Bitcoin and Cryptocurrency Technologies

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Bitcoin into other currencies, and wallet software, or software that allows people to manage their bitcoins may be centralized or decentralized to varying degrees. With this in mind, let’s break down the question of how the Bitcoin protocol achieves decentralization into five more specific questions: 1. Who maintains the ledger of transactions? 2. Who has authority over which transactions are valid? 3. Who creates new bitcoins? 4. Who determines how the rules of the system change? 5. How do bitcoins acquire exchange value? The first three questions reflect the technical details of the Bitcoin protocol, and it is these questions that will be the focus of this chapter. Different aspects of Bitcoin fall on different points on the centralization/decentralization spectrum. The peer‐to‐peer network is close to purely decentralized since anybody can run a Bitcoin node and there’s a fairly low barrier to entry. You can go online and easily download a Bitcoin client and run a node on your laptop or your PC. Currently there are several thousand such nodes. Bitcoin mining, which we’ll study later in this chapter, is technically also open to anyone, but it requires a very high capital cost. Because of this there has been a high degree of centralization, or a concentration of power, in the Bitcoin mining ecosystem. Many in the Bitcoin community see this as quite undesirable. A third aspect is updates to the software that Bitcoin nodes run, and this has a bearing on how and when the rules of the system change. One can imagine that there are numerous interoperable implementations of the protocol, as with email. But in practice, most nodes run the reference implementation, and its developers are trusted by the community and have a lot of power. 2.2 Distributed consensus We’ve discussed, in a generic manner, centralization and decentralization. Let’s now examine decentralization in Bitcoin at a more technical level. A key term that will come up throughout this discussion is consensus, and specifically,distributed consensus. The key technical problem to solve in building a distributed e‐cash system is achieving distributed consensus. Intuitively, you can think of our goal as decentralizing ScroogeCoin, the hypothetical currency that we saw in the first chapter. Distributed consensus has various applications, and it has been studied for decades in computer science. The traditional motivating application is reliability in distributed systems. Imagine you’re in charge of the backend for a large social networking company like Facebook. Systems of this sort typically have thousands or even millions of servers, which together form a massive distributed database that records all of the actions that happen in the system. Each piece of information must be recorded on several different nodes in this backend, and the nodes must be in sync about the overall 52
state of the system. The implications of having a distributed consensus protocol reach far beyond this traditional application. If we had such a protocol, we could use it to build a massive, distributed key‐value store, that maps arbitrary keys, or names, to arbitrary values. A distributed key‐value store, in turn, would enable many applications. For example, we could use it to build a distributive domain name system, which is simply a mapping between human understandable domain names to IP addresses. We could build a public key directory, which is a mapping between email addresses (or some other form of real‐world identity) to public keys. That’s the intuition of what distributed consensus is, but it is useful to provide a technical definition as this will help us determine whether or not a given protocol meets the requirements. Distributed consensus protocol. There are n nodes that each have an input value. Some of these nodesare faulty or malicious. A distributed consensus protocol has the following two properties: ● It must terminate with all honest nodes in agreement on the value ● The value must have been generated by an honest node What does this mean in the context of Bitcoin? To understand how distributed consensus could work in Bitcoin, remember that Bitcoin is a peer‐to‐peer system. When Alice wants to pay Bob, what she actually does is broadcast a transaction to all of the Bitcoin nodes that comprise the peer‐to‐peer network. See Figure 2.1. Figure 2.1 Broadcasting a transactionIn order to pay Bob, Alice broadcasts the transaction to the entire Bitcoin peer‐to‐peer network. Incidentally, you may have noticed that Alice broadcasts the transaction to all the Bitcoin peer‐to‐peer nodes, but Bob’s computer is nowhere in this picture. It’s of course possible that Bob is running one of the nodes in the peer‐to‐peer network. In fact, if he wants to be notified that this transaction did in fact happen and that he got paid, running a node might be a good idea. Nevertheless, there is no requirement that Bob be listening on the network; running a node is not necessary for Bob to receive the funds. The bitcoins will be his whether or not he’s operating a node on the network. What exactly is it that the nodes might want to reach consensus on in the Bitcoin network? Given that a variety of users are broadcasting these transactions to the network, the nodes must agree on 53
Page 1 and 2: Bitcoin and Cryptocurrency Technolo
Page 3 and 4: Preface — The Long Road to Bitcoi
Page 5 and 6: work, there is also the issue of co
Page 7 and 8: Finally, CyberCash has the dubious
Page 9 and 10: This was the first serious digital
Page 11 and 12: and so on — powers of two. That w
Page 13 and 14: Figure 3 shows the user side of the
Page 15 and 16: initial cost to acquire all the equ
Page 17 and 18: the system is to record the relativ
Page 19 and 20: original design. However, after Bit
Page 21 and 22: A final reason that’s often cited
Page 23 and 24: Chapter 1: Introduction to Cryptogr
Page 25 and 26: Figure 1.2 Because the number of
Page 27 and 28: Property 2: Hiding The second pr
Page 29 and 30: ecome: ● ● Hiding: Given H(
Page 31 and 32: SHA‐256 uses a compression functi
Page 33 and 34: Figure 1.5 Block chain.A block c
Page 35 and 36: Figure 1.7 Merkle tree. In a Mer
Page 37 and 38: throughout this book. 1.3 Digital S
Page 39 and 40: Figure 1.9 Unforgeability game.
Page 41 and 42: andomness just in making a signatur
Page 43 and 44: 1.5 A Simple Cryptocurrency Now let
Page 45 and 46: The first key idea is that a design
Page 47 and 48: Figure 1.13 A PayCoins Transa
Page 49 and 50: Perusing the NIST standard that def
Page 51: Chapter 2: How Bitcoin Achieves Dec
Page 55 and 56: consensus is somewhat pessimistic,
Page 57 and 58: Implicit Consensus. This assumpt
Page 59 and 60: Figure 2.2 A double spend attempt.
Page 61 and 62: In general, the more confirmations
Page 63 and 64: Figure 2.4 The block reward is c
Page 65 and 66: puzzle‐friendliness property from
Page 67 and 68: possible outcomes, and the probabil
Page 69 and 70: theory problem that’s not easily
Page 71 and 72: this interlocking interdependence b
Page 73 and 74: Further reading The Bitcoin whitepa
Page 75 and 76: Chapter 3: Mechanics of Bitcoin Thi
Page 77 and 78: In this example, Alice specifies tw
Page 79 and 80: 3.2 Bitcoin Scripts Each transactio
Page 81 and 82: the Bitcoin language and one has to
Page 83 and 84: exactly the same script, which is i
Page 85 and 86: in the normal case, this isn’t th
Page 87 and 88: Technically all of these transactio
Page 89 and 90: The header mostly contains informat
Page 91 and 92: in turn sends it to all of its peer
Page 93 and 94: Figure 3.10 Block propagation ti
Page 95 and 96: that actually affect them. So they
Page 97 and 98: that the old version would accept a
Page 99 and 100: Exercises 1. Transaction validation
Page 101 and 102: 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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to predict the low‐level fluctuat
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design, because miners have to veri
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Here's another example, this time f
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You can also trade shares for futur
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Order books.The final piece o
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Chapter 10: Altcoins and the Crypto
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Attracting miners has special impor
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with the launch date of the altcoin
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Namecoin is technically interesting
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10.3 Relationship Between Bitcoin a
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Switching costs are certainly not z
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If our altcoin is merge‐mined, we
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When we think about a rational mine
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DepositA [Altcoin block chain] Refu
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Sidechains. The sidechains vision i
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lock themselves could tell us. This
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written in bytecode and executed by
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Bitcoin. In particular, there are c
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The simple binary Merkle tree used
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Chapter 11: Decentralized Instituti
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Bitcoin, Alice can remotely transfe
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only these signatures of limited fo
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11.3 Template for Decentralization
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Sidebar: trust.Some people in th
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competition among intermediaries. P
Page 305 and 306:
To drive home the mismatch between
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Conclusion to the book Some people
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