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JULY 13, 2016




BATCH 3:00PM-5:00PM
Bitcoin is a digital asset or peer to peer, electronic cash payment system. It is based on open
source cryptographic protocol. The currency was introduced in the year 2008 by Satoshi Nakamoto and
came into existence in the year 2009. Its popularity can be explained by its property that there is no
central authority to control its functions. The bitcoin could be the future of secure digital transactions.
While old security models focus on locking people out, bitcoin model focuses on letting everyone in. This
has attracted people with good motive as well as bad motives to trade using bitcoins. Bitcoin has been
claimed to be the next big thing after the invention of the internet.

Bitcoin is an online currency which is run by a network of total strangers. Trusting strangers with
your digital information may sound silly, but is actually a revolution in distributed computing. Bitcoins
are basically valueless, their worth is decided by those trading in them and it is based on the concept of
block chain. Bitcoins are not issued or governed by a central authority but, instead are created in a
process called mining. The functionality of the bitcoins combines a state transition system (for book
keeping- which is very much needed for money flow) and a consensus system (for trust- needed to
believe bookkeepers).


The revolutionary idea of bitcoins is all based on the block chains- an open ledger that stores
history of financial transactions. All confirmed transactions are included in the block chain. The block
chains can be adapted to store any kind of digital information imaginable, which means systems like
bitcoins could be the future of all secure digital transactions.

The traditional banks carry out their function by maintaining a central ledger for all transactions
made. This is how the banks are able to tell the balance of a particular account. The bank here acts as a
central authority, and it is the responsibility of the bank to maintain the integrity and authenticity of its
transactions and accounts. The bitcoin on the other hand maintains a decentralized system, so it has to
use alternate means for account holders to verify Bitcoin ledger in order to agree on who owns what
and to prove the authenticity of the account holder before making a transaction.

In the bitcoin system, the authenticity of the public transaction log is taken care by a process
called mining. The transactions are included in blocks that are constructed using proof of work system
(Bitcoin requires that each block prove a significant amount of work was invested in its creation to ensure
that untrustworthy peers who want to modify past blocks have to work harder than honest peers who
only want to add new blocks to the block chain.). Each and every block is cryptographically bound to
previous block thus creating a blockchain.
In mining process, the miners tries
different nonce values until the block header
hashes to a value that satisfies the proof of
work difficulty required by the protocol. Once
the block is mined, it would be broadcasted
through the network. At this point, all miners
halt their mining process and works on a new
block that has a reference to the recently
found block. If 2 blocks are found
simultaneously, then the miners work on the
block first received, but keeping in memory the
alternative block. Once they find another
block, they switch to the longest chain that has
the largest difficulty. Anyone can calculate the
amount of computing resources that are
required to construct the blockchain.

Since the blockchains are computed

using significant computing resources, it could
be assured that it was not created by an
individual attacker. This helps to tell that the
transaction was produced by a whole
community and therefore should be a trusted

For each block mined out, the miners receive 25 bitcoins out of thin air. The amount of bitcoins
that can be received is fixed in the protocol. This amount is halved every 210000 blocks. The difficulty of
proof-of-work system is also adjusted per every 2016 blocks such that the difficulty for mining the block
would be 10 minutes on average. This adjustment is made using timestamps that are included in every

Now that it is found out that the authenticity is maintained by the mining process, similarly the
integrity and the chronological order of the block chain are enforced using cryptography. The
cryptography used in bitcoins make it impossible for anybody to spend funds from another users account
or to corrupt the block chain. Special mathematical functions protect every aspect of the system.


Suppose A wants to send money to B, then A would simply broadcast a message saying the
account and the amount. As the transaction message is passed through, all the nodes on the way update
their copy of the ledger. In order to be sure that the transaction has been initiated by the rightful owner,
a password called as a digital signature is used. It proves the authenticity of a message with the help of a
mathematical algorithm which prevents copying or forgery in the digital realm. Each transaction has a
completely different signature. This creation of the signature is also dependent on the message this
makes it difficult for anyone to reuse it for any other transaction. This dependence on the message also
means that no one can tamper or alter the message which would invalidate the message.

Fig: Block diagram showing working of digital signature

A digital signature uses 2 distinct but connected keys. The first key is the private key which is used
to create the signature and the other is the public key that can be used by others to check it. The private
key can be thought of as a true password and the digital signature as an intermediary that proves you
have the password, without having the need to reveal it. The public keys are actually the send to addresses
in the bitcoin. So to send someone money, you are actually sending it to their public key.

To spend money, one must prove that he is the true owner of the public key, and this is done by
generating a digital signature from the transaction message and his private key. Other nodes in the
function could use the signature in a different function to verify that it corresponds with your public key.
So with the help of the underlying math, they are able to verify that the sender owned the private key
without actually seeing the private key.


A bitcoin wallet is the equivalent of the physical wallet, except that it is in the bitcoin network.
This wallet contains the private keys which allows the user to spend the bitcoins allocated to it in the
block chain. It has the total balance of the bitcoins a specific person holds, and it could be used for
transactions just as done using a real wallet.


To send money, one must reference to a previous transaction, but the question is how do money
get into the transaction chain in the first place? As a way to slowly and randomly generate and distribute
the bitcoins, a reward is given to whoever solves the block. This is why solving blocks is called mining
although its real purpose is to authenticate transactions and safeguard the block chain. On an average, a
typical computer would take several years to solve a block, so an individuals chance of solving a block
before the rest of the network, which typically takes 10 minutes is very low. So in order to improve
income, many people collectively join together to form groups called mining pools that collectively work
to solve blocks and distribute rewards based on work completed. It is very unlikely for an attacker to solve
several blocks in a row faster than the rest of the network, but it is possible and the probability increases
with the increase in computational capabilities.


The order at which transactions take place could bring a great difference. Since the transaction
pass node by node through the network, there is no guarantee that the order in which the transactions
are received would be the same. The timestamps could also not be trusted as it could be altered to change
the time of transaction it was created. Therefore, there is no way for one to say if one transaction came
before another, and this opens up the potential for fraud.

For example, A could send a transaction giving money to B and wait for B to ship a product and
then wait for another transaction referencing that same input back to A itself. Now due to difference in
propagation times, there are chances of receiving the second, thereby double spending the transaction
to B, and when the transaction of B arrives at that node, it would be considered as invalid since it is trying
to reuse an input. So B would have lost both the shipped product as well as the money.

On the other hand, there would also be disagreement across the network whether A or B had the
money, since there is no way of proving were the transaction came from. So in order to make all the
nodes agree on the transaction order it uses a kind of mathematical race, and this is done by placing the
orders transactions in groups called blocks which are linked to each other to form blockchains. These
block chains are used to order transactions.

Government cant print money, or manipulate currency.
It provides anonymity to transactions.
It has lower global transaction costs.

It is difficult to exchange.
It could be used for illegal activity as it cannot be tracked, and supports anonymity.
The mathematical chain that solves the block chain uses substantial amount of electricity.


Bitcoins gives its users the capability to be in control of their money, and makes it easy to transfer
money anywhere in an easy way so the wallet must be secure under any circumstances.

Like any other commodity, bitcoins price keeps changing. Bitcoin is increasing in value. In 2010,
the price touched a maximum of $0.39 and then went to a low of $0.19. When the price went down, many
people proclaimed that bitcoin is dead. In 2011, from $0.19 the price went to $28.92 before going to a
low of $2.05. In spite of this crash, the price was far higher than the previous low of $0.19. In 2012-13, the
price touched $230 and then crashed to $66.85. In the last boom cycle in 2014, from the previous low,
the price touched $1147.25 and after that touched a low of $117.


Any transaction made cannot be reversed, it can only be refunded by the person receiving the
funds. Which means, that care must be taken while carrying out transactions, such that these transactions
must be made with people you trust or those who have a good reputation.


All Bitcoin transactions are stored publicly and permanently on the network, which means anyone
can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an
address remains unknown until information is revealed during a purchase or in other circumstances.


Bitcoins are still in active development. Each improvement makes bitcoins more appealing, but
also reveals new challenges as bitcoin adaption grows.


Bitcoin is not an official currency. That said, most jurisdictions still require you to pay income,
sales, payroll, and capital gains taxes on anything that has value, including bitcoins.


The bitcoins are widely used as exchange means for nefarious purposes in the Dark Web with
complete anonymity. The shift to a virtual currency has seem to be a great relief for the criminals. Any
financial transaction that leaves a trace also leaves evidence of their misdeeds. This is among one of the
reasons why criminals prefer bitcoins. Bitcoin made it much easier for them, because they have to trust
each other even less. Even complete strangers can cooperate.

In criminal world, money is a weak link. International trades were difficult to handle, it was bulky
and hard to hide, and suspicious. That is where digital currencies come into play. This digital currency
could be used for online money laundering which is done behind the veil of anonymity. It could accept
dirty money, convert them into digital currency and then convert them back into clean currencies. To
make transaction tracing more difficult the mixing services can be used. The mixing service works by
collecting bitcoins from several clients, then aggregating them together and finally forwarding the coins
to some new Bitcoin addresses that are owned by the same clients. With the help of the elaborate
software architecture that stands behind the cryptocurrency, it is possible to see the web of exchanges
involved, but it is not possible to see who is using them.

And given the speed with which bitcoins entered illicit commerce, it looks likely that drug
traffickers and other international criminals will ditch old-fashioned cash for digital currencies.


Bitcoins are a digital bearer asset. That means that anyone who holds the secret key (a 256 bit
random number) controls the bitcoins. Hacking bitcoin, therefore, typically involves finding out a way to
steal a user's secret key through technical means or by social engineering (i.e. fooling them into giving
away the key). To that extent, hacking a user's bitcoin account/wallet is not much different than hacking
any other software platform. The basics are similar.


If anonymous ownership and transactions of the bitcoins are used in combination with the
anonymous communication via the TOR network, then it enables crime economy and impairs catching
criminals. Bitcoins basically allows criminals to make peer to peer transaction without being tracked. By
leveraging the decentralized Bitcoin system, criminals not only make it hard to trail electronically, but
leave very few foot prints in the real world, making prosecution almost impossible.