Bitcoin and Cryptocurrency Technologies

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Evaluating the security of a Bitcoin beacon. Let’s say you’re participating in a lottery whose outcome is determined by the output of the Bitcoin beacon for some pre‐specified future block at height H in the block chain. There are N players in this lottery, and each of them is betting B bitcoins. If you’re also a miner, you might get lucky and find a hash puzzle solution for block H. Then you have the choice of whether or not to publish the block. If you don’t like the lottery outcome that would result from your publishing the block you found, you can simply discard it and let the lottery be determined by whoever else publishes block B. However, you’d forfeit the revenue that you could earn from that block. Let’s calculate how big the bet B needs to be for you to find the selective discarding strategy worthwhile. You successfully find a block at block height H and realize that if you publish it, you will definitely lose the lottery, whereas if you discard the block you’ll still have a 1/N chance of winning B * N bitcoins. That means it will be rational to discard the block if your expected payout of 1/N * B * N bitcoins (i.e., B bitcoins) is greater than the reward for mining a block (roughly 25 bitcoins in 2015, ignoring transaction fees). So the attack is profitable if B > 25. In mid 2015, 25 bitcoins is worth over 5,000 U.S. dollars. So if the bet per player is under $5,000, the lottery will be secure against this attack if the players are rational. One of the advantages of this scheme is that it’s a fully decentralized beacon, with no central point of trust. Compared to some other beacon proposals, it is fairly fast. It can create an output roughly every ten minutes. It’s also useful to be able to estimate the cost to an attacker to manipulate the beacon outputs using our simple model above. A downside of using Bitcoin as a beacon is that its timing is somewhat imprecise. Say we want to read the value of the beacon tomorrow at noon. We don't know exactly which block will be the latest block at that time. Although on average a block will be published within 10 minutes before or after noon, there is some variance. We also have to plan to tolerate a bit more delay if we want to reduce the likelihood of the block we look at being lost in a short fork. As is usual in Bitcoin, we’d want to wait for roughly six blocks to arrive before we believe that the beacon value has truly settled. Another downside is that the cost of manipulating the beacon value may be too low for some applications we care about. If we were actually running the NBA draft, where there are tens of millions of dollars at stake, it may suddenly look worthwhile for one of the teams to start bribing Bitcoin miners to manipulate this process. It remains an open question if we can extend this construction to make it secure when millions of dollars are on the line. Finally, our security evaluation ignores some real‐life factors. For example, a miner who is part of a mining pool doesn’t lose much by discarding a block, since they’re rewarded on the basis of shares rather than blocks. For now, Bitcoin beacons are an interesting but unproven idea. Scripting support for beacons. What if we extended Bitcoin’s scripting language with a special opcode to read beacon values? Currently there's no way to have any randomness in Bitcoin scripts. That’s by 256
design, because miners have to verify scripts and they all want to agree on whether a script is valid or not. But if we use the beacon value, it’s a public source of verifiable randomness. We could use the beacon to add randomness into transaction scripts that every miner could agree on. Suppose we had one opcode that would make a random decision based on the beacon output of the previous block. We could replace the entire complicated lottery protocol with just one script that reads the beacon value and assigns the output to one of nkeys. It wouldn't require a multi‐round protocol, security deposits, or timed hash commitments. One drawback of this idea is that it would now be possible for miners to manipulate the lottery simply by delaying the lottery transaction until a later block if they find that including the transaction in the block they’re mining would cause them to lose the lottery. It no longer requires forfeiting block rewards. It’s possible to make a variation of the beacon opcode that avoids this attack. Instead of referring to the previous block, you specify to use the beacon value at a particular block height. 9.5: Prediction Markets and Real World Data Feeds For the final topic of this chapter, we’ll look at how to implement a prediction market in a decentralized way using cryptocurrencies and the related topic bringing real‐world data into Bitcoin. A prediction market allows people to come together and make bets on future events such as a sports game or an election. Participants in a prediction market buy, sell, and trade “shares” in specific outcomes of such events. Team Germany Argentina Brazil United States England Netherlands Pre‐tournament 0.12 0.09 0.22 0.01 0.05 0.03 After group stage 0.18 0.15 0.31 0.06 0.00 0.05 Before semifinals 0.26 0.21 0.45 0.00 0.00 0.08 Before finals 0.64 0.36 0.00 0.00 0.00 0.00 Final 1 0 0 0 0 0 Table 9.12: Prices in dollars in a hypothetical prediction market for a selection of teams during the 2014 World Cup. The price of a share betting on the U.S. team to win the cup rose from 1 cent to 6 cents after U.S. performed well in the group stage. A share in Brazil rose progressively to 45 cents as Brazil advanced into the semifinals and then lost its entire value after Brazil lost its semifinal match. After the tournament only shares in Germany (who won the tournament) had any value. 257
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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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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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Page 211 and 212: een enough time for sellers to buil
Page 213 and 214: The text refers to “activities in
Page 215 and 216: A book that looks at the history of
Page 217 and 218: It’s easy to see how Bitcoin’s
Page 219 and 220: Why might memory‐hard and memory
Page 221 and 222: Until recently, it wasn’t known i
Page 223 and 224: meaning the exponential growth peri
Page 225 and 226: Next, consider the problem that SET
Page 227 and 228: In Permacoin, each miner Msto
Page 229 and 230: Interestingly, these concerns have
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Page 237 and 238: Chapter 9: Bitcoin as a Platform In
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Page 243 and 244: features without needing to change
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Page 247 and 248: you. In particular, you can’t use
Page 249 and 250: To solve this problem we can once a
Page 251 and 252: NBA draft lottery.One example th
Page 253 and 254: that there’s no way for anyone to
Page 255: to predict the low‐level fluctuat
Page 259 and 260: Here's another example, this time f
Page 261 and 262: You can also trade shares for futur
Page 263 and 264: Order books.The final piece o
Page 265 and 266: Chapter 10: Altcoins and the Crypto
Page 267 and 268: Attracting miners has special impor
Page 269 and 270: with the launch date of the altcoin
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Page 273 and 274: 10.3 Relationship Between Bitcoin a
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Page 277 and 278: If our altcoin is merge‐mined, we
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Page 283 and 284: Sidechains. The sidechains vision i
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Page 293 and 294: Chapter 11: Decentralized Instituti
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Page 299 and 300: 11.3 Template for Decentralization
Page 301 and 302: Sidebar: trust.Some people in th
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Page 305 and 306: To drive home the mismatch between
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Conclusion to the book Some people
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