Bitcoin and Cryptocurrency Technologies

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different servers that Mallory cannot access. How do they re-secure their wallet and effectively revoke the information that Mallory has learned? 4.2. If BitCorp uses a 2-out-of-2 instead of a 2-out-3 wallet, what steps can they take in advance so that they can recover even in the event of one of their servers getting broken into (and Mallory not just learning but also potentially deleting the key material on that server)? 5. Exchange rate 5.1. Speculate about why buying bitcoins in person is generally more expensive than buying from an online exchange. 5.2. Moore and Christin observethat security breaches and other failures of exchanges have little impact on the Bitcoin exchange rate. Speculate on why this might be. 6. Payments.A Bitcoin payment service might receive thousands of payments from various users near-simultaneously. How can it tell whether a particular user Alice who logged into the payment service website and initiated the payment protocol actually made a payment or not? 7. BitcoinLotto: Suppose the nation of Bitcoinia has decided to convert its national lottery to use Bitcoin. A trusted scratch-off ticket printing factory exists and will not keep records of any values printed. Bitcoinia proposes a simple design: a weekly run of tickets is printed with an address holding the jackpot on each ticket. This allows everybody to verify the jackpot exists. The winning ticket contains the correct private key under the scratch material. 7.1. What might happen if the winner finds the ticket on Monday and immediately claims the jackpot? Can you modify your design to ensure this won’t be an issue? 7.2. Some tickets inevitably get lost or destroyed. So you’d like to modify the design to roll forward any unclaimed jackpot from Week nto the winner in Week n+1. Can you propose a design that works, without letting the lottery administrators embezzle funds? Also make sure that the Week nwinner can’t simply wait until the beginning of Week n+1to attempt to double their winnings. 130
Chapter 5: Bitcoin Mining This chapter is all about mining. We’ve already seen quite a bit about miners and how Bitcoin relies on them — they validate every transaction, they build and store all the blocks, and they reach a consensus on which blocks to include in the block chain. We also have already seen that miners earn some reward for doing this, but we still have left many questions unanswered. Who are the miners? How did they get into this? How do they operate? What's the business model like for miners? What impact do they have on the environment? In this chapter, we will answer all of these questions. 5.1 The task of Bitcoin miners Do you want to get into Bitcoin mining? If you do, we’re not going to completely discourage you, but beware that Bitcoin mining bears many similarities to gold rushes. Historical gold rushes are full of stories of young people rushing off to find fortune and inevitably many of them lose everything they have. A few strike it rich, but even those that do generally endure lots of hardship along the way. We’ll see in this section why Bitcoin mining shares many of the same challenges and risks as traditional gold rushes and other get‐rich‐quick schemes. But first, let’s look at the technical details. To be a Bitcoin miner, you have to join the Bitcoin network and connect to other nodes. Once you’re connected, there are six tasks to perform: 1. Listen for transactions. First, you listen for transactions on the network and validate them by checking that signatures are correct and that the outputs being spent haven’t been spent before. 2. Maintain block chain and listen for new blocks. You must maintain the block chain. You start by asking other nodes to give you all of the historical blocks that are already part of the block chain before you joined the network. You then listen for new blocks that are being broadcast to the network. You must validate each block that you receive — by validating each transaction in the block and checking that the block contains a valid nonce. We’ll return to the details of nonce checking later in this section. 3. Assemble a candidate block.Once you have an up‐to‐date copy of the block chain, you can begin building your own blocks. To do this, you group transactions that you heard about into a new block that extends the latest block you know about. You must make sure that each transaction included in your block is valid. 4. Find a nonce that makes your block valid.This step requires the most work and it’s where all the real difficulty happens for miners. We will see this in detail shortly. 5. Hope your block is accepted.Even if you find a block, there’s no guarantee that your block will become part of the consensus chain. There’s bit of luck here; you have to hope that other miners accept your block and start mining on top of it, instead of some competitor’s block. 6. Profit. If all other miners do accept your block, then you profit! At the time of this writing in early 2015, the block reward is 25 bitcoins which is currently worth over $6,000. In addition, if 131
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Bitcoin and Cryptocurrency Technolo
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Preface — The Long Road to Bitcoi
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work, there is also the issue of co
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Finally, CyberCash has the dubious
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This was the first serious digital
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and so on — powers of two. That w
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Figure 3 shows the user side of the
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initial cost to acquire all the equ
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the system is to record the relativ
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original design. However, after Bit
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A final reason that’s often cited
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Chapter 1: Introduction to Cryptogr
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Figure 1.2 Because the number of
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Property 2: Hiding The second pr
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ecome: ● ● Hiding: Given H(
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SHA‐256 uses a compression functi
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Figure 1.5 Block chain.A block c
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Figure 1.7 Merkle tree. In a Mer
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throughout this book. 1.3 Digital S
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Figure 1.9 Unforgeability game.
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andomness just in making a signatur
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1.5 A Simple Cryptocurrency Now let
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The first key idea is that a design
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Figure 1.13 A PayCoins Transa
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Perusing the NIST standard that def
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Chapter 2: How Bitcoin Achieves Dec
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state of the system. The implicatio
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consensus is somewhat pessimistic,
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Implicit Consensus. This assumpt
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Figure 2.2 A double spend attempt.
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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
Page 79 and 80: 3.2 Bitcoin Scripts Each transactio
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Page 85 and 86: in the normal case, this isn’t th
Page 87 and 88: Technically all of these transactio
Page 89 and 90: The header mostly contains informat
Page 91 and 92: in turn sends it to all of its peer
Page 93 and 94: Figure 3.10 Block propagation ti
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Page 97 and 98: that the old version would accept a
Page 99 and 100: Exercises 1. Transaction validation
Page 101 and 102: Chapter 4: How to Store and Use Bit
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Page 105 and 106: The cryptographic magic that makes
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Page 109 and 110: Given this stringent requirement, s
Page 111 and 112: There is a formula called Lagrange
Page 113 and 114: Ideally, the site will encrypt thos
Page 115 and 116: seen exchanges that fail due to bre
Page 117 and 118: Figure 4.5: Proof of liabilities.
Page 119 and 120: crypto and we won’t cover it here
Page 121 and 122: Figure 4.8: Payment process involvi
Page 123 and 124: transaction can't create coins, but
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Page 127 and 128: Now if you look at a particular sec
Page 129: alance of 500,000 BTC. It then sign
Page 133 and 134: In most cases you'll try every sing
Page 135 and 136: You can see in Figure 5.3 that over
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Page 141 and 142: Disadvantages of GPU mining. GPU
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Page 145 and 146: Figure 5.10: Evolution of mining
Page 147 and 148: Hopefully, over time the embodied e
Page 149 and 150: Still, if we could replace Bitcoin
Page 151 and 152: Figure 5.11: Illustration of uncert
Page 153 and 154: Figure 5.13: Mining rewards. Thr
Page 155 and 156: Some mining hardware even supports
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Page 159 and 160: Figure 5.15 Forking attack.A mal
Page 161 and 162: Temporary block‐withholding attac
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Page 165 and 166: Chapter 6: Bitcoin and Anonymity
Page 167 and 168: Unlinkability. To understand unl
Page 169 and 170: eason is that use cases that we cla
Page 171 and 172: But this reveals something. The tra
Page 173 and 174: the other hand, are often not new a
Page 175 and 176: Figure 6.5. Labeled clusters.
Page 177 and 178: Luckily, this is a problem of commu
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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
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To drive home the mismatch between
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Conclusion to the book Some people
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