Bitcoin: A Peer-to-Peer Electronic Cash System (Nakamoto, 2008)

Summary:

· Double spending – Spending the amount already spent.

· A peer-to-peer network to be used as electronic payments proposed as a solution to the double spending problem, without the involvement of third party or any financial institution.

· Bitcoin is based on cryptographic proof and uses peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.

· To eliminate double spending, bitcoin proposes that the only method to prove the absence of a transaction is to be aware of all transactions, such that system participants agree on a single history of how they were received in order.

· It is based on the concept of blockchain, where each block contains hash of previous blocks to be timestamped, cryptographically signed timestamped transaction, and incrementing nonce whose value needs to be determined by expending computational resources.

· After solving the nonce, the transaction block can be verified by the parties in the network and be included in the blockchain. The process in determining and verifying the nonce value is proof-of-work.

· The blockchain stores all of these validated blocks. The honest chain will grow the fastest, and an attacker would have to repeat the block's proof-of-work and all subsequent blocks, which would consume a significant amount of resources.

· A moving average is used to calculate the proof-of-work difficulty, which is based on the average number of blocks every hour. The difficulty rises as the blocks number increases.

· The process starts when a new transaction is broadcasted to all nodes in the network. The transaction in now collected by each node, these nodes then start finding a difficult proof-of-work to include this transaction into a block. When a node finds the proof of work it broadcasts the block to all nodes. If the transaction is valid and not already spent, the block is accepted by nodes by updating the blockchain with the new block. These nodes are then incentivized for their work in the form of new coin and transaction fees.

· A user can get the longest proof-of-work chain from the network nodes and verify the timestamp of the linking block to previous blocks in the chain.

· Since only the sender and receiver's public keys are displayed in the transaction list, the involved party remains anonymous, ensuring privacy.

Introduction to Crypto and Cryptocurrencies (Coursera, n.d.)

Summary:

· Hash functions are efficiently computable and take any string as the input to give fixed-sized output. These functions are collision-free, puzzle friendly, and hiding the input.

· There is a very low chance that two different inputs can collide to produce the same output, but there is the possibility. Hence, it is safe to assume that two equal hashes have the same input value.

· In order for the input to be infeasible, it must be concatenated with a random key.

· No collision has ever been found for 256 bits hash function.

· Hash pointer shows the cryptographic information of where some data is stored and also shows what its value was.

· In hash pointer data structure, we have a linked list, where each block contains data and previous block hash as head.

· Even if an adversary was able to tamper with some data of a block and hashes of previous blocks, she won’t be able to guess the main hash pointer of the Head from where the blocks were created i.e., the genesis block. This is the Tampere evident property of blockchain.

· One can verify, the data belongs to the Merkle tree by showing that the hash of the data block belongs to the chain up to the root.

· Some advantages of Merkle tree are it hold many items if the root hash is known, can verify membership in time and space along the branches and sorted Merkle tree can verify non-membership in time and space too in case of some missing item along the chain.

· In general hash pointers can be used in any point-based data structures that has no cycles.

· A digital signature process involves secret key which a user use to sign a message, a public key of the user and verification of the signed message with the public key.

· Digital signature scheme has unforgeability property.

· Bitcoin uses Elliptic Curve Digital Signature Algorithm (ECDSA).

Bitcoin worth and investing

At today’s rate one bitcoin is worth 38,997 US dollars. Bitcoin's story has always soared to new heights and then plummeted to new lows, much like a roller coaster ride. Some had made fortunes out of it, while others had lost money frequently overnight. Comparing with bitcoin historical course, Year 2011 was the biggest downfall in the history of bitcoin. Despite its early climb to $32 from $2 (Andrew Lisa, 2021), bitcoin dropped to one penny on June 19 after Mt. Gox, one of the world's major Bitcoin exchanges, confessed that hundreds of accounts had been hacked and millions of dollars worth of Bitcoin were stolen. At this time, although bitcoin was far cheaper in comparison with today’s value, one would have loss fortunes.

However, if we compare the price of the Bitcoin now, investment done any time during the early phase of Bitcoin would have made anyone millionaire by today. Personally, if I had invested in Bitcoin in early 2015 when the price was around $300, the time when I first heard about the Bitcoin word, I would have already become a millionaire by 10 November 2021 when the bitcoin price reached its all time high at $68,990 (Edwards John, 2022).

Owning Bitcoin in Finland

It is legal to own Bitcoin or any cryptocurrencies in Finland. However, holding and any transaction made for virtual currencies are subject to tax as per (Vero, 2022). Any virtual currencies owned income should be filed as income and are taxed as capital gain. Additionally, any expenses on the virtual currencies should be filed too, as it would be added as in tax return as deductions.

Moreover, income from mining the virtual currencies is usually taxed as earned income as well. Also, any virtual assets like Non-fungible tokens (NFTs), virtual lands, games etc. also needs to be filed as assets and are subject to tax.

Alternative Coins (Alt Coins)

Various alternative blockchains have emerged along the time leveraging the underlying technology and concept of the blockchain. These new alternative blockchains addresses existing limitations and restrictions in the current blockchain technology and add improvement upon it either by adding new tools to it or adding another layer on top of it for different operations. Some of the alternative coins are mentioned below

Cardano (ADA): It is created using evidence-based methodologies and peer reviewed research and works on Proof of Stake (PoS) protocol. ADA is the alternative coin for Cardano blockchain (Cardano, n.d.).

Polkadot (DOT): This is a multi-block chain application environment for cross-chain communication between blockchains. It connects various blockchain forming a parachain network (Polkadot, n.d.).

Chainlink (LINK): They are the decentralized data feeding network which provide the communication between real world and block chain network (ChainLink, n.d.). Chainlink uses a middleware software or oracle for this purpose.

Tether (USDT): These are the coins representing the actual value of the real-world currency (fiat), US dollar(Tethar, n.d.).

Ethereum Classic (ETC): It is an open source Ethereum blockchain based cryptocurrency, which was formed after the main Ethereum blockchain was hacked in June 2016 (Ethereum Classic, n.d.). After the hack this blockchain continued working on the same versions however, Ethereum roll back their version to the timeline before it was hacked.

Blockchain simplified. (1. YT)

Block is collection of data, and block chain is the chain of these blocks. A block contains hashes, that means a unique identifier like a person name. But this hash depends on other data of the block. Simple example is: Let’s say we have a guy name Shawn; he is a skinny guy, and everybody calls him skinny Shawn. Later, he went to gym and got buffed up, now he is big, and everybody started calling him big Shawn. With the change in his quality, his name changed too i.e. His identifier or hash is also changed.

Along with the transactions data, a block also contains its own hash and the hash of the previous block. Since, every block contains their own hash and the hash of the previous block, they are connected together forming a chain. Hence, the name blockchain. A simple example could be People standing in a line, where each person in front knows the name and hair color of the person standing behind them. So, as long as they can be identified with their name and they also know the name of the person behind them, they can be arranged in the same line again and again.

Once, data is added to the blockchain it is pretty much immutable i.e., cannot be changed or altered with. Blockchain relies on decentralization to keep the data immutable. Decentralization means blockchain does not rely on a central system but depends on peer-to-peer network. An example of the centralized system is bank, which keep all the money, transactions history and data of people in their own data base and people trust their bank with their money. But in decentralization peer-to-peer network, responsibility of verifying and storing the data is distributed among the people. Anyone in this peer-to-peer network has a copy of the blockchain. This is what called a distributed ledger i.e., data is open and stored in multiple system.

When a new block is added to a blockchain, each person in the network verifies that it is ok to be added to the chain and adds it to their own version of the blockchain. If everything is verified and we have majority of the peer i.e., more than 50% agreed to the verifying the new block then we have a consensus or majority agreement. The accepted blockchain is updated to include this new block.

If an adversary wants to alter a blockchain by adding a faulty transaction block for their own benefits, then his version of the blockchain will be different than majority of the peers in the network. Hence, his version of the blockchain is rejected.

If somehow the adversary is able to include his block in his version of blockchain, then the original chain formed with previous hash breaks, as the transaction data and hash in this new block is different. The person can create a new blockchain using more computing resources related to his new block. To protect against this by slowing down the process, blockchain has algorithms. It is called proof of work.

Simply, lets consider a simple example with an equation where x * y = z, we need to find the value of ‘x’ and ‘y’ is unknown, but we know the value of ‘z’. By guessing the value of ‘x’ as 1,2,3,4, 5... we compare it to known value of ‘z’, until it is correct. When the value of ‘x’ is found such that its product with ‘y’ is equal to z, then it is considered this specific proof of work algorithm is solved. The process of solving the value is called mining. This value of ‘x’ is stored in the block and effects the hash and making it the correct one. So, basically it is brute forcing different answer until it is equal to ‘z’. Because of this proof of work algorithm, the adversary has to solve each and every hash for each block in a chain, and it requires a lot of resources.

However, if the majority of the peer agreed to include a block due to some kind of issue with the blockchain, then it can be altered as such too.

References

Andrew Lisa. (2021, June 30). 7 of the biggest Bitcoin Crashes in History. Https://Www.Gobankingrates.Com/Investing/Crypto/7-Biggest-Bitcoin-Crashes-History/?Utm_campaign=1101534&utm_source=yahoo.Com&utm_content=1&utm_medium=rss.

Cardano. (n.d.). Retrieved November 15, 2021, from docs.cardano.org/core-concepts/delegation

ChainLink. (n.d.). Retrieved November 15, 2021, from https://chain.link/

Coursera. (n.d.). Introduction to Crypto and Cryptocurrencies. Https://Www.Coursera.Org/Learn/Cryptocurrency/Lecture/GFEJL/Cryptographic-Hash-Functions.

Edwards John. (2022, February 10). Bitcoin’s Price History. Https://Www.Investopedia.Com/Articles/Forex/121815/Bitcoins-Price-History.Asp.

Ethereum classic. (n.d.). Retrieved November 15, 2021, from https://ethereumclassic.org/

Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. https://doi.org/10.2139/ssrn.3440802

Polkadot. (n.d.). Retrieved November 15, 2021, from https://polkadot.network/

Tethar. (n.d.). Retrieved November 15, 2021, from https://tether.to/

Vero. (2022, April 27). Virtual Currencies. Https://Www.Vero.Fi/En/Individuals/Property/Investments/Virtual-Currencies/.

1. YT https://www.youtube.com/watch?v=malwhCwEosk&t=171s