Bitcoin and Cryptocurrency Technologies

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Route 1: Directly on Bitcoin The natural starting point for block chain integration is Bitcoin’s block chain. This is the approach we used in the previous example of a smart car. The main advantage to using Bitcoin directly is deployability: the code runs, the network has acquired significant mining power, and the consensus process appears sound. However we were only able to use Bitcoin in the example application with some hacks, such as an equivalence between the crypto that’s used to authorize Bitcoin transactions and the crypto that’s used to open car doors. It will not always be the case that such hacks are possible. More fundamentally, if you have some arbitrarily complex contract between different parties, it is not necessarily the case that it can be represented adequately on Bitcoin’s block chain and executed atomically. To illustrate the perils of using Bitcoin’s block chain, let us consider how we might implement a few natural applications of disintermediation. First consider crowd funding services. As of 2015, the largest example is Kickstarter which matches entrepreneurs with funders through a central website. If we liked the idea of Kickstarter but wanted to build a completely decentralized alternative, we would need to realize a system where entrepreneurs can request contributions, but cannot spend the money until they collect a pre‐specified amount, all without the existence of an intermediary. Figure 11.1: crowd‐funding via Bitcoin.Each contributor signs their own input and the output. The transaction will be invalid until the cumulative sum of inputs matches or exceeds the output. An approach to technically achieving this, with Bitcoin, is to instruct entrepreneurs to create a single transaction with an arbitrary number of inputs (that can vary as the process in underway) and a single output to themselves for a specified amount, say 1000. Such transactions will circulate amongst potential sponsors, where anyone can contribute by adding an input to the transaction for the amount of their contribution and digitally signing their own input, as well as the overall output. Such a transaction cannot be spent by the entrepreneur until the inputs are greater than or equal to the output. This uses some little‐known features of Bitcoin in order to spend the final transaction given 296
only these signatures of limited form. While this is achievable on Bitcoin today, we already have to delve into some little known‐corners of Bitcoin. It is not an everyday standard Bitcoin transaction. Now consider a second example: paying for a proof. This example may initially seem strange but has some important applications. To illustrate it, say there is a hash function H and a publicly known value ythat is ostensibly an output value of Hon some input value, or pre‐image, x. Alice claims she knows this value xand Bob would like to pay Alice to learn it as well. In general, Hcould instead be any computable program, and Bob would like to learn input values that produce certain outputs he is interested in. In a variant of this problem, Bob might pay for the input values to be published publicly on the block chain. To securely realize this transaction, we must ensure atomicity: Alice should only get paid if she produces a correct input and Bob must be committed to paying upon production of such an input. Recall that in the protocol for atomic cross‐chain swaps in Chapter 10, we showed how to tie a payment with the revelation of the input value to a given hash output. A similar approach can be used here. These examples illustrate an important limitation of the direct approach of using Bitcoin’s block chain. In each case, we had to encode a complex transaction from the real world into Bitcoin’s abstractions. This may not always be possible. In the example of the smart car, we conveniently assumed that the car uses ECDSA signatures for authenticating the car owner. That allowed us to use the same public/private key pair on the block chain and in a key fob to unlock and start the car. In the crowd‐funding example, the way we have described it, the entrepreneur is able to collect only the exact amount they requested, no more. If the contributions exceed that amount, that excess becomes a transaction fee. Finally, in the paying for proof example, linking the payment to the revelation of a value becomes tricky if the function Hisn’t one of the hash functions that Bitcoin’s script supports. If you can’t — or don’t want to — shoehorn your application into Bitcoin’s transaction semantics, there is always the option of using an overlay currency, which we saw in Chapter 9. This treats Bitcoin as a mere data store, so the expressiveness of Bitcoin’s script becomes irrelevant. In addition to the ability to implement many more types of applications, this approach can also enable transparency. Consider the car sale example again. If the color of real world objects (in the sense of colored coins) is known, anyone can examine the block chain to see when a car sale has happened and how much was paid for it without necessarily knowing the identities of the buyer and seller. This may be useful in some circumstances, and the color can be kept private in situations where it is detrimental. On the other hand, there are important drawbacks. Users of an overlay currency can’t rely on Bitcoin miners to validate their transactions (since miners don’t understand the transaction semantics of the overlay). This means all users of the overlay must run their own full nodes, and SPV is not possible. Overlay currencies are also brittle if there are bugs in implementations that cause consensus protocol to fail. If two implementations of an overlay currency mutually disagree on whether a particular transaction is valid, it may fork the currency into two, with potentially disastrous consequences. By 297
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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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CommitCoin exploits this property.
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features without needing to change
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Page 247 and 248: you. In particular, you can’t use
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Page 273 and 274: 10.3 Relationship Between Bitcoin a
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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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