1 In this book I try to use ‘Bitcoin’ (with a capital B) when describing the concept, the idea, or the network, and ‘bitcoin’ (with a lowercase b) or BTC when describing the units of currency, the coins themselves. So: ‘I bought 5 bitcoins (or BTC) and saw the transaction on the Bitcoin blockchain’.
4 U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Purchasing Power of the Consumer Dollar, 2018, FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/CUUR0000SA0R
5 There are other measures of the purchasing power of USD, such as core inflation, which is more or less CPI without the effects of volatile prices such as food and energy.
6 For more information see https://www.bls.gov/cpi/questions-and-answers.htm
7 I once paid for a few nights’ accommodation in San Francisco by making a bitcoin payment to the landlord. It was much easier, cheaper, and faster than asking for bank details and making an international payment. But then we both use bitcoins. In fact, for international payments within the cryptocurrency community, it’s much easier, cheaper, and faster to pay each other in cryptocurrency than with bank wires.
8 Bitpay, https://bitpay.com
9 Frank Chaparro, “MORGAN STANLEY: ‘Bitcoin acceptance is virtually zero and shrinking,” Business Insider Singapore, July 12, 2017, https://www.businessinsider.sg/bitcoin-price-rises-but-retailers-wont-accept-it-7-2017
10 Note though that if the majority of the Bitcoin community agrees, the creation rate and maximum number of BTC can all be changed. As there is no central or formal governance, the rules can be changed according to the community’s preferences, though it is hard to push through contentious changes unless there is wide support. See the section on cryptocurrency forks.
11 Robert Sams on Rehypothecation, Deflation, Inelastic Money Supply and Altcoins.” Great Wall of Numbers. August 20, 2014. Accessed July 26, 2018. http://www.ofnumbers.com/2014/08/20/robert-sams-on-rehypothecation-deflation-inelastic-money-supply-and-altcoins/
12 Unless you are a BTC trader and have a mandate to increase the number of BTC under management.
13 Koning, JP. Twitter Post. April 24, 2018, 9:27 PM. http://www.jp_koning/status/988771481810186241
14 Here I am talking about an independently stable coin, which is different to a coin that is 100% backed by something else (essentially a ‘depository receipt’ redeemable at par for the backing asset).
15 David Milliken “BoE’s Carney says Bitcoin has ‘pretty much failed’ as currency,” Reuters, February 19, 2018, https://www.reuters.com/article/us-britain-boe-carney-currencies/boes-carney-says-bitcoin-has-pretty-much-failed-as-currency-idUSKCN1G320Z
17 Davies, Glyn. A History of money from ancient times to the present day. Cardiff: University of Wales Press, 1996
21 Graeber, David. Debt: The First 5000 Years. Melville House Publishing, 2011
22 Central banks do hold gold, financial assets, and foreign currencies; it’s just that they just don’t promise to give it to you when you turn up on their doorstep waving a banknote.
23 Well, except very rich people and corporations, it seems
25 https://www.the-star.co.ke/news/2018/03/21/baringo-stolen-cattle-suspected-to-be-used-for-paying-dowry_c1733135
26 By Marie-Lan Nguyen - Own work, Public Domain, https://commons.wikimedia.org/w/index.php?curid=884154
34 NB This particular story is not universally accepted by academics and historians, but as it involves the history of the words mint and money, I thought it was worth including. See http://penelope.uchicago.edu/Thayer/E/Gazetteer/Places/Europe/Italy/Lazio/Roma/Rome/_Texts/PLATOP*/Aedes_Junonis_Monetae.html
35 This is not a like-for-like comparison, as we do not know how the purchasing power of those coins changed in the period.
45 For the sake of completeness, I should add that there are exceptions and provisions to accommodate private transactions provided they are bilaterally agreed.
47 For example, https://www.straitstimes.com/singapore/courts-crime/jover-chew-former-boss-of-mobile-air-jailed-33-months-for-conning-customers
48 This is actually quite interesting. See https://www.bullionstar.com/blogs/bullionstar/singapore-brunei-and-the-10000-banknote/ for more on this arrangement.
51 https://www.bankofengland.co.uk/-/media/boe/files/ccbs/resources/understanding-the-central-bank-balance-sheet.pdf
53 I am reminded of films where a baddie is selling data, perhaps a list of secret agents, to another baddie and promises that this is the only copy of the data. Baddies are very trusting, it seems.
55 https://www.commbank.com.au/business/international/international-payments/correspondent-banks.html retrieved 25 Feb 2018
56 Or more precisely, C’s cash custodian.
57 Or more precisely, C’s asset custodian.
58 29 participants as at 19 May 2018: https://www.bankofengland.co.uk/payment-and-settlement/chaps although this is changing and the Bank of England will be allowing more participants to access its payment systems.
59 154 participants as at 30 April 2018: http://www.hkicl.com.hk/clientbrowse.do?docID=7195&lang=en
60 Actually, there is an entity called the Bank of International Settlements (BIS), which is a kind of Central Bank’s Central Bank, but it facilitates country to country sovereign payments such as war reparation payments (money paid by the loser to the winner to cover damage caused during the war), rather than commercial payments arising from the private sector.
61 Note: There is a difference between a branch and a subsidiary. A branch is a foreign company operating in a country (not locally incorporated) whereas a subsidiary is a local incorporated company that is owned by a foreign company. Really confusingly, ‘Citibank N.A. London Branch’ is a subsidiary of Citibank N.A., not a branch, even though it has ‘London Branch’ in its name. This is presumably because of historical reasons.
62 Of course, physical cash can move across borders.
63 http://pubdocs.worldbank.org/en/953551457638381169/remittances-GRWG-Corazza-De-risking-Presentation-Jan2016.pdf
66 In some newer blockchain platforms there are some additional ‘privacy’ layers where encrypted data is broadcast to a wide audience or a subset, and can only be decrypted by parties who hold the decryption key.
71 MD5 has been recognised as flawed, failing on collision resistance, but was used extensively for a period of time. Other ones have taken its place, but it is still used where the stakes are low.
75 https://www.wired.com/story/Bitcoin-mining-guzzles-energyand-its-carbon-footprint-just-keeps-growing/
76 This is the number of reachable nodes according to https://bitnodes.earn.com at time of writing. Note that it’s not ‘millions and millions’ of computers as some claim, for instance Don Tapscott said in one of his TED talks ‘And when a transaction is conducted, it’s posted globally, across millions and millions of computers’. This is an exaggeration of some 100-fold!
77 https://bitcoin.org/bitcoin.pdf is one place the whitepaper can be found.
78 Censorship resistance is extremely important in a world where nation states are overextending their roles in monitoring and censoring personal activities, including private financial transactions. While some people think it is ok that governments should be able to have insight and control over every single aspect of our private lives, they are fortunate to live in countries where governments are currently benign. Financial privacy and censorship resistance is extremely important, globally. Financial institutions are tools used by governments to enact their policies. One example of this is the weaponising of finance is via financial messaging network SWIFT: although SWIFT claims to be neutral a non-political cooperative based in Belgium, it is routinely pressured by various governments to cut off countries from the global financial network, and it obeys. This is a characteristic of centralised systems—there is always someone to pressure, to throw in prison or exclude if they disobey. While we mostly all agree that terrorism, however you define it, is a bad thing and cutting off terrorists’ funds is a good thing, it is possible for regimes to use the same methods to freeze the bank accounts of, say, homosexuals, immigrants, or other groups or individuals out of favour—far less obviously a use of power for the general public good.
79 Tim’s blog www.ofnumbers.com is one of the best blogs for data-driven analysis of the cryptocurrency industry.
81 We will start with a generic $ (dollars) as the accounting unit, and later see why we need to move to BTC.
82 Bitcoin addresses are more secure in some respects than bank accounts. It is inadvisable to make bank account details known, as Top Gear presenter Jeremy Clarkson found out in 2008. He printed his bank details in a newspaper called The Sun to try to make the point that other people could only use his bank account details to send payments to, not to pay from. He was proven wrong and his details were used to set up a £500 direct debit from his account. The perpetrator had some ethics and used a charity as the beneficiary. Mr Clarkson subsequently ate his words (an unusual occurrence) See https://www.theregister.co.uk/2008/01/07/clarkson_bank_prank_backfires/
83 Miguel Moreno provides some calculations of an address collision on his blog https://www.miguelmoreno.net/bitcoin-address-collision/.
84 This was a lesson learnt from Napster, a file sharing system that had a central administrator. It eventually failed and paved the way for Bit Torrent, a file sharing system without a central administrator which is harder to shut down.
85 And yes, this means that blockchains aren’t immutable, contrary to some commentary.
86 Technically the hash function is performed on a subset of the block’s data, called the block header, which itself includes hashes of the transactions contained within the block.
87 There are other rules too that determine a ‘valid’ block, such as its size in bytes, but the proof-of-work hash is what we focus on here.
88 Non-outsourceable Scratch-Off Puzzles to Discourage Bitcoin Mining Coalitions. Andrew Miller, Elaine Shi, Ahmed Kosba, and Jonathan Katz. ACM Computer and Communications Security (CCS), October 2015. http://soc1024.ece.illinois.edu/nonoutsourceable_full.pdf
89 Nowadays, special chips known as ASICs (Application Specific Integrated Circuits) are designed, built, and used specifically for this mining task. ASICs built for this purpose are very efficient at SHA-256 hashing but pretty much useless for anything else. So any comparisons between the amount of (very specific) calculations that Bitcoin miners can do per second, compared with the world’s supercomputers (that can do general purpose computing), is not comparing like for like and therefore a false comparison.
91 These attacks are named after Sybil Dorsett, the pseudonymous subject of a 1973 book Sybil by Flora Rheta Schreiber, a case study about Sybil’s multiple personality disorder.
92 The way this works in practice is that when Alice creates a transaction, she can specify that the transaction pays the recipient slightly less than the amount that is deducted from her account. In jargon, her transaction outputs is less than her inputs. This difference is the fee for the miner. The miner adds up the fees from all the transactions in the block and includes it in the ‘coinbase’ transaction which is a transaction paid to the miner and is described later.
93 But now it is a little more complicated, with innovations such as Segregated Witnesses where part of the data in the block isn’t counted towards the block’s size.
94 Not to be confused with a cryptocurrency wallet company based in the USA called Coinbase.
97 The ‘consensus mechanism’ in Bitcoin is not proof-of-work (as a lot of people say), it’s the longest chain rule (or to be pedantic, it’s the chain with the most work done on it, which normally equates to the most blocks). Showing a proof-of-work proof is the Sybl-resistant data entry mechanism, i.e., the entry price of being able to add a block, but the mechanism that is used to determine which chain of blocks commands consensus is the longest chain rule.
98 In blockchains like bitcoin, transactions are never completely settled. There is a probability that a longer chain exists somewhere and is adopted by the network. This means that cryptocurrency payments are settled probabilistically rather than deterministically. The deeper your transaction in the blockchain, the more probable it is that it won’t be usurped by a longer chain.
99 As an extreme precaution, miners have to wait 100 blocks before they can spend the special coinbase block reward they get from mining. This is called the coinbase maturity.
101 Actually, because a transaction can contain multiple payments, you need to refer to the transaction’s hash and the specific payment into your address.
102 https://tradeblock.com/bitcoin/tx/237e0b782a27f83873e781298f13ffae93fd6c274d49b36b015b7c2a814adea3
106 https://blockchain.info/pools?timespan=4days past 4 days of blocks, retrieved 27 May 2018
107 Although the pools are controlled by Chinese entities, the people controlling the hashrate contributing to those pools may not be Chinese and may be free to switch pools at will, in theory.
108 https://www.cnbc.com/2018/02/23/secretive-chinese-bitcoin-mining-company-may-have-made-as-much-money-as-nvidia-last-year.html
109 https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html retrieved 27 May 2018
116 https://www.justice.gov/usao-md/pr/over-566-million-forfeited-e-gold-accounts-involved-criminal-offenses
118 http://abcnews.go.com/US/black-market-bank-accused-laundering-6b-criminal-proceeds/story?id=19275887
130 https://www.wired.com/2011/06/silkroad-2/ and I have also seen this on Gawker, http://gawker.com/the-underground-website-where-you-can-buy-any-drug-imag-30818160 but I am not sure which came first of if they were simultaneously printed.
131 This is a reference to the 1973 film The Princess Bride, and Dread Pirate Roberts was, it turns out, a pseudonym for a series of ruthless pirates who handed the pseudonym from individual to individual once each was wealthy enough to retire.
136 Though there are some ETFs that can contain some bitcoins, for example the ARK Innovation ETF http://www.etf.com/sections/features-and-news/barely-any-bitcoin-left-ark-etfs
141 William Swanson has instructions on his blog https://www.swansontec.com/bitcoin-dice.html
142 It is recommended to encrypt the private key first with a memorable passphrase.
143 As an analogy, if you used unbalanced dice that always landed on a 5 or a 6, then it would be easier for a thief to match your rolls.
144 An easy way to understand a 2-of-3 key split is by considering a straight line on a graph. Let’s say the point at which the line crosses the x-axis is the private key. You can pick any 3 points on the line. Any single point will not give you any information at all about where the line crosses the x-axis, but any two points will lock down the line and tell you exactly where it crosses the x-axis.
145 Technically these are ‘P2SH’ or ‘Pay to Script Hash’ addresses, but most people call them ‘multi-sig’. These addresses start with the number ‘3’ instead of the number ‘1’.
147 I find that the user experience of account opening to be better with some cryptocurrency exchanges than traditional banks.
149 Up or down? It could be either: any indication that the coins are being sold could cause a panic that Satoshi no longer believes in the project, but conversely, if the coins were sent to a ‘burn’ address that effectively renders the coins to be immobile, this would take the supply off the market, which could lead to increased confidence and a price increase.
150 https://www.reddit.com/r/litecoin/comments/7kzw6q/litecoin_price_tweets_and_conflict_of_interest/
151 http://nordic.businessinsider.com/steve-wozniak-stockholm-apple-seth-godin-nordic-business-forum—/
152 https://www.wired.com/2015/12/Bitcoins-creator-satoshi-nakamoto-is-probably-this-unknown-australian-genius/
155 https://www.economist.com/news/briefings/21698061-craig-steven-wright-claims-be-satoshi-nakamoto-Bitcoin
158 https://www.ethernodes.org/network/1 in April 2018
160 The Gini coefficient is a metric used to describe wealth inequality in a population. It is a number from 0 to 1, where 0 means everyone has the same wealth and the number tends towards 1 as inequality increases.
161 http://www.ethdocs.org/en/latest/contracts-and-transactions/account-types-gas-and-transactions.html
165 Etherscan, a popular website for searching the Ethereum blockchain, uses both on https://etherscan.io/accounts
171 This address is not random; it is calculated deterministically using a combination of the creator’s address and how many transactions that creator has ever sent.
173 Go to https://etherscan.io/token/0xf8e386eda857484f5a12e4b5daa9984e06e73705 to see what’s going on in that smart contract.
179 This is a geek joke, the number 1337 means ‘leet’ or ‘elite’ referring to elite hacking skills.
181 You would think that the value of ETH should have fallen by the same value that was created by the ETC tokens. Alas, cryptocurrency markets don’t work according to conventional logic.
187 https://www.coindesk.com/enterprise-Ethereum-alliance-pledges-2018-blockchain-standards-release/
191 I now have a new appreciation for dictionary editors who have to battle daily with linguistic evolution versus pedantry!
192 ERC-20 is a set of technical standards for designing smart contracts on Ethereum that hold fungible tokens. Tokens compliant with ERC-20 have well-known interfaces and properties, meaning that they can be easily added by exchanges and wallets. Superior standards exist but remain compatible with ERC-20. JP Buntinx describes the idea in The Merkle: https://themerkle.com/what-is-the-erc20-ethereum-token-standard/
193 In another respect, cryptoassets are not bearer assets, because they are recorded on a register – the blockchain! Traditionally an asset is a bearer asset (she who holds it owns it) or a registered asset (she whose name is on a list owns it). Cryptoassets are somewhere in between.
194 https://onchainfx.com/categories used with permission
197 Note that ‘top’ is roughly defined by ‘market cap,’ i.e., token price times number of tokens outstanding. Top doesn’t mean good. I do not endorse any of these, nor do I think they are all legitimate. By the time you read this it will be out of date.
200 The conflation between success and disruption is one viewpoint that seems to be common in technology and innovation hubs. However, there are many routes to success. Success can equally be derived from creating technologies that incrementally improve business-as-usual company operations.
203 https://www.justice.gov/opa/pr/former-federal-agents-charged-bitcoin-money-laundering-and-wire-fraud
204 https://www.justice.gov/usao-ndca/pr/former-secret-service-agent-pleads-guilty-money-laundering-and-obstruction
205 To arrive as Indonesian Rupiah
208 http://www.dtcc.com/news/2017/january/09/dtcc-selects-ibm-axoni-and-r3-to-develop-dtccs-distributed-ledger-solution
210 http://www.hqla-x.com/hqlax-selects-corda-for-collateral-lending-solution-in-collaboration-with-r3-and-five-banks/
211 https://www.bloomberg.com/news/articles/2018-05-07/-cryptolandia-blockchain-pioneers-take-root-in-hipster-brooklyn
212 https://www.finastra.com/news-events/press-releases/finastras-fusion-lendercomm-now-live-based-blockchain-architecture
213 http://www2.calypso.com/Insights/press-releases/calypso-r3-and-five-financial-institutions-develop-trade-matching-application-on-corda-dlt-platform
218 https://medium.com/@matteozago/50-examples-of-how-blockchains-are-taking-over-the-world-4276bf488a4b
219 A special thanks to Dave Birch (www.dgwbirch.com) for popularising this question.
220 This is the USD value of the fundraises at the time of fundraise. As we will see later, the funding currency is usually cryptocurrency, usually bitcoins or ether. It is up to the projects to decide how they manage their received funds, and most balance between keeping some in cryptocurrency and some in fiat.
221 NB Sometimes there is no company, there is just a project or venture that controls a cryptocurrency address that can receive funds. Whereas with banks you have to be explicit with the owner of the bank account, there is no such requirement for creating cryptocurrency addresses on public networks.
222 We can argue about what to call participants who contribute to ICOs. I call them investors, because at the very least they are invested in the success of the project, whether they hope to financially profit from their investment, or hope to be able to use the eventual product or service.
225 https://github.com/ethereum/wiki/wiki/White-Paper though this version is periodically updated
227 In the European Union retail clients may request treatment as ‘elective’ professional clients.
231 Sometimes other cryptocurrencies such as Bitcoin are used, but Ethereum has become the default due to the number of templates that can be used for creating the smart contracts.
232 EOS is an example of a token initially recorded on Ethereum, then later redeemable for EOS-coins on the EOS platform.
235 https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/1bewilligung/fintech/wegleitung-ico.pdf?la=en
244 Note: I have slipped into ‘keeping few coins in wallets’ terminology rather than ‘keeping private keys that control few coins’ but by now I think you know what I mean.
245 On the subject of e-sports, some people mock or bully those who watch other people playing computer games, or those who dress up for fun as their favourite characters. Often these same people will themselves watch other people kick a ball around on some grass, dress up as their favourite footballer, sing songs, and pretend to be them.
246 For example, a token that trades close to 1 dollar.
247 A famous case was that of Bank Herstatt. Bank Herstatt was a German bank that engaged in foreign exchange trades. On 26 June 1974 it received Deutsche marks from a number of trading counterparties, who expected US dollars in return later in the day when the US markets operated. However, the bank went bankrupt before the US dollars were transferred, so the counterparties were left short of US dollars having paid out Deutsche marks. This led to the creation of the Basel Committee on Banking Supervision, famous for ‘Basel requirements,’ and CLS.
251 https://www.federalreserve.gov/aboutthefed/bios/board/default.htm retrieved 5 Jun 2018
253 https://www.federalreserve.gov/monetarypolicy/fomc.htm retrieved 5 Jun 2018
259 Atrtribution: By Kimse84 - I made this diagram, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=25448710
260 I am acutely aware that there are only two women in this list—it reflects the gender balance of the early years of the industry. Today, the number of talented women in the industry is growing and I am looking forward to learning from these experts too.
261 I’d like to thank Tim especially both for passing me detailed feedback on a number of sections in this book, and for his mentorship over the years.
Appendix
Appendix
Acknowledgments
About The Author
