Bitcoin and Namecoin

Overview and technical discussion

Allan Cecil

Welcome!

• This presentation was given at NBLUG.org on 2011-08-09.
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Covered in this talk:

• Introduction to Bitcoin
• Live demonstration of Linux client and mining tools
• Technical overview
• Market state and legal standing
• Namecoin overview
• Live demonstration of Namecoin DNS
• Security and anonymity considerations
• Q and A

What is Bitcoin?

Bitcoin is a decentralized, distributed digital currency

• Decentralized: No trusted third-party involved
• Distributed: Unstructured peer-to-peer network
• Digital: Public transaction database using public/private keypairs
• Currency: A Bitcoin (BTC) is a unit of account worth what the market perceives it to be worth
• Good intro video at weusecoins.com
• Some clarification, context, and caution is needed here

Transactions

Meet Alice and Bob. They want to make a transaction.

• Alice is a consumer. Bob has a widget that Alice wants.
• Alice has some Bitcoins. Bob is willing to take them as payment.
• Alice has a digital wallet, but it contains key pairs, not coins.
• Alice knows Bob's public key and creates a transaction that she signs with her private key.
• The transaction is made public, confirmed over time, and kept forever.

Live Demo

Clients are available for Windows, Linux, and Mac OS X

• The Linux client can be found as a .tar.gz file on bitcoin.org
• Precompiled 32-bit and 64-bit binaries are included
• Command-line bitcoind as well as a bitcoin GUI are available
• First launch will connect to peers using IRC and download the entire block chain (currently several hundred MB in size)

Details!

Bitcoin: Easy to use, complicated to understand fully

• Block chain: A growing list of all transactions

• Controlled, predefined rate of generation: 2,016 blocks every two weeks, or 1 block every 10 minutes
• When a block is found a new block is started using the hash of the previous block
• Peers will ignore any block that is invalid for any reason
• Orphaned blocks are possible; the network of peers will eventually settle on the longest (most difficult) block chain

Details!

• Transactions are broadcast by peers and are recorded in what will become the next block
• Transactions rely heavily on public/privite keysigning and hashes of previous transactions

More details!

Block generation, i.e. mining

• New bitcoins are put in circulation every time a block is created
• When generating a block, hashes are repeatedly created from:
• The hash of the previous block
• Unrecorded transactions the miner knows about (and has prioritized based on potential transaction fees)
• A nonce (a 32-bit integer incremented on each attempt)
• The block is accepted when a hash is found that meets a specific difficulty

More details!

Mining: It's a lottery

• Every time a miner tries a hash, there is an equal chance of finding a hash that meets the current target
• The difficulty can be visually understood by looking at a random block on blockexplorer.com
• The number of 0's at the beginning of the hash increases as the target difficulty rises
• The current difficulty makes pooled mining with GPU's the only practical option with FPGA and ASIC's on the horizon

More details!

There are a lot more technical details to Bitcoin's design:

• Whitepapers: Original whitepaper by Satoshi Nakamoto
• Bitcoin Wiki pages: Introduction, How Bitcoin works, FAQ, Block chain, Block Header, Transactions, address / keypair information, and Mining
• Technical talks :Brown bag presentation by Brian Warner, Technical overview by Matthaus Wander

The Bitcoin Economy

Bitcoins are being used anywhere a digital currency makes sense

• Online payments for goods and services
• Microtransactions
• 1 BTC is divisible to .00000001 places, commonly referred to as "1 Satoshi"
• Tips to anonymous people with public addresses
• Currency exchange (between fiat currencies as well as online currencies such as Linden Dollars)

The Bitcoin Economy

People have said some very conflicting things about Bitcoin...

• "You should convert all of your liquid assets to bitcoin as quickly as possible." - "Astrohacker", Bitcoin is the Econonmic Singularity
• "Long before there is a Great BitCoin Depression, the world will have realized that it is a flawed monetary system." - Brian Reiter, Bitcoin is Fatally Flawed
• How much people are talking about bitcoin is also interesting

The Bitcoin Economy

The Bitcoin market has been extremely volatile

• Early June: 1 BTC = $32 USD
• Mid-June: MtGox exchange site hacked, significant drop
• July: Gradual decline to 1 BTC = $7 USD
• As of August 9th, 1 BTC = ~$10 USD with large fluctuations (chart)
• A random sampling in a Bitcoin-related IRC channel showed continued optimism
• (Unscientific biased sampling at its finest)

The Bitcoin Economy

Some sanity

• Common sense. It's a good thing.
• Probably a bad idea: "...you should also take out loans to buy bitcoin..." - "Astrohacker", with Rick Falkvinge of the Pirate Party doing exactly that
• If you plan on using Bitcoin as an investment, research is a Good Thing(TM)
• If you decide to generate bitcoins, count the equipment and power costs

The Bitcoin Economy

Legal standing

• Bitcoin is decentralized and cannot be controlled by any one government
• If attackers controlled 50%+ of the network the worst they could do is double-spend
• Bitcoin usage for purchases of illegal goods has raised the attention of more than one senator
• Governments are still attempting to determine how to proceed
• Bitcoins could be accepted by merchants with taxes handled the same way as USD

Namecoin

Namecoin uses the Bitcoin foundation for a distributed DNS for the .bit TLD

• Triggered in part by four rounds of domain name seizures by US ICE officials, irritating many people
• Namecoin uses a different block chain than Bitcoin
• Namecoin adds RPC commands to create and update domain names
• Only the creator of the domain can change it
• Uses .bit TLD, not recognized by ICANN

Namecoin

Creating a .bit domain

• A name_new request is sent for free (or an optional transaction fee)
• After 12 blocks, a name_firstupdate creates the name and charges a network fee (initially high to preserve namespace for late adopters)
• Names must be updated occasionally (every 12,000 blocks) but can be updated at any time for any reason for free (or an optional transaction fee)

Namecoin

Resolving a .bit domain

• People who wish to resolve your .bit name must use a proxy or meddle with their DNS servers list
• Proxy: Can be done as a plugin to Firefox but the process is somewhat complicated
• DNS: Update DNS to point to a server that can resolve .bit
• Edit ./etc/resolv.conf in Linux, replacing nameserver with one from this list
• Live demo of resolving a .bit domain in Linux

Anonymity and security

By default, you are neither truly anonymous or safe from your wallet being stolen

• Transactions are generally anonymous because there is no obvious link between who owns an address but it is possible to track transactions or otherwise establish ownership
• Private keys are stored in wallet.dat which is unencrypted by default
• If your wallet is stolen the thief can spend your coins
• Encrypting or otherwise securing your wallet is highly recommended
• Wallet services that secure your wallet for you will likely mature with time

Summary and Q&A

• Bitcoin is a decentralized currency useful for online transactions
• Wild west: The Bitcoin market is still highly volatile
• Security and anonymity precautions are needed
• The fate of Bitcoin is still undecided by the market