Bitcoin and Cryptocurrency Technologies

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Further Reading An accessible overview of digital cash schemes focused on practical issues: P. Wayner. Digital Cash: commerce on the net (2nd ed). Morgan Kaufmann, 1997. A cryptographically-oriented overview of e-cash systems (Chapter 1) and micropayments (Chapter 7): B. Rosenberg (ed.) Handbook of Financial Cryptography and Security. CRC Press, 2011. Although not Chaum’s earliest paper on e-cash, this is arguably the most innovative, and it formed a template replicated by many other papers: D. Chaum, A. Fiat, M. Naor. Untraceable electronic cash. CRYPTO 1998. Many papers improved the efficiency of Chaum-Fiat-Naor using modern cryptographic techniques, but arguably the most significant is: J. Camenisch, S. Hohenberger, A. Lysyanskaya, Compact e-cash. Theory and Applications of Cryptographic Techniques, 2005 Some practical security observations on the financial industry and proposals, including Mondex: R. Anderson. Security Engineering (2nd ed). Wiley, 2008. An overview of the implementation of Chaum’s ecash proposal: B. Schoenmakers. Basic security of the ecash payment system. State of the Art in Applied Cryptography, 1997. Two papers cited by Satoshi Nakamoto in the Bitcoin whitepaper that are integral to Bitcon’s design: A. Back. Hashcash - A Denial of Service Counter-Measure, Online, 2002. S. Haber, W. S. Stornetta. Secure names for bitstrings. CCS, 1997. 22
Chapter 1: Introduction to Cryptography & Cryptocurrencies All currencies need some way to control supply and enforce various security properties to prevent cheating. In fiat currencies, organizations like central banks control the money supply and add anti‐counterfeiting features to physical currency. These security features raise the bar for an attacker, but they don’t make money impossible to counterfeit. Ultimately, law enforcement is necessary for stopping people from breaking the rules of the system. Cryptocurrencies too must have security measures that prevent people from tampering with the state of the system, and from equivocating, that is, making mutually inconsistent statements to different people. If Alice convinces Bob that she paid him a digital coin, for example, she should not be able to convince Carol that she paid her that same coin. But unlike fiat currencies, the security rules of cryptocurrencies need to be enforced purely technologically and without relying on a central authority. As the word suggests, cryptocurrencies make heavy use of cryptography. Cryptography provides a mechanism for securely encoding the rules of a cryptocurrency system in the system itself. We can use it to prevent tampering and equivocation, as well as to encode the rules for creation of new units of the currency into a mathematical protocol. Before we can properly understand cryptocurrencies then, we’ll need to delve into the cryptographic foundations that they rely upon. Cryptography is a deep academic research field utilizing many advanced mathematical techniques that are notoriously subtle and complicated to understand. Fortunately, Bitcoin only relies on a handful of relatively simple and well‐known cryptographic constructions. In this chapter, we’ll specifically study cryptographic hashes and digital signatures, two primitives that prove to be very useful for building cryptocurrencies. Future chapters will introduce more complicated cryptographic schemes, such as zero‐knowledge proofs, that are used in proposed extensions and modifications to Bitcoin. Once we’ve learnt the necessary cryptographic primitives, we’ll discuss some of the ways in which those are used to build cryptocurrencies. We’ll complete this chapter with some examples of simple cryptocurrencies that illustrate some of the design challenges that we need to deal with. 1.1 Cryptographic Hash Functions The first cryptographic primitive that we’ll need to understand is a cryptographic hash function.A hash functionis a mathematical function with the following three properties: ● ● ● Its input can be any string of any size. It produces a fixed size output. For the purpose of making the discussion in this chapter concrete, we will assume a 256‐bit output size. However, our discussion holds true for any output size as long as it is sufficiently large. It is efficiently computable. Intuitively this means that for a given input string, you can figure 23
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 and 10: This was the first serious digital
Page 11 and 12: and so on — powers of two. That w
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: A final reason that’s often cited
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
Page 63 and 64: Figure 2.4 The block reward is c
Page 65 and 66: puzzle‐friendliness property from
Page 67 and 68: possible outcomes, and the probabil
Page 69 and 70: theory problem that’s not easily
Page 71 and 72: 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
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To drive home the mismatch between
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Conclusion to the book Some people
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