May 24, 2013

What is Bitcoin

  • A math-based currency without a central bank
  • Based on P2P techniques, totally decentralized
  • No inflation
  • Infinitely divisible
  • Born in 2009, created by Satoshi Nakamoto (中本 聰)

Why do we need Bitcoin

  • Credit money is not reliable
  • Governments are creating huge inflations to repay their debts
  • Everything is tracked and controlled by the authoritiy

Must money issued by the government?

  • In the USA from 1837 to 1866, anyone can issue paper money
  • BerkShares: a local currency issued for the Berkshire region of Massachusetts by the BerkShares company.
  • Hayek: Denationalization of Money

How is Bitcoin issued without a central bank

  • Gold does not have to be issued by an issuer, only be dug by miners
  • Everyone can claim he found a Bitcoin as long as others accept
  • The problem is: why do I accept money you created?

What is the value of Bitcoin

  • As a general equivalent, like gold, it is:
    • Easy to distinguish and measure
    • Hard to generate
    • Limited in a certain amount
    • Storable
    • Dividable
    • Tradable
  • It has no difference with other commodity: the price is decided by the supply and the demand
  • According to Mises Regression Theorem:
    • Today's value depends on yesterday's value
    • Till the first day it has value

How is Bitcoin running

  • How does a decentralized monetary system record the owner of every coin?
    • It is simple and brutal: Every node in P2P network stores all transactions from the first day of Bitcoin's birth
    • Thus you can calculate out how much everyone has
  • How is the ownership of a Bitcoin transfered?
    • An account is a pair of private key and public key.
    • The public key is your address or accounts number.
    • The private key proves your ownership,
    • If Alice pays a certain amount of money to Bob, Alice should sign a message with her private key, which contains the last hash, Bob's public key and the amount of money she is going to transfer.
    • There should be some guarantors that witness this transaction.
    • Bob will not acknowledge this transaction until he knows this transaction indirectly from some other people.

How is Bitcoin running

  • How are transactions recorded?
    • We need a unique history of transactions, called blockchain.
    • Blockchain is a chain of blocks. Every block contains some transactions with hashed signatures, and linked to the previous block.
    • The work of generating new blocks is called mining, which is the process of packaging transactions into a block.
  • How to sign a transaction?
    • It relys on a mechanism called "Proof of work" (Hashcash Algorithm).
    • You can add anything into a message (to be signed), as loog as the hash code of it meets some requirements.
    • For example, the hash code is leading with a number of 0.
    • It is proved that the best approach of solving this problem is exhaustive enumeration.

How is Bitcoin running

  • Who are creating blocks?
    • Since creating new blocks costs a lot, there must be incentives.
    • The solution is, the one who created a block will get some Bitcoin as reward: this is how Bitcoin created.
    • Miners can also get trading fees spend by traders.
    • Only the longest blockchain will be accepted.
  • How to set the difficulity and reward of mining?
    • P2P network will tune the difficulity according to the computing power.
    • The reward of mining every block is 50 at first and halves every 210000 blocks.

The workflow of Bitcoin

Workflow of Bitcoin


  • Mining is essential for Bitcoin system, no mining no transaction.
  • Since more and more people are mining, the reward is getting lower.
  • CPU -> GPU -> FPGA -> ASIC
  • Big mining pools

Nodes Distribution of Bitcoin Network

Economic features of Bitcoin

  • Not freezable
  • Very hard to track
  • Trading cost is very low
  • No Taxation
  • In-born deflation
  • Global market

Market Price of Bitcoin



  • Too many speculators
  • Price fluctuation is too huge
  • Hard to tax
  • Anonymous trading
  • Conducive to money laundering
  • Arbitrage between markets is possible
  • Attacts lots of system invaders

Scalability issues

  • About $160 million costs in the last year (servers, electricity, labor), which means $11 per transaction!
  • History of all transactions are too large: for now serveral Gigabytes.
  • If it scales to as large as VISA, one block would be as large as 1GB.

P2P network's dilemma

  • Protocol is not able to upgrade smoothly.
  • Mining is more and more centralized, thus 51% attack is becoming possible.

Real World Bitcoin

  • You can buy and sell Bitcoin from exchanges with credit money
  • The biggest one is MtGox
  • provides an online wallet service.
  • BitInstant devotes in changing Bitcoin with offline money and goods.
  • BIPS exchanges different kinds of virtual money.

Any questions?

Thank You!

May 24 2013