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  1. 1. BITCOIN Joel John joeljohn.in July 1st, 2017
  2. 2. Contents 1. Abstract 2. Introduction 3. Literature Survey 4. Problem Definition 5. Methodology 6. Implementation 7. Analysis 8. Results & Discussions 9. Conclusion 10. Future Scope 11. References
  3. 3. 1. ABSTRACT The Goals 3
  4. 4. Abstract The goals behind Bitcoin were : ➢ Purely digital cryptocurrency ➢ Peer-to-peer payment system ➢ Direct payment without any 3rd party ➢ Decentralized ➢ Solves double spending ➢ Secure In 2009, Bitcoin was introduced satisfying all these goals 4
  5. 5. 2. INTRODUCTION The introduction of Bitcoin 5
  6. 6. “ “The one thing that’s missing but that will soon be developed is a reliable e-cash, a method whereby on the internet you can transfer funds from A to B without A knowing B or B knowing A, the way in which I can take a twenty-dollar bill and hand it over to you and there is no record of where it came from and you may get that without knowing who I am.” - Milton Friedman(Economist), interviewed in 1999 6
  7. 7. Introduction ➢ Attempts to create a digital e-cash started in the 1990’s, But weren't successful till the introduction of Bitcoin ○ End up being centralized ○ Couldn't solve double spending problem ■ Double spending : given set of coins is spent in more than one transaction ➢ Bitcoin was proposed by Satoshi Nakamoto on Oct.31,2008 ○ "Bitcoin: A Peer-to-Peer Electronic Cash System” ➢ First open source Bitcoin client was released and the Bitcoin network came into existence in January 2009 7
  8. 8. Introduction ➢ Bitcoin is based on an open-source cryptographic protocol. ➢ Bitcoin belong to a new category of currency --Cryptocurrency ➢ The formal definition of cryptocurrency is ○ “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.” ➢ Bitcoin is the first successful cryptocurrency ➢ It uses Blockchain to record transactions 8
  9. 9. 9 Original email Nakamoto send to the cryptography mailing list I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. The paper is available at: http://www.bitcoin.org/bitcoin.pdf The main properties: Double-spending is prevented with a peer-to-peer network. No mint or other trusted parties. Participants can be anonymous. New coins are made from Hashcash style proof-of-work. The proof-of-work for new coin generation also powers the network to prevent double-spending. Bitcoin: A Peer-to-Peer Electronic Cash System Abstract. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without the burdens of going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as honest nodes control the most CPU power on the network, they can generate the longest chain and outpace any attackers. The network itself requires minimal structure. Messages are broadcasted on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.of-work chain as proof of what happened while they were gone. Full paper at: http://www.bitcoin.org/bitcoin.pdf Satoshi Nakamoto
  10. 10. 10 First Version of Bitcoin Software
  11. 11. 3. LITERATURE SURVEY How the current system evolved 11
  12. 12. Literature Survey Mainly 4 types of currency systems existed : ➔ Commodity Money ● Barter System ➔ Specie-redeemable money ● Salt,Gold,Silver ➔ Unredeemable Money ● Paper currency ➔ Decentralized cryptocurrency ● Bitcoin 12
  13. 13. 4. PROBLEM DEFINITION The cons of current system 13
  14. 14. Problem Definition The Problems With Current System Are: ◆ Current digital payment system is entirely trust dependent ● 3rd Party involvement ◆ Irreversible transactions are impossible ● Leads to cost of mediation ◆ Cannot guarantee privacy of user ● Uses accounts ◆ Cannot solve double spending ◆ Involves a central authority 14
  15. 15. Problem Definition Money is a ➢ Medium of Exchange ➢ Store of Value ➢ Unit of Account Implementing a digital system which ○ Satisfies these 3 functions of money ○ Is decentralized ○ Works on proof-of-work(rather than trust) 15
  16. 16. 5. METHODOLOGY Behind Bitcoin 16
  17. 17. Methodology Bitcoin is a cryptocurrency i.e It uses cryptography to verify transactions Bitcoin relies on two cryptographic schemes: 1. Digital Signatures 2. Cryptographic Hash Functions 17
  18. 18. Digital Signatures Digital signatures are a way to authenticate a message between a sender and a receiver in a way that ensures: i. Authentication ➢ The recipient can verify that the message came from the sender ii. Non-repudiation ➢ The sender cannot deny sending the message iii. Integrity ➢ the message has not been tampered with. 18
  19. 19. Digital Signatures Digital signatures are implemented by using public key cryptography 19
  20. 20. Digital Signatures Digital signature algorithm used by Bitcoin is Elliptic Curve Digital Signature Algorithm (ECDSA ) It consists of : ➔ Private Key: ◆ A single unsigned 256-bit integer (32 bytes) ➔ Public Key: ◆ Either compressed or uncompressed. Compressed public keys are 33 bytes, uncompressed keys are 65 bytes, ➔ Signature: ◆ Mathematically generated from a hash of something to be signed, plus a private key. 20
  21. 21. Cryptographic Hash Functions It takes as input a string of arbitrary length and returns a string with predetermined length. The fundamentals for hash functions are: 1. Preimage resistant: ○ Given H it should be hard to find M such that H = hash(M). 2. Second preimage resistant: ○ Given an input m1, it should be hard to find another input, m2 (not equal to m1) such that hash(m1) = hash(m2). 3. Collision-resistant: ○ it should be hard to find two different messages m1 and m2 such that hash(m1) = hash(m2). 21
  22. 22. Cryptographic Hash Functions ➢ In Bitcoin it is used to enforce discipline in writing transaction records in the public ledger. ➢ Bitcoin uses SHA-256. SHA-256 Functions 22
  23. 23. 6. IMPLEMENTATION How Bitcoin works 23
  24. 24. Implementation The implementation procedure of Bitcoin can be categorized into: 1. Transactions 2. Blockchain 3. Proof-of-work 4. Network 5. Incentive/Mining 6. Combining & Splitting value 7. Storage 24
  25. 25. Transactions ➢ Transaction in Bitcoin can be referred as a chain of digital signatures. ○ Each owner transfers the bitcoin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the bitcoin ➢ The problem is to make sure that there are no double payments involved. ○ Common solution - using 3rd party(central authority) ○ Efficient solution - Publically announcing every transaction with proof of work system 25
  26. 26. 26 Bitcoin Transactions
  27. 27. Blockchain ➢ The blockchain is a public ledger that records bitcoin transactions. ○ The blockchain is a distributed database – ➢ Each network node stores its own copy of the blockchain. ○ To achieve independent verification of the chain of ownership of any and every bitcoin amount. ➢ Blockchain is the collection of block ○ Block is a permanent record of transactions. ○ A new block of transactions is created every 10 minutes ○ Maximum size of a block is 1 MB 27
  28. 28. 28 Field Description Size Magic no value always 0xD9B4BEF9 4 bytes Blocksize number of bytes following up to end of block 4 bytes Blockheader consists of 6 items 80 bytes Transaction counter positive integer VI = VarInt 1 - 9 bytes transactions the (non empty) list of transactions <Transaction counter>-many transactions Bitcoin Block Structure
  29. 29. 29 Field Purpose Updated when... Size (Bytes) Version Block version number You upgrade the software and it specifies a new version 4 hashPrevBlock 256-bit hash of the previous block header A new block comes in 32 hashMerkleRoot 256-bit hash based on all of the transactions in the block A transaction is accepted 32 Time Current timestamp as seconds since 1970-01-01T00:00 UTC Every few seconds 4 Bits Current target in compact format The difficulty is adjusted 4 Nonce 32-bit number (starts at 0) A hash is tried (increments) 4 Bitcoin Block Header
  30. 30. Blockchain 30 Blockchain has vast impact outside of Bitcoin
  31. 31. Proof-of-work ➢ The Bitcoin protocol sets a target value for a block header’s hash. ➢ The output must be less than the specified number,else it will be rejected ○ Done by varying the Nonce ➢ Target is adjusted every 2016 Block(~2 Weeks) to maintain average block time of 10 minutes ➢ Once a block has been created, it is irreversible ➢ Proof of work ensures on CPU is gets one vote ○ So as long as honest chain control major CPU, Attacks are impossible(since attacker has to redo proof-of-work for previous blocks) 31
  32. 32. Network The steps to run the network are as follows: 1. New transactions are broadcast to all nodes. 2. Each node collects new transactions into a block. 3. Each node works on finding a difficult proof-of-work for its block. 4. When a node finds a proof-of-work, it broadcasts the block to all nodes. 5. Nodes accept the block only if all transactions in it are valid and not already spent. 6. Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash. Nodes will always consider the longest chain to be correct and keep on expanding it 32
  33. 33. Incentive/Reward ➢ The first transaction of a block is called coinbase transaction ○ It generates new bitcoins for the creator of block ➢ Incentive is the only way in which new bitcoins are added to the circulation ○ The reward is halved every 210,000 blocks(4 Years) ● Starting bounty was 20 BTC,Currently its 12.5 ○ This process is termed as Bitcoin Mining ○ It is reward for CPU time and electricity ➢ Incentive encourage nodes to stay honest ➢ Incentive can also be funded with transaction fee ○ Once all bitcoins are generated(21 Million) transaction fee is the only reward for miners(Happens in Year 2140) 33
  34. 34. 34 Genesis Block of Bitcoin
  35. 35. Bitcoin Mining Hardware Changes CPU 35 GPU ASIC Now Bitcoin are mined using by “Mining Pool”
  36. 36. Combining and Splitting Value ➢ Bitcoins can be transacted only as whole ○ I.e. It can’t be splitted and transacted 36
  37. 37. Storage Bitcoins are stored in “wallets” ● Collection of Private Keys There are many types of wallets ➢ Software Wallets ➢ Web Wallets ○ 3rd Party,Stored Online ➢ Cold Wallets ○ Eg. USB wallets,Brain , Paper Wallets ➢ Hardware Wallets ○ Specific Hardware 37
  38. 38. 7. ANALYSIS A detailed look at Bitcoin 38
  39. 39. Advantages & Disadvantages 39 ADVANTAGES DISADVANTAGES 1) Freedom in Payment 1) Lack of Awareness 2) Control and Security 2) Risk 3) Information is transparent 3) Volatility 4) Decentralized 4) Still Developing 5) Low fees 5) Illegal Usage 6) Lesser risk for merchants 6) No buyer protection 7) Anonymous 7) No valuation guarantee
  40. 40. General Use 40 Estimated Transaction Volume of Bitcoin
  41. 41. Exchange Rate 41 Price chart of Bitcoin
  42. 42. Legality 42 Legality of Bitcoin By Country
  43. 43. Bitcoin Industry 43 Major Bitcoin Industry Sectors
  44. 44. 8. RESULTS AND DISCUSSIONS Current System vs Bitcoin 44
  45. 45. Stakeholders 45 Current System
  46. 46. Stakeholders 46 Bitcoin
  47. 47. Privacy Model 47 In Bitcoin, identities are kept private rather than transaction
  48. 48. Bitcoin vs Current System 48
  49. 49. 9. CONCLUSION What we have seen 49
  50. 50. “ “The digital currency known as Bitcoin is only nine years old ... Yet it is, quite simply, one of the most powerful innovations in finance & technology in last 1000 years.” 50
  51. 51. Conclusion Formation ◎ Bitcoin was developed in 2008 ◎ By Satoshi Nakamoto What is Bitcoin? Simply stating, Bitcoin is a cryptocurrency Why it was created? Bitcoin was created to overcome the limitations of current trust based payment system Properties ➔ Decentralized ➔ Anonymous ➔ Private ➔ Control of Supply ➔ Democratic ➔ Fast,Cheap,Reversible Blockchain Bitcoin is implemented by block chain technology Who use it? ➔ 1 Lakh + Merchants accepts bitcoin ➔ 5 Million+ Unique users 51
  52. 52. Future Scope ➢ To solve the Scalability problem, from 1st November 2017, the block size of Bitcoin will be increased to 2 MB ➢ The Version 0.15 of Bitcoin Core will have tremendous changes to make Bitcoin more user friendly 52
  53. 53. 10. REFERENCES The papers and sites visited 53
  54. 54. References [1.] Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, November 2008 [2.] Reuben Grinberg, “Bitcoin: An Innovative Alternative Digital Currency”, November 2011 [3.] Sascha Boehme, “Bitcoin: System Architecture, Opportunities and Challenges”, March 9,2015 [4.] Timo-Pekka Huhtinen, “Bitcoin as a monetary system: Examining attention and attendance”, 2014 [5.] https://en.wikipedia.org/wiki/Bitcoin/ [6.] https://bitsonblocks.net/2015/09/01/a-gentle-introduction- to-bitcoin/ 54
  55. 55. Thanks! 55