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History 1/2

Need

Exchange
Value
Coins
Notes
Bank Notes
Digital notes

Prehistory (b coin and others)

Anonymity vs Double Spending vs centralized
A lot of tries, but all failed
You had to give money to get money

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History 2/2

Satoshi Nakamoto
Why anonymous?
Legends
2008 till now

lessons?

Create a community
Never Give Up!

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This class

BC vs BC
Some math
Some Programming
Some Politics
Some.. what else? You say!

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Bitcoin

Decentralized
To make value, you need something scarce
Some Programming
Some Politics
Some.. what else? You say!

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Basics

We need security

Is the coin genuine?
Is the history written on stone?
Does someone double spends?

Cryptography

Hashes
Digital signatures

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Hash

General Properties

Free input size
Specific output length
Efficiently Computable; O(n)

Cryptographic hash

Collision resistance

Nobody can find collision
Even with Birthday Paradox

Hiding

One way
Used in commitments

Puzzle friendliness

Difficult to bruteforce

Sha256
Hash pointer: a pointer with a hash of data

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Blocks

TRX
Timestamps
Blocks are trxs, timestamps, previous hash and have a HASH
Hash

Deterministic
One way

Now lets create a blockchain

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Signatures

1. Only you can sign but everyone can verify 2. Is on a specific document
1. (sk, pk) = GenKey(size) 2. Sig = (sk, msg) 3. IsValid = (pk, msg, sig)
Bitcoin uses Elliptic CUrve Digital Signature Algorithm (ECDSA), strange choice by Satoshi
pk is your identity

No need for a username
No need for authority
You address is the hash of your pk
You can create as much as pks you want, but people can connect the dots too

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The blockchain is similar to a permanent book of records that keeps a log of all transactions that have taken place in chronological order.

Let’s envision a bank transaction in which there are three parties: the sender, the bank, and the recipient. In order to ensure that there are no fraudulent transactions, the bank acts as the central authority between the parties.

The blockchain also logs transactions between senders and receivers, except there is no bank or central authority. Instead, the blockchain relies on a public network of computers to verify the transaction. The blockchain is just an accurate, and permanent record of all the transactions that have happened amongst the members in that blockchain’s network. In this analogy, each block in the blockchain represents a transaction, and each transaction is connected to the prior transaction to form the entire connected blockchain.

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How blocks are created

TRXs are added to the mempool
When we have enough TRXs, it is called unconfirmed block
We move to the next pool and will try to confirm the last block
Announce our block and 51% should confirm (consensus)

But what happens if someone tampers a block? ;)
What happens if he recalculates other hashes too? ;)

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Decentralized

Who maintains the ledger of transactions?
Who has authority over which transactions are valid?
Who creates new bitcoins?
Who determines how the rules of the system change?
How do bitcoins acquire exchange value?

Different levels, internet, SNMP, messaging (say Yahoo!)

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Consensus

Difficult or impossible in the presence of malicious; Byzantine Generals Problem
But sometimes practice is better than theory :D especially in these two conditions:

We have incentives for good people
Random people will decide the next block

Anonymous consensus is even more difficult

Sybil attack
Random choice

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Implicit Consensus

In 5 steps

New transactions are broadcast to all nodes.
Each node collects new transactions into a block.
In each round, a random node gets to broadcast its block.
Other nodes accept the block only if all transactions in it are valid (unspent, valid signatures).
Nodes express their acceptance of the block by including its hash in the next block they create.

Lets review 3 main attacks: stealing bitcoins, DOS, Double Spend,

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Mechanics of bitcoin

How data is stored
How network works
Limitations

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TRXs

Account based? No

Common Idea: Jadi gave 15 to Zahra
very difficult to check the validity

Ledger based? Yes

Saved TRXs with their input and output
Change address, because we have to consume the whole coins

Scripting
MultiSig

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Bitcoin Network

Peer to Peer
TCP and random topology
Anyone can download the client and join; EQUAL

You will need a seed note
Others will start to forget you if you are not active for 3 hours

Flood or Gossip protocol. You tell the people you know, they check and pass if checks are passed

Latency can lead to different mempool, but mining will decide the ties (race condition)

Around 10K full chain nodes are 24/7 active
There are also simplified Payment Verification nodes (SPV) or lightweight nodes. These only contain headers, so only 100s of MBs instead of 100s of GBs

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Bitcoin Limitations

Created in 2009
Each block is 1MB, each TRX is 250 bytes -> each block contain 4K TRX only
One block every 10 minute -> 7 TPS! (VISA handels around 2K TPS and can handle 10K TPS peak)
Cryptographic algorithm is ECDSA. Some believe this will be broken during bitcoins life span
Solution? Soft and hard forks

So… there will be Forks!

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How to store

availability, security, and convenience
Wallets

Base 58 & QR Codes
Hot vs Cold storage (paper, brain, tamper resistance devices)
secret sharing (2 out of 2 R xor S), (2 out of N) points on axis, (N out of K): higher levels of formula (^2, ...)
banks : bank run, ponzi scheme, hack (Mt. Gox case), they need 3 to 10% liquidity
Online wallet/exchange (bank regulations, Proof of reserve, Proof of Liabilities)
Payment services
Currency (FIAT) exchanges (based on supply & demand)

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Bitcoin Mining

What is the task? Finding a valid block, less than 2^68 nonces will work
Difficulty changes every 2016 blocks
Hardware (CPU (20M), GPU (200M), FPGA(1G), ASIC(14G))
Energy consumption

Thermodynamic Limits (Landauer’s principle: each bit kT ln 2 joules)
Repurposing energy!
Electricity into cash

Pools

Syndicate idea
Anti cheat
51% GHash

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Mining Attacks

Forking Attack (Spending and then mining the previous block)
Forking via Bribery (clever idea? Run a pool with loss of revenue, or give tips in blocks!)
Block Withholding Attacks = Selfish Mining
Blacklisting or Punitive Forking (announcing that you won’t work on a chain if it contains blah blah)
Feather Forking (just like punitive forking but just for a short period of time)

Future? Moving toward mining based on TRX Fees

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Anonymity

Anonymous = without name
Anonymous vs pseudo-anonymous (reddit vs 4chan) vs unlikability
In bitcoin, you don’t have a real name but you have an address
Side channels (big data)
It is difficult to reach Unlikability because receiver sees the senders address
Why anonymity is needed?

To reach the traditional privacy we had
To reach a new level of privacy

Salary, class fees, paying subcontractors will reveal business plans
It is difficult to exchange fiat with cryptocurrency, laundering is difficult

TOR sample

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deanonymyzation

Check wikileaks donation page
When creating TRXs, we are joining coins: most of the time shared spending is evidence of joint control of the different input addresses
Attacks

Clustering
Direct trx with one person
Service providers, exchanges, fiat money
Carelessness; say posting your address to a forum for donations
Network layer: sudden connection to a lot of bitcoin nodes and a TRX is created there. 2011 black hat -> use TOR

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Deanonymyzation defences

Stealth addresses: g^x is the public key and the wallet address is H(g^x), so bob will publish g^x , alice will choose r, calculate g^xrand do the trx to that and inform bob about r
Mixing: if you want anonymity, use an intermediary

Online Wallets (do not promise, they know a lot!)
Dedicated mixing services (you have to trust)
Decentralized mixing (better anonymity, no theft based on protocol, no need to wait or trust an agent)

CoinJoin (people participate in Inputs)
Merge Avoidance (Target provides many Outputs for one TRX)
ZeroCoin and Zerocash
Check https://bitcoin.org/en/payment-processing-guide#introduction

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