Blockchain, Bitcoin, and Cryptocurrency Notes

Traditional Transactions

Scenario: Buying something worth 50 ADCW.
Process:
- Customer (you) gives card to merchant.
- Merchant contacts the bank (represented by someone in the class).
- Merchant asks the bank if the customer has enough funds.
- The bank checks the balance (e.g., 73 ADCW).
- If sufficient funds are available, the transaction goes through.
Role of the Bank: The bank stores all transaction data and is responsible for all transactions.
Limitation: A single entity (the bank) holds all the power.
Example: Trying to buy something for 100 ADCW when the balance is 73 ADCW will be rejected.

2008 Financial Crash and the Rise of Blockchain

Context: The 2008 financial crash, particularly the housing market crash, was due to banks lending money irresponsibly.
Impact: People lost money, couldn't pay mortgages, and lost their homes.
Result: This led to the boom of blockchain, Bitcoin, and other cryptocurrencies.

Cryptocurrency Scenario

Process: Instead of a bank, everyone in the room is queried to validate a transaction.
Example: Asking everyone if a purchase of 100 KCTW is possible.
Outcome:
- If everyone agrees, the transaction is valid.
- If someone disagrees or has mismatched information, the discrepancy is identified.
Accountability: Everyone holds the information, and accountability is collective.
Benefit: Prevents a single entity from manipulating data.
Example of Mismatch: A handwritten '0' making '73' look like '730' can be caught by others.

Key Concept: Decentralization

Everyone holds transaction information.
No single entity can alter the information unnoticed due to collective verification.
Addresses the issue of trusting one central authority.
Risk: Double majority issues which is unlikely due to technology.

Bitcoin Value and Market Influence

November 2021: One Bitcoin was worth £80,000.
Recent Fluctuations:
- Passed $90,650, then dipped back.
- Briefly showed over $100,000.
- Current value (as of the recording): $78,000.
Market Influencers:
- US elections: Unexpected results significantly influenced Bitcoin's value.
- Elon Musk: His involvement also affects the market.
Government Interest: Governments and financial sectors are heavily invested in cryptocurrency.
Acceptance as Currency:
- Companies like Microsoft and possibly Tesla accept Bitcoin.
- Increasingly used for transactions in places like California.

Blockchain Technology

NFTs (Non-Fungible Tokens): Powered by blockchain technology.
Inventor of Bitcoin: Satoshi (pseudonym) in Feb 2008; identity remains unknown.
Satoshi as a Unit: Smallest fraction of a Bitcoin (similar to cents in a pound).
Wallet-Based System: Bitcoin is purely software-based; wallets are created via Bitcoin addresses.
Transaction Sharing: Bitcoin addresses are shared during transactions.

Blockchain as a Digital Ledger

Concept: Blockchain is a digital ledger recording all transactions.
Process:
- Transactions are broadcasted to the network.
- Everyone in the network verifies the transaction.
- Miners verify transactions, ensuring they are legitimate.
- If verified, the transaction is approved.
Difference from Traditional Transactions: Banks verify in traditional systems, whereas everyone in the network does in blockchain.

Bitcoin Software and Transaction History

Software Size: Bitcoin software can be hundreds of gigabytes due to storing all transaction history since 2008. Every transaction is stored.
Core Properties of Blockchain:
- Agreement: Everyone agrees on transaction validity.
- Persistence: Once verified, transactions are permanently added to the ledger and cannot be changed.
- Liveness: Changes can be made if everyone agrees to the change.

Hash Functions

Definition: A mathematical function that is easy to compute in one direction but hard to reverse.
One-Way Function: Easy to get the output but almost impossible to determine the input.
Sensitivity to Change: A minor change in the input drastically changes the output.
Example: Using the demoblockchain.org website to demonstrate SHA256.
SHA256:
- Output: 256 bits (64 hexadecimal characters).
- Property: Even a small input change results in a completely different output, making it hard to reverse engineer.
- The encryption output is always fixed, regardless of the length of the input.
- Secure Hash Algorithm

Block Structure

Each block contains:
- Version information
- Timestamp
- Merkle root.
- Previous block hash.
- Transactions.
All this data is processed through a hash function to produce the block hash.

Merkle Root

Purpose: Efficiently store transaction information.
Process:
- Each transaction has a hash value.
- Instead of storing every hash, pairs of hashes are combined and hashed together.
- This process repeats up the tree until a single root hash (Merkle root) is obtained.
Handling Imbalance:
- If there's an odd number of transactions, the last hash is duplicated to create balance.
Benefit: The Merkle root contains a summary of all transactions in the block.

Blockchain Structure

Blocks of transactions are chained together.
Each block contains a reference to the previous block's hash.
This structure ensures transaction history cannot be amended and prevents double-spending.
SHA (Secure Hash Algorithm) is used to ensure security.

SHA (Secure Hash Algorithm) cont.

SHA generates a fixed-size output from variable-size input.
It is a one-way function, making it hard to reverse calculate the original input.
Two different inputs rarely generate the same output.
SHA algorithms are published and regulated by the National Institute of Standards and Technology (NIST).
SHA-256 is part of the SHA-2 series.

SHA-256 Algorithm

The input is divided into 512-bit blocks.
Each block undergoes 64 rounds of calculations (iterations).
These calculations involve bitwise operations and other complex functions.
The final output is a 256-bit hash value.

Verifying Transaction Integrity

If someone tries to claim a false transaction, the network can verify its authenticity.
The SHA-256 algorithm ensures same input will always generate the same output.
Any discrepancies in the input will result in a completely different hash value, revealing the attempted alteration.

Mining

Goal: Find an input that produces a specific output (hash) with a certain number of leading zeros.
Process: Miners try different inputs until they find one that meets the criteria.
Reward: If successful, the miner creates a new block and receives newly generated Bitcoins.
Proof of Work: The miner broadcasts the input and resulting hash to the network for verification.
Energy Consumption: Mining requires high-power computers, consuming a significant amount of energy.
Incentive: The reward for mining a new block decreases over time.
- Initially 50 Bitcoins (2009-2013).
- Currently 6.25 Bitcoins (worth approximately half a million dollars).

Bitcoin Limits

Creation Limit: Approximately one new Bitcoin is generated every 10 minutes.
Total Supply Cap: A maximum of 21,000,000 Bitcoins will ever exist.
Current Circulation: Around 19,000,000 Bitcoins have already been mined.
Dogecoin: Unlike Bitcoin, Dogecoin has no supply cap.

Use Cases for Blockchain Technology

Digital rights management (NFTs).
Microfinancing.
Global payments.
Supply chain tracking (e.g., tracking the origin and storage conditions of an expensive wine bottle).

Decentralization Advantages

No single entity controls the network.
Accountability is distributed among all participants.

Implementing a New Currency

Gather a group of friends to invest money.
Create a new SHA function.
Ensure the SHA function is secure to prevent easy mining and manipulation.

Decrypting SHA

If SHA is decrypted, anyone can mine, driving the price down and invalidating proof of work.

Quantum Computing Threat

Quantum computers potentially will be able to decrypt SHA in future, which might impact Bitcoin.

Volatility

Cryptocurrencies are extremely volatile, more so than the stock market. Bitcoin is decentralized with no government control.