Κατανεμημένα Συστήματα

Bitcoin and Blockchain

2019-2020

http://www.cslab.ece.ntua.gr/courses/distrib
 Blockchain Defined
Simply defined a Blockchain is little more than a:
• Distributed
• Secure
• Ledger (logfile)

A digital currency was in a lot of ways the first

demonstrable use
2
 What is Bitcoin
• A protocol that supports a decentralized, pseudo-anonymous,
peer-to-peer digital currency

• A publicly disclosed linked ledger of transactions stored in a

blockchain

• A reward driven system for achieving consensus (mining)

based on “Proofs of Work” for helping to secure the network

• An economy with an eventual cap of about 21M bitcoins

3
 Bitcoin Whitepaper – 2008.10.31

* Halloween
 Features of Bitcoin
• Essentially it’s “deflationary” – the reward is cut in half every four
years
• Nearly infinitely divisible currency units supporting eight decimal
places 0.00000001 (known as a Satoshi)
• Nominal transaction fee’s paid to the network
– Same cost to send $.01 as $1,000,000
• Consensus driven – no central authority
• Counterfeit resilient
– Cannot add coins arbitrarily
– Cannot be double-spent
• Non-repudiation – aka “gone baby gone” – no recourse and no
5
one to appeal to return sent tokens
 When did it start?
• “Satoshi Nakamoto” created the reference implementation that
began with a Genesis Block of 50 coins
• 2008
– August 18 Domain name "bitcoin.org" registered[1].
– October 31 Bitcoin design paper published
– November 09 Bitcoin project registered at SourceForge.net
• 2009
– January 3 Genesis block established at 18:15:05 GMT
– January 9 Bitcoin v0.1 released and announced on the cryptography
mailing list
– January 12 First Bitcoin transaction, in block 170 from Satoshi to Hal Finney

https://en.bitcoin.it/wiki/History 6
Why does it have value?

The worth of a thing

is the price it will bring.

7
 Why does it matter?

16 Billion Dollar Market Cap!

http://coinmarketcap.com
 BitCoin: Challenges
• All virtual currency must address the following challenges:
– Creation of a virtual coin/note
• How is it created in the first place?
• How do you prevent inflation? (What prevents anyone from creating
lots of coins?)
– Validation
• Is the coin legit?
• How do you prevent a coin from double-spending?
• Bitcoin takes a infrastructure-less approach
– Rely on proof instead of trust
– No central bank or clearing house
 Bitcoin: Motivation
 Rely on proof instead of trust
– Current online transactions rely on a trusted party (e.g, VISA)
– They take some risk, manage fraud, and get paid a fee.
• Buyer and Seller protection in online transcations
– Buyer pays, but the seller doesn’t deliver  Solved by using an
escrow (Buyer protection)
– Seller delivers, buyer pays, but the buyer makes a claim. VISA
refunds; the payment is reversed. Either the seller is penalized
and/or VISA charges more fee to handle these cases. Some
behaviors are fraudulent.
• BitCoin gets rid of this trusted middleman, by being able to directly
show the cryptographic proof that the money is transferred.
 Four components in secure
communication
• Authentication
• Confidentiality
• Integrity
• Availability
 What do we want to secure?
• Authentication (Who am I talking to?)
– Identification and assurance of the origin of
information
• Confidentiality (Is my data hidden?)
– Concealment of information
• Integrity (Has my data been modified?)
– Prevent improper and unauthorized changes
• Availability (Can I use the resources?)
– The ability to use the information or resource desired
 From the perspective of BitCoin
• Authentication
– Am I paying the right person? Not some other
impersonator?
• Integrity
– Is the coin double-spent?
– Can an attacker reverse or change transactions?
• Availability
– Can I make a transaction anytime I want?
• Confidentiality
– Not very relevant. But privacy is important.
 From the perspective of BitCoin
• Authentication  Public Key Crypto: Digital Signatures
– Am I paying the right person? Not some other
impersonator?
• Integrity  Digital Signatures and Cryptographic Hash
– Is the coin double-spent?
– Can an attacker reverse or change transactions?
• Availability
– Can I make a transaction anytime I want?
• Confidentiality
– Not very relevant. But privacy is important.
 Cryptographic Hash Functions
• Consistent: H(X) always yields same result
• One-way: given Y, hard to find X s.t. H(X) = Y
• Collision resistant: given H(W) = Z, hard to find X
such that H(X) = Z

Message of arbitrary length Hash Fn Fixed Size

Hash

e.g. SHA256 ->256 bits

 Collision resistant
• Find a collision:
– Try 2130 randomly chosen inputs
– 99,8% chance that two of them collide

• Takes too long to matter

 SHA256

In practice, we hope that SHA256 behaves “like

a random oracle”.

Calculation: If we made all computers in the world

compute …

It takes ~“ years” to find s.t.

Application: Hash as a message digest
• H(x) = H(y) then safe to assume x=y

• To recognize a file that we saw before, just

remember its hash

• Useful because it’s small

 One way
• Given H(x), infeasible to find x

• Distributions of values should be very spread

out (e.g., uniform)
 Digital Signature
Key Generation Signing Verification

Bob

Alice Alice
(Public) (Secret)
Alice
 Digital Signature
Key Generation Signing Verification

Alice Alice
(Public) (Secret)
Bob Alice
 Goal: Bob should be sure
Digital Signature that the message
originates from Alice.

Key Generation Signing Verification

Alice
(Public)
Bob

Message

Alice Alice
(Public) (Secret)
Alice A
 Digital Signature

Key Generation

Secret
Message
Secret Key
Public Key
Key
Signing

A
Message Public Key A

Verification
Security (informal): You cannot
produce valid signatures without the
secret key.
 Back to BitCoins
• Validation
– Is the coin legit? (proof-of-work)  Use of
Cryptographic Hashes
– How do you prevent a coin from double-spending?
 Broadcast to all nodes
• Creation of a virtual coin/note
– How is it created in the first place?  Provide
incentives for miners
– How do you prevent inflation? (What prevents
anyone from creating lots of coins?)  Limit the
creation rate of the BitCoins
 ATTEMPT #1

We now try to build bitcoin…

… but we will fail.
 Goals
• We want some kind of “digital money”.

 Everyone can participate.

 No central instance – no bank.

 Setting
 A network of computers.

• Every computer can send messages to some

other computers.
 Basic idea
 Every computer maintains Alice
(Public) 10 BTC
a table: “who owns
Bob
what?” (Public) 0.2 BTC

Charlie
 We will need: all (Public) 17 BTC
computers have the same Dora
0.001 BTC
table. (Public)

Eliza
(Public)
2 BTC
Remark: The public keys
are just bit strings.
 Sending Bitcoins
To send money, we use transactions. These are
messages like this:

Transfer 0.1 BTC

Alice
from (Public)

Bob
In “short”, transactions
to (Public) look like this: $ F T
A
 Sending Bitcoins
I’LL send 0.1
Bitcoin to Bob.

$ F T
Alice
Protocol: sending BTC Protocol: participating
1. Craft a transaction. On valid transactions:
2. Give it to your 1. Update ledger
computer. 2. Relay transaction
 Double Spending Thanks
!
I can exploit this!
Bob
These transactions
spend previously Thanks
Black Hat spent bitcoins! !

Black Hat prepares Alice

two transactions:
: Give BTC from Black Hat to Alice
: Give BTC from Black Hat to Bob
 Double Spending

• The bad guy spends the same Bitcoins with

two different transactions and .
 Computers receiving transaction will have a
different ledger than computers receiving
transaction .
 Consensus Protocols
• We need a protocol to agree on a transaction.
• “Consensus protocols”. Studied since 1980,
starting with Pease, Shostak, Lamport.
• Huge literature!
• Main idea for protocols:
What transaction are
you using? Protocols work if
(say) > 70% of the
computers follow
the protocol.
 This solution does not help us!

Design goal:  Everyone can participate.

By running a special
program, a bad guy
I will gladly participate…
With 1 000 virtual machines! controls many virtual
computers.
Like this, he can make
different participants
believe different things.
BITCOIN’S CONSENSUS PROTOCOL

Step 1: How does the protocol look like?

Step 2: What happens if people cheat?

 Blocks

0000031105830
A block contains
 for another block ,

 a list of transactions,

 and an arbitrary number

“nonce”. 8046465385222

Block is valid if the first

RH
digits of the hash of
are all zero. 0000077326777
 Blocks
 To find a valid block, we try
different values for this
string (“nonce”).
 On average, after tries, we

find a valid block.

 Bitcoin chooses on the fly

such that this takes about

Block is valid if the first
10 minutes.
digits of are all zero.
 Blocks
If we have a block, we can find
a “next block”:
Take from the previous block.
Add transactions.

¿ Try different values for this

string until the hash starts
with zeros.
 BitCoin Network
• Each P2P node runs the following algorithm [bitcoin]:
– New transactions are broadcast to all nodes.
– Each node collects new transactions into a block.
– Each node works on finding a proof-of-work for its block.
(Hard to do. Probabilistic. The one to finish early will
probably win.)
– 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 (digital signature checking) and not already spent
(check all the transactions).
– Nodes express their acceptance by working on creating the
next block in the chain, using the hash of the accepted
block as the previous hash.
 A Tree of Blocks
If we have a block, with a
bit of work, we can find a
“next block”…
¿
...and yet another “next
block”…

…or a block which

continues here…

… and so on.
A Tree of Blocks
In general, we can build a tree
of blocks like this.

But only ever downwards!

 Tie breaking
• Two nodes may find a correct block simultaneously.
– Keep both and work on the first one
– If one grows longer than the other, take the longer one

Two different
block chains
(or blocks)
may satisfy
the required
proof-of-work.
The Protocol for Finding Blocks

Protocol: finding blocks

1. Take the longest chain you
can find.
2. Collect transactions.
3. Find a new valid block here.
4. Publish it.
The Protocol for Participants
Protocol: To know who owns
BTC
1. Take the longest chain you
can find.
2. Process the transactions in
this chain in order.
 Reverting is hard…
• Reverting gets exponentially hard as the chain
grows.
2. Recompute 3. Recompute
nonce the next
nonce

1. Modify the transaction

(revert or change the
payer)
 Practical Limitation
• At least 10 mins to verify a transaction.
– Agree to pay
– Wait for one block (10 mins) for the transaction to
go through.
– But, for a large transaction ($$$) wait longer.
Because if you wait longer it becomes more
secure. For large $$$, you wait for six blocks (1
hour).
 Why work to find blocks?
Many people are trying to find blocks, which
uses a lot of resources…

A real lot!

This is called “mining”.

 Block reward
If you find a block, you get bitcoins as a reward.

Every transaction
Transfer 0.1 BTC specifies a fee. It goes
Alice
to the person who
from (Public) puts the transaction
Bob into a valid block.
to (Public)
A
A
Fee: 0.001 BTC
 Recap: The Bitcoin Protocol
Protocol: participate
 Relay valid transactions.
 Relay valid blocks in the longest chain.
 Work with the longest chain.

Protocol: miners
 Collect valid transactions.
 Publish valid blocks which extend the longest
chain.
 Step 1: How does the protocol look like?
BITCOIN’S CONSENSUS PROTOCOL
Step 2: What happens if people cheat?
 Double SpendsI found a valid block!
I can exploit this!
Bob

Black Hat

Once a block is found, the

Alice
double spends vanish.

Occasionally, two people find blocks at around the same

time… but typically the problem disappears.
 Build an Alternate Chain?
•  
Maybe I should
build another chain?
Hardware War
 Summary
• BitCoin combined techniques from crypto and the right
incentives.
– Nice design
– A trait for popular systems
• BitCoin is becoming industrialized.
– Miners form a pool.
– Mining hardware becomes sophisticated.
– BitCoin exchange
• Derivative market, etc.
– Government agencies are keeping an eye on them.
• Who will control BitCoin in the end?
 More uses of blockchain?
• If the blockchain technology works, it gives a new
consensus algorithm. What else can we use it for?

• Ideas:
– Multiparty computation protocols based on the
blockchain.
– Timestamping
– Crowdfunding
– Have your shares in the blockchain
– Smart payments
– etc…
 References
• Bitcoin and Cryptocurrency Technologies,
Arvind Narayanan, Joseph Bonneau, Edward
Felten, Andrew Miller, Steven Goldfeder
• Bitcoin: A primer by François R. Velde, senior
economist FRB
• Bitcoin: A Peer-to-Peer Electronic Cash
System, Satoshi Nakamoto
• http://bitcoinbook.cs.princeton.edu/