Page 148 - ITU-T Focus Group Digital Financial Services – Technology, innovation and competition

ITU-T Focus Group Digital Financial Services
Technology, Innovation and Competition

Exhibit 2: The Bitcoin cryptocurrency, is the first use of blockchain DLT.
Bitcoin is a cryptocurrency that uses blockchain technology. Bitcoin can be difficult to define as there
is no authoritative formal specification. In the original proposal, there are to be a limited number
of Bitcoins that can ever be mined. Through this methodology, the need for a central issuer – as an
1
intermediary ‒ is thus eliminated.
2
Bitcoins are created by a process known as mining, which involves users needing to solve a
cryptographic puzzle. Once the puzzle has been solved, a new Bitcoin is issued, and its presence is
announced to Bitcoin users – nodes - on the Bitcoin blockchain. Spending of a Bitcoin cryptocurrency
unit, or issuance of a new Bitcoin by ‘miners’, is sent across the nodes for verification. Thus, mining
is used to validate Bitcoin transactions and the validated records are stored on a blockchain. The
purpose of the blockchain is to track Bitcoin spending, specifically to prevent ‘double spending’ of
the same Bitcoin. The system is permissionless and public.

In order to incentivize people to do the mining, and to have Bitcoin transactions validated, they
pay successful miners by offering them newly-created Bitcoin when they finish validating a block of
transactions and adding it to the blockchain. Once there is consensus amongst the nodes that the
3
data can be added, the Bitcoin blockchain is updated with the new information. 4

1 For an analysis of Bitcoin’s components, see Bandeau, J et al (2015) Soak: Research Perspectives and Challenges for
Bitcoin and Cryptocurrencies, available at https:// goo. gl/ o6Av8h .
2 For the effects of Bitcoin on central banks and issuance of currency, see Rainer, B et al (2014) Bitcoin: Economics,
Technology, and Governance, available at https:// ssrn. com/ abstract= 2495572. However, there are initiatives by cen-
tral banks to use digital fiat currencies. For example, see the use of eCurrency technology which powers a digital fiat
currency instrument that has the same legal tender status as banknotes and coins. eCurrency and Banque Régionale
de Marchés partnered to launch a digital fiat currency, the eCFA, in Senegal. See Business Wire (2016) Currency
Mint Limited and Banque Régionale De Marchés Launch New Digital Currency in Senegal, available at https:// goo.
gl/ baMlSZ; and World Economic Forum (2016) The Future of Financial Infrastructure – Global Payments, available at
https:// goo. gl/ Wtza5r
3 While the value of a Bitcoin can fluctuate dramatically day-to-day, this has followed a general ascent. The first Bitcoins
in 2009 were traded at under US$0.01. In February 2017, a Bitcoin was trading at over US$1,000.
4 For the Bitcoin blockchain, the updating of the blockchain across all participant nodes can take up to 10 minutes.

1.3 Distributed ledger constructs

1.3.1 Overview

All blockchains operate by taking a number of records and putting them in a block and then chaining that block
to the next block, using a cryptographic signature. The method used to validate the accuracy of a distributed
16
ledger is known as ‘consensus.’
17
The manner in which consensus for proposed changes to the ledger is reached defines the type of blockchain. 18

16 See Annex A.
17 Any data that is placed on the block is said to be ‘on-chain’ and any data that derives from the blockchain, but which for some
reason must be swapped with another party not using blockchain technology is said to be ‘off chain.’ See also Mills et al (2016)
ibid.
18 Depending on the DLT, the consensus method may be called Proof of Stake (POS), or Proof of Work (POW). For example, with
cryptocurrencies POS is a consensus mechanism used as an alternative to the POW mechanism used in Bitcoin. POS cryptocur-
rencies are ‘minted’ rather than ‘mined,’ so avoiding expensive computations and thus providing a lower entry barrier for block
generation rewards. For a fuller discussion of these differences, see Bitfury Group (2015) Proof of Stake Versus Proof of Work,
available at https:// goo. gl/ ebS2Vo.

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