TERM PAPER ON BITCOIN

CRYPTOGRAPHY AND NETWORK SECURITY

CAP606

Submitted To:-
Mr.Puneet Kumar Kaushal
Submitted By:-
Deepak VidyaDatt Raturi
Reg. No.11203631
Rollno:-RD1E48A07


INDEX
CONTENTS

ABSTRACT.
INTRODUCTION.
OVERVIEW.
PROCESS OF BITCOIN MODEL.
LIMITATION.
CONCLUSION.


INTRODUCTION

Bit-coin is the worlds 1
st
completely decentralized digital currency, 4 short years ago
knowledge of it was limited to a handful of hobbyists on Internet forums. Today, the bit-coin
economy is larger than the economies of some of the worlds smaller nations. The value of a
bit-coin or BTC has grown and fluctuated greatly from pennies in its early days to more than
$260 at its peak in April 2013. The current market capitalization of the bit-coin economy is
estimated to be more than $1 billion.
Big and small businesses also have shown interest in integrating the Bit-coin platform
into their operations and providing new services within the bit-coin economy. Venture
capitalists too are eager to put their money behind this growing industry
The development of Bit-coin and its very early successes are an exciting testament to the
ingenuity of the modern entrepreneur.

Few questions arises in-fronts of us which are as follows and let us know more about bit-coin.

What Is Bit-coin?
It is an open source and peer-to-peer digital currency, Bit-coin is unique because it is the
worlds 1st completely decentralized digital-payments system. Which may sound
complicated, but the underlying concepts are not difficult to understand.

What is Virtual Currency or Digital Currency?
It is like currency as currency used in social gaming {Its value of virtual-currency and virtual
goods are generally restricted to virtual world, E.g. World of War-craft Gold, Zynga poker
chips}

What is the relation between virtual currency & gambling?
Virtual currency as electronic money form of alternative currency not produced by any central
banks e.g. Bitcoin.




OVERVIEW

Bit-coins invented in 2008 by the unidentified programmer known as Satoshi Nakamoto,
online transactions always required a trusted third-party intermediary.
For example,

Classic electronic payment System
If Alice wanted to send 50Rs to Bob on the Internet, she would have had to rely on a 3
rd

party service like PayPal or MasterCard. Intermediaries like PayPal keep a ledger of account
holders balances. When Alice sends Bob 50Rs, Pay-Pal deducts the amount from her account
and adds it to Bobs account, without such intermediaries, digital money could be spent twice.
Consider there are no intermediaries with ledgers, and digital cash is simply a computer file,
just as digital documents are computer files. Alice could send 50Rs to Bob by attaching a
money file to a message. But just as with email, sending an attachment does not remove it from
ones computer. Alice would retain a copy of the money file after she had sent it. She could
then easily send the same 50Rs to Charlie, (In computer science, this is known as the double-
spending problem)


Transferring money with the help of Bit-Coin

Bit-coins invention is revolutionary because for the 1st time the double-spending of
money problem can be solved without the need for a 3rd party, it does this by distributing the
necessary ledger among all the users of the system via a peer-to-peer network. Every transaction
that occurs in the bit-coin is registered in a public, distributed ledger, which is called the block
chain. Then accordingly new transactions are checked against the block chain to ensure that the
same bit-coins are not spent twice, Hence eliminating the double spending problem. Which
allow easy transferring of money without double spending?

Social gaming like Zynga Poker on Facebook uses Bit-coin Transaction.
It was launched in 2007 and had approximately 40 million users during height of its
popularity.
Where users receive for free virtual currency in the form of poker chips and users can
also buy more chips either through Facebook or from black markets or by giving third
parties users personal information.



PROCESS OF BIT-COIN MODEL
TRANSACTION


An electronic coin is defined as a chain of digital signatures, where each owner transfers
the coin to the next one by digitally signing a hash of the previous transaction and the public
key of the next owner and then adding these to the end of the coin, from which payee can verify
the signatures so to verify the chain of ownership. The main problem is of course is the payee
can't verify that one of the owners did or did not double-spend the coin, a common solution is to
introduce a trusted central authority that checks every transaction for double spending case.
After each transaction, the coin must be returned to the mint (central authority) 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 or central authority, with every transaction depends on them just like a bank.
There should be a way for the payee to know that the previous owners did not sign any earlier
transactions, the earliest transaction is the one that counts so we don't care about later attempts
to double-spend in this case. The only way left to confirm the absence of a transaction is to be
aware of all transactions going on and had happened till now.
In this mint based model the mint is aware of all transactions and decides which arrived
1
st
, to achieve this without a trusted 3
rd
party transactions must be publicly announced and we
need the system for participants to agree on a single history of order in which they were
received, the payee will needs proof that at the time of each transaction the majority of nodes
agreed it was the 1
st
received.


Time Stamp Server



The solution to this begins with a time-stamp server. A timestamp server works by taking a
hash of block (of items) to be time-stamped and widely publishes the hash such as in a
newspaper or Use-net post, Time-stamp proves that the data must and should have existed at the
time of course in order to get into the hash, each timestamp includes the previous timestamp in
its hash i.e. forming a chain with each and every additional timestamp reinforcing the ones
before it.

Proof of Work

Proof of work is use to implement a distributed timestamp server on a peer-to-peer basis,
proof-of-work involves scanning for a value that when hashed as like with SHA-256 the hash
begins with a number of 0 bits, average work required is exponential in the number of 0 bits
required and can be verified by executing a single hash function.
For Timestamp network, proof of work is implemented by incrementing a nonce in the
lock until a value is found which 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
ithout redoing the work, as later blocks are chained after it the work to change the block would
include redoing all the blocks after it in short repeating it.
The proof of work also solves the problem of determining the representation in majority
of decision making. If the majority were based on 1 IP address 1-vote it could be subverted by
anyone able to allocate many IPs, Hence Proof of work is essentially 1CPU 1 vote.

NETWORK
Steps to run Networks are as the following:
New transactions are broadcasted to all the nodes


Each node collects new transactions into the block

Each node works on finding a difficult proof of work for its block



When a node finds a proof of work it broadcasts the block to all the nodes

Nodes accept the block only if all transactions in it are valid and not already spent, Nodes
express their acceptance of the block by working on creating the next block in the chain,
using the hash of the accepted block as the previous hash





LIMITATION
Bit-coins are still not widely accepted till now,
It does not have any physical form,
Transactions in bit-coin are irreversible,
Bit-coin valuation fluctuates,
They are built in Deflation: Maximal number of bit-coins is fixed at 21 million,
Difficulty to associate the Bit-coin addresses with real life identities i.e. Encourage illegal
traffic.
CONCLUSION
Bit-coin is an emerging technical & economic phenomenon,
Bit-coin's future is uncertain i.e.:-
Level of volatility is High
Various security incidents are there like:
Theft of half million dollars in Bit-coin in June 2011 happened.
An attacker has gained access to the Bit-coins database once & modified the
number of Bit-coin available on the market2 million false bit-coins was added.