Bitcoin and Cryptocurrency Technologies

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and Lysyanskaya) was very fruitful—zero-knowledge proofs have also been applied to Bitcoin as we will see in Chapter 6. But back to Chaum: he took his ideas and commercialized them. He formed a company in 1989 called DigiCash, probably the earliest company that tried to solve the problem of online payments. They had about a five-year head start on other companies like FirstVirtual and CyberCash that we just discussed. The actual cash in Digicash’s system was called Ecash and they had another system called cyberbucks. There were banks that actually implemented it — a few in the US and at least one in Finland. This was in the 1990s, long before Bitcoin, which might come as surprise to some Bitcoin enthusiasts who view banks as tech-phobic, anti-innovative behemoths. Ecash is based on Chaum’s protocols. Clients are anonymous, so banks can’t trace how they’re spending their money. But merchants in ecash aren’t anonymous. They have to return coins as soon as they receive them, so the bank knows how much they’re making, at what times, and so on. Figure 2: Screenshot of DigiCash Figure 2 shows a screenshot from the software. As you can see, it shows you your balance as well as all the coins that you have that have been issued to you from the bank. Since there’s no way to split your coins, the bank issues you a whole set of coins in denominations of a cent, two cents, four cents, 10
and so on — powers of two. That way, you (or your software, on your behalf) can always select a set of coins to pay for the exact amount of a transaction. When you want to make a transaction, say, as in this example, you want to make a donation to the non-profit privacy group EPIC, you’d click on a donation link that takes you to the Digicash website. That would then open a reverse web connection back to your computer. That means your computer had to have the ability to accept incoming connections and act as a server. You’d have to have your own IP address and your ISP would have to allow incoming connections. If the connection was successful, then the ecash software would launch on your computer and you’d be able to approve the transaction and send the money. Chaum had several patents on Digicash technology, in particular, the blind-signature scheme that it used. This was controversial, and it stopped other people from developing ecash systems that used the same protocol. But a bunch of cryptographers who hung out on what was called the cypherpunks mailing list wanted an alternative. Cyperpunks was the predecessor to the mailing list where Satoshi Nakamoto would later announce Bitcoin to the world, and this is no coincidence. We’ll talk about the cypherpunk movement and the roots of Bitcoin in Chapter 7. The cypherpunk cryptographers implemented a version of of ecash called MagicMoney. It did violate the patents, but was billed as being only for experimental use. It was a fun piece of software to play with. The interface was all text-based. You could send transactions by email. You would just copy and paste the transactions into your email and send it to another user. Hopefully, you’d use end-to-end email encryption software such as PGP to protect the transaction in transit. Then there’s a proposal called Lucre by Ben Laurie with contributions from many other people. Lucre tries to replace the blind-signature scheme in ecash with a non-patent-encumbered alternative, with the rest of the system largely the same. Yet another proposal, by Ian Goldberg, tries to fix the problem of not being able to split your coins to make change. His idea was that the merchant could send you coins back if they had some coins, so that you might overpay for the item if you didn’t have exact change, and then you’d get some coins back. But notice that this introduces an anonymity problem. As we saw earlier, in ecash, senders are anonymous but merchants aren’t. When the merchant sends cash back, technically, they’re the sender, so they’re anonymous. But you, as someone who has to return this cash to the bank, aren’t anonymous. There’s no way to design this system without breaking the anonymity of users trying to buy goods. So Goldberg came up with a proposal where there were different types of coins that would allow these transactions to occur, allow you to get change back, and still preserve your anonymity. Now, why did DigiCash fail? The main problem with DigiCash was that it was hard to persuade the banks and the merchants to adopt it. Since there weren’t many merchants that accepted ecash, users didn’t want it either. Worse, it didn’t support user-to-user transactions, or at least not very well. It was really centered on the user-to-merchant transaction. So if merchants weren’t on board, there was 11
Page 1 and 2: Bitcoin and Cryptocurrency Technolo
Page 3 and 4: Preface — The Long Road to Bitcoi
Page 5 and 6: work, there is also the issue of co
Page 7 and 8: Finally, CyberCash has the dubious
Page 9: This was the first serious digital
Page 13 and 14: Figure 3 shows the user side of the
Page 15 and 16: initial cost to acquire all the equ
Page 17 and 18: the system is to record the relativ
Page 19 and 20: original design. However, after Bit
Page 21 and 22: A final reason that’s often cited
Page 23 and 24: Chapter 1: Introduction to Cryptogr
Page 25 and 26: Figure 1.2 Because the number of
Page 27 and 28: Property 2: Hiding The second pr
Page 29 and 30: ecome: ● ● Hiding: Given H(
Page 31 and 32: SHA‐256 uses a compression functi
Page 33 and 34: Figure 1.5 Block chain.A block c
Page 35 and 36: Figure 1.7 Merkle tree. In a Mer
Page 37 and 38: throughout this book. 1.3 Digital S
Page 39 and 40: Figure 1.9 Unforgeability game.
Page 41 and 42: andomness just in making a signatur
Page 43 and 44: 1.5 A Simple Cryptocurrency Now let
Page 45 and 46: The first key idea is that a design
Page 47 and 48: Figure 1.13 A PayCoins Transa
Page 49 and 50: Perusing the NIST standard that def
Page 51 and 52: Chapter 2: How Bitcoin Achieves Dec
Page 53 and 54: state of the system. The implicatio
Page 55 and 56: consensus is somewhat pessimistic,
Page 57 and 58: Implicit Consensus. This assumpt
Page 59 and 60: Figure 2.2 A double spend attempt.
Page 61 and 62:
In general, the more confirmations
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Figure 2.4 The block reward is c
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puzzle‐friendliness property from
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possible outcomes, and the probabil
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theory problem that’s not easily
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this interlocking interdependence b
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Further reading The Bitcoin whitepa
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Chapter 3: Mechanics of Bitcoin Thi
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In this example, Alice specifies tw
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3.2 Bitcoin Scripts Each transactio
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the Bitcoin language and one has to
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exactly the same script, which is i
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in the normal case, this isn’t th
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Technically all of these transactio
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The header mostly contains informat
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in turn sends it to all of its peer
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Figure 3.10 Block propagation ti
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that actually affect them. So they
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that the old version would accept a
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Exercises 1. Transaction validation
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Chapter 4: How to Store and Use Bit
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software can automatically turn the
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The cryptographic magic that makes
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may never know (or care) who the co
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Given this stringent requirement, s
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There is a formula called Lagrange
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Ideally, the site will encrypt thos
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seen exchanges that fail due to bre
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Figure 4.5: Proof of liabilities.
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crypto and we won’t cover it here
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Figure 4.8: Payment process involvi
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transaction can't create coins, but
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of U.S. dollars per day pass throug
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Now if you look at a particular sec
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alance of 500,000 BTC. It then sign
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Chapter 5: Bitcoin Mining This chap
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In most cases you'll try every sing
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You can see in Figure 5.3 that over
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steady‐state, the period to find
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TARGET=(65535
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Disadvantages of GPU mining. GPU
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may be the fastest turnaround time
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Figure 5.10: Evolution of mining
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Hopefully, over time the embodied e
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Still, if we could replace Bitcoin
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Figure 5.11: Illustration of uncert
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Figure 5.13: Mining rewards. Thr
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Some mining hardware even supports
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By April 2015, the situation looks
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Figure 5.15 Forking attack.A mal
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Temporary block‐withholding attac
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the transaction from address X
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Chapter 6: Bitcoin and Anonymity
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Unlinkability. To understand unl
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eason is that use cases that we cla
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But this reveals something. The tra
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the other hand, are often not new a
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Figure 6.5. Labeled clusters.
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Luckily, this is a problem of commu
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they are unhappy with anonymity pro
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Fees should be all-or-nothing. M
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Somebody looking at this transactio
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a single transaction that combines
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just minting one doesn’t automati
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Efficiency. Recall the statement
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We start with Bitcoin itself, which
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An alternative design to Zerocoin i
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elieve the same thing. So consensus
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of developers who maintain Bitcoin
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The interesting case is if the fork
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eing effectively bankrupt. As of ea
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In an important sense it doesn't ma
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of illegal items becomes potentiall
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arrest. So although Ulbricht was th
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kind of business that will handle l
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een enough time for sellers to buil
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The text refers to “activities in
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A book that looks at the history of
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It’s easy to see how Bitcoin’s
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Why might memory‐hard and memory
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Until recently, it wasn’t known i
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meaning the exponential growth peri
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Next, consider the problem that SET
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In Permacoin, each miner Msto
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Interestingly, these concerns have
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they can perform the signatures on
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schemes also require a small amount
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to provide an effective solution, t
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Chapter 9: Bitcoin as a Platform In
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means that if you actuallydo
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CommitCoin exploits this property.
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features without needing to change
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would just look like a dollar bill.
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you. In particular, you can’t use
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To solve this problem we can once a
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NBA draft lottery.One example th
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that there’s no way for anyone to
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to predict the low‐level fluctuat
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design, because miners have to veri
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Here's another example, this time f
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You can also trade shares for futur
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Order books.The final piece o
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Chapter 10: Altcoins and the Crypto
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Attracting miners has special impor
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with the launch date of the altcoin
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Namecoin is technically interesting
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10.3 Relationship Between Bitcoin a
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Switching costs are certainly not z
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If our altcoin is merge‐mined, we
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When we think about a rational mine
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DepositA [Altcoin block chain] Refu
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Sidechains. The sidechains vision i
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lock themselves could tell us. This
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written in bytecode and executed by
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Bitcoin. In particular, there are c
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The simple binary Merkle tree used
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Chapter 11: Decentralized Instituti
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Bitcoin, Alice can remotely transfe
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only these signatures of limited fo
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11.3 Template for Decentralization
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Sidebar: trust.Some people in th
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competition among intermediaries. P
Page 305 and 306:
To drive home the mismatch between
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Conclusion to the book Some people
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