Seminar Presentation On Bitcoin (01/07/2017). Origin to Future of Bitcoin

1. BITCOIN
Joel John
joeljohn.in
July 1st, 2017

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. 1.
ABSTRACT
The Goals
3

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. 2.
INTRODUCTION
The introduction of Bitcoin
5

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. 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. 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
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
First Version of Bitcoin Software

11. 3.
LITERATURE SURVEY
How the current system evolved
11

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. 4.
PROBLEM DEFINITION
The cons of current system
13

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. 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. 5.
METHODOLOGY
Behind Bitcoin
16

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. 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. Digital Signatures
Digital signatures are implemented by using
public key cryptography
19

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. 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. 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. 6.
IMPLEMENTATION
How Bitcoin works
23

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. 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
Bitcoin Transactions

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
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
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. Blockchain
30
Blockchain has vast impact outside of Bitcoin

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. 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. 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
Genesis Block of Bitcoin

35. Bitcoin Mining Hardware Changes
CPU
35
GPU ASIC
Now Bitcoin are mined using by “Mining Pool”

36. Combining and Splitting Value
➢ Bitcoins can be transacted only as whole
○ I.e. It can’t be splitted and transacted
36

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. 7.
ANALYSIS
A detailed look at Bitcoin
38

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. General Use
40
Estimated Transaction Volume of Bitcoin

41. Exchange Rate
41
Price chart of Bitcoin

42. Legality
42
Legality of Bitcoin By Country

43. Bitcoin Industry
43
Major Bitcoin Industry Sectors

44. 8.
RESULTS AND
DISCUSSIONS
Current System vs Bitcoin
44

45. Stakeholders
45
Current System

46. Stakeholders
46
Bitcoin

47. Privacy Model
47
In Bitcoin, identities are kept private rather than
transaction

48. Bitcoin vs Current System
48

49. 9.
CONCLUSION
What we have seen
49

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. 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. 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. 10.
REFERENCES
The papers and sites visited
53

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. Thanks!
55