Bitcoin

A Peer-to-Peer Electronic Cash System

Sahethi Depuru Muskan Jethani

Guru
Computer Engineering
Computer Engineering V. E. S. Polytechnic
V. E. S. Polytechnic Mumbai, India
Mumbai, India muskanjethani09@gmail
[email protected] .com
Abstract: A purely peer-to-peer version of electronic cash or mine them. Bitcoin can be used for online purchases and can
would allow online payments to be sent directly from one be used as an investment instrument. Primarily it’s used to buy
party to another without going through a financial goods and services.
institution. Digital signatures provide part of the solution, but
the main benefits are lost if a trusted third party is still
II. WHAT IS BLOCKCHAIN?
required to prevent double-spending. We propose a solution
to the double-spending problem using a peer-to-peer network.
The network timestamps transactions by hashing them into  Bitcoin is based on the underlying technology of blockchain.
an ongoing chain of hash-based proof-of-work, forming a  It is a public distributed ledger in which transactions made in
record that cannot be changed without redoing the proof-of- Bitcoin or any other digital currency are recorded in
work. The longest chain not only serves as proof of the chronological order.
sequence of events witnessed, but proof that it came from the  It is difficult to hack it because it is decentralized by that it
largest pool of CPU power. As long as a majority of CPU means that thousands of computers have copies of these
power is controlled by nodes that are not cooperating to ledger so it would be impossible to manipulate data on all of
attack the network, they'll generate the longest chain and these computers.
outpace attackers. The network itself requires minimal  It is cryptographically secure and it is immutable.
structure. Messages are broadcast on a best effort basis, and  The transaction details are stored in containers called
nodes can leave and rejoin the network at will, accepting the blocks.
longest proof-of-work chain as proof of what happened while  3 concepts of blockchain
they were gone.
o Public distributed ledger: A distributed ledger is a
Keywords: Bitcoin, Crypto, Cryptocurrency, transactions.
record of all transactions maintained in the
I. INTRODUCTION blockchain network across the globe. In the
network, the validation of transactions is done by
bitcoin users.
Bitcoin is the first decentralized digital currency that
allows peer-to-peer transfers without any intermediaries such as o SHA-256: Blockchain prevents unauthorized access
banks, governments, agents or brokers, using the underlying
by using a hash function called SHA-256 to ensure
technology of blockchain. Anyone around the world on the
that the blocks are kept secure. They are digitally
network can transfer bitcoins to someone else on the network
signed. Their hash value, once generated, cannot be
regardless of geographic location; you just need to just open an
altered. SHA-256 takes an input string of any size
account on the Bitcoin network and have some bitcoins in it,
and returns a fixed 256-bit output, and it is a one-
and then you can transfer those bitcoins. How do you get
way function—you cannot derive the reverse of the
bitcoins in your account? You can either purchase them online
 input reverse fully from the output (what you have • Any user with the mining hardware and internet access can
generated). take part.

o Proof of work: In blockchain mining, miners • The process is solved based on a difficult mathematical
validate transactions by solving a difficult puzzle called as proof of work.
mathematical puzzle called proof of work. To do • The miner who first solves the puzzle is rewarded.
that, the primary objective of the miner is to
determine the nonce value, and that nonce value is In the early days of bitcoin, miners used to solve
the mathematical puzzle that miners are required the mathematical puzzles using regular processors—
to solve to generate a hash that is less than the controlling processor units (CPUs). It used to take a lot of
target defined by the network for a particular time for mining Bitcoins and other cryptocurrencies, even
though the difficulty levels were easier than today. As
mentioned above, the difficulty level keeps changing and
growing, so the miners also had to increase their processing
power. They discovered that graphical processing units
(GPUs) proved to be more efficient than regular CPUs, but
this also had the drawback of consuming more electricity. A
miner has to calculate the return on investment based on the
hardware and the cost of electricity and other resources
needed to do the mining. Today miners use hardware called
block. ASIC (application-specific integrated circuit), which was
specifically introduced for mining Bitcoin and other
Fig 1: Blockchain
cryptocurrencies. It consumes less power and has a higher
computing power. Miners are profitable when their cost of
III. BITCOIN MINING
resources to mine one block is less than the price of the
reward. So, Bitcoin miners use their resources (hardware and
• It is the process of verifying Bitcoin transactions by
electricity) to verify a transaction, and each time a block is
recording them on a public ledger.
mined, new bitcoins are created in the network.
• Bitcoin mining is performed by high-powered computers
that solve complex computational math problems. The luck IV. WHAT IF SOMEONE TRIES TO HACK THE
and work required by a computer to solve one of these DATA?
problems is the equivalent of a miner striking gold in the
ground — while digging in a sandbox. What if someone tries to hack the data? Blockchain, as
the name implies, is a chain of blocks—let’s call the blocks A, B
• But the result of mining is “twofold” and C. Each block has solved a puzzle and generated a hash
o First, you can get a new bitcoin that you can own. value of its own, which is its identifier. Now suppose a person
tries to tamper with block B and change the data. The data is
o Second, by solving these computational math aggregated in the block, so if the data of the block changes, then
problems, bitcoin miners make the bitcoin the hash value that is the digital signature of the block will also
payment network trustworthy and secure, by change. It will therefore corrupt the chain after it—the blocks
verifying its transaction information. ahead of block B will all get delinked, because the previous hash
value of block C will not remain valid.
• Because Bitcoin is decentralized it is not regulated by
central authority, instead it is backed by millions of For a hacker to make the entire blockchain valid for the
computers across the world called as “miners”.   block B that has been changed, he or she would have to change
the hash value of all the blocks ahead of block B. This would
require a huge amount of computing power and is next to VI. SYMMETRIC AND ASYMMETRIC
impossible. With this method, blockchain is non-hackable and ENCRYTPTION
prevents data modification.
Bitcoin uses asymmetric encryption. There are two
V. TRANSACTION types of encryptions: Symmetric and Asymmetric. In order to
understand asymmetric let’s first understand symmetric
We define an electronic coin as a chain of digital
encryption.
signatures. Each owner transfers the coin to the next by
digitally signing a hash of the previous transaction and the This is the simplest kind of encryption that involves
public key of the next owner and adding these to the end of the only one secret key to cipher and decipher information.
coin. A payee can verify the signatures to verify the chain of Symmetrical encryption is an old and best-known technique. It
ownership. uses a secret key that can either be a number, a word or a string
of random letters. It is a blended with the plain text of a message
to change the content in a particular way.

Asymmetrical encryption is also known as public key

cryptography, which is a relatively new method, compared to
symmetric encryption. Asymmetric encryption uses two keys to
encrypt a plain text. Secret keys are exchanged over the Internet
or a large network. It ensures that malicious persons do not
misuse the keys. It is important to note that anyone with a secret
key can decrypt the message and this is why asymmetrical
encryption uses two related keys to boosting security. A public
key is made freely available to anyone who might want to send
Fig 2: Satoshi Nakamoto Diagram
you a message. The second private key is kept a secret so that
you can only know.
The problem of course is the payee can't verify that
one of the owners did not double-spend the coin. A common A message that is encrypted using a public key can only
solution is to introduce a trusted central authority, or mint, that be decrypted using a private key, while also, a message
checks every transaction for double spending. After each encrypted using a private key can be decrypted using a public
transaction, the coin must be returned to the mint to issue a new key. Security of the public key is not required because it is
coin, and only coins issued directly from the mint are trusted publicly available and can be passed over the internet.
not to be double-spent. The problem with this solution is that Asymmetric key has a far better power in ensuring the security of
the fate of the entire money system depends on the company information transmitted during communication. Asymmetric
running the mint, with every transaction having to go through encryption is mostly used in day-to-day communication
them, just like a bank. We need a way for the payee to know channels, especially over the Internet. Popular asymmetric key
that the previous owners did not sign any earlier transactions. encryption algorithm includes EIGamal, RSA, DSA, Elliptic
For our purposes, the earliest transaction is the one that counts, curve techniques, PKCS.
so we don't care about later attempts to double-spend. The only
way to confirm the absence of a transaction is to be aware of all
VII. WHAT IS HASHING?
transactions. In the mint-based model, the mint was aware of all
transactions and decided which arrived first. To accomplish this  Hashing is basically the act of using a hash function in order
without a trusted party, transactions must be publicly to produce a hash output. Examples of popular hash functions
announced, and we need a system for participants to agree on a are SHA256, MD5, Bcyrpt, RIPEMD. A hash function takes
single history of the order in which they were received. The an input of any size. The output of a hash function is of fixed
payee needs proof that at the time of each transaction, the size (say, a 64-character text). The output is also called
majority of nodes agreed it was the first received. a digest. Real example: sha256sum (“Meet me at 180 10th
 Ave. New York, NY 10011”) = Fig 3: Hashing
8D4364AFA2A79D46DDDA74361F9DF1EE939D84DC8
1E31FC53FAB221CA54E5E31  In theory, it is possible that 2 different inputs can produce the
 In hashing, given an input, it is easy to compute the output. same hash output. This is called collision. But in practice, a
But it is practically impossible to reverse engineer a hash good hash function makes it real hard (time consuming) to
output and derive the input. Hence a hash function is also find collisions.
called a one-way function.
 Corollary: you cannot use hashing for encryption and VIII. ADVANTAGES
decryption (as decryption is impossible due to the one-way
nature). Technically, encryption/decryption functions are • Fast peer to peer transaction.
map functions (N to N). A hash function is a reduce • Inability to counterfeit.
function (N to 1). So fundamentally, cryptography and • It is decentralized process
hashing are different beasts, though they may be combined • Low transaction fee.
for certain applications (such as public key cryptography). • All information is available to the public in public ledger to
 A hash output is useful to represent an input. This view the transaction.
representation is called a fingerprint. This is useful if you • Bitcoin is non- inflationary i.e. the value of bitcoin will not
want to make sure your data is not tampered or corrupted degrade with time but will only increase.
when it travels in a network. The hash of “sent data” should • Bitcoin are limited in number hence the value will not fall.
always equal the hash of “received data”. Its current inflation rate is 0.01%.
Basically, comparison of data is the most common use of • No taxes added on purchases.
hashing. • Comparatively faster than bank transactions.
• Identity of the seller and the buyer is not revealed hence
maintaining privacy.

IX. DISADVANTAGES

Let us examine the cons or drawbacks of bitcoins.

These limitations of bitcoins make them less attractive and
makes us seek better options. We have to somehow overcome
or eliminate these limitations of bitcoins to make them user
friendly. Bitcoins are a new emerging currency whose work is
still in progress. Their value is highly volatile and unstable
seeing wild fluctuations. It is internet-based, without which it
cannot function. It is totally virtual currency and money can be
lost due to computer breakdown or the absence or failure of a
backup.

Losing your private key can result in losing your

bitcoins. There is no way that the transactions can be reversed
or cancelled once completed. There can be a misuse of
anonymity of bitcoin transactions for criminal activities. The
benefits of bitcoins are skewed highly in favor of early
adopters. Bitcoin can be replaced with a better similar product
and there is uncertainty regarding its continuation over a long
period of time. Governments can ban bitcoins and make
transactions in bitcoins difficult. The slowness of transaction
verification is also an issue. The current version of bitcoins is o The awareness about bitcoins is growing and so
not fit to handle very high volume of transactions. their acceptance and adoption.
o The number of bitcoin transactions is increasing
X. CURRENT APPLICATIONS day by day.
o A large number of wealthy people do not want the
● Bitcoins are being used to buy goods and services as more government's regulations on their wealth and would
and more stores across the world are accepting bitcoin rather prefer storing in bitcoins.
payments.
XII. CONCLUSION
● Bitcoin transactions provide a customized level of
anonymity and it is relatively difficult to trace their trail.
So, bitcoins are being used to transact anonymously. • We have proposed a system for electronic transactions
without relying on trust.
o International payments can be made easily and • To solve double-spending we proposed a peer-to-peer
cheaply as bitcoins are not related to any country or network using proof-of-work to record a public history of
subject to any government regulation. transactions that quickly becomes computationally
impractical for an attacker to change if honest nodes control
o There is the freedom of the fact that there is no need
a majority of CPU power.
for permission from any authority for your
• The network is robust in its unstructured simplicity.
transactions.
• They do not need to be identified, since the messages are not
o Bitcoins provide a way to transact securely online as routed to any particular place and only need to be delivered
they use very strong cryptographic algorithms. on a best effort basis.

o Users and businesses like bitcoin payments because REFERENCES

there are no credit card fees to pay.  https://bitcoin.org › bitcoin
 https://www.slideshare.net/vishavpreet/bitcoin-78160251
o Bitcoins can be as an investment, expecting that their
 https://en.wikipedia.org/wiki/ Cryptocurrency
value will appreciate significantly in future.

o Bitcoins can be used to gamble on online sites like ACKNOWLEDGEMENT

SatoshiDice, RoyalBitcoin, Bitzino, Peerbet, etc. I would like to thank V.E.S. Polytechnic for giving us
this opportunity to present a technical paper hence helping us to
o Bitcoins are being used to shop online as increasing
improve our communication skills by working in group and also
numbers of vendors are allowing bitcoin transactions.
becoming technically sound at the same time. I would also like
Users now can make payments in bitcoins on their
to express my sincere gratitude and deepest appreciation to my
smartphones through bitcoin wallet apps.
esteemed teacher Mr. Avinash Dangwani (HOD) for guiding us
o Unlike credit card or bank payments, there is no need through this technical paper presentation.
to provide personal information to complete the
transactions. So, the hassle of providing identity can
be avoided.

XI. FUTURE SCOPE

• Even with the wild fluctuations in the value of the bitcoin,

its price has only risen exponentially.
• Many expect the price of bitcoin will only increase in
future due to following growth factors:
o There are limited number of bitcoins.