?” *
In the case of Bitcoin “consensus” goes to the chain with the highest number of blocks
Not just in theory, but in practice several large mining pools have generated six blocks in a row
To date the network has voluntarily shifted its mining power around or faced Distributed Denial of Service attacks
* When everyone says it does!

71. Ethereum.org Turing complete contracts on a blockchain.
Contracts are the main building blocks of Ethereum.
A contract is a computer program that lives inside the distributed Ethereum network and has its own ether balance, memory and code.
Every time you send a transaction to a contract, it executes its code, which can store data, send transactions and interact with other contracts.
Contracts are maintained by the network, without any central ownership or control.
Contracts are written in languages instantly familiar to any programmer and powered by Ether, Ethereum's cryptofuel.