Bitcoin and Cryptocurrency Technologies

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opened up to competition, we can potentially bring more transparency and public oversight to the process. Crypto, the state, and the big opportunity There is a striking parallel between the emergence of the modern state and the goals of the technology we have discussed in this chapter. In scaling society up from tribes and small groups, governments have had to confront precisely the problem of enabling secure commerce and other interactions between strangers. The methods may be very different but the goal is a shared one. While a maximalist vision for decentralization might involve dismantling the state, this is not really viable vision, especially when others who share our democracy want one. However, decentralization through technology is not necessary in opposition to the state at all. In fact, they can be mutually beneficial. For example, assuming well‐identified parties, transfers of smart property can use the block chain for efficient transfers and still use the court system if there is a dispute. We think the big opportunity for block‐chain technology is implementing decentralization in a way that complement the functions of the state, rather than seeking to replace them. It is tempting to think that things will get decentralized simply because the technology exists. But in practice, there needs to be a compelling economic reason, such as government regulation that is particularly onerous or inefficient, or a power imbalance that could lead to abuse. As one illustration of this, people in various African countries have adopted cell phone minutes as an ad‐hoc currency that is outside of state control and less subject to abuses of power. To summarize, we’ve shown the technical blueprint for decentralization in this chapter, and also critically examined the motivations behind decentralization. We encourage you to look for compelling use cases of decentralization, in particular ones that integrate into existing legal and regulatory practices. 306
Conclusion to the book Some people are excited about Bitcoin because of the underlying technology. Others are excited about its commercial possibilities, and yet others about its social and political implications. Reasonable people can disagree about the latter two, but we hope this book has convinced you that technologically, Bitcoin is deep, novel, interesting, and based on sound principles. Beyond Bitcoin there is a fascinating world of alternative cryptocurrency designs that we’re just starting to explore, some of which might one day be more important than Bitcoin itself. We got into Bitcoin because we believe in the power of its technology, and we think it’s deeply connected to the rest of computer science. While we’ve highlighted how seemingly amazing new technology can struggle to displace established institutions, we believe that in the long run, people will continue to find new commercially and socially useful things to do with cryptocurrency technology. Even if your interest is primarily commercial, you’d do well to master the underlying technology — understanding its power and limitations will help you better weather the market’s hype cycles. We’ll end with a few words about where to go from here. One of the best things about decentralization is that it’s a great platform for experimentation and learning. Anyone can download and analyze Bitcoin’s block chain, or build their own applications on top of it; we hope you’ll take advantage of these opportunities. We’ve created a number of online materials that complement this text. Our Coursera coursecontains video lectures that mirror the contents of this book. It also has quizzes and a series of programming assignments. Taking the course will also give you access to the forums where you’ll find a community of like‐minded learners. While the first draft of this book is complete, it is a work in progress. We’re watching developments in areas such as Ethereum, and whenever a body of scientific knowledge develops around a new area, we will release additional chapters. Check our course website! 307
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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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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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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 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
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Page 301 and 302: Sidebar: trust.Some people in th
Page 303 and 304: competition among intermediaries. P
Page 305: To drive home the mismatch between
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