HPC-51122

Blockchain Technology and

Internet of Things

Lecture 16
Developing Knowledge about Blockchain
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Beholding the Bitcoin Blockchain

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Objectives

Understanding where the Bitcoin blockchain came from

Straightening out some myths about Bitcoin
Staying safe when using Bitcoin
Mining for Bitcoins
Making a paper wallet to hold your Bitcoins

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Introduction

• Bitcoin - the purest aspects of blockchain technology.

• Knowing the basics of how the Bitcoin blockchain operates will allow you to better
understand all the other technology

• In this chapter,
fundamentals of how the Bitcoin blockchain operates
practical things to start doing now with Bitcoin.
find out how to mine the Bitcoin token, a new way to get your hands-on Bitcoins without buying
them
discover how to transfer your tokens to paper wallets
practical ways to keep your tokens safe online.

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Getting a Brief History of the Bitcoin Blockchain

• first introduced in the fall of 2008 as a whitepaper - www.bitcoin.org/bitcoin.pdf

• released as open-source software in 2009
• an anonymous programmer or cohort working under the name of Satoshi Nakamoto
• Satoshi Nakamoto created is an extraordinary peer-to-peer payment system
enables users to send Bitcoin,
the value transfer token,
directly and without an intermediary to hold the two parties accountable
network itself acts as the intermediary by verifying the transactions
assuring that no one tries to cheat the system by spending Bitcoins twice

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Getting a Brief History of the Bitcoin Blockchain (cont’d)

• Nakamoto’s goal was to close the large hole in digital trust

• solves the Byzantine general’s problem

How do you trust the information you are given
the people who are giving you that information, malicious third parties, can deceive you

• Many Bitcoin enthusiasts feel

blockchain technology is the missing piece
allow societies to operate entirely online because
it reframes trust by recording relevant information in a public space
that cannot be removed and can always be referenced making deception more difficult.

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Getting a Brief History of the Bitcoin Blockchain (cont’d)

• mix many old technologies - cryptography and payment are merged to create cryptocurrency

• Cryptography is the art of secure communication

• Payment through a token that represents values

• Cryptocurrency becomes entirely new

take the concept of money and move it online with the ability to trade value securely through a
token.

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Getting a Brief History of the Bitcoin Blockchain (cont’d)

• Blockchains also incorporate hashing

• Hashing also incorporates another old technology called Merkle trees,
 take many hashes and squeeze them down to one hash, while still being able to prove each piece
of data that was individually hashed (see Figure ).
• blockchains are ledgers, all old models are merged and facilitated online in a distributed
database, they become revolutionary.
• Bitcoin was designed primarily to send the Bitcoin cryptocurrency - creators realized that
it had a much larger potential.
• architected the blockchain of Bitcoin to be able to record more than the data concerning the
movement of the token.
• Bitcoin blockchain is the oldest, and one of the largest, blockchains in the world.
composed of thousands of nodes that are running the Bitcoin protocol
The protocol is creating and securing the blockchain
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Getting a Brief History of the Bitcoin Blockchain (cont’d)

Figure: Merkle Tree

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Getting a Brief History of the Bitcoin Blockchain (cont’d)
• blockchain is a public ledger of all transactions in the Bitcoin network
• Bitcoin protocol is the rules that govern this system
• Nodes
computers that are recording entries into that ledger
safeguard the network by mining for the cryptocurrency Bitcoin
New Bitcoins are created as a reward for processing transactions and recording them inside
the blockchain.
Nodes also earn a small fee for confirming transactions.
• Anyone can run the Bitcoin protocol and mine the token.
• It’s an open-source project that thrives as more individuals participate in the network.
• The fewer people who participate - more centralized - weakens the system
• To makes Bitcoin a secure system is the large number of independent nodes that are
globally distributed.
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Getting a Brief History of the Bitcoin Blockchain (cont’d)
• Now, need to purchase expensive specialized equipment or use a cloud service.(early - could
run the Bitcoin protocol and earn Bitcoins on a desktop computer)
• In order to create a message in the Bitcoin blockchain, you have to send some Bitcoin
from one account to another.
• When you send a transaction in Bitcoin, the message is broadcast across the whole network.
• After the message is sent, it’s impossible to alter it because the message is recorded
inside the Bitcoin blockchain.
 This feature makes it imperative that you always choose your message wisely and never broadcast
sensitive information.
• Broadcasting the same message to thousands of nodes and then saving it forever in the token’s
ledger can add up in a hurry.
• So, Bitcoin requires that you keep your communications very short. The current limit is just 40
characters.
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THE LIMITATIONS OF BITCOIN
• Blocks that make up the Bitcoin blockchain are limited to 1MB in size.
• Bitcoin blockchain can handle to seven transactions per second.
• New blocks occur on average about every ten minutes, but they aren’t guaranteed.
• Decentralization is key to Bitcoin’s robustness.
• Larger blocks would impose hardships on the miners and might push out small operations.
• Bitcoin has built-in limitations that prevent it from handling the global volume of monetary transactions.
• It is also being used to secure other types of data and systems.
• The demand to use the secure Bitcoin ledger is high.
 This difficulty is referred to as Bitcoin bloat, and it has slowed down the network and increased the cost of
transactions.
 At this point, most blockchain developers are only experimenting with expanding the utility of the Bitcoin
blockchain.
 Most are not at a point where they need to scale up their prototypes and concepts so that the Bitcoin
blockchain can handle their request.
 Other new blockchain technologies have also helped bring down the pressure on Bitcoin and given developers
cheaper options to secure data. 14
AS THE WORLD TURNS: THE DRAMA OF
BITCOIN
• There is significant conflict around the core development of Bitcoin.
• Dubbed the Bitcoin Civil War or the block size limit debate, the general conflict is between keeping Bitcoin
core as it is and enlarging the functionality of the software.
• This conflict appears simple, but the repercussions are enormous. Bitcoin’s permanent nature and the billions of
dollars’ worth of assets that Bitcoin software secures mean that every code change is rigorously reviewed and
debated.
• Beyond the internal conflict, Bitcoin is also under intense scrutiny from the outside.
• The decentralized nature of Bitcoin that may displace central authorities made it a target for regulators.
• Bitcoin is also favored by people who want to purchase illicit items anonymously or move money from a
controlled economy to a noncontrolled economy, bypassing governmental controls.
• All these factors have given Bitcoin a bad rap and drawn the judgment of society.
• Entrepreneurs that wanted to capitalize on the technology of Bitcoin rebranded it.
• The change in terminology was used to differentiate the software structure of Bitcoin and other cryptocurrencies.
• Software that used the structure of cryptocurrencies began being called blockchain.
• The shift to deemphasize the controversial tokens and highlight the structure of cryptocurrencies changed
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both
government and commercial views of Bitcoin from fear to excitement.
Getting a Brief History of the Bitcoin Blockchain (cont’d)

• Bitcoin is a living and ever-changing system - improve the system by making it stronger and
faster.

• Anyone can contribute to the Bitcoin protocol by engaging on its GitHub page (
www.github.com/bitcoin) - a small community of dominant core developers of Bitcoin.

• The most prolific contributors are Wladimir Van Der Laan, Pieter Wuille, and Gavin Andresen.

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Debunking Some Common Bitcoin Misconceptions (cont’d)
• Here are some of the misconceptions you might have heard about Bitcoin:
• Bitcoin was hacked. There has never been a successful attack on the Bitcoin blockchain that
resulted in stolen Bitcoins. However, many central systems that use Bitcoin have been hacked. And
wallets and Bitcoin exchanges are often hacked due to inadequate security. The Bitcoin community
has fought back by developing elegant solutions to keep their coins safe, including wallet
encryption, multiple signatures, offline wallets, paper wallets, and hardware wallets, just to name a
few.
• Bitcoin is used to extort people. Because of the semi-anonymous nature of Bitcoin, it’s used in
ransomware attacks. Hackers breach networks and hold them hostage until payment is made to
them. Hospitals and schools have been victims of these types of attacks. However, unlike cash,
which was favored by thieves in the past, Bitcoin always leaves a trail in the blockchain that
investigators can follow.
• Bitcoin is a pyramid scheme. Bitcoin is the opposite of a pyramid scheme from the point of view
of Bitcoin miners. The Bitcoin protocol is designed like a cannibalistic arms race. Every additional
miner prompts the protocol to increase the difficulty of mining. From a social point of view, Bitcoin
is a pure market. The price of Bitcoins fluctuates based on market supply, demand, and perceived
value. 17
Debunking Some Common Bitcoin Misconceptions (cont’d)
• Bitcoin will collapse after 21 million coins are mined. Bitcoin has a limit to the number of tokens it will
release. That number is hard-coded at 21 million. The estimated date of Bitcoin issuing its last coin is
believed to be in the year 2140. No one can predict what will happen at that point, but miners will always
earn some profit from transaction fees. Plus, users of the blockchain and the Bitcoins themselves will be
incentivized to protect the network, because if mining stops, Bitcoins become vulnerable and so does the
data that has been locked into the blockchain.
• Enough computing power could take over the Bitcoin network. This is true, but it would be extremely
difficult, with little to no reward. The more nodes that enter the Bitcoin network, the harder this type of
attack becomes. In order to pull this off, an attacker would need the equivalent of all the energy production
of Ireland. The payoff of this sort of attack is also extremely limited. It would only allow the attacker to roll
back his own transaction. He couldn’t take anybody else’s Bitcoins or fake transactions or coins.
• Bitcoin is a good investment. Bitcoin is a new and interesting evolution in how people trade value. It isn’t
backed by any single government or organization, and it’s only worth something because people are willing
to trade it for goods and services. People’s willingness and ability to utilize Bitcoin fluctuates a lot. It’s an
unstable investment that should be approached cautiously

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Bitcoin: The New Wild West

• Fake sites
• No, you first!
• Get-rich-quick schemes

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Mining for Bitcoins
• Mining for Bitcoin is how to earn Bitcoins by participating in the network.

• It’s usually handled by special mining hardware that is expensive and specialized.

• The equipment also needs Bitcoin mining software to connect to the blockchain and your
mining pool(a collaboration of many miners jointly work together and then splitting the rewards
of their efforts).

• Here are three standard ways to explore mining Bitcoin:

• Bitcoin-QT: The Bitcoin-QT client is the original software written by Satoshi Nakamoto. You can
download it at https://bitcoin.org/en/download.
• CGminer: CGminer is one of the most popular mining software. It is open source and available for
Windows, Linux, and OS at www.github.com/ckolivas/cgminer.
• Multiminerapp: The Multiminerapp is an easy Bitcoin client to run. You can download it at
www.multiminerapp.com. 20
Mining for Bitcoins

• Cloud mining allows you to start earning bitcoins in an industrious afternoon, without the need to
download software or buy equipment. Just follow these steps:
• Go to https://hashflare.io/panel.
• Scroll down the home page and click the Buy Now button under SHA-256 Cloud Mining.
• Go through the sign-up process.
• Link your bitcoin address.
• Buy a small amount of mining power.
• Join a mining pool.

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Making Your First Paper Wallet

• A paper wallet is a paper copy of your public and private key for your Bitcoins. Because they’re
completely offline, paper wallets are one of the most secure ways to hold Bitcoins when done correctly. The
advantage is that your private key is not stored digitally, so it isn’t subject to hacking. Making a paper wallet
is fairly easy.
1. Go to www.bitaddress.org.
2. Move your mouse around the screen until the amount of randomness shows 100%.
3. Click the Paper Wallet button.
This gives the option to create a paper wallet that you can print.
4. In the Addresses to Generate field, enter 1.
You can make several wallets at once, if you need to, but you might as well just start with one to get the
hang of it.
5. Click the Generate button. Figure shows a paper wallet I created.
6. Click the Print button.
Do not let anyone watch you create your paper wallet. This isn’t something you want to do at a public
computer. Make sure to use a printer that is private and not connected to the Internet so you’re not at
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Making Your First Paper Wallet

• Figure: The Paper Wallet

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Encountering the Ethereum Blockchain

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Objectives

Seeing how and why Ethereum started

Discovering the Ethereum blockchain
Uncovering blockchain hacks
Getting started with Ethereum
Creating a decentralized autonomous organization
Building smart contracts and decentralized corporations

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