Lecture 4, Cryptocurrency
What do bitcoins look like?
- Two unique numbers in public and private key - Kept in bitcoin wallets on a computer
Durability of cryptocurrency
Highly durable
Portability of cryptocurrency
Highly portable
What is cryptocurrency?
A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transaction and to control the creation of additional units of currency
Acceptance of cryptocurrency
Global, throughout the internet
Private key
- 51 characters starting with a 5 - Required to transfer value from this address
How does block chaining work?
- Allows participants of the network to perform mathematical verification and reach a consensus to agree on any particular value - Sender uses private key and announces transaction information over the network - Information broadcasted through the network - Miners solve the puzzle related to the transaction in order to process it. Requires investment into computing power - Miner receives rewards in form of bitcoins - Block is time stamped and added to the existing block chain - After new block added to chain, existing copies of the blockchain are updated for all the nodes on the network
Subdivisions of bitcoin
- Bitcoin = 1 unit - Deci-bitcoin = 1/10 of a bitcoin - Bitcent = 1/100 of a bitcoin - Millibit or millie = 1/1000 of a bitcoin - Bit = 1/10000 of a bitcoin - Satoshi = 1/1000000 of a bitcoin
Cryptocurrency is?
- Derives its trust from mathematical properties - Based on established, trusted cryptographic principles - Not made from chemical/physical properties - Not created by a central bank in a country as legal tender/status
Bitcoin compared to other bearer instruments
- Easier to transport anywhere in the world - Easier to secure - Immune to sovereign censorship, shutdown or confiscation - Immune to inflation and bank defaults
Legal status of cryptocurrencies
- Exchanging bitcoins for anything is basically barter, totally legal - Enhanced anonymity of Bitcoin potentially affords the same benefits as cash or gold to people operating outside the law, relatively frictionless to transfer to anyone in the world - Exchanging barter doesn't remover the requirements to pay tax - Value entirely inside the bitcoin economy, extremely difficult to trace - Authorities highly likes to attempt to regulate/ban cryptocurrency
Why use cryptocurrency?
- Fast, safe and cheap - Easy to use and highly portable - Untraceable - Neutral and transparent - Active involvement of users - Fewer risks to merchants - Low inflation and low risk of collapse - Secured by collective power of cryptocurrency miners. Difficult to change block chain but very easy to verify
Risks of using cryptocurrency
- Hackers, some cryptocurrencies been targeted by highly sophisticated hackers - Few legal protections, if things go wrong don't expect the same sort of help you'd get from a bank - Cost, high price volatility making cryptocurrencies cost more - Scams, many fraudsters taking advantage of the hype and offering fake opportunities - Lack of transparency, anonymous nature makes transparency and accountability very difficult to ensure safety with ventures
Cryptocurrency is a bearer instrument
- Holder has ownership - No other records kept as to the identity of the owner - Easy to keep anonymous - Hard or almost impossible to replace if lost or stolen
Technology behind bitcoin
- Its a protocol, unit of account is 'bitcoins' - Based on block chaining - All transactions are public but not by default tied to anyones real identity - Transaction consists of adding a new publicly accepted transaction to the block chain - Secured by a collective compute power of the miners, difficult to create new valid block. Easy to check the validity of a new block - Miners are awarded newly-mined bitcoins or transaction fees for successfully finding new blocks
Money is a unit of account
- Recognisable - Fungible, is the property of a good or a commodity whose individual units are essentially interchangeable and each of its parts is indistinguishable from another part - Divisible - Transportable - Transferable - Hard to counterfeit
Money is a store of value
- Stable supply - Durable - Securable - Stable value
Money as a medium of exchange
- Stands in for an arbitrarily long chain of barter - Widely accepted
Public key
34 characters starting with 1 or 3
Is cryptocurrency centralised or decentralised?
Decentralised and controlled by complex maths
Is cryptocurrency sovereign?
No
Does cryptocurrency have intermediates?
No its done through peer to peer
What is fiat currency?
One that is backed by trust
Who created bitcoin?
Satoshi Nakamoto
What is the cryptocurrency market similar to?
The Wild West, there are no rules
What was the first transaction?
Two papa johns pizzas for 10,000 bitcoin
Security of cryptocurrency
Very high
Scarcity of cryptocurrency
Very high as it is protected by block chaining
What type of money is cryptocurrency?
Virtual