Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!

  • FOR WENCES, THE allure of Bitcoin went deeper than just professional interest, to a time before he was wealthy and successful, during his childhood in a country that had been—and remained—locked in a seemingly intractable battle with its own currency. There was rarely a time during Wences’s youth when Argentina was not in some sort of financial crisis. In 1983, after years of staggering inflation, the government created a new peso, each one of which was worth 10,000 old pesos. That didn’t work and so in 1985 the new peso was replaced by the austral, which was worth 1,000 new pesos. Seven years later, continuing inflation led the government to go back to the peso, but this time pegged to the dollar, an experiment that eventually ended with a crushing financial crisis. During most of this time, inflation ran at over 100 percent a year, meaning that the value of money in the bank fell by half each year and often much more than that. Wences was descended from one of Argentina’s aristocratic families, but his particular branch had lost everything and ended up on a rustic sheep ranch out in the emptiness of Patagonia. When his father delivered wool and the check didn’t come through for a month, the value of the family income could fall sharply because of inflation, setting off yet another round of household cutbacks. “I think I understand economics better than most people because I grew up in Argentina,” he would say. “I’ve seen every single monetary experiment you can imagine. This is the street smart economics. Not the complex PhD economics.” One particular incident had seared itself into Wences’s memory. In 1984, during the first major episode of hyperinflation after the Argentinian military junta lost power, Wences’s mother came to get him and his two sisters from school. His mom was carrying two grocery bags filled with money—the salary she had just been given in cash. She rushed with Wences and his sisters to the grocery store and had them run through the aisles, grabbing as much food as possible before the hyperinflation caused the goods to be repriced. A man walked through the aisles all day doing nothing but repricing the items on the shelves to keep up with the rapidly changing value of the peso. When Wences and his mother got to the register, he and his sisters would run back and grab more food if they still had any money left. Holding on to money was equal to losing it. These experiences gave Wences insights into the nature of money that most people in the world learn only from textbooks. In America, the dollar seamlessly serves the three functions of money: providing a medium of exchange, a unit for measuring the cost of goods, and an asset where value can be stored. In Argentina, on the other hand, while the peso was used as a medium of exchange—for daily purchases—no one used it as a store of value. Keeping savings in the peso was equivalent to throwing away money. So people exchanged any pesos they wanted to save for dollars, which kept their value better than the peso. Because the peso was so volatile, people usually remembered prices in dollars, which provided a more reliable unit of measure over time. As Wences avidly pored over all the available writing about Bitcoin in the first months after discovering it, it seemed clear to him that for people in places like Argentina, Bitcoin might provide a much more efficient place to store money than the dollar. In Argentina, dollars had to be purchased through shady money changers, and were saved in closets or under the mattress. The promise of a virtual currency that could be bought and stored online, accessed from anywhere, and secured with a private key looked like a significant improvement.

  • Economists who had taken note of Bitcoin also pointed out that the virtual currency actually had built-in incentives discouraging people from using it. The cap on the number of Bitcoins that could ever be created—21 million—meant that the currency was expected to become more valuable over time. This situation, which is known as deflation, encouraged people to hold on to their Bitcoins rather than spend them.

  • The notion of Bitcoiners around the world sitting on their private keys and waiting to become rich begged the question of the intrinsic value of these digital files. What were all these locked-up virtual coins really worth if no one was doing anything with them? What was backing up all the value the coins seemed to have on paper?

  • Bitcoin fans argued that the United States dollar was not backed up by anything real either—dollars were just pieces of paper. But this argument ignored the fact that the United States government promised to always take dollars for tax bills, which was a real value no matter how much people disliked paying taxes. Practically no one was promising to take Bitcoin for anything. The primary value the coins had at this point was the expectation that they would be worth more in the future, allowing current holders to cash out for more than they paid. To some cynics, that description made Bitcoin sound suspiciously like a less savory sort of financial invention: a Ponzi scheme.

  • Satoshi Nakamoto’s aim in creating the decentralized Bitcoin ledger—the blockchain—was to allow users to control their own money so that no third party, not even the government, would be able to access or monitor it. But people were still opting for the convenience of centralized services like Coinbase and Bitstamp to hold their coins.

  • The great benefit of this business model was that the companies, rather than their customers, dealt with the headache of storing and securing the money. When early Bitcoin users lost the private keys to their Bitcoin addresses, the coins associated with those addresses were lost forever. With a Coinbase wallet, on the other hand, if a customer lost the password, it was like losing the password to a normal website—the company could recover it. What’s more, Coinbase customers didn’t have to download the somewhat complicated Bitcoin software and the whole blockchain, with its history of all Bitcoin transactions. This helped turn Coinbase into the go-to company for Americans looking to acquire Bitcoins and helped expand the audience for the technology.

  • The Chinese government had stepped right into the middle of the ongoing debate about how to define Bitcoin and had actually found itself in agreement with Wences Casares and many other advocates for Bitcoin, who believed that in 2013 the files on the blockchain were more similar to commodities, like gold, than to currencies, like dollars and euros, because Bitcoins were not yet widely or easily used as a medium of exchange or as units for accounting. Beyond those qualities, the Chinese government had also said that Bitcoin lacked the most important characteristic of a currency: government backing. The Chinese government’s categorization of Bitcoin as a digital commodity didn’t, on its face, seem terrible to Bobby. Within China, almost no one was using Bitcoin to buy and sell things—it was still just a speculative investment. The problem, though, was that because it was not considered money, the government had declared that banks and payment processors could not deal with Bitcoin, either directly or indirectly.

  • BitPagos had been started earlier in the year by two young Argentinians, a man and a woman, who had been running a consulting company and struggling to take payments from foreign customers. In addition to collecting ticket payments for the foundation, the new company was getting traction with hotels that took money from foreign tourists and didn’t want to pay the cost of getting those payments into pesos. By the time of the conference, BitPagos had already signed up around thirty hotels. Most of these hoteliers didn’t care about the ideas behind a decentralized currency; they were just happy to find a way around the expensive tollbooths that littered the Argentinian financial system. As an added bonus, they could end up with money in Bitcoins rather than the rapidly depreciating peso. This was an eminently practical use of Bitcoin to deal with the inflationary mess in Argentina, but it was so practical that it actually swung around into the domain of the ideological ambitions that Satoshi Nakamoto and the Cypherpunks had imagined. The Argentinian hoteliers might not have been libertarians, but they would have easily understood Satoshi’s early writing about Bitcoin, which explained that “the root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” Mismanagement of currencies was a part of daily life in Argentina.

  • Jamie Dimon, the chief executive of the nation’s largest bank, JPMorgan Chase, had told CNBC in late January that he was extremely skeptical that Bitcoin would ever amount to anything real. Dimon said that once Bitcoin companies had to follow the same rules as banks, when it comes to money laundering and compliance, “that will probably be the end of them.” Barry Silbert knew Dimon personally. When he saw Dimon’s comments about Bitcoin, he quickly e-mailed Dimon a link to the pro-Bitcoin essay that Marc Andreessen had written in the New York Times. A few days later, Dimon called Silbert. Dimon had clearly read Andreessen’s essay and sympathized with the view that virtual currencies could provide some opportunity for people outside the United States who didn’t have access to good banks. But Dimon responded that the potential of Bitcoin was not going to be enough to convince government officials to allow a competing currency to exist. Dimon knew what it was like to work in an industry that came under government supervision. Once Bitcoin came under similar regulation, it would require all the same fees and rules that bothered people in the traditional financial system. He didn’t dismiss Barry’s arguments, though, and invited him to come in and present Bitcoin to some of JPMorgan Chase’s executives. Dimon’s perspective was representative of a broader shift in the banking industry’s mind-set since the financial crisis. Before the mortgage meltdown had nearly brought down the American economy, Wall Street had hired some of the best young minds in the world and tasked them with finding innovative ways to make money. When many of those clever innovations ended up contributing to the economic collapse, the banks that survived were made keenly aware of how financial experimentation could go awry. What’s more, regulators put in place a raft of new rules that forced banks to think twice before taking unnecessary risks. Just as important, government officials were forcing banks to pay billions of dollars in fines for past infractions. Few banks paid as high a monetary price as JPMorgan. By the time Dimon and Silbert talked, the most important characteristic of any new business for JPMorgan was not how much money it would make, but how it would sit with regulators. JPMorgan had gone further than most in pulling back from potentially risky activity. During 2013 it had stopped working with remittance companies, check cashers, and even student-loan providers, not because it had to, but because it didn’t want the headache. Other banks were taking similar, if less aggressive, steps.

  • For many technology experts at banks, the most valuable potential use of the blockchain was not small payments but very large ones, which are responsible for the vast majority of the money moving between banks each day. In the stock trading business, for example, the lengthy settlement and clearing process means that the money and shares are all but frozen for three days. Given the sums involved, even the few days that the money is in transit carry significant costs and risks. As a result, various banks began looking at ways they could use the blockchain technology to make these sorts of large transfers quickly and securely. For many banks, the biggest stumbling block was the inherent unreliability of the Bitcoin blockchain, which is, of course, powered by thousands of unvetted computers around the world, all of which could stop supporting the blockchain at any moment. This increased the desire to find a way to create blockchains independent of Bitcoin. The Federal Reserve had its own internal teams looking at how to harness the blockchain technology and potentially even Bitcoin itself. Many in the existing Bitcoin community scoffed at the idea that the blockchain concept could be separated from the currency. As they viewed it, the currency, and the mining of the currency, was what gave users the incentive to join and power the blockchain. Given that a blockchain could be taken over and subverted if an attacker controlled more than 50 percent of the computing power on the network, a blockchain was only as secure as the amount of computing power hooked into the network. A blockchain run by a few dozen banks would be much easier to overwhelm than the Bitcoin network, which now commanded more raw computing power than all the major supercomputers combined.

  • In the current system, financial institutions were given the power to determine what sorts of businesses could live and die. His vision for what Bitcoin could do had remained steady. While others were talking about micro-payments and smart contracts, he was still fixated on the idea of a digital gold that people anywhere in the world could hold without requiring any permission from anyone. This was still the kid who had grown up in Argentina, watching his family look for a place that was more secure and reliable than the peso to store their savings.

Technical details

  • ADDRESSES AND SECRET KEYS: Anyone joining the Bitcoin network can generate his or her own Bitcoin address (generally a string of thirty-four letters and numbers), and a corresponding private key (generally a string of sixty-four characters). As an example, one actual Bitcoin address is: 16R5PtokaUnXXXjQe4Hg5jZrfW69fNpAtF The private key for this particular address is: 5JJ5rLKjyMmSxhauoa334cdZNCoVEw6oLfMpfL8H1w9pyDoPMf3 Only the person with this private key can sign off on transactions from that address (the address is empty so don’t bother trying). Each Bitcoin address has one and only one private key. The relationship between the private key and the address is determined by a series of complex math equations, which makes it essentially impossible to work backward from the public Bitcoin address to find the private key. A Bitcoin user can generate endless numbers of Bitcoin addresses and private keys. There is no cost for doing so. The length of the addresses and the sheer number of potential addresses ensure that it is all but impossible for the same address to be generated twice.

  • INITIATING A TRANSACTION: With a private key, a user, let’s call her Alice again, can send money from her address without ever sharing the private key with anyone else. Rather than sending out her private key, Alice puts her private key into software on her own computer, along with details of her transaction. Without sending this information to the network, the Bitcoin software on Alice’s computer runs the information through a series of complicated math equations that spits out a special code, often referred to as a digital signature. This part of the process can happen even if Alice’s computer is offline. It is this digital signature—a unique product of her private key and the transaction taking place—that Alice sends out to the network along with her transaction, much like a signature on a check.

  • VERIFYING TRANSACTIONS: The computers that get Alice’s digital signature are unable to work backward to get Alice’s private key, thanks to the mathematical innovations involved. But the computers can put Alice’s digital signature and her public Bitcoin address into another series of complicated math equations and verify that the digital signature was, indeed, created by the private key corresponding to the public address. Again, these are very sophisticated mathematical manipulations that happen on both sides of this, on one side to generate the signature and on the other to verify it. It is necessary for the computers on the network to verify every transaction because there is no central authority to do this work. Once the computers do verify that Alice has the right private key, they then check that Alice’s Bitcoin address has the coins she is trying to send. The computers on the network do this by scanning the record of all previous Bitcoin transactions coming to and from the address Alice is using.

  • CREATING BLOCKS AND RECORDING TRANSACTIONS (THE BITCOIN MINING PROCESS): Satoshi saw that it would be problematic if each computer on the network recorded every transaction as it arrived. A transaction might reach one computer before it reached another computer on the network, leading to disagreements about the balance in each address. Bitcoin needed to have one definitive record of when each transaction occurred, and Satoshi came up with a clever way to achieve this through the use of a kind of ongoing contest that any member of the network could compete in. To win the contest, all the computers on the network would compile recent transactions, as they were sent around the network, into long lists, which were referred to generically as blocks. After compiling the transactions into a block, a computer would then run the block through yet another specialized math equation, known as a hash function, which can take any data—the Gettysburg Address or your name—and turn these data into a unique sixty-four-character digest. The computers taking part in the Bitcoin contest are looking for a block that can be put into a hash function known as SHA 256 and generate a sixty-four-character digest with a specific number of zeroes at the beginning. If, for instance the computers are looking for a digest with five zeroes at the beginning, either of these digests would be a winner: 000006d77563afa1914846b010bd164f395bd34c2102e5e99e0cb9cf173c1d87 Or 000007ac6b77f49380ea90f3544a51ef0bfbfc8304816d1aab73daf77c2099319 Because SHA 256, like other hash functions, is essentially impossible to reverse-engineer, it is impossible to tell what sort of block will lead to a digest with five zeroes at the beginning. Given that SHA 256 and other hash functions always generate the same digest from any particular input, if every computer put the same transactions into their block, every computer would get the same digest out the other end. In order to differentiate their blocks, in the hope of finding a winning block, each computer would be tasked with adding a random number onto the end of the block. Because of the sensitive nature of hash functions, changing the random number at the end of the block from 20 to 22 could potentially change the digest from a digest with one zero to a digest with ten zeroes at the beginning. If one random number didn’t lead to a digest with the desired number of zeroes, the computer would try the block with another random number attached to see if that worked. All the computers hoping to win would keep trying out new random numbers—and adding incoming transactions—until one computer found a block that led to a digest with the correct number of zeroes. Because finding an answer involved trying out random numbers, this contest was more a game of luck than a game of skill—but the computer that could run guesses through the hash function fastest would increase its chances of winning, just as a person with twenty lottery tickets has a better chance of winning than a person with only one. The number of zeroes required to win the contest was somewhat inconsequential but made it easy to adjust the difficulty of the contest and ensure that new blocks arrived approximately every ten minutes. If computers were winning more often than every ten minutes, the Bitcoin software could adjust and demand that computers find a digest with more zeroes at the beginning. If computers were not winning frequently enough, the software could adjust and allow winners to have less zeroes. As the contest became harder, it required more high-powered computer hardware to win it.

  • WINNING BLOCKS: When a computer did find a winning block, it would send the winning block around the network, so that the other computers could verify that the block did indeed generate a digest with the desired number of zeroes at the beginning. The computers would then add the winning block to the blockchain held on all the computers, thus recording the list of transactions included in the block. That block became the official record of all transactions that occurred since the previous winning block. If the winning block left out a few transactions that were included in the blocks created by other computers, those transactions would not be recorded on the blockchain and would be left out for the next round of blocks. In addition to the transactions and the random number, the blocks also included a reference to the previous block and data on the state of the Bitcoin network, so that all this information would also be recorded on the blockchain. The creative method for arriving at a single, communally agreed upon record of transactions provided a long-sought solution to a conundrum known as the Byzantine Generals Problem. Before Bitcoin, computer scientists struggled with how to build a reliable network of unrelated people, if some of the people could not be trusted. The method of building a blockchain, with each block coming from just one member of the network, and disagreements being solved by majority rule, solved this problem.

  • GENERATING NEW COINS: When a computer generated a winning block, it also won a bundle of new coins—50 Bitcoins when the system first began. These coins were created in a clever way. In essence, when computers were generating the list of transactions in a block, they included, in their list of transactions, a transaction granting one of their own Bitcoin addresses 50 Bitcoins out of thin air. When a block won the lottery, and was added to the blockchain, this seemingly fictional transaction was turned into a reality, and the address in question had 50 more Bitcoins attached to it. By making it onto the blockchain the transaction was made real. The transaction that created new Bitcoins would be referred to as the coinbase of each block. If a computer tried to grant itself more than 50 new Bitcoins, the whole block would be rejected by the other computers, even if it generated a digest with the correct number of zeroes.