Bitcoin and Cryptocurrency Technologies

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To wrap up this chapter, we’ve talked about how a Bitcoin is an important part of a much larger ecosystem of cryptocurrencies and altcoins. They compete, cooperate, and interact in various ways, some cooperative, some harmful. It’s also possible that in the future, there will be technical ways for transactions in one block chain to explicitly refer to transactions in another block chain. There remain several open questions. Will the altcoin ecosystem consolidate so that a small number dominate, or will it stay diversified? Will application‐specific altcoins proliferate or will the Ethereum model of a general‐purpose platform come to dominate? Is Bitcoin itself eventually going to be overtaken by some other altcoin? Is it a good idea to encourage interaction between Bitcoin and altcoins? Or should each cryptocurrency be a separate system, for example by using incompatible mining puzzles rather than merge mining? We can’t answer these questions right now, but we’ve talked about all of the concepts you need to understand and appreciate their importance. Further Reading The sidechains white paper: Back, Adam, Matt Corallo, Luke Dashjr, Mark Friedenbach, Gregory Maxwell, Andrew Miller, Andrew Poelstra, Jorge Timón, and Pieter Wuille. Enabling blockchain innovations with pegged sidechains. 2014. A paper about Namecoin and alternate ways to design name/value stores using cryptocurrencies: Kalodner, Harry, Miles Carlsten, Paul Ellenbogen, Joseph Bonneau, and Arvind Narayanan. An empirical study of Namecoin and lessons for decentralized namespace design. In Workshop on the Economics of Information Security, 2015. The Ethereum white paper: Various authors. A Next‐Generation Smart Contract and Decentralized Application Platform. A paper that analyzes the incentive misalignment in Ethereum: Luu, Loi, Jason Teutsch, Raghav Kulkarni, and Prateek Saxena. Demystifying incentives in the consensus computer. ACM SIGSAC Conference on Computer and Communications Security, 2015. 292
Chapter 11: Decentralized Institutions: The Future of Bitcoin? So far in this book we’ve explored the state of Bitcoin and block chain technologies as of 2015. In this chapter, we’ll consider what future possibilities may be realized by Bitcoin. We won’t claim to know what might unfold, following the adage “never make predictions, especially about the future.” Hence the question mark in the title. Instead, we’ll stick to the academic approach we’ve taken so far in this book, even when studying potential future technologies. Bitcoin’s future is a subject that seems to muster enthusiastic and breathless visions of a true technological revolution. This chapter could be a manifesto. It is not. We identify notable proposals and take a clinical approach to categorizing them and critically evaluating their relative pros and cons. Bitcoin is a broad subject that encompasses the protocol itself as well as its potential as a platform for new applications. The focus of this chapter is not the future of the Bitcoin protocol, although we recognize that there are many issues that will shape the future of the protocol that are important to study, including Bitcoin’s governance, efficiency, scalability, and feature set. Instead we will focus on how Bitcoin’s apparent success at decentralizing currency may cause us to rethink other centralized institutions — ones dealing with stocks, bonds, property titles, and more. We’ll ask if block chain technology could be applied to decentralizing them as well. Not only should we ask if decentralization is technically possible, but also if it is financially sensible and beneficial to society. 11.1 The Block Chain as a Vehicle for Decentralization There were numerous failed attempts at digital or electronic cash before Bitcoin (the preface to this book touched upon many of them). Bitcoin’s key difference compared to most of these attempts is decentralization. The core innovation of Bitcoin that enables decentralization is the block chain. In this section, we will consider how block chain technology may enable decentralization in areas other than currency. Throughout this chapter, we’ll use a running example of a car whose ownership is controlled through a block chain. This is a specific example of a more general idea of smart property which we introduced in Chapter 9. Smart property, and digital contracts that govern them, were pioneered by Nick Szabo and others in the early 1990s, well before Bitcoin was proposed. However with a block chain, the idea can be made concrete. Motivating Example.Modern automobiles use two primary locking mechanisms: physical locks on the doors and a vehicle immobilizer which electronically prevents the engine from starting. The owner is provided with a key fob that communicates wirelessly with the car to authorize the doors to unlock 293
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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
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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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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
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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
Page 271 and 272: Namecoin is technically interesting
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 301 and 302: Sidebar: trust.Some people in th
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Page 305 and 306: To drive home the mismatch between
Page 307 and 308: Conclusion to the book Some people
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