Bitcoin: P2P Electronic Cash System

1. Bitcoin: P2P Electronic Cash System Cao Phương Nhất Duy Nguyễn Huỳnh Như Ý

2. Introduction • Commerce on the Internet rely on financial institutions • Reversible transactions • Increase transaction cost, cut off possibility for for small casual transactions • Large cost for non-reversible service • A certain percentage of fraud is accepted as unavoidable

3. Introduction

4. Proposal • A system allow any two willing parties to transact directly without the need for trusted third party • Transactions that are computationally impractical to reverse would protect sellers from fraud • Lower transaction fee • Problem of double-spending

5. Proposal • Peer to peer distributed system • Timestamp system • Based on proof-of-work

6. Transactions • A bitcoin is defined by a chain of digitally-signed transactions • It is possible to consider the coin as a token digitally signed by the owner that desires to transfer the currency. • Owner transfer the coin to the next by signing a hash of previous transaction and public key of next owner • Can’t check double-spending

7. Transactions

8. Timestamp Server • Double-spending??? • Without a trusted third party? • A system that all participants agree on a single history of order of transaction.

9. Timestamp Server • Take a hash of a block of items to be timestamped • Widely publish the hash • Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.

10. Proof-of-work system • Require some work from the service requester, usually meaning processing time by a computer • To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system • Once the CPU effort has been expended to make it satisfy the proof-of-work, the block cannot be changed without redoing the work

11. Hashcash • Was proposed in March 1997 by Adam Black • Add stamp to email header to prevent spam • X-Hashcash: 1:40:1303030600:adam@cypherspace.org::McMybZIhxKXu57jd:FOvXX • Sha1 = 000000000031791ed06fd1c882dc26e663dcc3c2

12. Timestamp based on proof-of-work • Hashcash like proof-of-work • Timestamp model • Double-SHA256 hash

13. Proof-of-work • Majority decision is represented by the longest chain • To modify past block, an attacker would have to redo the proof-of-work of the block and all blocks after it • Difficulty is changed based on network status • Expected to produce 1 block / 10 minutes • Every 2016 blocks (~ 2 weeks), network scales difficulty

14. Network • New transactions are broadcast to all nodes. • Each node collects new transactions into a block. • Each node works on finding a difficult proof-of-work for its block. • When a node finds a proof-of-work, it broadcasts the block to all nodes. • Nodes accept the block only if all transactions in it are valid and not already spent. • 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.

15. Network • Nodes always consider longest chain to be the correct one • If two nodes broadcast different versions of the next block simultaneously. Other nodes work on the first one they received, but save the other branch in case it becomes longer • When one branch becomes longer, the nodes that were working on the other branch will then switch to the longer one • New transactions and block do not necessarily need to reach all nodes

16. Network • "Length" is calculated as total combined difficulty of that chain, not number of blocks. • These blocks on the shorter chains are often called "orphan" blocks.

17. Incentive • By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. • This adds an incentive for nodes to support the network and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. • The incentive can also be funded with transaction fees. • The incentive may help encourage nodes to stay honest.

18. Reclaim Disk Space • Once the latest transaction in a coin is buried under enough blocks, the spent transaction before it can be discarded to save disk space. • Transactions are hashed in Merkle Tree. • Only the root included in block’s hash

19. Simplifed Payment Verification • It’s possible to verify payments without running a full network node. • Only need to keep block headers of the longest proof-of-work chain. • Query network nodes to confirm longest chain and obtain Merkel branch linking the transaction to the block. • He can see the that a network node has accepted it, and blocks added after confirm the network has accepted.

20. Simplified Payment method

21. Simplified Payment method • Simplified payment method can be fooled if an attacker overpower the network. • Accept alerts from network nodes when they detect an invalid block. • Software download full block and alerted transactions to confim inconsistency.

22. Combining and Splitting Value • To allow value to be split and combined, transactions contain multiple inputs and outputs. • Single input from larger previous transaction or multiple inputs combining smaller amounts. • Most two output: one for the payment, and one returning to the sender

23. Combining and Splitting Value

24. Privacy • The necessity to announce all transactions publicily. • Can not keep privacy by limit access to the information like traditional banking method. • Break the flow of information by keep the public keys anonymous.

25. Privacy • Bitcoin addresses should only be used once. • A new key pair should be used for each transaction to keep them from being linked to a common owner. • Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner.

26. Development of Bitcoin • First mentioned in a 2008 paper published under the pseudonym Satoshi Nakamoto, Bitcoin became operational in early 2009. • The value of one Bitcoin fluctuate unpredictably

27. Bitcoin value since 2009

28. Bitcoin value in the latest year

29. Status of Bitcoin • Current value of Bitcoin is 374.7 USD (13/11/2013) • Accepted from mainstream services such as OkCupid, Baidu, Reddit, Humble Bundle and Foodler. • Related to criminal activites: • Purchasing drugs, laundering money and online – gambling. • Botnets engaged in covert mining of Bitcoin. • The possibility of a “Bitcoin bubble”

30. Thank you for your listening!

31. References • Bitcoin: A Peer-to-Peer Electronic Cash System[bitcoin.org/bitcoin.pdf‎] Satoshi Nakamoto • en.bitcoin.it/wiki/protocol_specification