Bitcoin and Cryptocurrency Technologies

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But what if we could start from scratch and forget about soft forks, hard forks, and other challenges in bolting new features on to Bitcoin? We’ve learned a lot since 2008 when Bitcoin first came out. Why not design a new cryptocurrency from scratch and make everything better? In the next chapter, we’ll look at altcoins, which are attempts to do just that. We’ll talk about all the promising ideas and the challenges to face in starting a new cryptocurrency. Further Reading Project pages / specifications of two of the overlay protocols we looked at: The Counterparty protocol specification The OpenAssets protocol The secure multiparty lottery protocol we described is from the following paper, which is not for the faint of heart! Andrychowicz, Marcin, Stefan Dziembowski, Daniel Malinowski, and Lukasz Mazurek. Secure multiparty computations on Bitcoin. In IEEE Security and Privacy 2014. Papers by economists on the power of prediction markets: Wolfers, Justin, and Eric Zitzewitz. Prediction markets. No. w10504. National Bureau of Economic Research, 2004. Arrow, Kenneth J. et al. The promise of prediction markets. 2008. The prediction market design we described is from this paper, co‐authored by several of the present authors: Clark, Jeremy, Joseph Bonneau, Edward W. Felten, Joshua A. Kroll, Andrew Miller, and Arvind Narayanan. On Decentralizing Prediction Markets and Order Books. In Workshop on the Economics of Information Security, 2014. 264
Chapter 10: Altcoins and the Cryptocurrency Ecosystem Bitcoin is just one component (albeit an important one) of a broader ecosystem of alternative, but often quite similar, currencies called altcoins. In this chapter, we’ll look at altcoins and the ecosystem of cryptocurrencies. 10.1 Altcoins: History and Motivation Bitcoin was launched in January 2009. It wasn’t for another two years, until the middle of 2011, that the first Bitcoin‐like derived system, Namecoin, was launched. The rate of altcoin launches exploded in 2013, and hundreds have since followed. How many are there in all? It’s impossible to provide an exact number because it’s not clear which altcoins are worth counting. For example, if someone announces an altcoin and perhaps release some source code, but no one has started mining or using it yet, does that count? Other altcoins have been launched and seen some initial use, but then died very quickly after their launch. Figure 10.1: Altcoins launched per month (measured by genesis block creation). It’s also not quite clear what is an altcoin as opposed to simply another cryptographic currency. There were, after all, various cryptocurrency proposals and systems which predate Bitcoin and these are usually not called altcoins. Many altcoins borrow concepts from Bitcoin, often directly forking its code base or otherwise adopting some of Bitcoin’s code. Some make only very minor modifications to Bitcoin, such as changing the value of some parameters of the system, and continue to incorporate changes made by Bitcoin’s developers. To date, all altcoins that we know of begin with a new genesis block and their own alternate view of transaction history, rather than forking Bitcoin’s block chain after a certain point in history. For our purposes, we don’t need a precise definition of an altcoin. Instead we’ll loosely refer to any cryptocurrency launched since Bitcoin as an altcoin. 265
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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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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
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
Page 231 and 232: they can perform the signatures on
Page 233 and 234: schemes also require a small amount
Page 235 and 236: to provide an effective solution, t
Page 237 and 238: Chapter 9: Bitcoin as a Platform In
Page 239 and 240: means that if you actuallydo
Page 241 and 242: CommitCoin exploits this property.
Page 243 and 244: features without needing to change
Page 245 and 246: would just look like a dollar bill.
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 and 256: to predict the low‐level fluctuat
Page 257 and 258: design, because miners have to veri
Page 259 and 260: Here's another example, this time f
Page 261 and 262: You can also trade shares for futur
Page 263: Order books.The final piece o
Page 267 and 268: Attracting miners has special impor
Page 269 and 270: with the launch date of the altcoin
Page 271 and 272: Namecoin is technically interesting
Page 273 and 274: 10.3 Relationship Between Bitcoin a
Page 275 and 276: Switching costs are certainly not z
Page 277 and 278: If our altcoin is merge‐mined, we
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Page 281 and 282: DepositA [Altcoin block chain] Refu
Page 283 and 284: Sidechains. The sidechains vision i
Page 285 and 286: lock themselves could tell us. This
Page 287 and 288: written in bytecode and executed by
Page 289 and 290: Bitcoin. In particular, there are c
Page 291 and 292: The simple binary Merkle tree used
Page 293 and 294: Chapter 11: Decentralized Instituti
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Page 297 and 298: only these signatures of limited fo
Page 299 and 300: 11.3 Template for Decentralization
Page 301 and 302: Sidebar: trust.Some people in th
Page 303 and 304: competition among intermediaries. P
Page 305 and 306: To drive home the mismatch between
Page 307 and 308: Conclusion to the book Some people
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