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SESSION 2017-18

Bitcoin: The Internet Of Money

By: Mahesh Inder Singh
Dept. of Computer Science and Engineering

Submitted To: Ms. Medhavi Pandey

(Asst. Professor)
Dept. of Computer Science and Engineering

IEC-College of Engineering
Dr. APJ Abdul Kal am Technical University



CHAPTER 1: INTRODUCTION………………………………………1

1.1 The Invention..........................................................................1

1.2 History of Money…………………………………………....2
1.3 Internet and Money…………………………………………3

CHAPTER 2 : Generation of Bitcoin……..............................................5

2.1 Transacting Bitcoin……………………………….………6

2.2 Technologies Involved………………………………….…7
2.2.1 Timestamp Server………………………………………………...7
2.2.2 Proof-Of-Work……………………………………………………..7
2.2.3 Blockchain……………………………………………………………8
2.2.4 Peer-to-Peer Network……………………………………….…9
2.3 Mining and Production…………………………………...9
2.3.1 Solving the Nonce Problem………………………………….10
2.3.2 Production Economics…………………………………….……10


3.1 Money is the Message, Now Freed from the Medium……12


4.1 Acceptance of Bitcoin……………………………………………...14
4.2 Including 6.5 Billion People in Global Economy……………………….…..16


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I hereby declare that this submission is my own work and that, to the best of my knowledge
and belief, it contains no material previously published or written by another person nor
material which to a substantial extent has been accepted for the award of any other degree
or diploma of the university or other institute of higher learning, except where due
acknowledgment has been made in the text.

Name : Mahesh Inder Singh

Roll No : 1509010106

Date: 14/Apr/2018

Dept. of CS&E 1509010106

It gives me a great sense of pleasure to present the report of the B. Tech Seminar undertaken at B.
Tech. Third Year. I owe a special debt of gratitude to Asst. Professor Ms Medhavi Pandey,
Department of CS& E, IEC College of Engineering and Technology, for her constant support and
guidance throughout the course of my work. Her sincerity, thoroughness and perseverance have been
a constant source of inspiration for me. It is only her cognizant efforts that my endeavours have seen
the light of the day.

I also take the opportunity to acknowledge the contribution of Prof. Rajnesh Singh, Head,
Department of Dept. of CS&E, for his full support and assistance. I also do not like to miss the
opportunity to acknowledge the contribution of all faculty members of the department for their kind
assistance and cooperation during the development of my project. Last but not the least, I
acknowledge my friends for their contribution to the completion of the project.

Name : Mahesh Inder

Roll No.: 1509010106

Date : 14/Apr/2018

Dept. of CS&E 1509010106

1.1 The Invention:

Bitcoin is digital money. It is money just like euros or dollars, only it’s not owned by
a government. You can send it from any point in the world to any other point in the
world instantaneously, securely, and for minimal or no fees at all. Two days ago, we
saw one of the largest transactions ever recorded on the bitcoin network, where
someone transferred $150 million between two bitcoin accounts, in one second,
for zero fees. Just that allows you to grasp how disruptive this technology is going
to be in terms of international payment systems. But this is just the beginning.
Bitcoin is a digital currency that came into existence in 2008 as an invention by a
person called Satoshi Nakamoto. He published a paper where he posited that he
had found the way to create a decentralized network that could achieve consensus,
agreement, without any central controlling authority. Now, according to computer
science or distributed systems, this is known as the Byzantine Generals’ Problem.
It was first described in 1982. Until 2008, it was an unsolved problem. Then, Satoshi
Nakamoto said, "I have solved it." Guess what happened next? Everybody laughed,
ignored him, and dismissed him. He published his paper, and three months later, he
published software that allowed people to start building the bitcoin network.
Bitcoin is not a company. It is not an organization. It is a standard or a protocol
just like TCP/IP, or the internet. It’s not owned by anyone. It operates by simple
mathematical rules that everyone who participates in the network agrees on.
Through this simple mechanism, through this invention of Satoshi Nakamoto,
bitcoin is able to allow a completely decentralized network of computers to
agree on what transactions have occurred on a network, essentially agreeing on
who currently has the money.

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So, if I send money from my account to somebody else’s account in this peer-to-
peer, completely decentralized network, it’s just like sending an email. There’s
no one in the middle. Every ten minutes, the entire network agrees on what
transactions have happened, without any centralized authority, by a simple
election that occurs electronically.
This particular solution, this invention, is far more important than currency.
Currency is just the first app—just the first application that you can build on a
distributed consensus system. Other applications include distributed fair
voting, stock ownership, asset registration, notarization, and many other
applications we’ve never thought of before.

1.2 History of Money:

What is money? It’s an illusion. It’s imaginary. The reason we don’t grasp that is because
it’s so deeply embedded in our civilization. Money is one of the oldest technologies that
humanity has. It precedes writing. The very first samples of writing that we have are
spreadsheets. There are tallies and ledgers of debts owed and money preexisted that writing.
You might even speculate that money had an oral tradition until it needed to invent and
written tradition so writing was created for it.

In the history of money that now spans tens of thousands of years, there have been maybe
five major changes. From pure barter exchange, to the introduction of the first abstraction
of value. Shells, feathers, beads, nuts, stones and then precious metals, and then paper
money, and then plastic money and now network money.

Bitcoin introduces a platform on which we can run currency as an application on a network

without any central points of control. A system completely decentralized like the internet
itself. It is not money for the internet, but the internet of money.

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And what that does is introduces the very same things that the internet brought to
communication. If money is speech, if money is a language and if we disconnect it from all
other media, and make it pure speech, pure content, an internet content-type, a protocol
designation. Money over IP. It completely separates it from all of these previous notions of
nations, sovereign issuers, institutions that control, and so we go from institution-based
money to network-based money. And of course, everyone will welcome this with open arms.
Not a chance!

1.3 Internet and Money:

Today we have systems of money for small payments, systems of money for large
payments. We have systems of money for payments between individuals, we have
systems of money for payments between companies, we have systems of money for
payments between governments. Does that remind you of something? That’s how the
communication use to be before the internet. We had systems of communication for
pictures, systems of communication for letters, systems of communication for short
distance and long distance, and the internet came and unified all of those. What the
internet of money does, is it creates a single network which can do a micro transaction
to a giga transaction, in seconds anywhere in the world for any participant without

If we think about starting up a business in an international environment, there are two

primary barriers to becoming a global business. The first barrier is that it is difficult
to transport products and services across borders. With the internet, we solved that. We
can now create products and services that are virtual, ones that we can sell anywhere in
the world. So, we can deliver the product, but we still have one big problem: How do
we get paid? Bitcoin solves that part. It allows us to receive payments from anywhere
in the world, instantaneously. The bitcoin network allows any individual to send an
amount that is as small as 100-millionth of a bitcoin, which in today’s terms is a very
tiny amount of money. You can’t do that with today’s money and payment systems.

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Credit cards were made in the 1950s, and they were most certainly not made for an
internet age. Bitcoin is made for the internet age.

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New bitcoins are generated by a competitive and decentralized process called "mining".
This process involves that individuals are rewarded by the network for their services.
Bitcoin miners are processing transactions and securing the network using specialized
hardware and are collecting new bitcoins in exchange.

Commerce on the Internet has come to rely almost exclusively on financial institutions
serving as trusted third parties to process electronic payments. While the system works well
enough for most transactions, it still suffers from the inherent weaknesses of the trust-based
model. Completely non-reversible transactions are not really possible, since financial
institutions cannot avoid mediating disputes. The cost of mediation increases transaction
costs, limiting the minimum practical transaction size and cutting off the possibility for small
casual transactions, and there is a broader cost in the loss of ability to make non-reversible
payments for nonreversible services. With the possibility of reversal, the need for trust
spreads. Merchants must be wary of their customers, hassling them for more information
than they would otherwise need. A certain percentage of fraud is accepted as unavoidable.
These costs and payment uncertainties can be avoided in person by using physical currency,
but no mechanism exists to make payments over a communications channel without a trusted
party. What is needed is an electronic payment system based on cryptographic proof instead
of trust, allowing any two willing parties to transact directly with each other without the need
for a trusted third party. Transactions that are computationally impractical to reverse would
protect sellers from fraud, and routine escrow mechanisms could easily be implemented to
protect buyers. In this paper, we propose a solution to the double-spending problem using a
peer-to-peer distributed timestamp server to generate computational proof of the
chronological order of transactions. The system is secure as long as honest nodes collectively
control more CPU power than any cooperating group of attacker nodes.

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2.1 Transacting Bitcoin

Transactions We define an electronic coin as a chain of digital signatures. Each owner transfers
the coin to the next by digitally signing a hash of the previous transaction and the public key of
the next owner and adding these to the end of the coin. A payee can verify the signatures to
verify the chain of ownership.

The problem of course is the payee can't verify that one of the owners did not double-spend the
coin. A common solution is to introduce a trusted central authority, or mint, that checks every
transaction for double spending. After each transaction, the coin must be returned to the mint to
issue a new coin, and only coins issued directly from the mint are trusted not to be double-spent.
The problem with this solution is that the fate of the entire money system depends on the company
running the mint, with every transaction having to go through them, just like a bank. We need a
way for the payee to know that the previous owners did not sign any earlier transactions. For our
purposes, the earliest transaction is the one that counts, 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
transactions. In the mint-based model, the mint was aware of all transactions and decided which
arrived first. To accomplish this without a trusted party, transactions must be publicly announced,
and we need a system for participants to agree on a single history of the order in which they were
received. The payee needs proof that at the time of each transaction, the majority of nodes agreed
it was the first received.

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2.2 Technologies Involved

2.2.1 Timestamp Server

The solution we propose begins with a timestamp server. A timestamp server works by taking a
hash of a block of items to be timestamped and widely publishing the hash, such as in a newspaper
or Usenet post. The timestamp proves that the data must have existed at the time, obviously, in
order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a
chain, with each additional timestamp reinforcing the ones before it.

2.2.2 Proof of Work [with SHA-256 Algorithm]

Proof-of-Work To implement a distributed timestamp server on a peer-to-peer basis, we will need

to use a proof-of-work system similar to Adam Back's Hash cash, rather than newspaper or Usenet
posts. The proof-of-work involves scanning for a value that when hashed, such as with SHA-256,
the hash begins with a number of zero bits. The average work required is exponential in the number
of zero bits required and can be verified by executing a single hash. For our timestamp network, we
implement the proof-of-work by incrementing a nonce in the block until a value is found that gives
the block's hash the required zero bits. Once the CPU effort has been expended to make it satisfy

the proof-of-work, the block cannot be changed without redoing the work. As later blocks are
chained after it, the work to change the block would include redoing all the blocks after it. The
proof-of-work also solves the problem of determining representation in majority decision making.
If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to
allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. The majority decision is

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represented by the longest chain, which has the greatest proof-of-work effort invested in it. If a
majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and
outpace any competing chains. To modify a past block, an attacker would have to redo the proof-
of-work of the block and all blocks after it and then catch up with and surpass the work of the
honest nodes. We will show later that the probability of a slower attacker catching up diminishes
exponentially as subsequent blocks are added. To compensate for increasing hardware speed and
varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving
average targeting an average number of blocks per hour. If they're generated too fast, the difficulty

2.2.3 Blockchain

A Blockchain is a continuously growing list of records, called blocks,

which are linked and secured using cryptography. Each block
typically contains a cryptographic hash of the previous block,
a timestamp and transaction data. By design, a blockchain is
inherently resistant to modification of the data. It is "an
open, distributed ledger that can record transactions between two
parties efficiently and in a verifiable and permanent way".[8] For use
as a distributed ledger, a blockchain is typically managed by a peer-
to-peer network collectively adhering to a protocol for inter-node
communication and validating new blocks. Once recorded, the data
in any given block cannot be altered retroactively without the
alteration of all subsequent blocks, which requires collusion of the
network majority.

Blockchain formation. The main chain

(black) consists of the longest series
of blocks from the genesis block
(green) to the current block. Orphan
blocks (purple) exist outside of the
main chain.

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2.2.3 Peer-to-Peer Network

Satoshi combined both of these technologies to a peer to peer network similar to Bit torrent.

We say that bitcoin is peer-to-peer money. What does that mean? It refers to an architecture used in

terms of computer science or networking or distributed systems to describe the relationship between

participants and a system. The architecture of bitcoin is peer-to-peer because every participant in the

network speaks the bitcoin protocol on an equal level. There are no special bitcoin nodes; all nodes

are the same.

Peer-to-peer means that when you send out a transaction to the network, every peer treats it the same.

It has no context inside the peer’s system other than what it gets from the network. An interesting

issue in distributed systems is this issue of context and state. If you log in to Facebook and you have

an account with Facebook, you’re not using a protocol. All of the state is controlled by Facebook.

You have a login session and all of the data is held by them. We call that architecture client-server.

Bitcoin is different because it’s peer-to-peer, just like email or TCP/IP.

2.2 Mining and Production

Bitcoin mining is a peer-to-peer computer process used to secure and verify bitcoin
transactions—payments from one user to another on a decentralized network. Mining involves
adding bitcoin transaction data to Bitcoin's global public ledger of past transactions. Each
group of transactions is called a block. Blocks are secured by Bitcoin miners and build on top
of each other forming a chain. This ledger of past transactions is called the blockchain. The
blockchain serves to confirm transactions to the rest of the network as having taken place.
Bitcoin nodes use the blockchain to distinguish legitimate Bitcoin transactions from attempts
to re-spend coins that have already been spent elsewhere

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2.2.1 Solving the Problem

Anyone can run a node which is a bitcoin software, you just download the bitcoin software
(free) and leave a certain port open. Nodes spread bitcoin transactions around the network.
One node will send information to a few nodes that it knows, who will relay the information
to nodes that they know, etc. That way it ends up getting around the whole network pretty
quickly. Some nodes are mining nodes (usually referred to as "miners"). These group
outstanding transactions into blocks and add them to the blockchain. How do they do this?
By solving a complex mathematical puzzle that is part of the bitcoin program and including
the answer in the block. The puzzle that needs solving is to find a number that, when
combined with the data in the block and passed through a hash function, produces a result
that is within a certain range.
This is much harder than it sounds.
(For trivia lovers, this number is called a "nonce", which is a concatenation of "number used
once." In the case of bitcoin, the nonce is an integer between 0 and 4,294,967,296.)
How do they find this number? By guessing at random. The hash function makes it
impossible to predict what the output will be. So, miners guess the mystery number and
apply the hash function to the combination of that guessed number and the data in the block.
The resulting hash has to start with a pre-established number of zeroes. There's no way of
knowing which number will work, because two consecutive integers will give wildly varying
results. What's more, there may be several nonces that produce the desired result, or there
may be none (in which case the miners keep trying, but with a different block configuration).
The first miner to get a resulting hash within the desired range announces its victory to the
rest of the network. All the other miners immediately stop work on that block and start trying
to figure out the mystery number for the next one.
As a reward for its work, the victorious miner gets some new bitcoin.

2.2.2 Production Economics

The supply of bitcoin is determined algorithmically based on a geometrically declining

supply function, meaning that, in the beginning, every 10 minutes, 50 new bitcoins are
created. So, every block, the heart beats 10 minutes created 50 new bitcoins. That’s how
currency is introduced into the economy. Every 4 years, it gets cut in half. 50 to 25 in
November of 2012. And in the year 2016 in July, we had our second halving event, which
was celebrated with birthday parties all over the world, and bitcoin’s reward went from 25
to 12.5 bitcoin. As a system, it’s design to have a monetary policy that is purposefully
deflationary and simulates the issuance of precious metals. It gets harder and harder and

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harder to mind gold at greater and greater and greater cost, and bitcoin is the same. The
idea being that less and less is issued over time. If you follow that geometric curve, at
some point you reach the end.
In the year 2141, bitcoin is no longer issued. 21 million [bitcoin] coins is the asymptotic
cap. It will never reach 21 million coins. That is part of the protocol, it is an unchangeable
part of the protocol and it is a rule enforced by every system that participates in the bitcoin
network. It is meant to be sound money, but it’s not the only monetary policy that exist.
The idea is really for bitcoin to serve as a very, very solid reserve currency, for many other

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Most people don’t realize what it means to convert money into a content type. We’ve taken
the transaction, which is just 250 bytes, and we’ve separated it from the transport medium,
so it doesn’t depend on any underlying security. Independently verified as spendable,
authentic, and properly signed by any system that has a full copy of the blockchain, in fact,
even by systems that only have a partial copy of the blockchain. That transaction can be
verified in seconds. All it has to do is reach one node in the network that can talk to miners.
That’s it. Once it’s injected into the bitcoin network and once it propagates, you can be
almost certain that the transaction will be included eventually and will become valid. If I
look at any transaction, I can calculate if it has sufficient fees, and then I can make certain
assumptions about how miners are going to treat that transaction because I know the rules
by which they operate on a consensus network. I know that once the transaction is propagated
enough, it will appear in a block near you, soon.

3.1 Money is the Message, Now Freed from the Medium

Money is a content type, and we just wrenched it free from the medium. The medium has
been a series of interconnected networks that segregate money by size and recipient. We
have payment networks for small money. We have payment networks for large money. We
have payment networks for fast money. We have payment networks for slow money.
Payment networks for businesses to pay businesses. Payment networks for governments to
pay governments. Payment networks for consumers to pay businesses. Payment networks
for consumers to pay consumers. Oh wait, we don’t really have those. We don’t have
payment networks for consumers to pay consumers. We don’t have payment networks to do
small payments because the traditional medium does not allow that range of expression.

One cannot send you 20 cents across the world, from one individual to another individual,
because the medium constrains the message. The cost of production does not allow me to
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express that range of transactional expression. But now we have separated the message from
the medium. We have created money as a content type. That money is now able, at near zero
production cost, to express the entire range of transactional expression—from the tiny to the
enormous, from consumer to consumer, from government to government.

What happens next? The gatekeepers tell you that this network is not serious. The

gatekeepers confuse their payment-network cost for the value of their service. The

gatekeepers of the old payment networks will tell you that this new form of payment is vulgar

and cheap. It is something that is only used for trivialities. All of the very serious people will

remain on the solid, quality payment networks of the past. Because if they can control and

restrict the range of expression, they think that means it’s quality. It’s not. It’s just an inflated

cost of production. It’s bare naked elitism at its worst. They cling to the medium and fail to

see that now the message can be transported over any medium at zero cost, instantaneously.

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4.1 Acceptance of Bitcoin

Let’s have a look on acceptance of bitcoin worldwide:

• Till date, we have on an average 200k transaction recorded daily.

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Legal Status of Bitcoin

• Till date we have maximum number of Start-up Investment in Bitcoin only.

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4.2 Including 6.5 Billion People in Global Economy

There’s another reason bitcoin will win. There is a massive imbalance that most people here don’t

notice. People who have bank account can buy and sell any currency in the world. A bank account

from which they can wire money anywhere in the world. A bank account from which they can access

international markets like the Tokyo Stock Exchange or the German stock exchange. A market from

which they can access credit and liquidity.

There are 2 billion people who have no bank accounts at all. There are another 4 billion people who

have very limited access to banking. Banking without international currencies, banking without

international markets, banking without liquidity. Bitcoin isn’t about the 1 billion. Bitcoin is all about

the other half.

We’ve seen what happens with the development of the cell-phone technology that was deployed in

Africa faster than any other technology ever in the history of humanity. We see small villages, where

they have no running water, wood fires to cook with, and no electricity — yet there’s one little solar

panel on top of a mud hut and that solar panel is not there for light. It’s there to charge a Nokia 1000

feature phone. That phone gives them weather reports, grain prices at the local market, and connects

them to the world. What happens when that phone becomes a bank? Because with bitcoin, it can be

a bank. What happens when you connect 6.5 billion people to a global economy without any barriers

to access?

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1. [Bitcoin: The Internet of Money, by Andreas Antonopoulos]

2. [Wikipedia: Blockchain]
3. []
4. []

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