Bitcoin Generation Algorithm
This paper is a study on Bitcoin Generation Algorithm. Bitcoin mining is the method of adding transaction records to Bitcoin’s community ledger of earlier period transactions or blockchain. The mining practice is used to confirm and secure transactions. This method is organized as a speed game among persons or firms – the miners – with diverse computational powers to solve a mathematical difficulty, bring a proof of work, extend their solution and attain agreement among the Bitcoin network nodes with
Bitcoin was created by Satoshi Nakamoto, who published the invention and later it was implemented as open source code. A merely endto-end version of electronic cash would allow online payments to be sent straight from one person to another without going through an economic body. Bitcoin is a network practice that enables folks to transfer assets rights on account units called “bitcoins”, created in limited quantity. When a person sends a few bitcoins to another individual, this information is broadcast to the peer-to-peer Bitcoin network.
3.What Is Bitcoin?
Bitcoin is a crypto-currency ,a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator that can be sent from user-to-user on the peer-to-peer bitcoin network without the need for intermediaries.
One of the most interesting aspects of Bitcoin is that it does not require a central authority to verify transactions. All the transactions are recorded in a public ledger called the blockchain. New transactions are broadcast to all nodes in the network, and each node collects new transactions in to a block. Once a block reaches a certain size (which is equal to the amount of transactions happened in about 10 minutes), all the nodes in the network need to agree on the same block. Once agreed, the block is ?nished and new transactions are kept in a new block.
4.HOW DOES BITCOIN WORK?
-;The first thing you need to think about with a virtual currency is the transaction - the actual exchange of value from one person to another. While this may sound simple, in many ways it can be easy to forge a transaction to try to cheat the system. With physical currency, transactions are controlled by banking institutions which verify that they’re not forged and are unique.
Figure:Bitcoin Transaction Life Cycle
4.2. A Serial Number
-> To avoid people trying to forge transactions or reuse them with virtual currency, you need a way to tie a unique serial number to each person and each transaction as well. Bitcoin does this by using a private and public encrypted key. These hashes are used to make sure transactions aren’t duplicated in the network and there’s no way to cheat the system.
4.3. Goodbye Banks
-> Currently, banks are in place to facilitate a financial transaction between two people. When Bitcoin was being set-up, it was realized that banks could be taken out of the picture entirely if a peer-to-peer network was created to verify the transactions between two entities. This decentralization of financial transactions is one of the biggest reasons so many smart people are getting excited about Bitcoin.
4.4. Bitcoin Mining
-> Another piece is needed to make Bitcoin work. If it’s too easy for transactions to be validated, people could program bots to flood the network with verifications, making it difficult to actually verify the transaction. To combat
this, the idea is to make it computationally difficult to verify the transaction. This helps fight against the bad guys while at the same time offering a way to reward people who give up computing power to verify the transaction. The computational puzzle has to be difficult enough to make it impossible to hack while easy enough to still allow people to solve in a reasonable amount of time.
5.Bitcoin vs. Convenstional currencies
5.1.Bitcoin is Decentralized
Unlike traditional currency, which is controlled by a central authority - usually an arm of the government - Bitcoin is decentralized. Because it operates as a peer-to-peer network, all transactions and verification of transactions are done by various people in the network.
Figure: Bitcoin is Decentralized
5.2. Bitcoin is Virtual Currency
The other thing that sets Bitcoin apart from traditional currency is the fact that it’s virtual. That is to say coins and paper money aren’t produced to represent the value. Instead, all bitcoins exist in virtual space. This means you can’t go to an ATMand withdraw physical money. Some people have created unofficial physical representations of bitcoins, but first and foremost, Bitcoin is virtual.
5.3. Bitcoin has Scarcity
Because only 21 million bitcoins will be created, BTC has scarcity, unlike traditional currenc that can be printed when governments decide to print more. To spread out the creation of bitcoins being released into the world, the number that are created by “mining” will half every four years. This means that people will still be able to create them until the year 2140. At that time, no new bitcoins will be created and the existing stockpile will enjoy the benefits of scarcity - i.e. becoming more valuable.
5.5. Bitcoin transactions cannot be reversed
In order to preserve the block chain of all transactions in sequential order, Bitcoin transactions are not reversible. Additionally, a Bitcoin transaction can take ten minutes or more to confirm. This is different than other currencies that typically process transactions in seconds and also allow for reversing a charge to a credit or debit card.
5.6. Bitcoin is not Ubiquitous
Wherever you go in the world, you’re going to run into local currencies. In most places, you’ll be able to trade your country’s money for bills of the country you’re visiting. And no matter where you go in the world, you’re going to be able to trade your money for goods and services. Bitcoin hasn’t yet been embraced by the world at large. This may change in years to come as more businesses begin to accept Bitcoin for payment, but for now it’s a difference that matters to a lot of people.
6.Bitcoin Strengths and Weaknesses
While Bitcoin has a lot of strengths, there are some weaknesses for the cryptocurrency as well. We’re going to take a look at both the pros and cons of Bitcoin so that you can get a better understanding of where this virtual currency is going to head in the years ahead.
The fact that it’s already growing in popularity so rapidly is a good sign, but
there are hurdles that Bitcoin is going to have to get over if it’s to survive and thrive in the future.
First, let’s go over some of the main strengths of cryptocurrency in general and Bitcoin specifically.
6.1.1.Anonymity and Privacy
One of the big strengths of Bitcoin currently is that it offers virtual anonymity and a lot more privacy than is found in current financial systems. Bitcoin uses hash addresses to send and receive money, and these hashes or addresses can changed from transaction to transaction. Because of that, it’s entirely possible for two parties to be completely anonymous when conducting their transactions.
Because addresses (hashes) can be created for each transaction, it makes it really difficult to track and trace financial activity of any single person in the network. And, unlike cash which is also private to an extent, you can use Bitcoin online to do virtual transactions. Add to that the fact that there’s no central authority keeping tabs on all transactions, people can feel safer about their privacy.
6.1.2.No transaction fees
When you use a credit or debit card, the processor charges a transaction fee. The charge is given to the merchant which can cut down on their profit margin considerably. However,Bitcoin doesn’t have transaction fees - at this time. When 21 million bitcoins are produced and released into the world this may change, but for now Bitcoin doesn’t charge a transaction fee.
When Bitcoin mining goes away, there’s going to be no financial incentive for people to verify transactions by solving a block and adding it to the block chain. At that time, there’s a good chance that a low BTC transaction fee may be instituted in order to make sure others still verify transactions. Giving them a cut of the transaction fee will enable the system to continue.
6.1.3.No central governing authority
When you purchase something around the world, you’re typically taxed by the government for the transaction. Currently, Bitcoin is not recognized as money by any government so it is not taxed. Most Bitcoin transactions could be thought of as trades - which are generally exempt from taxation by governments.
This is likely to change if and when Bitcoin begins to be recognized as legitimate currency around the world. This is actually an incentive for governments to legally recognize Bitcoin as proper money. No one is sure when or if this will happen, but it’s something to think about as Bitcoin continues to experience a lot of growth around the world.
Next, let’s take a look at some of the weaknesses of Bitcoin. There’s a good chance a lot of these problems are going to be solved going forward, but for now they’re weaknesses.
While this hasn’t happened a lot - yet - there are many signs pointing to governments around the world interfering with the growth of Bitcoin. Whether it’s stopping bitcoins from being transferred to bank accounts or something else, one of the biggest weaknesses of Bitcoin currently is the chance of even more government interference as the virtual currency becomes more popular around the world. This is also a good thing on some levels, however.For example, no one wants money laundering or other illegal activities to be condoned or made possible due to Bitcoin. So, in some ways, the fact that governments are starting to getinvolved is a good thing that will help Bitcoin grow even more in the years ahead.
6.2.2.No Monetary Sovereignty
Another weakness of Bitcoin is that it has no monetary sovereignty. Basically, this means that Bitcoin is not yet accepted as “real money” around the world. Bitcoin is not backed by any government currently. Some may consider this a strength, but it also poses some problems for people (especially corporations) that want to make money with Bitcoin.
Bitcoin is, at its core, another fiat currency that isn’t backed by precious metals or other items of value. The exact value of a single BTC is that which is given to it by people. This makes Bitcoin extremely vulnerable to destabilization. For example, if a large number of people who have bitcoins suddenly decide to sell, this may cause a panic that devalues bitcoins considerably.
6.2.3.Deflationary by design
If Bitcoin deflation happens too quickly, investors are not going to want to invest large amounts of BTC because their efforts won’t be rewarded as BTC becomes more valuable during the time it takes them to create a product and take it to market.
There’s also the real possibility of a recession if a large number of people who purchase BT for investment reasons hold onto their bitcoins. If they can control large amounts of the 21 million bitcoins that will be in circulation, there’s a good chance that others won’t be able to conduct transactions because they don’t have enough bitcoins in their possession. At this point, a recession or even a depression become a real possibility. 6.2.4.Accidental Loss and Theft
Another problem is the loss or theft of bitcoins. Because Bitcoin has no protection mechanism built into the currency, it’s possible for someone to lose their wallet file. If this happens, the bitcoins they had in the wallet will be taken out of the system - theoretically forever. This could help spur the problems with deflation mentioned above.
Additionally, if someone manages to steal bitcoins from another person, there’s no way to rollback the transaction, even if there’s proof that a theft occurred. The Bitcoin system is built so that once a transaction happens it’s there permanently. If not, it would destroy the integrity of the block chain. With most current financial transactions - like with a credit card - you can contest a transaction and get your money back. This isn’t possible - currently - with Bitcoin.It’s definitely something that needs to be considered moving forward.
6.2.5.Black market appeal
Because of the decentralization of Bitcoin as well as the anonymity that it can provide, there’s a good chance that many are going to try to abuse the system for financial gain. Because of the way it’s set up, there’s no way to deny any person or corporation from participating in the Bitcoin network. And this may make it favorable for black markets - like Silk Road - to use Bitcoin as a means to commit crimes online without being caught
6.2.6.It is complicated to use
While the Bitcoin software is relatively easy to use, it’s not as easy as whipping out your credit card and making a transaction. Because it’s somewhat complicated to use, there’s a chance that a lot of the world’s population may not use it, which will affect whether Bitcoin continues to grow or not.
This is changing gradually as Bitcoin software becomes easier to use, but a lot more work needs to be done before Bitcoin really takes off. Luckily, there’s a lot of financial gain to be had by those who can come up with easier ways to use Bitcoin. This means there’s going to be a lot of people working on the problem of Bitcoin being difficult for some people to understand and use.
6.2.7.It is a poor use of computing power
Last but not least, you have to consider that Bitcoin mining takes quite a bit of processing power.This computational power could be used for other more productive reasons. Some say that the Bitcoin network is already the world’s largest peer-to-peer network - at least when it comes to processing and number crunching. This may not seem like a big thing, but you have to consider all the electricity that’s needed to keep all the computers on the network going.
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. Producing a proof of work can be a random process with low probability so that a lot of trial and error is required on average before a valid proof of work is generated. Bitcoin uses the Hashcash proof of work system.
One application of this idea is using Hashcash as a method to preventing email spam, requiring a proof of work on the email’s contents (including the To address), on every email. Legitimate emails will be able to do the work to generate the proof easily (not much work is required for a single email), but mass spam emailers will have difficulty generating the required proofs (which would require huge computational resources).
Hashcash proofs of work are used in Bitcoin for block generation. 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. The difficulty of this work is adjusted so as to limit the rate at which new blocks can be generated by the network to one every 10 minutes. Due to the very low probability of successful generation, this makes it unpredictable which worker computer in the network will be able to generate the next block.
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. Each block contains the hash of the preceding block, thus each block has a chain of blocks that together contain a large amount of work. Changing a block (which can only be done by making a new block containing the same predecessor) requires regenerating all successors and redoing the work they contain. This protects the block chain from tampering.
A proof of work is a cryptographic puzzle used to ensure that a party has performed a certain amount of work. In particular, the Bitcoin mining process incorporates a proof of work system based on Adam Back’s Hashcash 3. It has two basic properties – ?rstly, it ensures that the party providing the proof of work has invested a prede?ned amount of e?ort in order to create the proof and secondly, that the proof is e?ciently veri?able. Typically, ?nding a solution to a proof of work puzzle is a probabilistic process with a success probability depending on the prede?ned di?culty.
Figure:Proof Of Work
Let Alice and Bob be two parties communicating with each other and let Alice require Bob to perform a certain amount of computational work for each message he sends to Alice. To do so, Alice can require Bob to provide a string whose one-way hash satis?es a prede?ned structure. Finding such a string has a certain success probability that will determine how much work Bob has to invest on average in order to ?nd a valid solution.
For example, in Bitcoin the hashing algorithm is double-SHA256 (SHA2562) and the prede?ned structure is a hash less or equal to a target value T. The success probability of ?nding a nonce n for a given message msg, such that H = SHA2562(msg||n) is less or equal to the target T is
PrH ? T =T
This will require a party attempting to ?nd a proof of work to perform, on average, the following amount of computations
1 = 2256
PrH ? T T (2)
Finally, it is easy to see that it can be e?ciently veri?ed whether the nonce accompanied with the message is indeed a valid proof of work by simply evaluating
SHA2562(msg||n) ? T (3)
8.An Overview of SHA256
A detailed description of the SHA256 hashing algorithm can be found in the official NIST standard. This section provides an overview of the SHA256 algorithm that forms the backbone of the Bitcoin ecosystem. The integrity of Bitcoin transactions depends upon the
collision resistance and pre-image resistance of the SHA256 hashing algorithm. It is important to remember the fact that in the Bitcoin protocol, the SHA256 hash is computed twice.