Bitcoin the hype, the myth and the truth part 2

Review ● The Block and the Chain in depth ● Proof-of-work Algorithm ● Bitcoin Mining ● Bitcoin problems and weakness - The Truth about 51% Attack ● Bitcoin Soft fork vs Hard fork ● Bitc

Bitcoin: The Hype, The Myth and The Truth

~ Part 2 - 6/11/2017 ~

Tran Duc Thang

-~ A Technical Overview about How Bitcoin works -~

● What is Bitcoin? Review

● The Block and the Chain in depth

● Proof-of-work Algorithm

● Bitcoin Mining

● Bitcoin problems and weakness - The Truth

about 51% Attack

● Bitcoin Soft fork vs Hard fork

● Bitcoin Scaling: On-chain vs Off-chain

3

The purpose of this Seminar is to

explain How Bitcoin works,

not to encourage you to buy Bitcoin.

● Peer-to-Peer Electronic Cash System

Block Structure

5

Field Description Size

Magic Number value always 0xD9B4BEF9 4 bytes

Blocksize number of bytes following

up to end of block 4 bytesBlockheader consists of 6 items 80 bytes

Transactions the list of transactions

● A tree constructed by hashing paired data (the leaves),

then pairing and hashing the results until a single hash

remains

● The final hash is called Merkle Root

● The leaves are almost always transactions from a single

block.

Block Structure - Merkle Tree

Block Structure - Merkle Tree

7

Merkle root is cryptographic proof of which

transactions are included in the block, and which

order they are in

Block Structure - Merkle Tree

Block Structure - Block Header

9

Field Purpose Updated when Size

(bytes)

Version Block Version Number Upgraded software

provides newer version 4

Prev Block

Hash Hash of the previous block header New block comes in 32

Merkle Root

Hash Hash based on all transaction in the block Transactions list inside a block changes 32

Time Current timestamp Every few seconds 4

Bits Current target Difficulty is adjusted 4

● A proof of work is a piece of data which is

difficult (costly, time-consuming) to produce but

easy for others to verify and which satisfies

certain requirements

● Bitcoin uses the Hashcash proof of work system.

● In order for a block to be accepted by network

participants, miners must complete a proof of

work which covers all of the data in the block.

Proof-of-work

● For a block to be valid it must hash to a value less

than the current target; this means that each block

indicates that work has been done generating it

successors and redoing the work they contain This

protects the block chain from tampering.

algorithm

Proof-of-work

11

● The target is a 256-bit number that all Bitcoin

clients share

● The lower the target, the more difficult it is to

generate a block

Proof-of-work

What happens if two blocks are mined nearly at the

“The only way for everyone to stay on the

same page is to believe that the longest* chain

is always the valid one, no matter what.”

~ Nakamoto Satoshi ~

● Mining is the process that:

○ Adds valid transactions into a block

○ Finds the nonce, so that the hash of the

block header is lower than or equal to the

network’s current target

○ Adds more bitcoins to circulation (create new

bitcoins)

● Miners use Computing Power to mine Bitcoin

Bitcoin Mining

15

● Computing Power is measured by Hash Rate

● Hash Rate is the speed at which a compute is

completing an operation in the Bitcoin code

● A higher hash rate is better when mining as it

increases your opportunity of finding the next

block and receiving the reward.

● Current total network hashrate is about 10 EH/s

(10,000,000,000,000,000,000 Hash/s)

Bitcoin Mining

Bitcoin Mining

17

● Early Bitcoin client versions allowed users to use

their CPU to mine.

● After that, the advent of GPU mining made CPU

mining financially unwise as the hashrate of the

network grew to such a degree that the amount

of bitcoins produced by CPU mining became

lower than the cost of power to operate a CPU

● Nowadays, GPU is also unprofitable to mine

Bitcoin Mining

An application-specific

integrated circuit, or ASIC, is a

microchip designed and

manufactured for a very

specific purpose.

ASICs designed for Bitcoin

mining were first released in

2013

Bitcoin Mining

19

● As more and more miners competed for the limited

supply of blocks, individuals found that they were

working for months without finding a block and

receiving any reward for their mining efforts This made

mining something of a gamble.

● Miners then started organizing themselves into pools so

that they could share rewards more evenly.

Bitcoin Mining

Bitcoin Mining

21

Bitcoin Mining

● Bitcoin is hard to understand, and requires users to be

well versed in computer security

● Bitcoin transactions verification is slow

● Bitcoin transaction fee is high* (for small transactions)

● Bitcoin has no built-in consumer protection

● Bitcoin has technical weaknesses vulnerable to

orchestrated attacks

Bitcoin Problems

23

● A majority attack, or 51% attack is a potential attack on

the bitcoin network whereby an organization is somehow

able to control the majority of the network mining power

(hashrate).

Bitcoin Problems - Majority Attack

Block n Block n + 1 Block n + 2 Block n + 3

Block n + 2 Block n + 3 Block n + 4

With the majority hashing power, the attacker CAN:

● Reverse transactions that he sends while he's in control

This has the potential to double-spend transactions that

previously had already been seen in the block chain

● Prevent some or all transactions from gaining any

With the majority hashing power, the attacker CAN NOT:

● Reverse other people's transactions without their

cooperation

● Change the number of coins generated per block

● Send coins that never belonged to him

Bitcoin Problems - Majority Attack

Bitcoin Network is secured by

Hashing Power (hashrate)

Bitcoin Problems - Majority Attack

27

Bitcoin, a “Cash System” or “Digital Gold”?

Bitcoin Problems

● Chain fork: the occurrence of multiple blocks at the

same height

invalidate previous transactions Soft fork provides

backward compatibility.

previously invalid events valid Hark fork is not

backward compatible.

Bitcoin Fork

29

● Soft Fork and Hard Fork can lead to a chain split

● A chain split is the state of the network when

mining is based on more than one chain at the

same time

Bitcoin Fork

● The one-megabyte limit has created a

bottleneck in bitcoin, resulting in increasing

transaction fees and delayed processing of

transactions that cannot be fit into a block

○ Make a bigger Block

○ Change the way of constructing Transaction

and Block

Scaling Bitcoin

31

● Increase the block size limit

● Require a hard fork

● On-chain scaling

Scaling Bitcoin: Big Block

● Segregated Witness, or SegWit, is the name

used for a soft fork change in the transaction

format It removes (segregate) the script and

signature data (witness) from transaction

● Require a soft fork -> already activated on

● Bitcoin whitepaper: https://bitcoin.org/bitcoin.pdf

● Bitcoin wiki: https://en.bitcoin.it/wiki/Main_Page

● Bitcoin forum: https://bitcointalk.org/

● Bitcoin Reddit: https://www.reddit.com/r/Bitcoin/ and

Thank you for listening!

35