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 Bitcoin Scaling:

Bitcoin: The Hype, The Myth and The Truth

~ Part 2 - 6/11/2017 ~

~ 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

● Peer-to-Peer Electronic Cash System

Block Structure

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Field Description Size

Magic Number value always 0xD9B4BEF9 4 bytes

Blocksize number of bytes following up to end of

block

4 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

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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

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

● 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

● Changing a block requires regenerating all successors and redoing the work they

contain This protects the block chain from tampering.

● Bitcoin use SHA-256 as the Proof-of-Work hashing algorithm

Proof-of-work

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● 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 same time?

“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

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● 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

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● 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

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● 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

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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

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● 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 + 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 confirmations

● Prevent some or all other miners from mining any valid blocks

Bitcoin Problems - Majority Attack

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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

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

Bitcoin Problems

● Chain fork: the occurrence of multiple blocks at the same height

● Soft fork: a change to the protocol that would only invalidate previous

transactions Soft fork provides backward compatibility

● Hard fork: a change to the protocol that makes previously invalid events valid

Hark fork is not backward compatible.

Bitcoin Fork

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● 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

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● 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 1/8/2017

● Allow off-chain scaling solutions, like Lightning Network

Scaling Bitcoin: Small Block

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

● http://nakamotoinstitute.org/

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

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

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

● Bitcoin Price: https://coinmarketcap.com/

Thank you for listening!

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