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BITCOINIntroduction, Technical Aspects,
and Ongoing Developments
Bernhard Haslhofer, AIT Aljosha Judmayer, SBA Research
Austrian Financial Market Authority (FMA) 2015-04-30
About us - Bernhard Haslhofer• Data Scientist @ Austrian Institute of
Technology
• “Extracting knowledge from data”
• Machine learning, network analytics, data/text mining
• Previously
• Researcher @ Cornell University, NY, USA
• PhD. / Univ. Ass @ University of Vienna
• Economics / Computer Science @ Technical University of Vienna
+43 664 88390692 [email protected]
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About us - Aljosha Judmayer• PhD @ TU Vienna
• “Resilience aspects of distributed systems”
• Researcher @ SBA Research GmbH
• Previously
• IT Security Consultant
+43 660 460 888 9 [email protected]
PGP ID: E687AADD PGP FP: 4016 59DB D4E0 A908 FCDF
7BFB A40D 40AC E687 AADD
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Agenda
• Introduction to Bitcoin
• Technical Aspects
• Ongoing developments
• Questions and Discussion
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Agenda
• Introduction to Bitcoin
• Technical Aspects
• Ongoing developments
• Questions and Discussion
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What are Bitcoins?
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A virtual currency• Money that is only exchanged electronically
• Functions:
• Measure of value
• Medium of exchange
• Store of value
• Currency code: XBT
• Currency symbol: B⃦
• Exchange rate to other currencies (USD, EUR, …)
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• Difference to other currency systems:
• no trusted parties
• no pre-assumed identities
• Also known as “cryptocurrency”
A virtual currency
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A decentralized, P2P technology
• “Decentralized” = no need to trust third party
• “Peer-to-Peer (P2P)” = no central authority
• collective transaction management (block chain)
• collective money issuance (mining)
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A community effort
• … driven by
• enthusiasts
• entrepreneurs
• developers
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Who invented Bitcoin?
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David Chaum (1983)
• Conceived eCash
• Anonymous electronic money
Source: http://de.wikipedia.org/wiki/David_Chaum12
Wei Dei (1998)• Describes idea of distributed crypto-currency
• B-money: all transactions are publicly (anonymously) broadcasted.
“Satoshi Nakamoto” (2009)• Published article on mailing list
• Designed and implemented original Bitcoin software (until mid 2010)
• Created “genesis block” with message “EThe Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
?
Bitcoin: A Peer-to-Peer Electronic Cash System
Satoshi Nakamoto
www.bitcoin.org
Abstract. A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a
financial institution. Digital signatures provide part of the solution, but the main
benefits are lost if a trusted third party is still 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 an ongoing chain of
hash-based proof-of-work, forming a record that cannot be changed without redoing
the proof-of-work. The longest chain not only serves as proof of the sequence of
events witnessed, but proof that it came from the largest pool of CPU power. As
long as a majority of CPU power is controlled by nodes that are not cooperating to
attack the network, they'll generate the longest chain and outpace attackers. The
network itself requires minimal structure. Messages are broadcast on a best effort
basis, and nodes can leave and rejoin the network at will, accepting the longest
proof-of-work chain as proof of what happened while they were gone.
1. Introduction
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 non-
reversible 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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How do I pay with Bitcoins?
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Via web applications
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Via mobile devices
Source: https://www.bitkassa.nl/
Business Owner Customer
Source: http://www.wired.com/2014/07/blockchain-back/17
Using a “fat” client
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Using plastic cards
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Where can I pay with Bitcoins?
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How do I acquire Bitcoins?
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Earn bitcoins
• By completing tasks on Websites (e.g., CoinWorker, BitVisitor)
• By receiving salaries (e.g., Internet Archive)
• By receiving donations
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Buy Bitcoins via Exchange
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Buy Bitcoins via Exchange
EUR
EUR
EUR
XBT
XBT
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Other Exchanges
Buy Bitcoins at ATM
Source: https://coinfinity.co/bitcoin-kaufen/30
Mine Bitcoins• “Mining” refers to the process of
• adding transaction records to Bitcoin’s public ledger (block chain) of past transactions
• creating new Bitcoins
• Resource intensive computation (energy costs)
• Miners receive
• transaction fees
• newly created coins
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Mine Bitcoins
Source: http://99bitcoins.com/20-insane-bitcoin-mining-rigs/#prettyPhoto
How does the overall Bitcoin market look like?
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What are Altcoins?
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Source: http://cryptocoincharts.info/coins/graphicalComparison 41
DEMO
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The Big Picture
P2P Network
Broadcast Transaction
Blockchain 43
The Big Picture
P2P Network
Blockchain
Miners
Collect pending Transactions
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The Big Picture
P2P Network
Blockchain
Miners
Find a block
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The Big Picture
P2P Network
Blockchain
Miners
Broadcast new block
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P2P Network
Synchronize Blocks
Blockchain
Receive Confirmations
The Big Picture
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P2P Network
Synchronize Blocks
Blockchain
Receive Confirmations
The Big Picture
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Agenda
• Introduction to Bitcoin
• Technical Aspects
• Ongoing developments
• Questions and Discussion
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Blockc
hain
Transactions
Hash
AsymmetricEncryption
Mining
….
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Agenda
• Introduction to Bitcoin
• Technical Aspects
• Ongoing developments
• Questions and Discussion
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BITCRIME• Bitcoin’s history also has association with crime
• Silk Road (Feb. 2011 - Oct. 2013)
• Bots are placed for mining purposes
• Bitcoin-based Ponzi schemes (US federal court)
• CryptoLocker (2014) -> encrypt file, demand ransom to release decryption key
• Theft
• Collapsed exchanges (e.g., Mt. Gox liquidated in 2014)
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BITCRIME• Bilateral (AT/DE) research project (KIRAS)
• Prevention and prosecution of organized crime in virtual currencies
• Interdisciplinary team (policy makers, law enforcement, data scientists, security researchers)
• https://www.bitcrime.de/
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Technical Part• Blockchain analytics tool
• find details about addresses, transactions
• merge addresses into entities
• search for graph patterns
• direct/indirect flow of bitcoins between addresses
• money laundering patterns
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Technical Part
• (Dark) Web Crawler
• find bitcoin addresses in the (dark) web
• extract additional contextual information
• integrate with Blockchain analytics tool
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Alternative Applications for Bitcoin (A2Bit)
• FFG Bridge Early Stage
• Reuse concept of block chains and proof-of-* for alternative
• applications beyond currency
• Generalising the Bitcoin protocol for trustworthy distributed key-value stores
• work based on approaches taken in Namecoin
• possible applications: public key exchange, identity management
• Platform, time-stamping service, digital rights management, twitter clone, alternative domain name system, ...
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Other recent developments
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MIT Digital Currency Initiative
• Goal: create a safe, stable and secure digital currency
• Conduct research (security, stability, scalability)
• Test concepts that have high social standards
• Evidence-based research to support existing and future policy and standards
Source: https://bitcoinmagazine.com/20040/mit-media-lab-announces-launch-mit-digital-currency-initiative-headed-former-white-house-senior-adviser/59
Digital currencies:response to the call for information
March 2015
Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414040/digital_currencies_response_to_call_for_information_final_changes.pdf
–Bonneau et al. (2015)
“Bitcoin is a rare case where practice seems to be ahead of theory. We consider that a
tremendous opportunity for the research community to tackle the many open questions
about Bitcoin which we have laid out.”
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References
• Nakamoto, S. (2011). Bitcoin: A Peer-to-Peer Electronic Cash System. Available at: https://bitcoin.org/bitcoin.pdf
• Bonneau, J. et al. (2015). Research Perspectives and Challenges for Bitcoin and Cryptocurrencies
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