How bitcoin works

1. BitCoin
Moein Hosseini

2. 2 / 59
Table Of Contents
● History of Money
● Introduction to BitCoin
● Keys, Addresses, Wallets
● Transactions
● The Blockchain
● Mining

3. 3 / 59
History Of Money

4. 4 / 59
History Of Money
● Barter
– Needs double coincidence of wants
● Commodity Money
– Portable & Divisible
● Use of Tokens
– Backed By Deposits Of Gold
– Fiat Money

5. 5 / 59
Uses Of Tokens
● Representative Money
– The value of the token is baked by a commodity,
eg: Gold, Silver
– Was in use until 1971 (Gold Backed Dollar)
● Fiat Money
– The value of the token is based on the
confidence on Issuer, eg: Governments
– National Debt
– Economic Crisis

6. 6 / 59
Cash Payment
● Quite Portable
● No Charge For Transactions
● No Audit
● CASH IS NOT FREE
– Replaced with newly printed ones
– Heavy insurance
– Counterfeiters

7. 7 / 59
Digital Money
● Credit Cards
● Debit Cards
● Stored Value Cards
● Electronic Cash
● Electronic Checks
● etc.

8. 8 / 59
Digital Currencies
● Is Authentic and Not Counterfeit
● Double Spending

9. 9 / 59
Yap Stone Money

10. 10 / 59
Solution
● Decentralized P2P Network (BitCoin Protocol)
● Public Ledger (Blockchain)
● Decentralized Mathmatical Currency Issuance
(Distributed Mining)
● Decentralized Transaction Verification
(Transaction Script)

11. 11 / 59
Byzantine Generals Problem

12. 12 / 59
Who Created BitCoin?
● October 31, 2008
– Satoshi Nakamoto Published paper: “A peer-to-
peer electronic cash system“
● Januray 3, 2009
– Satoshi released BitCoin Source Code
● April 23, 2011
– Satoshi said “Moved onto other things“

13. 13 / 59
BitCoin Overview

14. 14 / 59
Buying a Cup of Coffee

15. 15 / 59
Transaction

16. 16 / 59
Transaction Chain

17. 17 / 59
Transaction

18. 18 / 59
Mining

19. 19 / 59
Asymmetric Encryption

20. 20 / 59
Elliptic Curve Cryptography

21. 21 / 59
Elliptic Curve Cryptography
PubKey = PrivKey * G

22. 22 / 59
BitCoin Address

23. 23 / 59
Public Key Compression

24. 24 / 59
BitCoin Wallet

25. 25 / 59
Nondeterministic Wallets

26. 26 / 59
Deterministic Wallets

27. 27 / 59
Mnemonic Code Words
● Create Random Sequence (128 to 256 Bit)
● Create Checksum (First Few Bits of SHA256)
● Add the Checksum
● Divide The Sequence Into Sections Of 11 Bits
● Produce 12 to 24 Words (mnemonic code)

28. 28 / 59
Mnemonic Code Words

29. 29 / 59
Creating Master Key

30. 30 / 59
Creating Child Key

31. 31 / 59
Extended Keys–Public Key

32. 32 / 59
Extended Keys–Private Key

33. 33 / 59
Keys Path

34. 34 / 59
Vantiy Address

35. 35 / 59
Transactions
● Creating Transactions – Like a Check
– Submit for execution
– Need Signature
– Online / Offline
● Broadcasting
– About 300~400 Bytes
– Unlike Credit Card, Just Needs Propagation

36. 36 / 59
Transactions
● Peer-To-Peer Network
– Valid transactions sends to three or four peers
– In few seconds every nodes know it
● Prevent Spamming, DoS Attack
– Validate transaction before sending

37. 37 / 59
Transaction Structure

38. 38 / 59
Locktime
● Defines the earliest time that a transaction can be
added to the blockchain
● Set to ZERO : Immediatly
● NonZero and Below 500 million : Block Height
● Above 500 million : Timestamp

39. 39 / 59
UTXO
● Unspend Transaction Output
● No Account
● No Balances
● Only Unspend Transactions
– I have 5$
– A cup of coffee is 1.5$
– 3.5$ as exchange

40. 40 / 59
Output Structure

41. 41 / 59
Input Strcutre

42. 42 / 59
More About Transaction
● Transaction Fee
– Sum(Inputs) – Sum(Outputs)
● Orphan Transaction
– Depends on unrecieved transaction
– MAX_ORPHAN_TRANSACTIONS

43. 43 / 59
Transaction Scripts
● Programmble Money
● Pay to Hash Address
– Locking: scriptPubKey
– Unlocking: scriptSig
● Pay to Script Hash
– Multi Signatures Transactions

44. 44 / 59
Evaluate A Script

45. 45 / 59
Evaluate A Script

46. 46 / 59
Evaluate A Script

47. 47 / 59
Pay to Script Hash
● Any payments need M signature of N
● Cons:
– Five times larger
– More transaction fee
● Solution
– Pay to script matching this hash, a script will be
present later when this output is spent

48. 48 / 59
Pay to Script Hash
● MultiSig With Out P2SH
● MultiSig With P2SH

49. 49 / 59
Blockchain

50. 50 / 59
Header Structure

51. 51 / 59
Gensis Block

52. 52 / 59
Merkle Tree

53. 53 / 59
Node Types

54. 54 / 59
Node Types

55. 55 / 59
Mining

56. 56 / 59
Mining

57. 57 / 59
BitCoin Hash Rate

58. 58 / 59
Difficulty and Retargeting
● Every two weeks (2016 blocks)
● As bug its 2015 blocks ^_^

59. 59 / 59
Thanks