Bitcoin and Cryptocurrency Technologies

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Chapter 7: Community, Politics, and Regulation In this chapter we'll look at all the ways that the world of Bitcoin and cryptocurrency technology touches the world of people. We'll discuss the Bitcoin community’s internal politics as well as the ways that Bitcoin interacts with traditional politics, namely law enforcement and regulation issues. 7.1: Consensus in Bitcoin First let’s look at consensus in Bitcoin, that is, the way that the operation of Bitcoin relies on the formation of consensus amongst people. There are three kinds of consensus that have to operate for Bitcoin to be successful. 1. Consensus about rules.By rules we mean things like what makes a transaction or a block valid, the core protocols and data formats involved in making Bitcoin work. You need to have a consensus about these things so that all the different participants in the system can talk to each other and agree on what's happening. 2. Consensus about history.That is, consensus about what is and isn’t in the block chain, and therefore a consensus about which transactions have occurred. Once you have that, what follows is a consensus about which coins — which unspent outputs — exist and who owns them. This consensus results from the processes we’ve looked at in Chapter 2 and other earlier chapters from which the block chain is built and by which nodes come to consensus about the contents of the block chain. This is the most familiar and most technically intricate kind of consensus in Bitcoin. 3. Consensus that coins are valuable.The third form of consensus is the general agreement that bitcoins are valuable and in particular the consensus that if someone gives you a bitcoin today, then tomorrow you will be able to redeem or trade that for something of value. Any currency, whether it's a fiat currency like the dollar or cryptocurrency like Bitcoin, relies on consensus that it has value. That is, you need people to generally accept that it's exchangeable for something else of value, now and in the future. In a fiat currency, this is the onlykind of consensus. The rules don’t emerge by consensus ‐‐‐ what is and isn’t a dollar bill is declared by fiat. History isn’t salient, but state is ‐‐‐ who owns what. State is either determined by physical possession, as with cash, or delegated to professional record keepers, i.e., banks. In cryptocurrencies, on the other hand, rules and history are also subject to consensus. In Bitcoin, this form of consensus, unlike the others, is a bit circular. In other words, my belief that the bitcoins I'm receiving today are of value depends on my expectation that tomorrow other people will 194
elieve the same thing. So consensus on value relies on believing that consensus on value will continue. This is sometimes called the Tinkerbell effect by analogy to Peter Pan where it's said that Tinkerbell exists because you believe in her. Whether it's circular or not, it seems to exist and it's important for Bitcoin to operate. Now, what's important about all three forms of consensus is that they're intertwined with each other, as Figure 7.1 shows. Figure 7.1: Relationships between the three forms of consensus in Bitcoin First of all, consensus about rules and consensus about history go together. Without knowing which blocks are valid you can’t have consensus about the block chain. And without consensus about which blocks are in the block chain, you can’t know if a transaction is valid or if it’s trying to spend an already‐spent output. Consensus about history and consensus that coins are valuable are also tied together. Consensus about history means that we agree on who owns which coins, and that’s a prerequisite for believing that the coins have value — without a consensus that I own a particular coin I can’t have any expectation that people will accept that coin from me as payment in the future. It’s true in reverse as well — as we saw in Chapter 2, consensus about value is what incentivizes miners to maintain the security of the block chain, which gets us consensus about history. The genius in Bitcoin’s original design was in recognizing that it would be very difficult to get any one of these types of consensus by itself. Consensus about the rules in a worldwide decentralized environment where there's no notion of identity isn’t the kind of thing that's likely to happen. Consensus about history, similarly, is a very difficult distributed data structure problem that is not likely to be solvable on its own. And a consensus that some kind of cryptocurrency has value is also very difficult to achieve. What the design of Bitcoin and the continued operation of Bitcoin show is that even if you can't build any one of these forms of consensus by itself you can somehow stand up all three of them together and get them to operate in an interdependent way. So when we talk about how things operate in the Bitcoin community we have to bear in mind that Bitcoin relies on agreement by the participants and that consensus is a fragile and interdependent thing. 195
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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
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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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Page 145 and 146: Figure 5.10: Evolution of mining
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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
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Page 159 and 160: Figure 5.15 Forking attack.A mal
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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.
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Page 179 and 180: they are unhappy with anonymity pro
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Page 187 and 188: just minting one doesn’t automati
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Page 191 and 192: We start with Bitcoin itself, which
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Page 197 and 198: of developers who maintain Bitcoin
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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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