Bitcoin and Cryptocurrency Technologies

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Sidebar: Bitcoin’s block size conundrum.Due to Bitcoin’s growing popularity, as of early 2016 it has become common for the 1-megabyte space in blocks to be filled up within the period between blocks (especially when, due to random chance, a block take longer than 10 minutes to find)first, resulting in some transactions having to wait one or more additional blocks to make their way into the block chain. Increasing the block size limit will require a hard fork. The question of whether and how to address the block chain’s limited bandwidth for transactions has gripped the Bitcoin community. The discussion started years ago, but with little progress toward a consensus, it has gradually gotten more acrimonious, escalating into a circus. We’ll discuss Bitcoin’s community, politics, and governance in Chapter 7. Depending on the resolution of the block-size problem, some of the details in this chapter might become slightly out of date. The technical details of increasing Bitcoin’s transaction-processing capacity are interesting, and we encourage you to read more online. At this point, you should be familiar with the technical mechanics of Bitcoin and how a Bitcoin node operates. But, human beings aren’t Bitcoin nodes, and you’re never going to run a Bitcoin node in your head. So how do you, as a human, actually interact with this network to get it to be useable as a currency? How do you find a node to inform about your transaction? How do you get Bitcoins in exchange for cash? How do you store your Bitcoins? All of these questions are crucial for building a currency that will actually work for people, as opposed to just software, and we will answer these questions in the next chapter. Further Reading Online resources. In this chapter, we discussed a lot of technical details, and you may find it difficult to absorb them all at once. To supplement the material in this chapter, it’s useful to go online and see some of the things we discussed in practice. There are numerous websites that allow you to examine blocks and transactions and see what they look like. One such “blockchain explorer” is the website blockchain.info. A developer-focused book on Bitcoin that covers the technical details well (especially Chapters 5, 6, and 7): Antonopoulos, Andreas M. Mastering Bitcoin: unlocking digital cryptocurrencies. O'Reilly Media, 2014. 98
Exercises 1. Transaction validation: Consider the steps involvedin processing Bitcoin transactions. Which of these steps are computationally expensive? If you’re an entity validating many transactions (say, a miner) what data structure might you build to help speed up verification? 2. Bitcoin script: For the following questions, you’re free to use non-standard transactions and op codes that are currently disabled. You can use as a shorthand to represent data values pushed onto the stack. For a quick reference, see here: https://en.bitcoin.it/wiki/Script. a. Write the Bitcoin ScriptPubKey script for a transaction that can be redeemed by anybody who supplies a square root of 1764. b. Write a corresponding ScriptSig script to redeem your transaction. c. Suppose you wanted to issue a new RSA factoring challengeby publishing a transaction that can be redeemed by anybody who can factor a 1024-bit RSA number (RSA numbers are the product of two large, secret prime numbers). What difficulties might you run into? 3. Bitcoin script II: Alice is backpacking and is worried about her devices containing private keys getting stolen. So she would like to store her bitcoins in such a way that they can be redeemed via knowledge of only a password. Accordingly, she stores them in the following ScriptPubKey address: OP_SHA1 OP_EQUALVERIFY a. Write a ScriptSig script that will successfully redeem this transaction. [Hint: it should only be one line long.] b. Explain why this is not a secure way to protect Bitcoins using a password. c. Would implementing this using Pay-to-script-hash (P2SH) fix the security issue(s) you identified? Why or why not? 4. Bitcoin script III. a. Write a ScriptPubKey that requires demonstrating a SHA-256 collision to redeem. b. (Hard) write a corresponding ScriptSig that will successfully redeem this transaction. 5. Burning and encoding a. What are some ways to burn bitcoins, i.e., to make a transaction unredeemable? Which of these allow a proof of burn, i.e., convincing any observer that no one can redeem such a transaction? b. What are some ways to encode arbitrary data into the block chain? Which of these result in burnt bitcoins? [Hint: you have more control over the contents of the transaction “out” field than might at first appear.] c. One user encoded some JavaScript code into the block chain. What might have been a motivation for doing this? 6. Green addresses: One problem with green addresses is that there is no punishment against double-spending within the Bitcoin system itself. To solve this, you decide to design an altcoin 99
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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
Page 47 and 48: Figure 1.13 A PayCoins Transa
Page 49 and 50: Perusing the NIST standard that def
Page 51 and 52: Chapter 2: How Bitcoin Achieves Dec
Page 53 and 54: state of the system. The implicatio
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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
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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
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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
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Page 97: that the old version would accept a
Page 101 and 102: Chapter 4: How to Store and Use Bit
Page 103 and 104: software can automatically turn the
Page 105 and 106: The cryptographic magic that makes
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Page 109 and 110: Given this stringent requirement, s
Page 111 and 112: There is a formula called Lagrange
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Page 115 and 116: seen exchanges that fail due to bre
Page 117 and 118: Figure 4.5: Proof of liabilities.
Page 119 and 120: crypto and we won’t cover it here
Page 121 and 122: Figure 4.8: Payment process involvi
Page 123 and 124: transaction can't create coins, but
Page 125 and 126: of U.S. dollars per day pass throug
Page 127 and 128: Now if you look at a particular sec
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Page 131 and 132: Chapter 5: Bitcoin Mining This chap
Page 133 and 134: In most cases you'll try every sing
Page 135 and 136: You can see in Figure 5.3 that over
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Page 141 and 142: Disadvantages of GPU mining. GPU
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Page 145 and 146: Figure 5.10: Evolution of mining
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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
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To drive home the mismatch between
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Conclusion to the book Some people
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