L04: Bitcoin I Flashcards
Introduction to Bitcoin
* Origin of philosophy: Bitcoin, as conceptualized by Satoshi Nakamoto, is designed to be a … without the need for a trusted third party.
* Decentralization: No single entity has …. It operates on a peer-to-peer network where each participant, or node, has access to the entire blockchain.
* Birth of Bitcoin: As discussed in the history of blockchain, prior developments in cryptography and digital transactions laid the groundwork, making Bitcoin’s effective implementation possible upon its introduction. Unlike other technologies that evolved through incremental advancements, Bitcoin emerged with a …
* Challenges in centralization: …
peer-to-peer electronic cash system
control over the entire blockchain
complete set of operational concepts and technologies.
Despite its decentralized ideal, Bitcoin mining has shown tendencies towards centralization, which contradicts its fundamental nature.
Bitcoin addresses
* What are Bitcoin addresses?
◦ …, functioning similarly to bank account numbers in traditional finance.
◦ Each address is … and is used to …
* Creation process
1. Creation process: A …, which remains secret and
is the cornerstone of Bitcoin security.
2. Public key derivation: Using the private key, a …
3. Hashing and formatting: The public key undergoes …. A checksum is added before the
address is encoded in Base58Check: WHY?
Unique identifiers used to receive and send Bitcoin
publicly visible on the Bitcoin blockchain; direct transactions to and from a wallet.
random private key is generated
public key is computed via the Elliptic Curve Digital Signature Algorithm (ECDSA) on the secp256k1 curve.
two rounds of hashing, first with SHA-256 and then with RIPEMD-160
eliminating visually similar characters to prevent errors in address transcription.
- Hashing
◦ SHA-256: This is the first hash function used and stands for Secure Hash Algorithm
256-bit. It is widely recognized for its … and is used to ….
◦ RIPEMD-160: After SHA-256, the output is further hashed using RIPEMD-160 (RACE
Integrity Primitives Evaluation Message Digest). WHY? - Formatting
◦ Checksum Addition: To ensure the integrity of the Bitcoin address, a checksum is added.
This involves …
◦ Base58Check encoding: This encoding converts the hash into a … - The final output is a Bitcoin address that can be safely and easily shared, ensuring that the …
security; compress the public key
It reduces the hash size, creating a more compact representation.
taking the RIPEMD-160 hash, running it again through SHA-256 twice, and then appending the first 4 bytes of the result to the end of the RIPEMD-160 hash.
string of characters that is easier for humans to read, write, and communicate.
address is free from transcription errors.
The Unspent Transaction Output (UTXO) model
* Intuitively, we consider Bitcoin to use an account-based ledger. However, an account-based approach required a …
* Bitcoin does not track balances of accounts; instead, it tracks …, known as Unspent Transaction Outputs (UTXOs).
* Each transaction uses existing UTXOs as inputs (Txin) and creates new UTXOs as outputs (Txout). The sum of input UTXOs must equal the sum of output UTXOs, ensuring …
◦ UTXOs can be …
◦ If …, you can use a change address (the address the money is sent back to).
* Each transaction is uniquely identified by a hash of its contents, known as the Transaction ID (TxID).
fairly complicated mechanism for tracing balances at all times.
coins that have been transferred but not yet spent
no Bitcoin is created or destroyed within a transaction.
combined from several addresses and split to make payments to multiple addresses.
you need to pay less than the combined UTXO of the input addresses
Bitcoin Scripts: Locking and Unlocking Mechanism
* Inputs and outputs contain …They are sets of instructions included in transactions that …
* Output script (scriptPubKey)
◦ When someone sends you Bitcoin, they are essentially …This condition must be
met for the funds to be spent in the future.
◦ The output script (scriptPubKey), also called locking script, is included in the output of the transaction. It defines the condition under which …
Give an example,
scripts for verification; determine how Bitcoins can be spent.
creating a new output in a transaction that is ”locked” with a specific condition.
the new output can be spent
For example, a common condition is that the funds can only be spent by someone who can provide a valid signature matching the recipient’s public key.
- Input script (scriptSig)
◦ When you want to spend those Bitcoins, you create a new transaction where you are the …. The Bitcoins that were previously sent to you are now…
◦ To spend the inputs, you must provide an input script (scriptSig), also called…, that …. The unlocking script typically includes a…
sender; inputs in this new transaction.
unlocking script
satisfies the locking script’s conditions from when you received the Bitcoins
signature that proves you own the private key corresponding to the public key that the Bitcoins were locked to.
Details of a typical transaction
slide 17
Transaction broadcast
1. Once a transaction is signed, it is…
2. Each node receiving the transaction checks it for validity; if it passes, the node …
3. The mempool is where … until a miner picks them up to include them in a new block.
4….
5. The new block is broadcast to the network. Other nodes will … and, upon validation, …, and start over.
broadcast to the whole network.
adds the transaction to its memory pool (mempool) and further broadcasts it to other nodes.
unconfirmed transactions wait
Once selected by a miner, a transaction is confirmed when it is included in a block that is added to the blockchain.
verify the block; add it to their copy of the blockchain
Bitcoin Ecosystem– Full Nodes (4)
- Maintains a complete copy of???
2/3. What do they do?
- Who runs this?
- Maintains a complete copy of the blockchain.
- Validate incoming block and transaction
- Relay valid blocks and transactions to other nodes.
- Can be run by anyone–> supporting the decentralised nature of the network
Bitcoin Ecosystem– Simplified Verification Process (SVP) Nodes (3)
- What does it download?
- Depends on full node but why?
- Allow lightweight client functionality or not? Why so?
- Does not download the entire blockchain but does download block headers (only) to verify the existence of transactions in a block.
- Depends on the work of full nodes to ensure that the rules of the network are being followed.
- Allow lightweight client functionality, enabling users with constrained resources to participate in the network.
Bitcoin Ecosystem– Wallets (4)
- What is it?
- What does it store?
- Wallet owners own…
- SW or HW???
- Interfaces for users to interact w/ their bitcoin holdings
- Store private keys needed to sign transactions
- Wallet owners own different private keys to UTXOs. QUESTION: Does a wallet owner have a lot of UTXOs or only one?
- Can be either software-based or hardware-based(higher security).
Bitcoin Ecosystem– Miners
Who are they?
What are they responsible for?
Rewards?
Individuals who run mining software to validate transactions and mine new blocks.
Responsible for the costs associated with mining such as electricity and hardware.
Getting reward is infrequent and random. Rewards is usually tx fees and newly minted bitcoins.
Bitcoin Ecosystem– Mining pools
What is it?
Why does it exist?
Group of miners combining their computational resources to increase their collective mining power.
Helps stabilise the income of miners individually as mining is more competitive. The bitcoin rewards are shared proportional to the amount of work each miner contributes.
Bitcoin Ecosystem– Exchanges
What is it?
Platforms where users can trade bitcoins for fiat currencies/other cryptocurrencies.
Majority of all exchanges take place on centralised exchanges.
Tumblers/Mixers
Services designed to …
Mix the coin of different users, making it more challenging to..
enhance privacy by obscuring the connection between BTC addresses and the entities that use them.
trace coins back to their original source
