1. 1
A Guide to
Blockchain and
Cryptocurrency
Mark Suster, @msuster

2. The problem with understanding cryptocurrencies and blockchain is that
people conflate too many issues.
2
• Will Bitcoin price keep going up?
• Will the fed crack down on Bitcoin?
• Will cryptocurrencies disrupt governments?
• Will ICOs replace venture capital?

3. Anti-Authoritarians
• Libertarians
• Emerging Market
Citizens
3
And to understand anybody making arguments in Crypto you of course have
to understand their role / biases in evaluating the potential or risks.
Incumbents
• Governments
• Banks
• VCs
Disruptors
• Technologists
• Crypto funds
Crypto

4. 4
I. What is Bitcoin
II. What are Ethereum, alt coins, and Internet 3.0
III. Unresolved problems

5. 5
Bitcoin
2008

6. 6
Bitcoin
Bitcoin
Blockchain
2013

7. 7
Bitcoin
Bitcoin
Blockchain
“Gold”
Software
“contracts”
Bitcoin Ether
Bitcoin
Blockchain
Ethereum
Blockchain
2014

8. 8
Bitcoin
Bitcoin
Blockchain
Bitcoin Ether
Bitcoin
Blockchain
Ethereum
Blockchain
ICOs
Ether
Ethereum
Blockchain
2015-16
Ethereum’s biggest “use
case” to date seems to be
helping other coins create
a market.

9. 9
Bitcoin
Bitcoin
Blockchain
Bitcoin Ether
Bitcoin
Blockchain
Ethereum
Blockchain
ICOs
Ether
Ethereum
Blockchain
New
currency,
“alt coins”
New
Blockchains
2017-18
• Stellar
• Tezos
• Stratis

10. 10
I like to think of the topic as three distinct layers that are related but need to
be understood in their own rights.
ICOs
Cryptocurrencies / tokens
Blockchain

11. 11
Historically digital assets on the Internet have been freely copied and
distributed. This obviously doesn’t work when it’s money.
Pictures
CDs
DVDs
• Napster
• BitTorrent

12. 12
The goal of blockchains is to:
P2P computer
nodes
• Make each digital asset identifiably unique (through cryptography),
• Create a record that is trusted (a ledger),
• Without a central issuer (decentralized),
• And form consensus among computers of which transactions are valid.

13. 13
The foundational concept that underpins digital property rights is
cryptography.
Input
Output
Algorithm
6e812e782R52Bx
Long string of transaction data, sender, recipient, quantity, amount, etc…
“Hash” of fixed length

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Algorithm
Hash
Data Data Data
Any computer can run the
same data through the
algorithm and will always get
the same hash. This is critical
for verification.

15. 15
Algorithm
Hash
Algorithm
Hash A Hash B
Data Data Data Data A Data B
If you get different
hashes, then you know
the input data wasn’t
identical.

16. 16
Algorithm
Hash
Algorithm
Hash A Hash B
Data Data Data Data A Data B
Algorithm
Hash
? ? ?
?
There is no way to run the
hash in reverse to figure
out the original data,
making anonymity &
security possible.

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Cryptographic hashes are just data and can be combined.
Hash AB
Bob 0.5 Bitcoin debit, Mary 0.5 Bitcoin credit Steve 2.2 Bitcoin debit, Susan 2.2 Bitcoin credit
SHA-256
(Secure hash algorithm)
Hash A Hash B
SHA-256 This hash is a digital
fingerprint that represents
both sets of transactions.
SHA-256

18. 18
Most importantly you can create a single hash that represents all the transaction
data. The “root hash” that represents the entire dataset is still just 256 bits.
Root Hash
ABCD
Hash AB Hash CD
Hash A Hash B Hash C Hash D
Used to efficiently compare
large datasets
Transaction A Transaction B Transaction C Transaction DTransaction data
“Merkle Tree”

19. 19
A “block” is just a row of data that has a hash calculation from an underlying
Merkle Tree, so it ensures that the underlying data haven’t been changed.
Transaction Data
Block Header
Root hash of current transaction data +
hash of previous header +
nonce +
timestamp, etc)
Components of a block
(simplified)

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A blockchain is a sequence of blocks that stores every transaction and each links to the
previous block, so that anyone can easily confirm that the entire data structure is accurate.
Rest of headerRoot Hash
Current block
Genesis block Data
Hash of Prev Header Root Hash Rest of header Data
Block Header
Hash of Prev Header Root Hash Rest of header Data
Hash of Prev Header Root Hash Rest of header Data

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The next big concept is to understand how a trustless and decentralized P2P
network works. Historically we required trusted, central authorities.
Store of value Transfer of value
KYC
3rd
party
Bank
or
You
Another
person
Business
Financial
intermediary
Custody, Remediation

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In a decentralized system you have peer-to-peer nodes that interact with each
other. This is how Napster & Skype worked and how BitTorrent works.
Decentralized data transfer:
• Each user is a “node” that can use the
network for free.
• The only catch is that while your client
is open, the network uses your
computer & bandwidth to transfer
video files, music files or complete
phone calls.(BitTorrent, Napster, Skype)
User’s Computer = Node

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Bitcoin created a P2P network in which nodes were servers attached to blockchain
databases. Every node stores every transaction that has ever happened so that a central
authority doesn’t need to.

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New transactions are constantly broadcasted to the network.
Every 10 minutes a new block is added to the blockchain
representing the new transactions.
All nodes update their databases (ledgers) accordingly.
But how do they agree which transactions to include?

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That is where mining comes into play. Mining is nothing more than the computers in the
Bitcoin network validating all of the new transactions and competing to be the first node
that gets to add the new block to the database.
Input: Transactions in the past 10 minutes
Output: Hash of fixed length
SHA-256

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Miners are given an output parameter for which they need to guess the input. The only
way to get the right hash is for the computer to try billions of random inputs until it
guesses the right answer.
SHA-256
Input: Recent transaction data + Arbitrary number (“Nonce”)
Hash Goal
Must start with a fixed
number of zeroes
000006e812e782R52Bx

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This process is called “proof of work” because by iterating through billions of
attempts you prove that you’ve dedicated computing resources to the network.
12345
12346
74623
SHA-256
Output Hash
Input: Transaction data + Nonce
Hash Goal
6e812e782R52Bx
28yB6zXuo87zS2
Iteratively guess numbers until one
randomly produces the right result.
000006e812e782R52Bx

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When Bitcoin started it was just some cheap computers deployed by college
students, techies, etc. out of their homes.
Easy to solve for
the nonce, financial
reward was small.

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When more money could be made people put more CPUs at work and hosted them in
faster hosting centers to solve the “proof of work” before others and win more Bitcoin.
Many CPUs, higher
power machines ,
professional hosting

30. 30
With more money at stake, smart technical miners found that GPUs (for computer
graphics) were faster than CPUs (for general computing) at the “proof of work” task.
GPUs > CPUs

31. 31
Eventually the largest miners built special-purpose ASIC chips that beat
GPUs. We now have an arm’s race that favors the large & powerful.
ASIC
This also favors
people in low-cost
or subsidized
electricity countries
like China.

32. 32
This first person to solve for the nonce gets Bitcoin (today 12.5 BTC or ~$150,000). With
data + nonce other nodes can easily verify by running it through an algorithm. The one-
way function is very easy to check.
00000…
74623
SHA-256
Output Hash
Input: Transaction data + Nonce
Hash Goal
000006e812e782R52Bx

33. When >50% of Hash power (miners computing power in the network) agree that
the nonce is valid, consensus is reached without any authority (decentralized).
33
New block added
New block added
New block
added

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What should you know about Bitcoin?
• Bitcoin is a digital fingerprint that can’t be repeated because two people can’t
own it at the same time.
• Its use case now is mostly gold (“store of value”).
• It’s impractical for a $3 for a coffee due to energy use, transaction fees, latency
& lack of price stability (not a great “transfer of value” today)
• In the future, someone could create a stable coin whose value doesn’t change
much—and which can be used more easily for transactions.

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I. What is Bitcoin
II. What are Ethereum, alt coins, and Internet 3.0
III. Unresolved problems

36. 36
Ethereum’s big idea: besides exchanging money, wouldn’t it be helpful to find
other trustless ways of doing business? “Smart contracts” were created.
Bitcoin Ethereum
Money Smart contracts
Blockchains

37. What should you know about Ethereum?
37
• Ethereum is the most scaled platform where a large number of
developers are competing to build infrastructure.
• It differs from the Bitcoin use case (i.e. gold) and is more of a
platform for software interactions (called smart contracts).
• But it could emerge as a dominant platform for distributed
apps (DAPPs) platform (time will tell).

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As an example, businesses today are typically built by a centralized entity
which concentrates power and profits.
Example: Dropbox
$ for storage
$M
UsersDropbox
• Raise venture capital
• Invest $$$ in servers to
store your documents
• Recoup money by
charging users fees

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Smart contracts allow you to build distributed businesses on top of the
blockchain where third-parties provide the resources and are rewarded directly.
Example: Decentralized Dropbox
$ for storage
UsersNetwork
• Provide server space,
processing power, bandwidth
• Collect a currency / token
• Pay a currency / token

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What is an ICO? It is when an entity creates new coins and sells them to new
buyers, today it is usually on top of the Ethereum blockchain.
ICOs
Cryptocurrencies / tokens
Blockchain
Initial Coin Offering on Ethereum
• Avoid having to replicate the
process of creating a whole
new blockchain infrastructure
• Most popular type of smart
contract on Ethereum

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Be careful of any ICO that doesn’t have an explicit reason
to exist to incentivize network participation / resources
(otherwise it is just another form of crowd funding and
one that is likely to be highly regulated).

42. Company
42
Distributed applications (DAPPs) get most experienced venture capitalists
excited. But what should a VC own—equity or token?
Users who invest in tokens to fund
development of the service
Token
ownership
Value of
tokens

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• Illiquid
• Relatively stable, with few
valuation fluctuations
• Governance and shareholder
rights; management lock up due
to stock agreements and
illiquidity
• Liquid (unless new governance
rules)
• Potentially huge daily price
fluctuations
• Potential moral hazard without
governing rules
Equity Tokens

44. 44
Why are alt coins created and what are they?
• We’ve seen the emergence of Bitcoin and Ether. Those currencies
represent > 50% of the value of all currencies.
• There are companies creating new coins (ecosystems), which are
known as “alt coins” (Litecoin, Monero, Ripple)
• Alt coins can be built on top of Ethereum or you can create your own
blockchain.
• Whether any alt coins becomes valuable depends on the value they
provide and how they incentivize network participants to participate.

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Why do people refer blockchain networks as “Internet 3.0”?
IP
TCP
HTTP
HTML
Open protocols beat proprietary
“closed” networks.
“Walled garden”
The big Internet companies built on top
of open protocols but then made each
of their systems proprietary, making it
hard for new companies to compete.
Internet 1.0 Internet 2.0
Internet Protocols
X

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Big Company
Protocol
User
identity
User bank
details
Social graph
(who you know, how
well you know them)
Interest graph
(how they serve
relevant ads)
Reputation
(am I a 5 or a 2 when I
work with people?)
Big companies establish a “network effect” and lock you in because through all of
your data they are more efficient at serving you than any other startup could be.

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• Google & Apple can charge a 30% tax on apps.
• Apple can decide it doesn’t like fart apps.
• Facebook can decide how to promote news & media.
• Google can display shopping competitors, flight
information, hotel booking and stop referring traffic.
Big Company
As a society we’re starting to see the consequences of this, which could
get worse if power concentrates even further.

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Internet 3.0 is a possibility to return to a decentralized web where the big
companies have less control.
If BigCo services were
blockchain protocols then users
could “port” their information
more easily to new startupsIP
TCP
HTTP
HTML
Identity
Banking
Reputation
Socialgraph
Interestgraph

49. 49
I. What is Bitcoin?
II. What are Ethereum, alt coins, and Internet 3.0
III. Unresolved problems

50. 50
Blockchains are showing signs of not scaling well today.
A whole series of companies are
emerging to perform work not
completed by the core blockchain
Side chains
“Level 2” networks
“Layer 2” networks
Block N-1 Root hash Other info
Block N-2 Root hash Other info
…
Block 1 Root hash Other info
Block 0 Root hash Other info
Root hash Other info
1

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If hash power becomes centralized, then blockchain loses its
decentralization properties.
• Remember that consensus is achieved when >50% of hash
power achieves consensus.
• So if the nodes are concentrated (owned by a few players)
then the system is less independent.
• For example, what if state actors (Russia? North Korea? US?)
decide to secretly put resources into a given network.
2

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It’s one thing to have a trustless transaction with a person,
but what happens when I can’t trust the code?
The DAO project had a software wallet with a bug such
that a hacker was able to exploit a bug to the tune of $50
million (later recovered). When dealing with “trusted”
companies, there is at least remediation.
Code
Ethereum
Trustless transaction
3

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In an unbundled ICO world, how do you stop management
teams from leaving with millions without even delivering value?
ICOs
Cryptocurrencies / tokens
Blockchain
• Need legal governance
• Likely to see SEC oversight
• How to stop pump-and-dump coin
trading if coin owners are anonymous
(especially since there are private
groups now collaborating on
encrypted messaging networks like
Telegram & Signal)?
4

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We are lacking mechanisms to enforce governance and world order.
If the transactions are partially anonymous, then how do governments:
• Track the flow of money to terrorists, white supremacists, criminal
gangs?
• Track the flow of illegal “money of influence” to state actors?
• Manage large economies and not give up control of money
supply?
5

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In the end, the boom-and-bust of over-investment that also attracted a lot of innovation will
eventually lead to a future wave of huge future investment off of the back of today’s ashes.
We’ve seen this before:
• Cable
• CLECS/DSL
• Wireless
• Internet 1.0
We are
somewhere here
Time
Euphoria /
value

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A Guide to
Blockchain and
Cryptocurrency
Mark Suster, @msuster