InnovationandCryptoventures History of Digital Money CampbellR.Harvey DukeUniversity,NBERand InvestmentStrategyAdvisor,ManGroup,plc February20,2017 CampbellR.Harvey2017 2 Thebeginning Barter • Veryinefficient. • Needtomatchneedsofbuyers/sellers CampbellR.Harvey2017 3 Thebeginning Coins(Gold/Silver) • Needmetaltostartandmaintain CampbellR.Harvey2017 4 Thebeginning PromissoryNotes/Fiat • Needtrust • Needtostartitoffandmaintain CampbellR.Harvey2017 5 Credit ModernonͲline • Buysomethingfromretailerandgiventhemyourcardinformation. Theretailerdealswithbank,creditcardcompany,etc. • Paypal isdifferent.Itisanintermediarythatsitsbetweenyouandthe retailer.YougivecarddetailstoPaypal andPaypal approvesthe transactionandsettleswithretailer.Youdon’tneedtogiveseller creditcarddetails.ApplePayissimilarinthisrespect. • Whilepeoplehesitanttogivecarddetailsonline,wedoitanyways. Lotsofcostlyfraud. CampbellR.Harvey2017 6 Credit CampbellR.Harvey2017 7 Credit CampbellR.Harvey2017 8 DigitalCredit FirstVirtual 1994 • SimilartoPayPal.YougivethemcarddetailsandFVdealtwithretailer • Allcommunicationoveremail.Noencryptionused. • Customerhad90daystodisputechargesandretaileronlygotpaid after90days! CampbellR.Harvey2017 9 http://web.stanford.edu/~joelaw/bennpaper/emoney.html#FV DigitalCredit SETArchitecture*1997 • Avoidsuserhavingtosendcardinformationtoretailers– butavoid havingtoenrollwithintermediary • StandarddevelopedbyVisa/MC/Netscape/IBM/Microsoft/Verisign/RSA http://www.maithean.com/docs/set_bk1.pdf andhttps://en.wikipedia.org/wiki/Secure_Electronic_Transaction CampbellR.Harvey2017 10 DigitalCredit SETArchitecture*1997 • Customerbrowseswebsiteanddecidesonwhattopurchase • Customersendsorderandpaymentinformation,whichincludes2partsinonemessage: a.PurchaseOrder–thispartisformerchant b.CardInformation–thispartisformerchant’sbankonly. • Merchantforwardscardinformation(partb)totheirbank • Merchant’sbankcheckswithIssuerforpaymentauthorization • IssuersendauthorizationtoMerchant’sbank • Merchant’sbanksendauthorizationtomerchant • Merchantcompletestheorderandsendsconfirmationtothecustomer • Merchantcapturesthetransactionfromtheirbank • Issuerprintscreditcardbill(invoice)tocustomer CampbellR.Harvey2017 11 https://en.wikipedia.org/wiki/Secure_Electronic_Transaction DigitalCredit SETArchitecture1997 • AnimportantinnovationintroducedinSETisthe dualsignature.Thepurpose ofthedualsignatureistolinktwomessagesthatareintendedfortwodifferent recipients. • Inthiscase,thecustomerwantstosendtheorderinformation(OI)tothe merchantandthepaymentinformation(PI)tothebank. • Themerchantdoesnotneedtoknowthecustomer'screditͲcardnumber,and thebankdoesnotneedtoknowthedetailsofthecustomer'sorder. • Thecustomerisaffordedextraprotectionintermsofprivacybykeepingthese twoitemsseparate.However,thetwoitemsmustbelinkedinawaythatcan beusedtoresolvedisputesifnecessary. • Thelinkisneededsothatthecustomercanprovethatthispaymentis intendedforthisorderandnotforsomeothergoodsorservice. CampbellR.Harvey2017 12 DigitalCredit SETArchitecture1997 • HashesoftheOIandthePIareindependentlycalculatedbythecustomer. • Thedualsignatureistheencryptedhash(withthecustomer'sprivatekey)of theconcatenatedhashesofPIandOI. • Thedualsignatureissenttoboththemerchantandthebank.Theprotocol arrangesforthemerchanttoseethehashofthePIwithoutseeingthePIitself, andthebankseesthehashoftheOIbutnottheOIitself. • ThedualsignaturecanbeverifiedusingthehashoftheOIorPI.Itdoesn't requiretheOIorPIitself.ItshashdoesnotrevealthecontentoftheOIorPI, andthusprivacyispreserved. CampbellR.Harvey2017 13 DigitalCredit CyberCash 1994 • UsedSETarchitecture. • DigitalcashproductcalledCyberCoin whichallowedformicroͲtransactions • FirstcompanytogetUSapprovalforexportingencryption • KilledbyY2K! CampbellR.Harvey2017 14 DigitalCredit WhyCybercash andSETfailed* • ProblemsurroundscertificatesͲ awaytosecurelyassociatea cryptographicidentity(publickey)withareallifeidentity. • WebsitesneedtoobtaincertificatesfromaCertificateAuthoritylike VerisignorSymantec • CyberCash andSETrequirednotjustmerchants– butallusersgeta certificate(verycostlyprocess) *Visa,Mastercard,andAmericanExpressuseaprotocolknownas3ͲDSecure.Eachhastheirownnameforthis. CampbellR.Harvey2017 15 DigitalCredit InmidͲ1990s,W3Cwaslookingintostandardizingfinancialpayments– nothinghappeneduntiltheyannouncedrevisitinginOctober2015 CampbellR.Harvey2017 16 CryptoCash Cash • Anonymous • TransactionscanoccuroffͲline • Nointermediary • Butneedstobeinitiallycreatedandendowed Note • Bitcoinnotcompletelyanonymous • NeedtobeonͲline CampbellR.Harvey2017 17 CryptoCash Cryptocurrency • Intuition.Igiveoutpiecesofpaperthatcanberedeemedforacertain amountbyme.Isignthepiecesofpaper.Peoplemusttrustmeandmy signatureneedstobeunforgeable. • Thisishowcurrencystartedintermsofpromissorynotes • Wecouldhaveadigitalversionbutweknowyoucanmakeperfectdigital copies–thesocalled“doublespend”problem • Soyoucouldaddnotjustasignaturebutaserialnumber.Whenaretailer getsthenote,youcheckaledgerfortheserialnumbertomakesureit hasnotalreadybeenspent. CampbellR.Harvey2017 18 CryptoCash Cryptocurrency • Needacentralservertokeeptrackofserialnumbers.Once,youcollect enoughnotes,youpresentthemtotheauthorityandtheyissueyoufresh serialnumbers(youcanonlyspendonce) • Notethisisnotanonymouslikerealcash CampbellR.Harvey2017 19 CryptoCash DavidChaum – Digitalmoneypioneer, 1983 • Determineswaytokeepanonymousandprevent doublespending • Iissueanote.Youpickaserialnumber(long randomnumber).Isignitandamunabletosee theserialnumber(blindsignature) • Requirescentralserverandeverytransaction goesthroughserver • OffͲlineideadevelopedin1988 CampbellR.Harvey2017 20 CryptoCash DavidChaum – Digitalmoneypioneer,1983 • Everydigitalcoinissuedtoyouencodesyouridentity– butnoone(not eventhebank)candecodeit • Whenyoudoatransaction,therecipientrequiresyoutodecodepart– butnotall • Butifyouattempttodoublespend,therecipientcanputthetwo decodedpartstogetheranddetermineyouridentity • Clunkyinthatyoucan’tsplitcoins CampbellR.Harvey2017 21 CryptoCash DavidChaum – Digicash,1990 • ThecashinDigicash wasknownasecash CampbellR.Harvey2017 22 CryptoCash DavidChaum – Digicash,1990 • Clientsanonymous,merchantsarenot • Nosplittingcoinssoawalletwouldhavecoinsofvarioussizes • TomakeanonͲlinepurchase,merchantwouldhavetoacceptecash • Whenyouclickonthepayment,ittakestoyoutoDigicash website,andopena reversewebconnection–i.e.yourmachineneedstoactlikeaserver(need yourownIPandtheISPneedstoallowincomingconnections) • Ifconnectionsuccessful,softwarewouldbelaunchedtodotransaction • 100%collateralizedbasedonUSdollar CampbellR.Harvey2017 23 CryptoCash DavidChaum – Digicash,1990 • Digicash evenhadahardwarewallet • Mondex (acquiredbyMastercard)andVisaCash twotechnologies • Likecash,ifyoulosewallet,youloseyourmoney • Ifhardwarefailsorcardfails,moneyisalsogone CampbellR.Harvey2017 24 CryptoCash DavidChaum – Digicash,1990 • Anumberofcompetingideasarose • Forexample,therewasaproposaltogive“change”– butthisdestroyed theanonymity. CampbellR.Harvey2017 25 CryptoCash WhydidDigicash fail? • Hardtopersuademerchantstouseit • DidnotsupportuserͲtoͲusertransactions Note • Bitcoindoesnotdistinguishbetweenusersandmerchants CampbellR.Harvey2017 26 CryptoCash Commoditybackedcurrencies • EͲgold.100%collateralizedbygold • Digigold fractionallycollateralized However • Anycollateralizedcurrencywillfluctuatewiththevalueoftheunderlying, whetherUSdollaroracommodity • Whatifadigitalcurrencyisnottiedtoanycollateral? CampbellR.Harvey2017 27 CryptoCash NoCollateralDigitalcurrencies • Scarcity isessentialforaviablecurrency • CynthiaDwork andMoniNaor proposedgettingyour computertosolvepuzzles • Theirapplicationwastoeliminateemailspam http://www.wisdom.weizmann.ac.il/~naor/PAPERS/pvp.pdf CampbellR.Harvey2017 28 CryptoCash NoCollateralDigitalcurrencies • AdamBackproposessimilarideahashcash in 1997(againinthecontextofeliminating spam) Note • Bitcoin“proofofwork”hasasimilarideato Hashcash http://www.cypherspace.org/hashcash/hashcash.pdf CampbellR.Harvey2017 29 CryptoCash Whydidhashcash fail? • Spamnotthatbigofaproblem • Anyways,hackerscouldtakeovercommuters,createhashcash,andthen useittofinanceemailspammingefforts Note • Also,thereispotentiallyunlimitedcurrencycreationinhashcash – you justneedtosolveapuzzle.Incontrast,bitcoinhasscarcity. CampbellR.Harvey2017 30 CryptoCash Ledger • Blockchain ideagoesbackatleastto1991inthecontextofdocument dating(StuartHaberandScottStornetta) • Whenanewdocumentcomestoaserver,theserver“signs”the documentwithatimeͲstampandareference(orpointer)totheprevious document.Theentirehistoryischainedtogether. • Alaterpapersuggestedusingblocksofdocumentsratherthanindividual documents https://www.anf.es/pdf/Haber_Stornetta.pdf CampbellR.Harvey2017 31 CryptoCash Ideasclosetobitcoin • BͲmoneybyWeiDai(memberofthecypherpunks) • Anyonecancreatemoney(hashingproblem) • Peertopeernetwork • Eachnodemaintainsaledger,butitisnotagloballedgerlikebitcoin– justwhatpeoplethinkeveryone’sbalanceis. http://www.weidai.com/bmoney.txt CampbellR.Harvey2017 32 CryptoCash Ideasclosetobitcoin • Notethereispoliticalaspecttothiswork,inparticularwiththe cypherpunk group • EricHughes:ACypherpunk’s Manifesto1993 "Privacyisnecessaryforanopensocietyintheelectronicage....Wecannot expectgovernments,corporations,orotherlarge,facelessorganizationsto grantusprivacy...Wemustdefendourownprivacyifweexpecttohave any....Cypherpunks writecode.Weknowthatsomeonehastowrite softwaretodefendprivacy,and...we'regoingtowriteit." http://www.activism.net/cypherpunk/manifesto.html CampbellR.Harvey2017 33 CryptoCash Bitgold • NickSzabo(hadideain1998)but beganpromotingitin2005