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BitcoinA Digital Currency

Functions of Money

Bank’s role● A financial institution

● Accepts deposits and lends money● Centralized system

● Offers financial services● Processes payments from two or more

commercial parties● Today deals with a lot of Electronic Payments

What is Bitcoin? ● A digital currency (or aka cryptocurrency)● Software-based payment system● The payment process acts between

(potentially) anonymous users● Based on peer-to-peer network● A lot of cryptography but nothing is

encrypted :-) ● Without………..

Who?

Satoshi Nakamotohttp://www.newsweek.com/2014/03/14/face-behind-bitcoin-247957.html

Let’s make a payment

• Alice:• retrieves the Bob’s address• generates own Public/Private key• builds a message with:

• Transaction of 1 BTC to Bob’s address• Transaction’s signature• Announces her public key for signature

verification• broadcasts the message to the Bitcoin network

Alice wants to give 1 BTC

to Bob

Why Public/Private key?

● Bob has the Alice’s public key● Only Alice knows the private key● Bob verifies the transaction signature using

the Alice’s public key

● Only Bob is authorized because has the private key

● Double-Spending problem?

Solve Double-Spending Problem

● Transaction details are sent and forwarded to all Bitcoin nodes

● A Block-Chain contains all transaction done● Each blocks into chains must be valid and

must include a proof-of-work

Network

Transaction x Bob

Bitcoin Address● A Bitcoin-balance is associated to the Bitcoin address● A Bitcoin Address is derived by a ECDSA Public Key by using

hash functions

512 bit ECDSA Public Key with

prefix

SHA-256 of Public Key with

prefix

RIPEM160 of SHA-256

output

Base58 Encoding (HASH

+ Checksu

m)

1422cPZaPRiqeWL8njn87NjLwgZxxmZmKp

Bitcoin Address

Bitcoin transaction● Composed by one/more Input and Output● Input(s) is a reference to an output(s) in a

different transaction● Uses Scripting system (Forth-like - stack

based) to verify signatures and addresses● Transaction can include fees

Bitcoin transaction

Bitcoin transaction is Signed

● The Transaction from B to C is signed with B’s private key

● The B’s public key is included in the transaction

Block Chain● A transaction databases shared by

all nodes (like a ledger)● Each block must contain a Proof-of-

Work● Contains a reference (hash) to the

previous block● Block chain avoids the double

spending

Transactions into block

Merkle Tree

Proof-of-Work

● To add a block to a Block Chain● Corresponds at time of computation● The time is spent computing hash function● The Proof-of-Work is builded when the hash’s

output has a specific property● A block with a Proof-of-Work each 10 minutes

about● The difficulty is established by a target

Miners

● The miners spends time to find a Proof-of-Work in order to receive a Bitcoin fee (now is 25 BTC)

● The reward reduces 50% every 4 years● The mining process will end when 21 million

bitcoins will be reached● After that time the miners will earns imposing

a transaction fee

Wallet software● Wallet software is used to generate address

and make transaction

ATM in the world