BitCoin and Cryptocurrencies Wiley. The.Bitcoin .Big .Bang.Jan.2015

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THE BITCOIN BIG BANG

  When I began writing The Bitcoin Big Bang, it was for selfish reasons:I had bought Bitcoin near the peak and now was in a losing trade and needed to know everything about this “investment.” I figured I couldturn my research into a book and learn a few things in the process. The first half of the book describes what Bitcoin is and how it works, whilethe second half illustrates the multiple uses of the blockchain tech- nology and explores the ramifications for investments, business, andgovernment.

Chapter 1 Bitcoin Is a Bubble When I see a bubble, I buy that bubble, because that is how I make money

  The concept behind the technology is as old as commerce itself: cut out Bitcoin Is a Bubble 11 empires have been built on this concept, for example, the food co-ops of the 1970s in the United States were the first-generation Costco, BJ’sWholesale, and Sam’s Club. If you choose this path, I can’t promise a campfire and a round of “Kumbaya”at the end, but I can promise that you will have a front-row seat to what could be the most disruptive technology since the Internet and thepersonal computer.

Chapter 2 Understanding the Digital Gold Rush You have to learn the rules of the game. And then you have to play better than anyone else

  —Albert Einstein n January 1848, James Marshall, a foreman working at John Sutter’s timber mill, found a piece of shiny metal in the tailrace. Few knew it at the time, butAmerican icons were being born; Levi Strauss and Wells Fargo are the most recognizable, but don’t forget Studebaker and even the modern-day name of the city’s football team.

20 T H E B I T C O I N B I G B A N G enough to back the U.S. dollar with the full faith and credit of the U.S

  Bitcoin is quickly findinga way to disintermediate the financial services industry; that is to say,Satoshi Nakamoto was intent on cutting out the large middlemen in the Understanding the Digital Gold Rush 21 There is more to the story of Satoshi Nakamoto and a decentralized financial system, but before we can jump down that rabbit hole we need to know the basics. A transaction (apple) is broadcast to the network (class of kids, aka miners), and the miners work to solve the equation and verify thatthe previous owner of the apple (bitcoin) had to right to give it to the teacher.

Chapter 3 Bitcoin Is More than Digital Gold Every informed person needs to know about Bitcoin because it might be one of the world’s most important developments

  The simple message was, “I am not DorianNakamoto.” The creator and operator of the page confirmed that the account used to post this message was the same account associated withthe original posting of the Bitcoin paper. Even the revered former Federal Reserve Chairman Paul Volcker said in a speech that the Fed had taken “actions that extend to the very edgeof its lawful and implied powers.” Bitcoin may be a response to this loss of credibility and whoever created it went to great lengths to removeany centralized third party.

Chapter 4 Byzantine Generals’ Problem He who knows when he can fight and when he cannot, will be victorious

  Hissolution was to create a communication platform that was open to all— well, open to all that had the aptitude to attend Harvard. His solutionbecame known as the social network; he became a billionaire and had a It is a safe bet that Hollywood will eventually make a movie aboutSatoshi Nakamoto, even if they have to make it up.

B. A small number of traitors cannot cause the loyal generals to adopt a bad plan

  The solution required a method to protect the contents of themessage, a way to reduce the number of messages sent, a way to detect Byzantine Generals’ Problem 53 by encrypting the message, imposing a cost to decode the message, pro- viding a way to verify that the message was legitimately decoded, andproviding an incentive to the honest generals. The Byzantine generals cannot trust that the mes-sage they heard was the legitimate message—in simple terms, the mes- sage could be “attack” or “retreat.” The Bitcoin protocol wraps themessage in an incredibly difficult mathematical equation, and the solu- tion to the problem is the valid message of “attack” or “retreat.” Anadded layer of security is accomplished by the cryptographic equation itself.

51 Percent Attack

  To understand the 51 percent attack, let’s suppose we have a group of 10 generals all using the Bitcoin protocol to decipher a message to“attack” or “retreat.” In this case, 6 of the 10 generals would need to confirm that the message was legitimate by comparing the message theyreceived to 5 other messages. Solving the BGP means the decision about allocating funds is removed from the bank and placed back into the hands of the holders of the funds.

Chapter 5 A Decentralized Financial System Change is the law of life. And those who look only to the past or present are certain to miss the future

  Driving to the bank, filling out a wire transfer form, and then waiting hours for the confirmation are all costs KeithJPMorgan FederalBank of Citibank AmericaReserve Wells FargoAlan Figure 5.1 A Simple Transaction in a Centralized Financial System A simple transfer of money may look something like this: SupposeAlan has performed landscaping working for Keith and is now requesting payment. Bit- coin is about to do to the financial services industry what the telegraphdid to the Pony Express and e-mail did to the U.

66 T H E B I T C O I N B I G B A N G system shared the blame for creating a deeper economic malaise

  When Bernanke writes about the“asymmetry between surplus and deficit countries,” he uses the example of France’s refusing to play by the “rules of the game.” For the inter-national gold standard system to operate correctly, the countries that were experiencing gold inflows should have allowed their economiesto inflate. Using the example of the “rules of the game” of the international gold standard mention by Ben Bernanke, France would not be able to preventthe money supply from inflating.

68 T H E B I T C O I N B I G B A N G economy at the exact moment it should be taking steps to slow growth

  If the Industrial Revolu-tion was the catalyst for modern economies to move from an agrarian to a manufacturing society, then the Bitcoin is the vehicle that will trans-port the financial system from centralized to decentralized. This com-pany embraced the technology of the Industrial Revolution and used it to expand a flour-milling business into one of the largest food processorsin the world.

Chapter 6 What Do You Call a Bitcoin Miner? A Banker

  This is in fact true; the Bitcoin protocol replaces the banker with the miner and by doing so removes the cost of a middleman. If someone wanted to spend the bitcointhat Keith sent to Alan, they would not only have to perform the labo- rious task of finding the correct hash value, but they would have to goback and refind every hash value for every single transaction that has ever taken place—a virtually insurmountable task.

Chapter 7 Nautiluscoin—0 to

  At least Iwill be able to test the efficacy of the NSF; if I can create a liquid and stable market with a huge flaw in the code, then when it isfixed the coin will be even stronger. I aminclined to move toward proof-of-stake, as it allows Nautilus- coin to pay a “dividend.” Since my goal is to make Nautiluscoin the investment of choice for professional investors entering the digital currencyspace, I think proof-of-stake and the “dividend” will be easy to understand.

Chapter 8 Building the Nautiluscoin Economy The truth is no online database will replace your daily newspaper

  Algorithmic Monetary Policy In the case of the Nautiluscoin economy, the goal of the monetary pol- icy will be to increase or decrease purchasing power in response to therelative strength or weakness in the economy. The first of these tools alreadyexists in the form of the Nautiluscoin Stability Fund (NSF), while the 114 T H E B I T C O I N B I G B A N G The NSF was conceived to stabilize the price of Nautiluscoin and ultimately increase the purchasing power of the users and holders ofthe currency.

Chapter 9 Investing and Trading in Alternative Currencies With e-currency based on cryptographic proof, without the need to

  If we consider an emerging currency a proxy for the underlying good or service provided,then it follows that as the good provided by the emerging economy is more widely accepted the value of the emerging currency increases. (Number of Transactions per Day) Figure 9.4 Price of Bitcoin Rises To explore why the success of Bitcoin could be detrimental to the price, let’s suppose, in extremis, that every merchant in the world acceptsbitcoin and every consumer has exactly the number of bitcoins they desire.

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