The basics of Bitcoins and Blockchains, Antony Lewis, 2021 - If you were curious to understand the fundamentals behind cryptocurrencies, from a history of money and financial intermediation, public key cryptography, cryptoassets and related ecosystems and stakeholders from an almost unbiased standpoint, this book could be a very good start. It is pretty well-structured and written in a very lucid manner that anyone will be able to understand very easily.
My notes -
• Explaining bitcoin needs a multi-disciplinary approach considering economics, law, computer science, civil society, history, geopolitics etc.
• Bitcoin accounts are technically just addresses to the account
• Cryptoassets - cryptocurrencies and tokens (can be fungible or non-fungible). Token can be like a digital cloakroom ticket or a digital depository receipt (promising access to an underlying product or service)
• Blocks in Blockchains are bundles of transaction data, linked to each other (each block has hash reference of previous block). Blockchains can be public (Bitcoin or Ethereum), private or permissioned
• Cash doesn’t betray identity information and can be spent anonymously
• Digital money is settled by increasing or decreasing the balance in accounts held by trusted intermediaries
• Online card payments are ‘card not present’ transactions vs swiping at the till is ‘card present’ transaction
• Money is a medium is exchange, a store of value, and a unit of account. The three functions need not be fulfilled by the same instrument
• Bitcoin is the first digital asset that doesn’t have a trusted intermediary that can potentially block a transaction
• Bitcoin’s volatility makes it a poor store of value. Inelastic supply and fluctuating demand causes extreme volatility
• Stability is determined more by liquidity (how many people are willing to buy and sell the asset) than the price of the asset
• BTC is the USD of cryptocurrencies
• Bitcoin has been declared dead over 300 times
• Double coincidence of wants - Both parties wanting exactly the thing the other party has in a barter - it is exceedingly rare
• Two books to refer - ‘A history of money from Ancient times to the present day’ and ‘Debt: the first 5000 years’
• Money solving inefficiencies of barter is a myth propagated by Adam Smith. Barter always worked in communities. To overcome ‘double coincidence of wants’, societies always went by ‘reputation’ - ‘have a chicken now but remember it for later’. Debt and credit existing before the invention of money
• Something may be scarce but that doesn’t mean it is, or should be, valuable
• Representative money - money backed by underlying asset - like Gold. So essentially representative money is like a warehouse receipt (counter-party risk exists)
• Fiat money - not backed by anything. It has no intrinsic value and is not convertible
• History of money through the ages - 9000 BCE - Commodity money (Eg. Cattle). 3000 BCE - First banks in Babylon evolved from warehouses where commodity was stored. 2200 BCE - First use of money without intrinsic value (inedible unlike cattle or grain), like lumps of silver. 1800 BCE - Regulation appears - Prices, Tariffs, criminal law, civil law etc. in Hammurabi code. 1200 BCE - Shell money like cowries. 700-600 BCE - Mixed Metal coins. 600-300 BCE - Round coins. Precious metal coins. Alexander even pegged gold coin to 10 silver coins. 323-30 BCE - Representative money. 30-14 CE: Tax reforms by Caesar - sales, land and poll taxes. 270 CE - Debasement of Roman coins - silver content dropped from 100% to 4%! 306-337 CE - Gold for rich, debased coins for poor. 435 CE - British coins were stopped from being used for 200 years. 1300s - King Edward debased pennies twice (debasement is common throughout history of money). 1600s - Goldsmiths become Bankers. 1660s - Central banking with Riksbank. 1913 - Fed! 1999 - Euro. 2009- Bitcoin
• Gresham’s Law - Bad money drives out good. When pure gold and a debased impure gold coin co-exist, though both can buy same goods, the impure gold coin would get spent first - over time, the pure gold coins will cease from circulation
• Just because we grew up with one form money doesn’t mean that it will last forever
• Rai Stones - stones used as currency in island of Yap. Curious case of a large lost stone which was lost in sea which continued to be used though no could see it, and claims on the stone were honored and continued to have value
• It is hard to peg things that trade in markets abroad
• 1934 Gold Reserve act debased the dollar against Gold. It also outlawed private possession of Gold. 1971 Nixon stopped converting dollars to Gold ending the Bretton Woods agreement. 1976 - Abandoned Gold, dollar became pure fiat money
• Fiat currency is backed by the threat of state violence
• Currency peg - lets say apples and oranges are used as currency and are pegged to each other at one apple = one orange. Then you need as many oranges in reserve, as there are apples in circulation and vice versa to maintain the peg. Pegs are hard to maintain and eventually break (as with Soros and Bank of England)
• Quantitative Easing or QE - Central bank increasing money in circulation in order to stimulate flagging economy
• Clearing banks have accounts with central bank called reserve accounts
• The problem with central banks buying risky bonds on its balance sheet - these bonds end up backing the currency in the balance sheet
• Cash doesn’t have double-spend problem as you can’t use same note to pay two different people. Digital assets have to overcome double-spend
• To overcome the double-spend problem, most digital assets like fiat currencies have a trusted book-keeper who maintains a list of who owns what
• Most payments between banks, be it same bank or different banks or cross border or cross border involving foreign exchange are all handled by adjusting ledger entries in the books of participating banks who act as trusted intermediaries
• Same bank transfers are simple ledger entry changes within the bank. Payments involving different banks go through correspondent bank accounts (nostros) or through central bank payment system (because each bank will need to have an account in every other bank for nostro to work but needs to have only one clearing account with central bank)
• Payment through the central bank are done via DNS or RTGS. DNS is a net-settlement system that works periodically. Very capital-efficient but can let credit-risk build up in the system during settlement period. RTGS is real-time settlement of individual payments
• Banks create money when they write loans. When a british bank writes loans in USD, it creates money that exists outside the domestic currency zone (US). This is normal and not all currency is controlled by the respective central bank
• Encryption - turning plain text to cyphertext and decryption the reverse. Breaking the encryption is being able to do the latter without being given the key. Symmetric - Same key used for encryption and decryption. Asymmetric - different keys. Public key cryptography is asymmetric
• Digital Signatures - PGP - Pretty Good Privacy, designed in 1990s - used for signing documents like emails. GPGSuit can be used to generate a public/private keypair. Private key is used to generate a document signature that is attached to the document. The receiver can use the public key to generate the signature and verify it against what’s in the document. If the doc was tampered, the signature wouldn’t match
• ECDCA - Elliptic Curve Digital Signature Algorithm. Uses a elliptic curve to generate public/private keypairs mathematically. Both are very large integers. Bitcoin uses ECDSA extensively. The ECDSA public keys are wallet addresses and the private key are used to sign outbound transactions.
• Hashes - A series of mathematical steps or algos that takes input data and produces an output - a hash or digest or fingerprint. Hashes are deterministic (same input always produces same output). Good cryptographic hashes are deterministic, fast to compute forwards while hard to reverse-engineer without brute-force (trapdoors), a small change in message should produce completely different hash and shouldn’t have hash collisions (diff messages having same hash value). Egs. MD5, SHA-256 (both produce Fixed-length outputs). Hashes are used extensively in cryptoassets - in mining, as transaction identifiers, an blocks ids and for preventing tampering
• Bitcoin is not centrally controlled and no one sets the interest rates. Transactions are self-signed and bundled in blocks and added to the blockchain. As long as majority of CPU power is controlled by nodes not co-operating to attack the network, they’ll generate the longest chain and outpace the attackers. For first time in history, we are able to value from A to B without trusted third-party intermediaries
• In bitcoin blocks are created every 10 mins on avg. The deeper in the ledger your transaction is and more blocks are built over it, the more confirmed your transaction is. When there are discrepancies or competing blocks, the longest chain wins.
• Proof-of-work - Blocks are created with pending transactions by block-creators and hash is computed. The creator with the lowest hash wins - its a game of chance. Since hash funcs are deterministic, a set of transactions will always generate same digest - so creators play with a special field (nonce) to generate new hashes that are lower by trying out diff nonce inputs. This process is called mining
• People making transactions set the fees and this fees goes to the miners creating the blocks that include these transactions. So in peak hours, transaction fees goes up (Gas)
• Coinbase transactions - the first transaction that creates bitcoins. After that they are only moves between addresses (wallets). Rest of the coins are created using block rewards (50 BTC per block in 2009 and keeps reducing over time - was 12.5 BTC in 2018). The overall 21 million is the max number of BTC that will ever reach in circulation
• The network self-corrects and slows down if blocks are created more quickly than target of 1 block every 10 mins. This is done by adjusting the target number above which hashes are invalid.
• Each block refers to previous block by its hash. When there are multiple chains of blocks being mined at same time, the longest chain is considered and the competing chain is discarded and becomes orphan and the transactions in that chain become ‘unconfirmed’ and will have to be included in later blocks (At least 6 blocks deep means transaction is confirmed)
• 51% attack - when over 50% of total hash power in network is used to re-write blocks. Has happened in some unpopular coins
• Bitcoin is digital but works more like physical cash (non-fungible, compared to fungibility of digital money) where you can pay either the $10 note your received in the morning of the $50 you would like to break. You make the choice
• While most digital money thinks in terms of ‘account balance’, in bitcoins, its in terms of transactions - UTXO (unspent transaction outputs)
• Bitcoin mining is not decentralized, top 3 miners control over 50% and can easily orchestrate a 51% attack - 80% of mining power is in chinese control
• Bitmain produces hardware that mines 70-80% of total blocks in Bitcoin. h/w manufacturing is not decentralized either
• 90% of value is owned by less than 0.7% of the addresses (this is true in most asset classes anyway)
• Hardware wallets are simply stores for your private key. When transactions are sent to them, they sign it without revealing the private key. You don’t store your BTC in these wallets, you simply store the private keys
• Hot wallet - exchanges keep wallets connected to the internet to facilitate customer transactions - these are a usual targets of theft
• Satoshi Nakamoto controls about 1 million bitcoins - 5% of BTC in circulation. If these ever move, it is bound to affect price of BTC
• Ethereum blockchain can do more than payments with its support for smart contracts on the ethereum virtual machine.
• Ethereum time between blocks is 14 secs (compared to Bitcoin’s 10 mins). Ethereum operates on the basis of gas fees, charged for searching, retrieving, storing of data or making changes to ledger. Bitcoin block size is around 1MB vs Ethereum’s 15-20kb. Max block size of Bitcoin is specified in bytes while that of Ethereum is specified based on computational complexity
• Orphan blocks in Ethereum parlance are called ‘uncles’ 
• Two types of Ethereum accounts - one that only stores ETH and another that contains smart contracts
• Ethereum smart contracts are ‘turning complete’ - fully functional and can perform any computation that can be done in any other programming language
• Solidity / Serpent, LLL (Lisp like language) are primary languages used to write smart contracts
• DAO - Decentralized Autonomous Organizations are like VC companies where investors get tokens in return for their investment and use them to vote for which startups get funding. The smart contracts govern the voting process and release funds to startups
• In cryptocurrency land it is fine to cheer for censorship resistance, unless you’ve lost money (Ethereum under Buterin has unwound transactions in the past where fraud was involved, leading to form in the blockchain creating Ethereum Classic where these transactions weren’t unwound)
• Forks in crypto world might be fork in the codebase or fork in blockchain (chainsplit)
• Digital tokens - although BTC and ETH and digital tokens themselves technically (blockchain-native tokens), nomenclature is now restricted to things like tokens issued by ICOs (asset-backed tokens that are similar to IPOs where a company raises cash), or utility tokens (claim to a service) tracked on the Ethereum blockchain (ERC-20 standard tokens)
• Tracking real-world items by using digital overlay is difficult. Eg. food from farm to customer as though blockchains are immutable, they only record what someone else tells them
• Permissioned blockchains are private blockchains used for specific purposes - Corda, built by consortium of banks and used for broad purposes. Hyperledger Fabric, built by IBM and Quorum built by JP Morgan
• Most blockchain usecases are simple straight-forward digitization projects but use of “blockchain” piques interest and unlocks budgets, so most people abuse it
This book is easily the best I would recommend on the subject for a thorough understanding of the ecosystem from historical and contemporary perspective. 10/10