Tutorial 3: Bitcoin Flashcards
- What is a Bitcoin address?
A) A unique identifier used to receive and send Bitcoin
B) A public key used for mining Bitcoin
C) A hardware wallet for storing Bitcoin
D) A private key used to sign transactions - How often does the Bitcoin network adjust its mining difficulty?
A) Every 1,000 blocks
B) Every 2,016 blocks
C) Every 21,600 blocks
D) Every 100 blocks
A) A unique identifier used to receive and send Bitcoin
B) Every 2,016 blocks
- Which of the following scenarios correctly describes how a miner might optimize their chances of successfully mining a Bitcoin block?
A) Increasing the number of nodes they operate to gain a larger share of the network.
B) Prioritizing transactions with the lowest fees to process more transactions per block.
C) Collaborating with other miners in a mining pool to combine computational power.
D) Switching to a less competitive altcoin to avoid Bitcoin’s high mining difficulty. - In the context of Bitcoin mining, what is the primary purpose of the nonce in a block header?
A) To verify the digital signature of the miner.
B) To prevent double-spending by providing a unique identifier for each transaction.
C) To adjust the block size according to network conditions.
D) To vary the input of the hash function in order to find a valid hash under the network’s
current difficulty target.
C) Collaborating with other miners in a mining pool to combine computational power
D) To vary the input of the hash function in order to find a valid hash under the network’s current difficulty target
True/False
- “Bitcoin uses an account-based ledger system to track balances.”
- “A 51% attack on the Bitcoin network would allow attackers to reverse their own transactions and double-spend coins.”
- “If a miner finds a valid hash for a block, they can choose to keep this block secret and continue mining on top of it to potentially increase their rewards.”
False. Bitcoin uses a UTXO (Unspent Transaction Output) model rather than an account-based ledger.
True. Controlling 51% of the network’s hash power allows attackers to double-spend their coins and potentially halt new transactions.
True. This is known as a “selfish mining” strategy, though it carries risks and is generally not practiced widely.
Describe the role of the memory pool (mempool) within the Bitcoin network.
The memory pool (mempool) is a space where all valid but unconfirmed transactions wait until a miner includes them in a block. Each node in the Bitcoin network maintains its own version of the mempool. It plays a crucial role in transaction processing, as miners select transactions from the mempool to include in new blocks, often prioritizing those with higher fees.
Wallet Types
Recommend a suitable type of wallet (hot or cold) for Alice and Bob based on their Bitcoin investment strategies described below. Justify your recommendations by referencing their respective needs.
Alice: Engages in daily trading of Bitcoin. She buys and sells frequently throughout the day to capitalize on market fluctuations.
Bob: Purchased Bitcoin as a long-term investment, intending to use it for his children’s college funds many years in the future. He does not plan to access or trade these funds regularly.
(Hints:
Hot Wallets:
* Software-based and connected to the internet.
* Generally less secure than cold wallets due to their internet connectivity, making them
vulnerable to online attacks.
Cold Wallets:
* Can be hardware-based (like USB devices) or paper-based.
* Trades convenience for increased security by remaining offline.)
Alice: Since Alice engages in daily trading of Bitcoin and needs frequent access, a hot wallet is recommended. Hot wallets are software-based, connected to the internet, and provide the necessary convenience for frequent transactions.
Bob: For Bob, who holds Bitcoin as a long-term investment and does not plan to access it regularly, a cold wallet is more suitable. Cold wallets, being offline, offer enhanced security, protecting his investment from online threats.
Lightning Network
Explain why state channels, such as the Lightning Network, are termed Layer 2 solutions and identify two potential disadvantages.
State channels, such as the Lightning Network, are termed Layer 2 solutions because they operate on top of the base blockchain (Layer 1) to enable faster and cheaper transactions by handling them off-chain.
Two potential disadvantages:
Liquidity Lock-up: Funds must be locked in channels, reducing their availability for other uses.
Complexity: Managing and maintaining state channels can be complex and may require more technical understanding.
Transaction Fees
Discuss two reasons why transaction fees are necessary in the Bitcoin network and explain why the block reward alone is not sufficient.
Transaction fees are necessary in the Bitcoin network for two main reasons:
Incentivizing Miners: Fees provide miners with compensation for including transactions in blocks, especially as block rewards diminish over time.
Preventing Spam: Fees deter spamming the network with low-value transactions by making it costly.
The block reward alone is not sufficient because it halves approximately every four years (halving event), eventually reaching zero. Transaction fees will become the primary incentive for miners.
Mining Pools
Explain why miners may find it profitable to join forces with other miners — forming so-called mining pools. How does it impact the distribution of mining rewards?
Miners join mining pools to combine their computational power, increasing their chances of finding a block and receiving consistent rewards. In a mining pool, rewards are distributed proportionally based on the contributed hash power, providing more predictable income compared to solo mining.
On May 8, 2024, the Bitcoin network’s total hashrate was 569.29 exahashes per second (EH/s). The top three mining pools by three-day hashrate were1:
* FoundryUSA, at 175.76 EH/s (30.9% of the total network hashrate)
* AntPool, at 161.77 EH/s (28.4% of the total network hashrate)
* ViaBTC, at 73.11 EH/s (12.8% of the total network hashrate)
Discuss the potential implications if:
a) FoundryUSA and AntPool collude.
b) AntPool and ViaBTC collude.
(a) If FoundryUSA and AntPool collude:
Combined Hashrate: 337.53 EH/s (30.9% + 28.4%)
Implications: With 59.3% of the total network hashrate, they would exceed the 51% threshold, potentially allowing them to execute a 51% attack, double-spend, and disrupt the network’s integrity.
(b) If AntPool and ViaBTC collude:
Combined Hashrate: 234.88 EH/s (28.4% + 12.8%)
Implications: They would control 41.2% of the total network hashrate, not enough for a 51% attack but sufficient to have significant influence over block production and transaction prioritization.
The 51% Attack
A billionaire, bored with conventional investments, playfully considers taking control of the Bitcoin network with a 51% attack. This enterprising individual can liquidate 70% of their $3.8 billion fortune to finance their new hobby: collecting state-of-the-art ASIC miners. Each high- performance ASIC miner (WhatsMiner M63S) costs $10,000 and has a hashrate of 406 TH/s. The total network hashrate is currently 569.29 EH/s.
a) Can this billionaire successfully achieve a 51% control of the network with the resources described? Calculate the number of ASIC miners they can purchase and the total hashrate they would control, and compare it to the current network hashrate.
Calculation:
Resources: 70% of $3.8 billion = $2.66 billion
ASIC Miners: $2.66 billion / $10,000 per miner = 266,000 miners
Total Hashrate: 266,000 miners * 406 TH/s = 108,196,000 TH/s = 108.196 EH/s
Comparison: 108.196 EH/s compared to the current network hashrate of 569.29 EH/s. The billionaire would control approximately 19% of the network’s total hashrate, insufficient for a 51% attack.
The 51% Attack
A billionaire, bored with conventional investments, playfully considers taking control of the Bitcoin network with a 51% attack. This enterprising individual can liquidate 70% of their $3.8 billion fortune to finance their new hobby: collecting state-of-the-art ASIC miners. Each high- performance ASIC miner (WhatsMiner M63S) costs $10,000 and has a hashrate of 406 TH/s. The total network hashrate is currently 569.29 EH/s.
b) Discuss potential challenges that the billionaire would face in attempting this 51% attack.
Challenges:
Hardware Acquisition: Procuring a large number of ASIC miners is logistically difficult and time-consuming.
Energy Costs: Running so many miners would require substantial electricity and infrastructure.
Detection and Response: The network and community would likely detect an attempted attack and could implement countermeasures, such as hard forks.
Mining Difficulty
The Bitcoin network adjusts its mining difficulty approximately every two weeks (or every 2,016 blocks) to ensure that blocks are found roughly every 10 minutes. The current difficulty is 40,000,000,000,000 (40 trillion), and the total network hashrate is 569.29 EH/s. Suppose the network hashrate suddenly doubles to 1,138.58 EH/s right after a difficulty adjustment.
a) What is the expected time to find a block immediately after the hashrate doubles, but before the next difficulty adjustment?
b) Assuming the hashrate remains doubled, what will the new difficulty be after the next adjustment?
a) Expected Time to Find a Block:
Relative Hashrate Change: 569.29 EH/s to 1,138.58 EH/s (doubles)
New Expected Time: Target Block Time / Relative Hashrate Change = 10 minutes / 2 = 5 minutes
b) New Difficulty:
New Difficulty = Current Difficulty * Relative Hashrate Change
Calculation: 40 trillion * 2 = 80 trillion
The new difficulty would double to 80 trillion after the next adjustment if the hashrate remains doubled.
