BITCOIN
An introduction to a decentralised and anonymous currency.
By Andy Brodie
TABLE OF CONTENTS
• What is a currency?
• What is Bitcoin?
• History
• How do Bitcoins and Bitcoin transactions work?
• Demonstration
WHAT IS A CURRENCY?
• “Something that is used as a medium of exchange.”
• It has no intrinsic value.
• It does not have to be “backed” by anything (e.g. gold)
• Typically USE centralised minting and validation; e.g. Bank of England.
• Something is only worth what someone else is willing to pay for it.
WHAT IS BITCOIN?
• Bitcoin is an electronic currency with some unique features.
• Decentralised
• Not controlled by a central authority, unlike e.g. GBP controlled by the Bank of England.
• Difficult to hack as there’s no central authority to attack.
• (Nearly) Anonymous Transactions
• Senders and receivers identified only by keys, which can change with each transaction.
• Further anonymity provided by “mixers” which split and combine transactions.
• Fast
• Transactions are typically completed within 10 minutes.
• Distributed
• Difficult to attack and subvert as network is distributed world-wide.
• Changing a committed transaction requires more CPU power than the rest of the network.
• Open
• Based on mathematical cryptography principles and open source software.
HISTORY
• 2008 - Satoshi Nakamoto publishes a paper outlining the theory of Bitcoin.
• 2009 – Bitcoin software released (by Nakamoto)
• 2010 – First purchase of Pizza using Bitcoins
• 2011 – First exchanges established and first recorded theft
• 2012 – First Bitcoin exchange licensed as a bank in Europe
• 2013 – Bitcoin market cap passes $1,000,000,000
• The identity, or identities, of Satoshi Nakamoto remains unknown.
• But as theory is published and software is open source, it’s still trustable.
WHAT IS A BITCOIN?
• Current exchange rate 1BTC = £78 (at time of writing)
• Each BTC unit, or fraction, has a designated owner.
• The owner is identified by a public key.
• In order to “spend” a Bitcoin, i.e. transfer it to someone else, you need the
private key that corresponds to the public key.
• Wallet software or online exchanges keep track of which Bitcoins belong to you.
• If you lose the private key, the coin is lost forever.
• This is known as a zombie coin.
THE BITCOIN NETWORK
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Bitcoin is supported by a network of nodes running Bitcoin software.
Transactions are broadcast to all nodes.
Transactions are grouped into blocks.
Nodes broadcast verified blocks to each other.
Blocks join together to form block chains.
Block chains provide the transaction history used to verify new transactions.
• Anyone can set up their own node.
• You just need the software (e.g. BitcoinQt) and an Internet connection.
• Better yet, there are rewards for running a server:
• Minting new coins.
• Collecting transaction fees for including transactions within blocks.
BITCOIN TRANSACTIONS
• Each participant in a transaction has an address.
• Similar to a sort code and bank account number combination.
• Addresses are public keys.
• There is no cost for creating new addresses.
• Some recommend creating a new address for each transaction to aid anonymity.
• Mixer services provide greater anonymity by merging and re-splitting transactions.
• A transaction transfers Bitcoins of some value from one address to another.
• Contains variable number of inputs to outputs.
• Transaction fees are collect by omitting an output in a transaction.
• All Bitcoin transactions are public.
• Similar to stock market tapes today.
HOW BITCOIN TRANSACTIONS
WORK
1. New transactions are broadcast to all nodes.
2. Each node collects new transactions into a block.
3. Each node works on signing its block via difficult proof-of-work
4. When a node finds a valid signature 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.
BLOCKS
• Blocks contain:
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A “coinbase” minting transaction.
Zero or more transactions between addresses.
A signature - a difficult computational proof-of-work.
Reference to the chronologically prior block (the chain).
• When Bitcoin launched, the “coinbase” could mint 50 Bitcoins.
• However, mining rate is decreasing to a theoretical maximum of 21 million
Bitcoins.
• Current reward is 25BTC (likely to remain until 2016 before decreasing further).
• On average, transactions are incorporated in to blocks within 10 minutes of
publication.
PROOF-OF-WORK
• Blocks are “mined.”
• Mining is a CPU intensive process.
• To create a new block, a combined hash (SHA-256 ) of a previous block and a
calculated nonce must start with a required number of zero bits.
• Number of zero bits required controls difficulty to account for:
• Increasing CPU power in the network as more people join.
• Moore’s Law.
• Difficulty is reset every 2016 blocks by fixed algorithm in nodes to maintain block
generation rate.
• Mining is typically done using GPU,dedicated FPGAs or custom ASICs.
• The reward for creating a new block is:
• Claiming the output of the coinbase transaction.
• Collection transaction fees (any unspecified outputs of a transaction).
• Currently, investing in a high-end GPU may pay off in 6 months.
KEY MESSAGES
• Bitcoins are a decentralised, independent currency.
• No central administration, minting or checking process.
• Based around strong cryptography principles.
• Spending is anonymous.
END
This work is licensed under the Creative Commons Attribution 4.0
International License.