BLOCKCHAIN BACKGROUND

Historical Developments Leading to Blockchain & Bitcoin

• Key Precedents:
• Leslie Lamport and the Byzantine General’s Problem
• Haber & Stonetta, 1991
• Adam Back, Hashcash, 1997
• Wei Dai, b-money, 1998
• Michael Doyle patent, 1998
• Nick Szabo, The God Protocol, 1998
• David Chaum, DigiCash, 1999
• Ian Grigg and the “third book,” the public one, 2005
• “A lot of people automatically dismiss e-currency as a lost cause because of all the
companies that failed since the 1990's. I hope it's obvious it was only the centrally
controlled nature of those systems that doomed them. I think this is the first time we're trying
a decentralized, non-trust-based system.”—Satoshi Nakamoto, 2/15/2009 post
Key Source #1: Haber and Stornetta
• In January of 1991, two programmers named Stuart Haber
and Scott Stornetta published an article in the Journal of Cryptography, titled, “How to
Time-Stamp A Digital Document”
• It focused on business issues in migrating from paper document management to digital
document management
• As each document is time-stamped by the server, its certificate given is embedded in the
document and the next document through having a hash pointer to the previous
document’s certificate, thus ensuring that digital documents could not be tampered
with “after the fact”
• Solution: Rather than time stamping the media file, we time stamp the actual data
included in the document, and link documents together through hash pointers.
• These ideas contributed to digital ledger time stamping of individual transactions
Key Source #2: Nick Szabo, The God Protocol
• In 1998, legal scholar Nick Szabo proposed a framework for a digital currency known as
bitgold
• His protocol had at its heart a ledger that runs on a “virtual machine” (which comprises
a network of peer-to-peer nodes) accessible to multiple parties
• Bitgold protected the privacy of individuals but provided detail on the transactions
themselves to provide a verifiable public ledger
• Bitgold had all the key ingredients of bitcoin: Szabo’s bitgold idea had participants who
would dedicate computer power to solving cryptographic puzzles that once solved,
would be sent to the Byzantine fault-tolerant central public registry and assigned to
the public key of the solver.
• Each solution would become part of the next challenge, creating a growing chain of new
solutions. This would enable the network to verify and time-stamp new bitgold coins
• Nick Szabo, btw, is one of the leading ideas for the true identify of Satoshi Nakamoto
(almost a phonetic play on letters of Nickolas Szabo)...
 Other Precedents
Author & Year Concept Significance
David Chaum, 1989 DigiCash was a cryptographic DigiCash had many of the elements that made it into Bitcoin, including a
universal ledger that would protect universal ledger, encrypted accounts and systems to prevent double spending.
identity of the payer while enabling Chaum successfully marketed it to European governments and Visa and Microsoft
that payer to irrefutably identify and actually sold a contract to the Netherlands as part of their E-Z Pass system and
the payee if needed went pre-IPO before central banks got nervous and the proposed projects fell apart.

Ross Anderson 1990’s – Multiple cryptographic articles, During the 1990’s and early 2000’s, Ross Anderson, a Professor of Security
early 2000’s arguing that financial institutions Engineering at Cambridge’s Computer Laboratory, published dozens of papers on
such as banks had significant cybersecurity and cryptosystems in general. These focused on how systems are
cybersecurity risks susceptible to intrusion and hacking, steganography, public key encryption
He noted that, in particular, financial institutions such as banks had significant
cybersecurity risks, and these risks did not primarily result from failures in
cryptography but rather in failures in the implementation of the security processes
and systems. Anderson would go on to argue for a new paradigm in processes and
protocols for cybersecurity, particularly in regard to hacking and intrusion.
 Other Precedents
Author & Year Concept Significance
Adam Back, 1997 Hashcash was designed to In order to post to a site or mail server, posters needed to solve a small
disincentivize spammers by cryptographic puzzle prior to each post. The puzzle only took a second to solve,
requiring posters to solve a little and for individuals, would never be noticed; but spammers, issuing perhaps
proof-of-work puzzle which cost millions of mass emails, would incur significant costs. Cf.
electrical cycles... http://www.hashcash.org/papers/announce.txt

Michael Doyle, 1998 Chain of Evidence Protocols In 1998, Michael Doyle filed a patent for an invention that used public key digital
utilizing public key cryptography signature time-stamps that were based on the concept of transient time-interval-
for signing digital documents related secret cryptographic keys. These keys were then used to digitally sign
documents during specific time intervals and then are permanently destroyed.
The public key that corresponds to each time interval stamp (derived from the
private key) is saved for future authentication of the content of time-stamped data
and time of creation of time-stamped data. The validity of the public keys is
ensured through the certification of each time interval’s public key using the
previous time interval’s secret key, immediately before that secret key is destroyed
This invention hearkened back to the Haber and Stornetta article on time-
stamping documents, which relies on cryptography instead of trusted third parties
 Other Precedents
Author & Year Concept Significance
Wei Dai, 1998 b-money ran anonymous peer-to-peer In his paper on b-money, Dai laid out the core properties of cryptocurrency
transactions where distributed systems, “a scheme for a group of untraceable digital pseudonyms to pay each other
nodes would maintain the ledger with money and to enforce contracts amongst themselves without outside help.”
and were validated through Satoshi Nakamoto referenced Dai’s work in his Bitcoin paper. Cf.
computational work http://www.weidai.com/bmoney.txt
Ian Grigg, 2005 Companies would keep a private Grigg believed that a third public ledger that would cryptographically sign every
double-entry journal of transaction in the public ledger would lead to a programmable public record that
transactions, but would add a third would make fraud less likely. Imagine this applicability in light of Bernie Madoff.
public ledger which could be Cf. http://iang.org/papers/triple_entry.html
verified by anyone
King, Oksman & Bry, The technology surrounding public On August 15, 2008, a patent was requested by Neal King, Vladimir Oksman, and
2008 and private keys described in this Charles Bry on Updating and Distributing Encryption Keys. Their patent focused
patent closely resembles what came on a method for providing secure communications through an exchange protocol
to be known (just a few months such as a password authenticated key exchange protocol, which is used to create a
later) as bitcoin keys and addresses. shared secret. From this shared secret, two keys are created: a utilized key (public)
and a stored key (private). The utilized key is used to encrypt messages between
nodes. When it is time to replace the utilized key to maintain security, the stored
key is used to encrypt messages for generating and distributing a new shared secret.
The new shared secret is then used to generate a new public key and a new private
key. There is some speculation that King et. al. registered the site Bitcoin.org,
buying the domain name anonymously over anonymousspeech.com...
Historical Developments Leading to Blockchain & Bitcoin
• Predecessor Papers
• Leslie Lamport and the Byzantine General’s Problem
• Haber & Stonetta, 1991
• Adam Back, Hashcash, 1997
• Wei Dai, b-money, 1998
• Michael Doyle patent, 1998
• Nick Szabo, The God Protocol, 1998
• David Chaum, DigiCash, 1999
• Ian Grigg and the third book, the public one, 2005
• Then, on October 31, 2008, Satoshi Nakamoto, whom no one had ever heard of before,
publishes a whitepaper on “Bitcoin,” an electronic peer-to-peer cash system and
subsequently, on January 9, 2009, publishes reference code for bitcoin on SourceForge,
written in C++ targeting the Microsoft Windows Visual Studio environment
So, Who is Satoshi Nakamoto?
• Fascinating to contemplate, a lot of linguistic research and speculation has gone into
this, but if you’re interested, some of the leading contenders are:
• Michael Clear, former cryptography student at Trinity College, Dublin. The New
Yorker's Joshua Davis did a linguistic analysis of Satoshi’s writings and Michael Clear’s
writings
• Adam Penenberg at FastCompany speculates that Satoshi is King, Oksman and Bry,
through more linguistic analysis, identifying one phrase “computationally impractical
to reverse,” which appeared in Satoshi’s writings as well as their patent
• Jed McCaleb, a resident of Japan, who created the troubled bitcoin exchange Mt. Gox
and later co-founded decentralized payment systems Ripple and Stellar
• Professors of CS Donal O'Mahony and Michael Peirce, of Trinity College, Dublin
(where Michael Clear was a student...)
• Wei Dai, creator of b-money
So, Who is Satoshi Nakamoto?
• Nick Szabo, founder of Bitgold, “I’ve concluded there is only one person in the whole
world that has the sheer breadth but also the specificity of knowledge and it is this
chap.”—Financial author Dominic Frisby
• Michael Weber, a Swiss software developer with odd ties to the origination of
bitcoin.org
• Dorian Prentice Satoshi Nakamoto, a reclusive Japanese-American computer engineer
from Temple City, CA, population ~35K in 2010
• Hal Finney, Satoshi’s first correspondent and first Bitcoin tester, who passed away in
August of 2014 from ALS, who, most incredibly, also lived in Temple City, CA
• In what is kind of like a real-life Byzantine General’s Problem, every single one of these
“Satoshi Candidates” have one thing remarkably in common...
• Whoever he, or she is, or they are, they all deny being the Satoshi Nakamoto...
• For more information, see a nice summary at coindesk.com:
https://www.coindesk.com/information/who-is-satoshi-nakamoto/ and
https://en.wikipedia.org/wiki/Satoshi_Nakamoto#Dorian_Nakamoto
WHAT IS MONEY?
“For the desire of money is the roote of all euill, which while some lusted after, they erred from the faith, and pearced
themselues through with many sorowes.”
—1 Timothy, 6:10, Geneva Bible, 1599

In the world of change, here I am

Tryin' to have some thangs
So what you need is some game to get your money man
Oh baby, in the world of paper, paper
Money, money, money, money
Money, money, money, money
Money, money, money
—Snoop Dogg
Well, there’s money...
• There’s Money...
And then…there’s MONEY!
First, What is Value?
• Value is sort of like what Justice Potter Stewart said in 1964 about pornography...I can’t
define it, “but I know it when I see it.”
• I’ll give you $100 for your pen...
Wait, I changed my mind...
• Value is sort of like what Justice Potter
Stewart said in 1964 about
pornography...I can’t define it, “but I
know it when I see it.”
• How about instead of the $100 bill I give
you the number of live cows equal to
1/35th of a contract of live cattle?
• Assume the USDA market rate for a
pound of beef is around $1.85 per pound
and you get about 500 lbs. of freezer
meat from a single cow...
First, What is Value?
• Money pre-existed writing...we know this because the Law of
Hammurabi talked about money...
• In early colonial America, where hard currency was in short supply,
warehouse receipts for tobacco circulated as money
• In early colonial-era British West Africa, cases of gin were used as
money
• In WWII prison camps, P.O.W.s used Red Cross cigarettes as money
(cf. Gresham’s Law)
• During the early days of the USSR, one could
buy almost anything with salt or baked bread
• In 2002 after the monetary system of Argentina
collapsed, the affluent neighborhood of
Palermo hosted bartering clubs where antique
silver and china was traded for prime
Argentinian beef
First, What is Value?
• Money is a language, a language we use to communicate value to each other—
Antonopoulos
• We talk about a word in “common currency,” what gives a word its meaning is precisely
that shared society-wide agreement
• We know that we can teach monkeys the value of money...studies have been done where
monkeys will use tokens to get bananas and will resort to armed robbery and
prostitution to get banana tokens
• Trade is thus the result of people’s deliberate attempts to improve their position, not an
innate “propensity to truck, barter, and exchange,” as suggested by Adam Smith
The Metallist Theory of Money
• The idea that value inheres in money, that a coin’s (or token’s) value is a ding an sich,
value is intrinsic, beginning as a convenient means of transferring ownership of some
other thing—sheep or dollars?
• This theory states that money originated because of gold coins that were fungible and
easily transported (in your pocket), and this facilitated trade between tribes that moved
beyond tribalism to a more open marketplace
• Coins can be dated back to the iron age as a means of barter (exchange), a means of
barter much more efficient (read less costly) than trading twelve cows for a canoe
• When Adam Smith speaks in The Wealth of Nations that societies were burdened by
barter until the genius of European coins appeared on the scene, he’s speaking as the
quintessential Metallist
The Metallist Theory of Money
• This origin of money makes intuitive sense, once everyone in a given market
(defined originally geographical proximity) had reached some form of societal consensus
as to its value, thus understanding money (such as gold and silver) as a token of an
abstract but portable measure of value
• Note that almost all early European monies were actually measures of precious metal,
including the German Mark (249 grams of gold), the French Franc (4.5 grams of silver),
and the English Pound (240 pence of silver in 20 shillings/pound weighed one pound)
• Early Kings would literally shave off a portion of a newly-minted coin as a form of
seigniorage, profiting directly from the issuance of new currency...in the immortal words
of Mel Brooks, “it’s good to be da King...”
• Remember, any weight of gold, even a haircut, is worth something...
especially when it can be melted down and combined
• Modern governments realize seigniorage because of the interest-free loan
that a government obtains by printing money on comparatively worthless
pieces of fancy paper
The Metallist Theory of Money
• The idea of metallism is most closely associated with the Vienna School headed by Carl
Menger, that money became a convenient token to exchange in order to reduce the
costs of barter and exchange (how you going to get the cows home?)
• The term Metallist was coined by Georg Friedrich Knapp to describe monetary
systems using coins minted in silver, gold or other metals
• At the core of the Metallist view is the notion of portable fungibility, of money as a
more convenient currency of exchange than a hundred pigs...
• The problem is that modern anthropologists have found societies that did not actually
use money, or coins at all...calling this barter theory a myth
And then there’s this island called Yap...
• The Micronesian island of Yap was visited by a young
American adventurer William Henry Furness III, a graduate
of St. Paul’s School and Harvard College (he was 8 years
behind Teddy Roosevelt) “When I have met an immigrant
tottering under a bundle which
• Furness made several expeditions to Southeast Asia and contained his all...I have pitied him,
not because that was his all, but
Oceania between 1895 and 1903 documenting the culture of because he had all that to carry.”—
Thoreau, “Economy”, Walden

these lovely coral islands

• Furness was an odd duck, certainly a man of his time, and through his travels
he reported back to “civilization” on the languages and cultures he
encountered
• He used an early phonograph to actually record the speech of the Yapese
and wrote a dictionary of the language, which to this day forms quite
a legacy of Ethnolinguistics
• Furness also reported a strange type of currency among the Yapese,
namely, that their coins were...well...rather large...
The Rai (Fei) Stone Money A Yapese “Coin”

• As a coral island, Yap had no natural stone or ore, so the islanders

transported stone wheels made of aragonite, called rai (fei), to Yap, by
outrigger canoe from Palau, an island some 250 miles away
• A rai with a diameter of about 1 foot (of stone) was enough to purchase a
large pig, but some were as large as 12 feet in diameter
• As the stones were a little large to slip into one’s pocket, the
monetary system of Yap relied on an oral ledger that was shared as common
currency among the Yapese.
• The key to the success of this shared oral ledger is that the details were
memorized by multiple members of the society each of whom could at any
time testify as to the true ownership of any given rai stone
• Because these stones are too large to move once they were on Yap, buying an
item with one simply involved a social consensus that the ownership had
changed (not a ton of people...the island is only 11 mi. x 11 mi.)
• As long as the transaction is recorded in the oral history, it would accrue to
the seller and no physical movement of the stone was required, they relied
on consensus of multiple witnesses…
I owe, I owe, it’s off to Palau I go...
• Furness tells the story of one such canoe journey where a rai stone literally
broke through the bottom of the outrigger canoe, and sank to the bottom of
the ocean
• No problem...the sinking was reported back to Yap, and recorded into the oral
ledger, and became legal currency...physical location was somewhat irrelevant, Garden Court of the Bank of Canada

once it had been mined...even if the actual stone was at 50 fathoms.

• The rai system shows just how far some societies will go in creating abstract
notions of value
• Needless to say, such anthropological evidence poses certain difficulties for
metallists...
• This implies that it may not be the physical weight of money as its
function in an exchange, an exchange that often was compensation
for a debt, which often reduced internecine tribal warfare
• And it is this notion of debt that leads us to the second fundamental
theory of money...
The Chartalist Theory of Money
• People began to question the intrinsic value of money, even of gold
which is the metallist’s standard, arguing instead that money hinges
on society’s consent to accepting money in settlement of a debt
• The Assyrians were loaning “money” to farmers four thousand years
ago, and many tie the crucial historical development of modern banking
to medieval and Renaissance Italy originating in the cities
of Florence, Venice and Genoa
• It is this agreement among people, this consensus, that gold, or silver, has value, that makes money,
not its physicality, its beauty, or it’s intrinsic constitution
• Chartalists (charta, L. “token”) argue that it is in fact this consensus that focuses on debt and
credit that creates the trust network that makes money worth something
• Chartalists focus not on efficient means of barter but rather on the role of the state (King,
Country, Central Bank) in being the clearinghouse for debts and credits through its monopoly
power over taxes, which is paid in the coin of the realm, fiat currency
• Note that Chartalist currency tended to be local, whereas Metalist currencies proved more useful
for international (inter-state) trade (so says your King…)
What is money?
• In this modern view, currency only conveys a symbolic token of value, nothing real, all
managed by the state’s levers that affect the money supply in terms of printing paper
and taxing citizens
• The value derives solely from the collective consent of society to commonly accept any given
token as a token of value, be it a dollar, a euro, or a yuan, fiat currencies.
• This gave rise to the idea that for something to be defined as money it must be able to
(a) embed, or store value over time, (b) be a standard for measuring the relative value of
economic items, and (c) a medium of exchange for the buying and selling of goods and
services.
• And only in the developed world do fiat currencies truly work as money, meaning they
are stores of value, units of account, and mediums of exchange. Fiat currencies in the
developed world, such as the US Dollar and the Euro, exhibit our three properties of
money.
• Unfortunately, countries with stable fiat currencies only account for approximately 15%
of the world’s population.
CRYPTOCURRENCY AS MONEY
“We might foresee a future in which all transactions are costlessly and instantaneously recorded
for all to see, making the idea of money, at least as a physical construct, obsolete.”—Michael F.
Bryan, Federal Reserve Bank of Cleveland, cf. “Island Money” 2004
An Analogy: The California Gold Rush: 1848-1855
• The California Gold Rush took place between 1848 and 1855, primarily located in the
Sierra Nevada mountains throughout northern California
• An estimated 300,000 prospectors, known as ‘49ers (1849) headed to California to get
rich, coming from Latin America, Europe, Australia, and as far away as China
• Miners tended to make money (income > expenses) in the earlier years, but after more
competition arrived and the “pay dirt” began to dry up, later miners tended to lose money
more often than they made it
• By 1855, gold could be retrieved profitably from the goldfields only by groups of workers
working together in partnerships or as employees.
• The economy that arose around the miners was more profitable...those selling goods and services to
miners, such as pick axes, pans, room and board, meals, sturdy blue denim (Levi Straus!), tended
to make the real money, not the miners themselves
• In the end, a mine is not infinite, and there is a finite amount of gold in “them thar hills”, and
once it’s all mined, the former rich vein is empty
• It is remarkable how similar this is to Bitcoin’s money supply algorithm with its 21,000,000
bitcoin limit
• It is equally remarkable how much “off-chain” income is being driven off the bitcoin mine...
Remember 1849? • All good things come to an end...even
goldmines...
• Bitcoin’s money supply is algorithmically
Inflation halves
designed to reduce over time according to a
~ every 4 years 19.9 MM BTC
“fixed” schedule, about every four years
• “The idea is to mimic the extraction
of minerals...As the most readily accessible
About 4%
resources are exhausted, the supply dwindles.
Annual
Inflation
Unlike real resources, however, there is no as-
Every 210,000 blocks mined,
yet-undiscovered, hidden lode a fortunate
the block reward is cut in half prospector can strike to disrupt the money
About 8%
Annual
supply. Should a powerful new computer be
introduced to the network, the difficulty of the
Inflation

forced-work challenge would soar, keeping the

rate at which blocks are approved—and new
money created—unchanged.”—The Economist, 2011
How is Bitcoin Valued?
• Bitcoin derives its value in a similar way to other state-based fiat currencies, on the open
market, based on supply and demand
• Mostly internet-based exchanges create a marketplace for the sale and purchase of bitcoins
• The more demand for the fixed supply of bitcoins, the more the price goes up
• The more people are wanting to sell their bitcoins, the more the price drops
• Bitcoin is based on a geometrically declining rate of supply that is actually deflationary
over time
 THE LEDGER
“And I saw the dead, both great and small stand before God: and the bookes were opened, and another
booke was opened, which is the booke of life, and the dead were iudged of those thinges, which were
written in the bookes, according to their woorkes.”
—The Book of Revelations, 20:12, Geneva Bible, 1599

Ubi no e ordo ibi est confusio

—Luca Pacioli, 1494
Ledgers
• Ledgers have been used since the ancient Mesopotamians recorded
payment records for taxes, payments, and worker pay
• The Code of Hammurabi was itself written on ledgers
• These accounts contain debits and credits journaled in a dual-column
form, and included balances carried forward from the preceding year
Marco Polo, 1254 – January 8–9, 1324
• The modern concept of double-entry ledgers comes in 1494 from a Franciscan
friar and friend of Leonardo da Vinci, named Luca Pacioli, who first fully
described the system in his mathematics textbook Summa de arithmetica,
geometria, proportioni et proportionalità, published in Venice
• Pacioli is known as the “father of modern accounting”
• By the end of the 15th century, the bankers and merchants of Florence, Genoa, Venice
and Lübeck were using this system widely.
“Quanto alor debito e anche credito...”
• Prior to Friar Pacioli, Christendom had held usury to be an evil thing
(like the Statist Paul Krugman concerning Bitcoin), primarily because of
disputes that inevitably followed its use, which usually involved usurious
interest rates, that were charged primarily because of risk of lending
• In this he introduced and simultaneously legitimized “la pecunia numerata
e ogni altra faculta su’staniale”...cash, as well as “other stuff” including
property, possessions and wealth, and other ways to gain credit...
• By uniting the act of good faith in debt with good faith in God (pray each morning
he advised his readers), Pacioli legitimized credit in the eyes of the Church, thus
helping it overcome its disdain for credit
• Pacioli’s double-entry accounting became hugely influential in pre-Renaissance Europe, it
essentially allowed goods to be exchanged on the basis of demonstrated ability to pay, as
evidenced in the ledger, without having to ship, say, physical coins all across the Mediterranean
• The double-entry system is essential to business because without it, Pacioli said, “businessmen
would not be able to sleep at night...Their minds would keep them awake with worry about
their businesses.”
• In the end, ledgers and their double-entry accounting engender trust...
They call it Central Banking for a reason...
• Goldsmiths in England emerged in the late 1700’s as a secure
depository for wealthy merchants to store their precious metals, and in
return the merchants would be issued a “receipt” for their deposit, a
receipt which could only be redeemed by the original depositor
• Eventually the goldsmiths began to lend the money out on behalf
of the depositor
• These promissory notes were issued as payable on demand to the holder of the note, and
there was an assumption that coinage would be available as a fraction of a note
• Eventually these notes began to take on a life of their own, and the notion of negotiable
instruments came to the fore, and marketplaces began to be erected to establish money
markets for the goldsmith’s notes
• Under Queen Anne (the “Regina” in the coat of arms), parliament ruled that despite
custom, the notes issued by the goldsmiths were not, after all, negotiable instruments, as
another bank was being incorporated to provide negotiable money (and seigniorage...)
They call it Central Banking for a reason...
• Economists generally credit England’s creation of the Bank of England
in 1694 with modern-day finance (exactly 200 years after Pacioli’s
publication)
• William III’s (of Orange) credit was poor, and he could not borrow
the £1.2MM pounds sterling he need to keep the French off his shores
during the Nine Years’ War, so he persuaded a group of wealthy individuals to form a
corporation to lend him money to rebuild the English Navy
• This corporation was created by royal charter as the Governor and Company of the Bank of
England, and was given a virtual monopoly on all new issuance of banknotes in England
• In 1695, the Bank of England began producing banknotes that were hand-printed and signed
promissory notes whereby the bank promised to pay the bearer the amount designated on the
note, on demand, at any time (the requirements for signature remained for almost 200 years)
• These banknotes were denominated in pounds of sterling, and ranged from £20 to £1,000 (note
all early European monies were measures of precious metal, including the German mark (249
grams of gold), the French franc (4.5 grams of silver), and the English pound (240 pence of
silver in 20 shillings/pound, which weighed one pound)
They call it Central Banking for a reason...
• The Bank Charter Act of 1844 monopolized the Bank of England as a
government entity alone able to issue banknotes
• The goal of the act was to control the number of banknotes entering the
economy by enacting the Bank of England as a central regulator for the
issuance of new notes into circulation
• This essentially gave the bank the right to regulate the money supply
• As such, today all central banks are tasked with this responsibility to
control the money supply and to establish monetary policy
• Central banks also directly influence global economies by affecting everything
from economic growth, inflation, to employment statistics
• At 10:07:58 PM on Jul 29, 2011, a transaction
930a2114cdaa86e1fac46d15c74e81c09eee1d4150ff9d48e76cb0697d8e1d72
appeared in a block on the Bitcoin blockchain containing an embedded picture.
• What is the ASCII picture to the right?
The Story of Another Bank
• In 1850, Emanuel, Henry and Mayer Lehman founded a dry goods store in
Montgomery, Alabama, where they would accept cotton in payment for goods
• With a surplus of cotton, they began trading their cotton on exchanges,
eventually founding the New York Cotton Exchange twenty years later
• The company eventually got into underwriting public offerings of companies including a
Fortune 500 list of Sears, Woolworth’s, Macy’s, Gimbel’s, Studebaker, B. F. Goodrich,
and others
• Over a hundred years after its founding, on January 29, 2008, the Wall Street firm
Lehman Brothers reported its results for FY 2007, which had been a “great year” for the
investment bank, posting record revenue of $59 billion and earnings of $4.2 billion, an
amount twice what it had earned just four years earlier
• Lehman’s ledger never looked better, with the tiny exception of a ton of Repos on these
things called Collateralized Debt Obligations (CDOs)
• Nine months later, on September 15th, 2008, the 158-year old firm filed for bankruptcy
and led to the greatest world economic crisis since the Great Depression, and fired its
26,200 employees, and then, two weeks later...
satoshin@gmx.com Sed quis custodiet ipsos Custodes?
• On October 31, 2008, while the world was still —Juvenal, c. AD 100
in reeling with the words crisis, depression,
Lehman Brothers, Wachovia, Merrill Lynch,
Bear Stearns and AIG Insurance, a whitepaper
appeared describing something called Bitcoin,
written by a previously-unknown person
named Satoshi Nakamoto
• It described a peer-to-peer version of electronic
cash that relied on digital signatures to move
digital money directly from one party to
another, using hashes and something called
proof-of-work, that would ensure that the
honest nodes would forever outpace “attackers”
seeking to undermine the system
 “A DISTRIBUTED LEDGER”
“I wear the chain I forged in life...The chain was made up of cash boxes...ledgers... heavy purses...”
—Bob Marley, Scrooge’s partner, A Christmas Carol, Charles Dickens, 1843

“The shock of Lehman wasn’t so much that it happened, but that even most experts trusted the ledgers so
completely until it was too late.”—Casey and Vigna, The Truth Machine, 2018

Oxford English Dictionary: Ledger /ˈledʒə/, n., a., & v.

A.1.c A record book, a register...
A.1.d The principal book of the ‘set of books’ ordinarily employed for recording financial transactions.
3 A flat stone slab covering a grave.
5 Angling. A bait or lure fished on the bottom without a float...
Distributed Ledger Technology
• Distributed Ledger Technologies represent a protocol for building, replicating, and
sharing information across a shared ledger system, shared across peers
• A ledger, in this context, is a digital history of transactions which represent an exchange
of value between two or more parties
• Each peer node works together, collectively, to maintain the distributed ledger, by
keeping a local copy of the global database on each node
• Distributed Ledgers are built on a peer-to-peer network of data stores which allow users
to manage information across multiple computers, while eventually retaining ACID
properties:
• Atomicity
• Consistency (eventual…)
• Isolation
• Durability
Distributed Ledger Technology
• Distributed Ledgers operate smoothly without any need for a central authority or
database administrator
• The network makes the Distributed Ledger available and visible at any time from any
place to anyone, promoting a shared-view of the data
• An audit trail is kept up to date which allows anyone to verify any transaction in the
Distributed Ledger
• Unauthorized changes, including deletions, are not allowed
• Despite its distributed model, Distributed Ledgers allow information stored and
communicated across the network to have a high level of trustworthiness
• In Bitcoin, it is the process of networked consensus that ensures the integrity of its
distributed ledger, and it accomplishes this over a peer-to-peer network