2 Marks Questions

1. Goofy Coin

o Goofy Coin is a hypothetical cryptocurrency example often used to explain

blockchain concepts like digital signatures, consensus mechanisms, and proof of
work.

2. Scoorge Coin

o Scoorge Coin is another illustrative example used to demonstrate the concept of

centralized ledgers where one entity (Scoorge) manages all transactions, contrasting
with decentralized systems.

3. UTXO (Unspent Transaction Output)

o UTXO refers to the remaining amount of cryptocurrency that is left after a

transaction. It serves as an input for future transactions. Bitcoin uses the UTXO
model to track user balances.

4. Proof of Work (PoW)

o Proof of Work is a consensus algorithm used in Bitcoin to secure the network. Miners
solve complex mathematical puzzles to validate transactions and add blocks to the
blockchain.

5. Transaction Fee Calculator

o A transaction fee calculator determines the fee based on the transaction size (in
bytes) and the current fee rate set by the network. Fees incentivize miners to
prioritize transactions.

10 Marks Questions

Soft Fork and Hard Fork in Detail

In blockchain technology, forks refer to changes or upgrades to the blockchain protocol. These can
occur due to disagreements in the community, security upgrades, or the addition of new features.
Forks are classified into two main types:

 Soft Fork (Backward-Compatible)

 Hard Fork (Non-Backward-Compatible)

✅ Soft Fork

Definition:

A Soft Fork is a blockchain protocol upgrade that remains backward-compatible. This means that
even nodes (computers running the blockchain software) that have not updated to the latest version
can still recognize and validate blocks created by upgraded nodes.
  Backward-Compatible: Old nodes continue functioning without disruption, although they
may not understand or utilize new features introduced by the fork.

 Consensus Maintenance: Soft forks maintain consensus across the network, preventing splits
or chain divergence.

 Minor Changes: They often introduce optimizations, bug fixes, or feature enhancements
without fundamentally changing the blockchain's rules.

How It Works:

 The network introduces stricter rules through a soft fork.

 Miners using the updated software enforce the new rules.

 Old nodes, while unaware of the stricter rules, still accept the blocks as valid since they
follow the older, broader set of rules.

 This allows the entire network to remain on a single chain.

Example:

SegWit (Segregated Witness) — Bitcoin’s Soft Fork in 2017

 Purpose: Improve scalability and fix transaction malleability.

 How It Worked: SegWit separated the digital signature (witness data) from the main
transaction data, reducing block size.

 Backward Compatibility: Old nodes did not reject SegWit transactions, though they could
not recognize or benefit from the signature separation.

 Impact: Enhanced transaction throughput without splitting the chain.

Advantages of Soft Forks:

 No chain split, keeping the network unified.

 Lower risk of security issues.

 Compatible with old nodes.

Disadvantages of Soft Forks:

 Upgraded nodes must enforce stricter rules, limiting flexibility.

 Slower adoption of new features if users do not upgrade.

✅ Hard Fork

Definition:
A Hard Fork is a non-backward-compatible update to the blockchain protocol. It introduces
significant changes that older nodes cannot understand or validate. If some nodes refuse to upgrade,
the blockchain splits into two separate chains — one following the old rules and the other following
the new rules.

 Permanent Chain Split: Results in two independent blockchains.

 Creation of a New Cryptocurrency: Often, a hard fork results in the creation of a new coin.

 Conflict Resolution: Hard forks are sometimes used to resolve disputes within the
community.

How It Works:

 Developers propose a significant protocol change.

 Nodes and miners vote on whether to accept the change.

 If consensus is not reached, nodes that accept the new rules upgrade their software.

 Nodes that reject the changes continue using the old rules.

 This results in two separate blockchains.

Example:

Bitcoin Cash (BCH) — Bitcoin’s Hard Fork in 2017

 Reason: Disagreements over Bitcoin’s block size limit (1 MB).

 Solution: Bitcoin Cash increased the block size to 8 MB to allow faster and cheaper
transactions.

 Outcome: The blockchain split into two networks — Bitcoin (BTC) and Bitcoin Cash (BCH).

 Impact: Bitcoin Cash emerged as a new cryptocurrency with its own independent network.

Advantages of Hard Forks:

 Enables major upgrades and protocol changes.

 Provides the opportunity for the creation of specialized blockchains.

 Resolves governance disputes by allowing both sides to pursue their vision.

Disadvantages of Hard Forks:

 Chain splits may reduce network security due to lower hash power.

 Users may lose trust in the network.

 It can cause market confusion and volatility.

✅ Key Differences Between Soft Fork and Hard Fork

Aspect Soft Fork Hard Fork

Compatibility Backward-compatible Non-backward-compatible

Chain Split No chain split Blockchain splits into two

Upgrade Requirement Only miners need to upgrade All nodes must upgrade

Risk Level Lower risk Higher risk

Examples SegWit (Bitcoin) Bitcoin Cash (BCH), Ethereum Classic (ETC)

Purpose Minor upgrades and bug fixes Major changes and ideological disagreements

Double Spending Problem

✅ What is the Double Spending Problem?

The Double Spending Problem refers to the possibility that a user might attempt to spend the same
digital currency twice. Unlike physical currencies (e.g., cash), which can only exist in one place at a
time, digital currencies are essentially data. Since data can be copied or manipulated, digital
currencies face the risk of fraudulent activities where the same coins are spent multiple times.

This is a major issue in decentralized systems, especially in cryptocurrencies like Bitcoin that operate
without a central authority to verify transactions. Preventing double spending is essential for
maintaining trust and ensuring the integrity of digital currencies.

✅ Why is Double Spending Possible?

 Lack of Physical Form: Cryptocurrencies are purely digital and can be duplicated or falsified.

 No Central Authority: Unlike traditional banks, cryptocurrencies rely on decentralized

validation by nodes on the network.

 Delay in Transaction Confirmation: It takes time for a transaction to be confirmed and added
to the blockchain. During this period, malicious actors may attempt to perform double
spending.

✅ Types of Double Spending Attacks

1. Race Attack:

o The attacker sends two conflicting transactions to different recipients.

o One transaction is sent to a merchant for a purchase, while the other is sent to a
second wallet owned by the attacker.

o If the attacker’s transaction gets confirmed first, the merchant loses.

 2. Finney Attack:

o The attacker mines a block with a fraudulent transaction but does not broadcast it
immediately.

o After making a payment with the same coins, the attacker quickly broadcasts their
mined block, invalidating the payment.

3. 51% Attack:

o If an attacker controls 51% or more of the total mining power, they can manipulate
the blockchain by rewriting the transaction history and spending the same coins
multiple times.

✅ Solution to Double Spending in Bitcoin

Bitcoin solves the double spending problem using three primary mechanisms:

1. Blockchain

 Bitcoin uses a decentralized, immutable ledger called the blockchain.

 Every transaction is recorded on the blockchain and is publicly accessible.

 Once a transaction is confirmed and added to a block, it is nearly impossible to reverse it.

2. Proof of Work (PoW)

 Proof of Work is the consensus algorithm used in Bitcoin.

 Miners compete to solve complex mathematical puzzles to add a block of transactions to the
blockchain.

 This requires significant computational power, making it impractical for attackers to rewrite
the blockchain.

3. Consensus Mechanism

 Bitcoin follows a longest chain rule — the chain with the most cumulative computational
work is considered valid.

 If a malicious actor attempts double spending, the network will reject the fraudulent
transaction if the legitimate chain grows faster.

 Transaction Confirmations:

o When a transaction is included in a block, it receives 1 confirmation.

o For added security, merchants often wait for 6 confirmations before considering a
transaction final.

o Each additional block strengthens the security of the transaction.

✅ Example of Double Spending Prevention

Imagine Alice has 1 BTC and wants to purchase goods from both Bob and Carol.

1. First Transaction:

o Alice sends 1 BTC to Bob.

o The transaction is broadcast to the network and added to the blockchain once
confirmed.

2. Second Transaction (Attempted Fraud):

o Alice simultaneously sends another transaction of 1 BTC to Carol.

o However, miners and nodes will detect that Alice has already spent her 1 BTC with
Bob.

3. Outcome:

o The first transaction to be confirmed and added to the blockchain will be considered
valid.

o The second transaction will be rejected as an invalid double-spend.

o Bob receives the valid 1 BTC, while Carol’s transaction is discarded.

✅ Why Double Spending is Impractical in Bitcoin

 High Computational Cost: Rewriting the blockchain to reverse a confirmed transaction

requires massive computational resources.

 Network Monitoring: Thousands of nodes monitor and validate transactions, making

malicious activity detectable.

 Economic Disincentives: Attempting to double spend often results in loss of resources, as

successful manipulation requires controlling over 51% of the network's hash power, which is
economically infeasible.

Public Key Infrastructure (PKI) in Detail

✅ What is Public Key Infrastructure (PKI)?

Public Key Infrastructure (PKI) is a system of processes, technologies, and entities designed to
manage and secure digital communications using cryptographic keys. It is widely used to ensure
confidentiality, integrity, and authentication during online interactions.

In the context of cryptocurrencies like Bitcoin, PKI provides a mechanism for verifying the legitimacy
of transactions, ensuring only authorized users can sign and approve payments.

✅ Key Functions of PKI

1. Authentication:
 o PKI confirms that the sender of a message is who they claim to be by validating
digital signatures using public keys.

2. Data Integrity:

o It ensures that the data (e.g., transactions) has not been altered during transmission.

3. Encryption:

o PKI encrypts sensitive information using public and private keys, protecting data
from unauthorized access.

4. Non-Repudiation:

o Once a sender signs a transaction using their private key, they cannot deny sending
it.

✅ Components of PKI

The Public Key Infrastructure consists of several essential components:

1. Public Key:

o A cryptographic key that is publicly accessible.

o It is used to verify digital signatures and ensure the authenticity of messages.

o In Bitcoin, a user's public key is derived from their private key using cryptographic
algorithms like Elliptic Curve Digital Signature Algorithm (ECDSA).

2. Private Key:

o A secret cryptographic key known only to the owner.

o It is used to sign transactions, proving ownership and authorization.

o If someone gains access to a private key, they can control the associated
cryptocurrency.

3. Digital Certificates:

o A digital certificate acts as a form of electronic identity that binds a public key to a
specific user or entity.

o Certificates are issued by trusted entities called Certificate Authorities (CAs).

o In cryptocurrencies, while digital certificates are not used in the same way as
traditional PKI, wallet addresses act as identifiers.

4. Certificate Authority (CA):

o A CA is a trusted organization that verifies the identity of entities and issues digital
certificates.

o In Bitcoin, Certificate Authorities are not used. Instead, the blockchain itself acts as a
trust mechanism through consensus and decentralization.
✅ How PKI Works in Bitcoin

In Bitcoin, PKI is simplified and adapted for secure transactions using public-private key pairs. Here's
how it works:

Step 1: Key Generation

 Every Bitcoin user generates a pair of keys using cryptographic algorithms.

 The private key is kept secret and used for signing transactions.

 The public key is shared with others and used to verify signatures.

 The public key is further hashed to create a Bitcoin address for receiving payments.

Step 2: Transaction Creation

 When a user wants to send Bitcoin, they create a transaction that includes:

o Sender’s address (Public Key Hash)

o Receiver’s address

o Amount

 The sender signs the transaction using their private key.

Step 3: Transaction Verification

 Miners and nodes verify the transaction using the sender’s public key to ensure:

o The signature is valid and was generated by the rightful owner.

o The sender has sufficient funds.

o The transaction follows network rules.

Step 4: Block Confirmation

 Once verified, the transaction is added to a block and confirmed by the blockchain network
through the Proof of Work (PoW) consensus mechanism.

✅ Example of PKI in Bitcoin

Let’s break down a simple Bitcoin transaction using PKI:

1. Alice wants to send 1 BTC to Bob.

2. Alice has a private key and a corresponding public key (which has generated her Bitcoin
address).

3. Alice creates a transaction and signs it using her private key.

4. Alice broadcasts the signed transaction to the network.

5. Nodes use Alice’s public key to verify the digital signature.

 6. If the signature is valid and Alice has enough funds, the transaction is added to the
blockchain.

7. Bob receives the 1 BTC once the transaction is confirmed.

✅ Security in PKI and Bitcoin

1. Cryptographic Strength:

o Bitcoin uses Elliptic Curve Cryptography (ECC) and the ECDSA algorithm for secure
key generation and signature verification.

2. Tamper-Proof Ledger:

o Once a transaction is added to the blockchain, it is immutable and cannot be

reversed.

3. Decentralized Verification:

o Unlike traditional PKI systems that rely on CAs, Bitcoin’s security is maintained
through a decentralized network of nodes.

4. Anonymity:

o While public keys are visible, they do not reveal personal identities, providing privacy
to users.

✅ Comparison Between Traditional PKI and Bitcoin's PKI

Aspect Traditional PKI Bitcoin’s PKI

No central authority, decentralized

Central Authority Certificate Authorities (CAs)
verification

Trust Mechanism Based on third-party certificates Based on blockchain consensus

Not required; public key and signatures

Digital Certificates Required to verify public keys
used

Encryption Algorithm RSA, ECC, or others ECC (Secp256k1)

Transaction Verifies identity for secure Verifies digital signatures for

Verification communication transactions

Data Integrity Ensured using certificates and CRLs Ensured using blockchain immutability

Hard and Soft Storage in Detail

✅ 1. Hard Storage (Cold Storage)

Hard Storage, also known as Cold Storage, refers to the practice of storing cryptocurrency private
keys offline. Since it is disconnected from the internet, it provides a high level of security and
protection against cyberattacks, malware, and hacking.

Characteristics of Hard Storage:

 Offline Storage: No internet connectivity, preventing remote hacking.

 Physical Form: Stored on physical devices like USB drives, hardware wallets, or paper wallets.

 Long-Term Security: Ideal for storing large amounts of cryptocurrency securely for extended
periods.

 Limited Accessibility: Not convenient for frequent transactions.

Types of Hard Storage:

1. Hardware Wallets:

o Physical devices that securely store private keys.

o Examples: Ledger Nano S, Ledger Nano X, Trezor.

2. Paper Wallets:

o A printed document containing a public key and a private key.

o Provides excellent security if stored in a safe place.

3. Air-Gapped Devices:

o Completely isolated computers or devices with no internet connectivity, used to

store private keys or sign transactions offline.

Advantages of Hard Storage:

 Highly secure from online threats.

 Immune to malware, phishing attacks, and hacking attempts.

 Suitable for long-term cryptocurrency holdings.

Disadvantages of Hard Storage:

 Risk of physical damage or loss.

 Requires safekeeping in a secure, dry, and temperature-controlled environment.

 Less convenient for making frequent transactions.

✅ 2. Soft Storage (Hot Storage)

Soft Storage, also known as Hot Storage, refers to storing cryptocurrency private keys online or in
software wallets that are connected to the internet. It is designed for quick and easy access, making
it ideal for day-to-day transactions.

Characteristics of Soft Storage:

 Online Storage: Private keys are stored digitally in applications or cloud services.

 Convenience: Quick access for making frequent payments and transactions.

 Lower Security: Vulnerable to cyberattacks, malware, and phishing attempts.

Types of Soft Storage:

1. Mobile Wallets:

o Smartphone applications that store private keys.

o Examples: Trust Wallet, MetaMask, Coinbase Wallet.

2. Desktop Wallets:

o Software installed on a personal computer.

o Examples: Electrum, Exodus.

3. Web Wallets:

o Online services where users can manage their cryptocurrencies through a web
browser.

o Examples: [Link], Binance Wallet.

4. Exchange Wallets:

o Provided by cryptocurrency exchanges for trading purposes.

o Example: Binance, Coinbase.

Advantages of Soft Storage:

 Easy to access and use for day-to-day transactions.

 Often comes with user-friendly interfaces and additional services like staking or lending.

 Quick fund transfers and trading.

Disadvantages of Soft Storage:

 High risk of cyberattacks and hacking.

 Dependency on third-party services, leading to custodial risks.

 Vulnerable to phishing scams and malware attacks.

Transaction Fees Calculator in Bitcoin

✅ Definition:

In Bitcoin, transaction fees are small payments users include to incentivize miners to confirm and
add their transactions to the blockchain. The fees go directly to miners as a reward for their work.

Unlike traditional payment systems that charge fees based on the transaction amount, Bitcoin fees
are calculated based on the transaction size in bytes and the fee rate (measured in Satoshis per
Byte).

 1 Satoshi = 0.00000001 BTC

Bitcoin Scripts - Multisignature (Multisig)

✅ Definition:

A Multisignature (Multisig) is a type of Bitcoin script that requires multiple signatures (private keys)
to authorize a transaction. It enhances security by distributing control across multiple parties.

Instead of relying on a single private key, multisig wallets need a predefined number of signatures
(e.g., 2-of-3, 3-of-5).
✅ How Multisignature Works

1. Key Generation:

o Multiple private-public key pairs are generated.

2. Script Creation:

o A multisig script defines how many signatures are required for a valid transaction.

3. Transaction Signing:

o Participants sign the transaction using their private keys.

4. Verification:

o Nodes verify the signatures using the corresponding public keys.

✅ Example: 2-of-3 Multisig Wallet

 Alice, Bob, and Carol create a 2-of-3 multisig wallet.

 To spend the funds, at least two out of the three participants must sign the transaction.

 Even if one key is compromised, the funds remain secure.

Use Cases:

 Joint Accounts: Families or businesses can manage funds together.

 Escrow Services: Funds are held in escrow until both parties approve the release.

 Corporate Governance: Requires multiple executives to approve financial transactions.

✅ Advantages of Multisignature:

 Enhanced security against theft or unauthorized access.

 Prevents a single point of failure.

 Useful for decentralized and transparent financial management.

✅ Disadvantages of Multisignature:

 Complex setup and management.

 Risk of losing access if multiple key holders are unavailable.

 Requires careful key management practices.

Consensus - Proof of Work (PoW) and DEX

✅ Consensus in Blockchain

A consensus mechanism is a protocol used in blockchain networks to achieve agreement among

distributed nodes on the validity of transactions. It ensures that all copies of the blockchain remain
synchronized without requiring a central authority.

Proof of Work (PoW)

Proof of Work (PoW) is the first consensus mechanism, introduced by Bitcoin. It involves miners
competing to solve complex cryptographic puzzles to validate transactions and create new blocks.

✅ How PoW Works:

1. Transaction Verification: Miners gather pending transactions and validate them.

2. Hash Generation: Miners repeatedly generate hashes using the block's data and a random
number (nonce) until they find a hash that meets specific criteria.

3. Block Addition: The first miner to solve the puzzle broadcasts the block to the network.

4. Consensus: Other nodes verify the solution, and if valid, the block is added to the blockchain.

5. Reward: The successful miner receives a block reward and transaction fees.

✅ Key Features of PoW:

 Security: Highly secure due to its computational difficulty.

 Decentralization: No central authority; miners validate transactions.

 Energy-Intensive: Requires massive computational power and electricity.

✅ Example:

In Bitcoin, miners solve puzzles using the SHA-256 hash function. It takes enormous computational
effort to find a valid hash, but once found, it is easy for other nodes to verify.

Decentralized Exchange (DEX)

A Decentralized Exchange (DEX) allows users to trade cryptocurrencies directly with one another
without relying on intermediaries. Transactions on DEXs are governed by smart contracts — self-
executing code that facilitates trades.

✅ How DEX Works:

1. Peer-to-Peer Trading: Users connect their wallets and trade directly.

2. Smart Contracts: Enforce trade rules and execute transactions automatically.

3. Liquidity Pools: Users contribute to liquidity pools to facilitate trading. In return, they earn
fees.

4. On-Chain Transactions: All trades are recorded on the blockchain, ensuring transparency.

✅ Examples of DEXs:
  Uniswap (Ethereum)

 PancakeSwap (BNB Chain)

 SushiSwap

✅ Advantages of DEXs:

 User Control: Users retain ownership of their private keys and funds.

 Privacy: No KYC (Know Your Customer) process is required.

 Decentralization: Operates without a central authority.

✅ Disadvantages of DEXs:

 Low Liquidity: May suffer from limited trading volume.

 Slower Transactions: Network congestion can lead to delays.

 Technical Complexity: Users need knowledge of blockchain wallets and gas fees.

Comparison: DEX vs. CEX (Centralized Exchange)

Feature DEX (Decentralized Exchange) CEX (Centralized Exchange)

Control Users control funds Exchange controls funds

Privacy High (No KYC required) Low (KYC required)

Liquidity Low to Moderate High

Transaction Speed Moderate to Slow Fast

Security Higher (No centralized point of failure) Lower (Prone to hacking)

Regulation Often unregulated Regulated in most regions

Cryptocurrencies and Hash Functions

✅ Cryptocurrencies

A cryptocurrency is a form of digital currency that uses cryptography to secure transactions, control
the creation of new units, and verify the transfer of assets. Unlike traditional currencies issued by
governments (fiat currencies), cryptocurrencies operate on decentralized networks using blockchain
technology.

 Blockchain: A public, immutable ledger that records all transactions across the network.

 Cryptography: Ensures secure and tamper-proof transactions.

 Decentralization: No central authority controls the network; it’s maintained by nodes.

✅ Examples of Cryptocurrencies:

1. Bitcoin (BTC)

o Created by Satoshi Nakamoto in 2009.

o First and most popular cryptocurrency.

o Uses Proof of Work (PoW) for consensus.

o Acts as a digital alternative to gold, often called "Digital Gold."

2. Ethereum (ETH)

o Introduced by Vitalik Buterin in 2015.

o Supports Smart Contracts and Decentralized Applications (dApps).

o Transitioned from Proof of Work (PoW) to Proof of Stake (PoS) for energy efficiency.

3. Litecoin (LTC)

o Created by Charlie Lee in 2011.

o Often referred to as the "Silver to Bitcoin’s Gold."

o Uses the Scrypt hashing algorithm for faster and more energy-efficient mining.

Hash Functions in Cryptocurrencies

A Hash Function is a cryptographic algorithm that takes an input (message or data) and produces a
fixed-length output called a hash. In cryptocurrencies, hash functions are crucial for securing
transactions, maintaining data integrity, and ensuring blockchain security.

 Bitcoin uses the SHA-256 (Secure Hash Algorithm 256-bit) hash function.

 Each block of transactions has a unique hash, linking it to the previous block, forming a chain
of blocks (blockchain).

✅ Properties of Hash Functions:

1. Deterministic:

o The same input will always produce the same output.

o Useful for verifying data integrity.

2. Collision-Resistant:

o It is nearly impossible to find two different inputs that produce the same hash.

3. Irreversibility (One-Way Function):

o The hash cannot be reverse-engineered to get the original input.

 4. Efficient:

o Hash functions are computationally fast and efficient.

✅ Example - SHA-256 in Bitcoin

 SHA-256 (Secure Hash Algorithm 256-bit) is a cryptographic hash function used by Bitcoin.

 It generates a 64-character hexadecimal hash for any input data.

Example:

plaintext

CopyEdit

Input: "Bitcoin"

Output: 6b9c1c1379a4e02d5640e7f9c4e9d223a6bb174c680f1a1de2a82e1f6ccf4e5

 Each block contains a hash of the previous block, forming a linked chain.

 Any attempt to alter transaction data will change the hash, immediately exposing fraud.

9. Centralized Exchange (CEX)

✅ Definition

A Centralized Exchange (CEX) is a cryptocurrency trading platform managed by a central authority or

a company. It acts as an intermediary between buyers and sellers, facilitating trades in a controlled
and regulated environment.

 Users trust the exchange to hold their funds and execute trades on their behalf.

 CEXs are commonly used for trading cryptocurrencies with fiat currencies like USD, EUR, or
INR.

✅ Examples of Centralized Exchanges (CEXs):

1. Binance:

o Largest CEX by trading volume.

o Offers spot, futures, and margin trading.

2. Coinbase:

o Popular in the US.

o User-friendly for beginners.

3. Kraken:

o Provides advanced trading options.

 o Offers staking and futures contracts.

✅ Advantages of CEXs:

1. High Liquidity:

o CEXs maintain large reserves of cryptocurrencies, ensuring fast order matching.

o Provides better prices and reduces price slippage.

2. User-Friendly Interfaces:

o Designed for ease of use, making them ideal for beginners.

3. Additional Services:

o Many exchanges offer margin trading, staking, lending, and futures trading.

4. Fiat Support:

o Users can directly purchase cryptocurrencies using their local currency through bank
transfers or credit cards.

✅ Disadvantages of CEXs:

1. Lack of Control:

o Users do not have access to their private keys.

o “Not your keys, not your coins” — If an exchange is hacked, users may lose funds.

2. Security Risks:

o CEXs are prime targets for hackers.

o High-profile hacks include Mt. Gox (2014) and Coincheck (2018).

3. Centralization:

o The exchange has the authority to freeze or restrict funds.

o Regulatory actions can affect operations and user accounts.

Comparison: Centralized Exchange (CEX) vs. Decentralized Exchange (DEX)

Feature Centralized Exchange (CEX) Decentralized Exchange (DEX)

Control Managed by a central authority Controlled by users via smart contracts

Feature Centralized Exchange (CEX) Decentralized Exchange (DEX)

Privacy Requires identity verification (KYC) Anonymous trading possible

Security Vulnerable to hacks More secure (No single point of failure)

Liquidity High liquidity Lower liquidity

Trading Speed Fast May be slower due to network congestion

User Experience Beginner-friendly Requires technical knowledge

Fees Higher fees due to intermediaries Lower fees, only network fees

Fiat Integration Supports fiat-to-crypto transactions Usually does not support fiat

10. Public Key Infrastructure (PKI) in Bitcoin

✅ Introduction to PKI

Public Key Infrastructure (PKI) is a framework that uses cryptographic methods to manage and
secure digital keys. It ensures the confidentiality, integrity, and authenticity of data during digital
communication.

In Bitcoin and other cryptocurrencies, PKI provides a secure mechanism for generating, managing,
and verifying cryptographic keys used in transactions. Every user has a pair of keys:

 Public Key: Shared openly and used for verifying the authenticity of transactions.

 Private Key: Kept secret and used to sign transactions, proving ownership of the funds.

Key Concepts in PKI

1. Key Generation

 Bitcoin uses Elliptic Curve Digital Signature Algorithm (ECDSA) for key generation.

 The algorithm generates two mathematically linked keys: a private key and a corresponding
public key.

 The private key is a 256-bit number, while the public key is derived from the private key using
elliptic curve multiplication.

 The public key is then hashed using SHA-256 and RIPEMD-160 algorithms to create a Bitcoin
address.

✅ Example:

 Private Key: 5Kb8kLf9zgWQnogidDA76...

 Public Key: 04bfcab055db12...

 Bitcoin Address: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa

2. Transaction Signing

 When a user wants to send Bitcoin, the transaction is digitally signed using their private key.

 The signature serves as proof that the transaction was authorized by the true owner of the
funds.

 Since the private key is never revealed, the security of the funds remains intact.

✅ Steps in Transaction Signing:

1. Alice wants to send 1 BTC to Bob.

2. Alice’s private key signs the transaction data, creating a digital signature.

3. The signature is included in the transaction and broadcast to the Bitcoin network.

3. Verification

 Nodes in the network receive Alice’s transaction and verify it using her public key.

 The nodes apply ECDSA verification to ensure that:

o The signature was generated using Alice’s private key.

o The transaction has not been altered.

 If the verification is successful, the transaction is added to the blockchain.

✅ Verification Process:

 The node extracts Alice’s public key from the transaction.

 It applies the signature verification algorithm to check the authenticity.

 If verified, the transaction is considered valid.

Benefits of PKI in Bitcoin

1. Authentication:

o Ensures the sender of the transaction is the rightful owner of the Bitcoin being
transferred.

o Prevents impersonation or fraud.

2. Integrity:

o Once a transaction is signed, it cannot be altered without invalidating the signature.

o Protects the blockchain from tampering.

3. Non-Repudiation:

o The sender cannot deny initiating a transaction after it has been signed and verified.

o Provides accountability in the network.

 4. Trustless Environment:

o PKI enables Bitcoin to function without the need for a centralized authority.

o Nodes collectively maintain the integrity of the system.

Example Scenario: Alice Sending Bitcoin to Bob

1. Transaction Creation:

o Alice wants to send 1 BTC to Bob.

o She enters Bob’s Bitcoin address and specifies the amount.

2. Transaction Signing:

o Alice uses her private key to sign the transaction.

o The transaction is broadcast to the Bitcoin network.

3. Verification:

o Nodes in the network receive the transaction.

o Using Alice’s public key, they verify the signature.

o If the verification is successful, the transaction is included in a block.

4. Confirmation:

o After the block is added to the blockchain, Bob receives the 1 BTC.

Role of Proof of Work (PoW) and PKI

While PKI handles the signing and verification of individual transactions, Proof of Work (PoW)
ensures the consensus across the network.

 PKI: Ensures the authenticity and security of transactions.

 PoW: Prevents double-spending and secures the network against attacks by requiring miners
to solve computationally intensive puzzles.

 Together, they maintain the integrity and reliability of the Bitcoin blockchain.