Bitcoin Generation Algorithm 1

Bitcoin Generation Algorithm
1.Abstract

This paper is a study on Bitcoin Generation Algorithm. Bitcoin mining is the method of adding transaction records to Bitcoin’s community ledger of earlier period transactions or blockchain. The mining practice is used to confirm and secure transactions. This method is organized as a speed game among persons or firms – the miners – with diverse computational powers to solve a mathematical difficulty, bring a proof of work, extend their solution and attain agreement among the Bitcoin network nodes with
2.Introduction

Bitcoin was created by Satoshi Nakamoto, who published the invention and later it was implemented as open source code. A merely endto-end version of electronic cash would allow online payments to be sent straight from one person to another without going through an economic body. Bitcoin is a network practice that enables folks to transfer assets rights on account units called “bitcoins”, created in limited quantity. When a person sends a few bitcoins to another individual, this information is broadcast to the peer-to-peer Bitcoin network.

3.What Is Bitcoin?

Bitcoin is a crypto-currency ,a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator that can be sent from user-to-user on the peer-to-peer bitcoin network without the need for intermediaries.

Figure:Bitcoin
One of the most interesting aspects of Bitcoin is that it does not require a central authority to verify transactions. All the transactions are recorded in a public ledger called the blockchain. New transactions are broadcast to all nodes in the network, and each node collects new transactions in to a block. Once a block reaches a certain size (which is equal to the amount of transactions happened in about 10 minutes), all the nodes in the network need to agree on the same block. Once agreed, the block is ?nished and new transactions are kept in a new block.

4.HOW DOES BITCOIN WORK?

4.1.The Transaction
-­;The first thing you need to think about with a virtual currency is the transaction -­ the actual exchange of value from one person to another. While this may sound simple, in many ways it can be easy to forge a transaction to try to cheat the system. With physical currency, transactions are controlled by banking institutions which  verify  that  they’re  not  forged  and  are  unique.

Figure:Bitcoin Transaction Life Cycle
4.2. A Serial Number
-­> To avoid people trying to forge transactions or reuse them with virtual currency, you need a way to tie a unique serial number to each person and each transaction as well. Bitcoin does this by using a private and public encrypted key.   These hashes are used to make sure transactions aren’t duplicated in the network and there’s  no  way  to  cheat  the  system.
4.3. Goodbye Banks
-­> Currently, banks are in place to facilitate a financial transaction between two people. When Bitcoin was being set-­up, it was realized that banks could be taken out of the picture entirely if a peer-­to-­peer network was created to verify the transactions between two entities. This decentralization of financial transactions is one of  the  biggest  reasons  so  many  smart  people  are  getting  excited  about  Bitcoin.
4.4. Bitcoin Mining
-­> Another piece is needed to make Bitcoin work. If it’s too easy for transactions to be validated, people could program bots to flood the network with      verifications, making it difficult to actually verify the transaction. To combat
this, the idea is to make it computationally difficult to verify the transaction. This helps fight against the bad guys while at the same time offering a way to reward people who give up computing power to verify the transaction. The computational puzzle has to be difficult enough to make it impossible to hack while easy enough to still allow people to solve  in  a  reasonable  amount  of  time.

Figure:Bitcoin Mining
5.Bitcoin vs. Convenstional currencies

5.1.Bitcoin  is  Decentralized

Unlike traditional currency, which is controlled by a central authority -­ usually an arm of the government -­ Bitcoin is decentralized. Because it operates as a peer-­to-­peer network, all transactions  and  verification  of  transactions  are  done  by  various  people  in  the network.
Figure: Bitcoin  is  Decentralized
5.2.      Bitcoin  is  Virtual  Currency

The other thing that sets Bitcoin apart from traditional currency is the fact that it’s virtual. That is to say coins and paper money aren’t produced to represent the value. Instead, all bitcoins exist in virtual space. This means you can’t go to an ATMand withdraw physical money. Some people have created unofficial physical representations of bitcoins, but first and foremost, Bitcoin  is  virtual.

5.3. Bitcoin  has  Scarcity

Because only 21 million bitcoins will be created, BTC has scarcity, unlike traditional currenc that can be printed when governments decide to print more. To spread out the creation of bitcoins being released into the world, the number that are created by “mining” will half every four years. This means that people will still be able to create them until the year 2140. At that time, no new bitcoins will be created and the existing stockpile will enjoy the benefits of scarcity  -­  i.e.  becoming  more  valuable.
5.5. Bitcoin  transactions  cannot  be  reversed
In order to preserve the block chain of all transactions in sequential order, Bitcoin transactions are not reversible. Additionally, a Bitcoin transaction can take ten minutes or more to confirm.   This is different than other currencies that typically process transactions in seconds and also  allow  for  reversing  a  charge  to  a  credit  or  debit  card.
5.6.      Bitcoin  is  not  Ubiquitous

Wherever you go in the world, you’re going to run into local currencies. In most places, you’ll be able to trade your country’s money for bills of the country you’re visiting. And no matter where you go in the world, you’re going to be able to trade your money for goods and    services. Bitcoin hasn’t yet been embraced by the world at large. This may change in years to come as more businesses begin to accept Bitcoin for payment, but for now it’s a difference that  matters  to  a  lot  of  people.

6.Bitcoin Strengths and Weaknesses

While Bitcoin has a lot of strengths, there are some weaknesses for the cryptocurrency as well. We’re going to take a look at both the pros and cons of Bitcoin so that you can get a better  understanding  of  where  this  virtual  currency  is  going  to  head  in  the  years  ahead.

The fact that it’s already growing in popularity so rapidly is a good sign, but
there are hurdles that  Bitcoin  is  going  to  have  to  get  over  if  it’s  to  survive  and  thrive  in  the  future.

6.1.Strengths
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First, let’s go over some of the main strengths of cryptocurrency in general and Bitcoin specifically.

6.1.1.Anonymity and Privacy

One of the big strengths of Bitcoin currently is that it offers virtual anonymity and a lot more privacy than is found in current financial systems. Bitcoin uses hash addresses to send and receive money, and these hashes or addresses can changed from transaction to transaction. Because of that, it’s entirely possible for two parties to be completely anonymous when  conducting  their  transactions.

Because addresses (hashes) can be created for each transaction, it makes it really difficult to track and trace financial activity of any single person in the network. And, unlike cash which is      also private to an extent, you can use Bitcoin online to do virtual transactions. Add to that the fact that there’s no central authority keeping tabs on all transactions, people can feel safer  about  their  privacy.

6.1.2.No transaction fees

When you use a credit or debit card, the processor charges a transaction fee. The charge is given to the merchant which can cut down on their profit margin considerably. However,Bitcoin doesn’t have transaction fees -­ at this time. When 21 million bitcoins are produced and released  into  the  world  this  may  change,  but  for  now  Bitcoin  doesn’t  charge  a  transaction  fee.

When Bitcoin mining goes away, there’s going to be no financial incentive for people to verify                               transactions by solving a block and adding it to the block chain. At that time, there’s a good chance that a low BTC transaction fee may be instituted in order to make sure others still verify  transactions.  Giving  them  a  cut  of  the  transaction  fee  will  enable  the  system  to  continue.

6.1.3.No central governing authority

When you purchase something around the world, you’re typically taxed by the government for the transaction. Currently, Bitcoin is not recognized as money by any government so it is not          taxed. Most Bitcoin transactions could be thought of as trades -­ which are generally exempt from  taxation  by  governments.

This is likely to change if and when Bitcoin begins to be recognized as legitimate currency around the world. This is actually an incentive for governments to legally recognize Bitcoin as proper money. No one is sure when or if this will happen, but it’s something to think about as Bitcoin  continues  to  experience  a  lot  of  growth  around  the  world.

6.2.Weaknesses

Next, let’s take a look at some of the weaknesses of Bitcoin. There’s a good chance a lot of  these  problems  are  going  to  be  solved  going  forward,  but  for  now  they’re  weaknesses.

6.2.1.Government interference

While this hasn’t happened a lot -­ yet -­ there are many signs pointing to governments around  the world interfering with the growth of Bitcoin. Whether it’s stopping bitcoins from being transferred to bank accounts or something else, one of the biggest weaknesses of Bitcoin currently is the chance of even more government interference as the virtual currency  becomes more popular around the world. This is also a good thing on some levels, however.For example, no one wants money laundering or other illegal activities to be condoned or made possible due to Bitcoin. So, in some ways, the fact that governments are starting to getinvolved  is  a  good  thing  that  will  help  Bitcoin  grow  even  more  in  the  years  ahead.

6.2.2.No Monetary Sovereignty

Another weakness of Bitcoin is that it has no monetary sovereignty. Basically, this means that Bitcoin is not yet accepted as “real money” around the world. Bitcoin is not backed by any government currently. Some may consider this a strength, but it also poses some problems for people  (especially  corporations)  that  want  to  make  money  with  Bitcoin.

Bitcoin is, at its core, another fiat currency that isn’t backed by precious metals or other items of value. The exact value of a single BTC is that which is given to it by people. This makes Bitcoin extremely vulnerable to destabilization. For example, if a large number of people who have bitcoins suddenly decide to sell, this may cause a panic that devalues bitcoins considerably.

6.2.3.Deflationary by design

If Bitcoin deflation happens too quickly, investors are not going to want to invest large amounts of BTC because their efforts won’t be rewarded as BTC becomes more valuable  during  the  time  it  takes  them  to  create  a  product  and  take  it  to  market.

There’s also the real possibility of a recession if a large number of people who purchase BT for investment reasons hold onto their bitcoins. If they can control large amounts of the 21 million bitcoins that will be in circulation, there’s a good chance that others won’t be able to   conduct transactions because they don’t have enough bitcoins in their possession. At this point,  a  recession  or  even  a  depression  become  a  real  possibility. 6.2.4.Accidental Loss and Theft

Another problem is the loss or theft of bitcoins. Because Bitcoin has no protection mechanism built into the currency, it’s possible for someone to lose their wallet file. If this happens, the bitcoins they had in the wallet will be taken out of the system -­ theoretically forever. This could   help  spur  the  problems  with  deflation  mentioned  above.

Additionally, if someone manages to steal bitcoins from another person, there’s no way to rollback the transaction, even if there’s proof that a theft occurred. The Bitcoin system is built so that once a transaction happens it’s there permanently. If not, it would destroy the integrity of the block chain. With most current financial transactions -­ like with a credit card -­ you can contest a transaction and get your money back. This isn’t possible -­ currently -­ with Bitcoin.It’s  definitely  something  that  needs  to  be  considered  moving  forward.
6.2.5.Black market appeal

Because of the decentralization of Bitcoin as well as the anonymity that it can provide, there’s a good chance that many are going to try to abuse the system for financial gain. Because of the way it’s set up, there’s no way to deny any person or corporation from participating in the           Bitcoin network. And this may make it favorable for black markets -­ like Silk Road -­ to use Bitcoin  as  a  means  to commit  crimes  online  without  being caught
6.2.6.It is complicated to use

While the Bitcoin software is relatively easy to use, it’s not as easy as whipping out your credit card and making a transaction. Because it’s somewhat complicated to use, there’s a chance that a lot of the world’s population may not use it, which will affect whether Bitcoin continues to    grow  or  not.

This is changing gradually as Bitcoin software becomes easier to use, but a lot more work needs to be done before Bitcoin really takes off. Luckily, there’s a lot of financial gain to be   had by those who can come up with easier ways to use Bitcoin. This means there’s going to      be a lot of people working on the problem of Bitcoin being difficult for some people to   understand  and  use.

6.2.7.It is a poor use of computing power

Last but not least, you have to consider that Bitcoin mining takes quite a bit of processing power.This computational power could be used for other more productive reasons. Some say    that the Bitcoin network is already the world’s largest peer-­to-­peer network -­ at least when it comes to processing and number crunching. This may not seem like a big thing, but you have   to  consider  all  the  electricity  that’s  needed  to  keep  all  the  computers  on  the  network  going.

7.Proof-of-Work

A proof of work is a piece of data which is difficult (costly, time-consuming) to produce but easy for others to verify and which satisfies certain requirements. Producing a proof of work can be a random process with low probability so that a lot of trial and error is required on average before a valid proof of work is generated. Bitcoin uses the Hashcash proof of work system.
One application of this idea is using Hashcash as a method to preventing email spam, requiring a proof of work on the email’s contents (including the To address), on every email. Legitimate emails will be able to do the work to generate the proof easily (not much work is required for a single email), but mass spam emailers will have difficulty generating the required proofs (which would require huge computational resources).
Hashcash proofs of work are used in Bitcoin for block generation. In order for a block to be accepted by network participants, miners must complete a proof of work which covers all of the data in the block. The difficulty of this work is adjusted so as to limit the rate at which new blocks can be generated by the network to one every 10 minutes. Due to the very low probability of successful generation, this makes it unpredictable which worker computer in the network will be able to generate the next block.
For a block to be valid it must hash to a value less than the current target; this means that each block indicates that work has been done generating it. Each block contains the hash of the preceding block, thus each block has a chain of blocks that together contain a large amount of work. Changing a block (which can only be done by making a new block containing the same predecessor) requires regenerating all successors and redoing the work they contain. This protects the block chain from tampering.
A proof of work is a cryptographic puzzle used to ensure that a party has performed a certain amount of work. In particular, the Bitcoin mining process incorporates a proof of work system based on Adam Back’s Hashcash 3. It has two basic properties – ?rstly, it ensures that the party providing the proof of work has invested a prede?ned amount of e?ort in order to create the proof and secondly, that the proof is e?ciently veri?able. Typically, ?nding a solution to a proof of work puzzle is a probabilistic process with a success probability depending on the prede?ned di?culty.
Figure:Proof Of Work
Let Alice and Bob be two parties communicating with each other and let Alice require Bob to perform a certain amount of computational work for each message he sends to Alice. To do so, Alice can require Bob to provide a string whose one-way hash satis?es a prede?ned structure. Finding such a string has a certain success probability that will determine how much work Bob has to invest on average in order to ?nd a valid solution.

For example, in Bitcoin the hashing algorithm is double-SHA256 (SHA2562) and the prede?ned structure is a hash less or equal to a target value T. The success probability of ?nding a nonce n for a given message msg, such that H = SHA2562(msg||n) is less or equal to the target T is
PrH ? T =T
2256 (1)
This will require a party attempting to ?nd a proof of work to perform, on average, the following amount of computations
1 = 2256
PrH ? T T (2)
Finally, it is easy to see that it can be e?ciently veri?ed whether the nonce accompanied with the message is indeed a valid proof of work by simply evaluating
SHA2562(msg||n) ? T (3)
8.An Overview of SHA256

A detailed description of the SHA256 hashing algorithm can be found in the official NIST standard. This section provides an overview of the SHA256 algorithm that forms the backbone of the Bitcoin ecosystem. The integrity of Bitcoin transactions depends upon the
collision resistance and pre-image resistance of the SHA256 hashing algorithm. It is important to remember the fact that in the Bitcoin protocol, the SHA256 hash is computed twice.