BITCOINS and CRYPTOCURRENCIES How It Works. Principal Consultant CISA, CISSP

Transcription

1 BITCOINS and CRYPTOCURRENCIES How It Works Principal Consultant CISA, CISSP

2 Requirement: Unlearn many things that you thought you were very certain about. Have an open mind.

3 Covered topics Bitcoin And Cryptocurrencies How Does It Work? Introduction To The Economics Of Bitcoin

4 Money and Currency Something that is generally accepted Currency Store of value: an asset that can be used now or tomorrow Unit of account: allows a value to be expressed in an understandable way, and allows value of items to be compared Medium of exchange: allows good or services to be traded without barter system

5 Crypto Currency Cryptocurrency A digital asset designed to work as a medium of exchange using cryptography to secure the transactions, & to control the creation of additional units of the currency N.B. Does not rely on trust to work; Limited supply Virtual Currency (as per BSP Circular 944) Any type of digital unit that is used as a medium of exchange or a form of digitally stored value created by agreement within the community of Virtual Currency users. Virtual Currencies are not issued nor guaranteed by any jurisdiction and do not have legal tender status.

6 Bitcoin Releases as open-source software in 2009 A unit of a cryptocurrency Peer-to-peer system, without intermediary First decentralized digital currency; others: Litecoin, Ethereum, Monero Renders PCI DSS obsolete Revolutionary, just like the Internet or BitTorrent or Wikipedia or Linux

7 Bitcoin A digital payment system Open-source design World-wide payments Cheap processing fees Accounting transparency; yet pseudonymous; Privacy by design Transactions are verified by network nodes; recorded in a public distributed ledger called blockchain

8 General Acceptance Merchants PayPal Microsoft Dell Newegg Overstock TigerDirect Time Inc Virgin Galactic Sacramento Kings Non-Profits Mozilla Foundation Electronic Frontier Foundation Greenpeace Free Software Foundation Against Malaria Foundation

9 Bitcoin Value, BTC = 1 XBT = US$ 7, = PhP 380,216.95

10 Stock of Narrow Money Value of total quantity of currency in circulation BTC or XBT US$ B = BTC 16,667 PH Peso US$ 66.03B

11 Fiat vs Crypto Currency Fiat money Does not have intrinsic value Value comes from being declared as legal tender by the government of the issuing country Governments can take it away (e.g. India, 2016) Susceptible to inflation (e.g. government prints more) Expensive to produce and regulate Much easier to steal

12 Utility of Bitcoin Cheaper remittance fees No 3 rd party intermediary Serve those without bank access ~71M Filipinos (from World Bank's Global Findex Database) Coinciding with National Broadband Plan of DICT Anti-poverty tool

13 Fundamentals of Bitcoin Blockchain Shared public ledger All confirmed transactions are included here and for public viewing Transactions Transfer of value between Bitcoin wallets Payee verifies signature to verify chain of ownership Address (Wallet) Stores info / credentials necessary for transactions Similar to bank accounts Mining Record-keeping service Awards Bitcoins and transaction fees to Miner

14 Bitcoin Address 3JpQhaaz2CGbtZuz8TyWKq3RCH7AXZ5zC3

15 Bitcoin Address Can be software, online, or physical XBT wallets Stores credentials for Bitcoin holdings Uses public-key cryptography (ECDSA) Stores a collection of public and private keys Private Key - unsigned 256-bit integer Public Key - derived from Private Key, but not in reverse - used to determine if a Signature is authentic Signature - proves that a signing operation took place ⁴⁸ possible wallets

16 Blockchain is a 21st-century a transaction ledger to determine ownership, establish valuations or delineate liabilities to track & chronologically journal any transaction that involves the exchange of value between parties whether that value is rooted in monetary funds, stocks, bonds, real estate or commodities such as corn, rice or even pork bellies to record birth and death certificates to provide an attestable record of these bookends of life events

17 Blockchain Decentralized DB of transactions, visible to public 140+ GB now, growing every 10m Cryptographic nature allows for verified trust, not inherent trust

18 Blockchain vs Bank Ledger

19 Transactions English: Transfer of value between Bitcoin wallets Geek: wallets reassign the Bitcoins, from one owner to another, by adding a transaction to public ledger

20 Transaction Process To simplify: 1. Payer learns Bitcoin address of Payee (i.e. Public Key) 2. Payer broadcasts to network that he will give Payee, 1 BTC 3. Payer uses own Bitcoin wallet, signing transaction with own Private Key, then is propagated & validated by the network 4. Miners process the transaction, each verifies intent of Payer (using his Public Key), & a Confirmation is given after success 5. Updated Blockchain (i.e. public ledger) gets propagated 6. Payee is now assured that Payer has given payment of 1 BTC

21 Transactions Input: identify Bitcoins are being spent; from Payer Output: assigns Bitcoins to new owners; to Payee Unspent Output: used as Input for future transactions

22 Transaction Chain Stored history of ownership in a list Record of all transactions between different Bitcoin wallets (i.e. Bitcoin addresses) since the beginning There are no records of Accounts And Balances Instead, ownership of funds is verified through links to previous transactions Validity of each new transaction is dependent on validity of each previous transaction Stored in blockchain

23 Transaction Each transaction can only be used once as Input Prevents double-spending attack Verified by: checking if Input is from Payor funds of Payor are equal or more than the intended payment for Payee Input transactions are unspent, or new checking the Bitcoin address, or wallet, of Payee

24 Transaction Order Prevents double-spending fraud Transactions are grouped together in blocks, then linked together called the Block Chain Each block of transactions is a reference to the previous block Transactions in each block are considered to have happened in the same time Transactions not in a block are Unconfirmed, or unordered

25 Transaction Order Any node on network can collect any set of Unconfirmed transactions, and put them in a block Then broadcasts this on network as suggestion to be next for Confirmation, or included in blockchain Blocks are not chained by order of time Miners calculate new (SHA256) hash values based on combination of previous hash value, the new transaction block, and a random number Easy to verify, but extremely time-consuming to generate A success is called a Confirmation of a transaction block, happens every 10 minutes because of all world computers

26 Transaction Fees Fees: optional, but note that Miners can prioritize transactions that pay higher fees better payout than Money Market!

27 Unit Of Account Bitcoin: Symbol can be BTC, or XBT, or Satoshi: smallest amount, BTC mbtc: BTC

28 Bitcoin Mining Bitcoins are rewarded to Miners every time they find a new block (with proof-of-work) Total amount to be mined is only 21,000,000 coins Record-keeping service Maintains consistency of blockchain, complete, and tamper proof

29 Supply A successful Miner finding the new block is rewarded with new Bitcoins and transaction fees Rewards get harder to get every 210,000 blocks, or 4 years Estimated that by year 2140, all 21 million BTCs are mined Satoshi Nakamoto set monetary policy to be based on scarcity Coinbase transaction First transaction in a block, always created by a Miner All BTCs started in a coinbase transaction

30 Bitcoin Mining Pools

31 Bitcoin Mining Pools

32 Ownership Bitcoin users can spend funds associated with a specific Bitcoin wallet Payer must digitally sign a transaction using his Private Key The network verifies the signature of Payer using the Payer's Public Key Loss of Private Key, means loss of ownership Payer can only accept funds, but not spend it, ever. Loss can be due to irrecoverable password, forgotten wallets, damaged hard disk drive or USB flash drive, or death of person Computationally improbable, or effectively impossible, to recover lost Private Keys

33 Ownership

34 Privacy Bitcoins are pseudonymous Bitcoin owners are not explicitly identified, but all transactions on the blockchain are public Regulators can unveil Bitcoin wallet owners through KYC controls Transactions that spend coins from multiple inputs may indicate one owner Privacy is increased by generating new Bitcoin address for each transaction Mixers aggregate multiple Bitcoins and output to new addresses increase privacy

35 Governance Originally led by Satoshi Nakamoto, then Gavin Andresen, then Bitcoin Core for the reference implementation Proposed various governance and blocksize standard alternatives are Bitcoin XT, Bitcoin Classic, and Bitcoin Unlimited

36 Buying and Selling

37 Pricing Determined by the market in which it trades Supply versus demand Traded like ForEx, or commodities Crypto currency trading platforms

38 PH Regulation for Bitcoin BSP Circular 649 (E-Money) Also dated 2009, just like start of Bitcoin Differentiated against crypto currencies BSP Circular 944 (Virtual Currency Exchanges) Dated 06 February 2017 (Monday) Doesn't endorse Bitcoin as currency Regulates Virtual Currency when used for delivery of financial services, particularly payments and remittances

39 LAGGUI AND ASSOCIATES, INC. Bitcoin

40 PH Regulation for Bitcoin BSP Circular 944 (Virtual Currency Exchanges) Very welcome development Impact is yet to be understood, as everyone, including a regular person, is to be treated as a remittance company Brings to mind fees to be paid, as well as controls required, reporting requirements

41 Exercise: Create BTC Wallet Receive Bitcoin, now

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