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"Peer-to-Peer" is an important concept in Bitcoin. It means that Bi...
Here I give a quick overview of a few concepts important for a good...
Satoshi Nakamoto is the name used by an unknown person or persons. ...
The double spending problem in a cryptocurrency is about a user bei...
What is proof of work?
The risk that a digital currency can be spent twice. Double-spendin...
**Reversible Transactions** Credit card payments are monitored b...
This nicely — and correctly — shows crypto systems are alternatives...
Here, I believe escrows can only help the buyers but merchants stil...
This diagram can be hard to understand at first. The diagram is i...
As it stands, the system is still vulnerable to double spending. Sa...
The purpose of the timestamp server is to prove (or disprove) the e...
Is this the only purpose of the timestamp?
*Hashcash* is a proof-of-work system that can be used for instance ...
A [block](https://en.bitcoin.it/wiki/Block) is a record of a number...
I don't think Satoshi intended one-ASIC 50,000+ votes
When we talk about 'modifying a block' we are not talking about cha...
This is the step at which we are checking for any double spending.
The "longest" chain isn't necessarily the one with the most blocks ...
Highlighted for importance
Doesn't this jeopardise Satochi's initial idea of a currency for sm...
Here the author describes a way to develop bitcoin clients that don...
A quick resource for understanding Merkle Trees: https://hackernoon...
Simplified Payment Verification (SPV) is about verifying that a tra...
One important thing to understand here is that each transaction can...
In case it wasn't clear: Alice has 3 Bitcoins and wants to send Bob...
Consider an attacker that has paid some merchant, has had its trans...
Analysis to show that as long as an attacker possesses less than 50...
$k$ is the number of blocks the attacker has already mined in secre...
Bitcoin: A Peer-to-Peer Electronic Cash System
Satoshi Nakamoto
satoshin@gmx.com
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.
1
2. Transactions
We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the
next by digitally signing a hash of the previous transaction and the public key of the next owner
and adding these to the end of the coin. A payee can verify the signatures to verify the chain of
ownership.
The problem of course is the payee can't verify that one of the owners did not double-spend
the coin. A common solution is to introduce a trusted central authority, or mint, that checks every
transaction for double spending. After each transaction, the coin must be returned to the mint 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, with every transaction having to go through them, just like a bank.
We need a way for the payee to know that the previous owners did not sign any earlier
transactions. For our purposes, the earliest transaction is the one that counts, so we don't care
about later attempts to double-spend. The only way to confirm the absence of a transaction is to
be aware of all transactions. In the mint based model, the mint was aware of all transactions and
decided which arrived first. To accomplish this without a trusted party, transactions must be
publicly announced [1], and we need a system for participants to agree on a single history of the
order in which they were received. The payee needs proof that at the time of each transaction, the
majority of nodes agreed it was the first received.
3. Timestamp Server
The solution we propose begins with a timestamp server. A timestamp server works by taking a
hash of a block of items to be timestamped and widely publishing the hash, such as in a
newspaper or Usenet post [2-5]. The timestamp proves that the data must have existed at the
time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in
its hash, forming a chain, with each additional timestamp reinforcing the ones before it.
2
Block
Item Item ...
Hash
Block
Item Item ...
Hash
Transaction
Owner 1's
Public Key
Owner 0's
Signature
Hash
Transaction
Owner 2's
Public Key
Owner 1's
Signature
Hash
Verify
Transaction
Owner 3's
Public Key
Owner 2's
Signature
Hash
Verify
Owner 2's
Private Key
Owner 1's
Private Key
Sign
Sign
Owner 3's
Private Key
4. Proof-of-Work
To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-
of-work system similar to Adam Back's Hashcash [6], rather than newspaper or Usenet posts.
The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the
hash begins with a number of zero bits. The average work required is exponential in the number
of zero bits required and can be verified by executing a single hash.
For our timestamp network, we implement the proof-of-work by incrementing a nonce in the
block until a value is found that 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
without redoing the work. As later blocks are chained after it, the work to change the block
would include redoing all the blocks after it.
The proof-of-work also solves the problem of determining representation in majority decision
making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone
able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. The majority
decision is represented by the longest chain, which has the greatest proof-of-work effort invested
in it. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the
fastest and outpace any competing chains. To modify a past block, an attacker would have to
redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the
work of the honest nodes. We will show later that the probability of a slower attacker catching up
diminishes exponentially as subsequent blocks are added.
To compensate for increasing hardware speed and varying interest in running nodes over time,
the proof-of-work difficulty is determined by a moving average targeting an average number of
blocks per hour. If they're generated too fast, the difficulty increases.
5. Network
The steps to run the network are as follows:
1) New transactions are broadcast to all nodes.
2) Each node collects new transactions into a block.
3) Each node works on finding a difficult proof-of-work for its block.
4) When a node finds a proof-of-work, it broadcasts the block to all nodes.
5) Nodes accept the block only if all transactions in it are valid and not already spent.
6) 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.
Nodes always consider the longest chain to be the correct one and will keep working on
extending it. If two nodes broadcast different versions of the next block simultaneously, some
nodes may receive one or the other first. In that case, they work on the first one they received,
but save the other branch in case it becomes longer. The tie will be broken when the next proof-
of-work is found and one branch becomes longer; the nodes that were working on the other
branch will then switch to the longer one.
3
Block
Prev Hash Nonce
Tx Tx ...
Block
Prev Hash Nonce
Tx Tx ...
New transaction broadcasts do not necessarily need to reach all nodes. As long as they reach
many nodes, they will get into a block before long. Block broadcasts are also tolerant of dropped
messages. If a node does not receive a block, it will request it when it receives the next block and
realizes it missed one.
6. Incentive
By convention, the first transaction in a block is a special transaction that starts a new coin owned
by the creator of the block. This adds an incentive for nodes to support the network, and provides
a way to initially distribute coins into circulation, since there is no central authority to issue them.
The steady addition of a constant of amount of new coins is analogous to gold miners expending
resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
The incentive can also be funded with transaction fees. If the output value of a transaction is
less than its input value, the difference is a transaction fee that is added to the incentive value of
the block containing the transaction. Once a predetermined number of coins have entered
circulation, the incentive can transition entirely to transaction fees and be completely inflation
free.
The incentive may help encourage nodes to stay honest. If a greedy attacker is able to
assemble more CPU power than all the honest nodes, he would have to choose between using it
to defraud people by stealing back his payments, or using it to generate new coins. He ought to
find it more profitable to play by the rules, such rules that favour him with more new coins than
everyone else combined, than to undermine the system and the validity of his own wealth.
7. Reclaiming Disk Space
Once the latest transaction in a coin is buried under enough blocks, the spent transactions before
it can be discarded to save disk space. To facilitate this without breaking the block's hash,
transactions are hashed in a Merkle Tree [7][2][5], with only the root included in the block's hash.
Old blocks can then be compacted by stubbing off branches of the tree. The interior hashes do
not need to be stored.
A block header with no transactions would be about 80 bytes. If we suppose blocks are
generated every 10 minutes, 80 bytes * 6 * 24 * 365 = 4.2MB per year. With computer systems
typically selling with 2GB of RAM as of 2008, and Moore's Law predicting current growth of
1.2GB per year, storage should not be a problem even if the block headers must be kept in
memory.
4
BlockBlock
Prev Hash Nonce
Hash01
Hash0 Hash1 Hash2 Hash3
Hash23
Root Hash
Hash01
Hash2
Tx3
Hash23
Root Hash
Transactions Hashed in a Merkle Tree After Pruning Tx0-2 from the Block
Prev Hash Nonce
Hash3
Tx0 Tx1 Tx2 Tx3
8. Simplified Payment Verification
It is possible to verify payments without running a full network node. A user only needs to keep
a copy of the block headers of the longest proof-of-work chain, which he can get by querying
network nodes until he's convinced he has the longest chain, and obtain the Merkle branch
linking the transaction to the block it's timestamped in. He can't check the transaction for
himself, but by linking it to a place in the chain, he can see that a network node has accepted it,
and blocks added after it further confirm the network has accepted it.
As such, the verification is reliable as long as honest nodes control the network, but is more
vulnerable if the network is overpowered by an attacker. While network nodes can verify
transactions for themselves, the simplified method can be fooled by an attacker's fabricated
transactions for as long as the attacker can continue to overpower the network. One strategy to
protect against this would be to accept alerts from network nodes when they detect an invalid
confirm the inconsistency. Businesses that receive frequent payments will probably still want to
run their own nodes for more independent security and quicker verification.
9. Combining and Splitting Value
Although it would be possible to handle coins individually, it would be unwieldy to make a
separate transaction for every cent in a transfer. To allow value to be split and combined,
transactions contain multiple inputs and outputs. Normally there will be either a single input
from a larger previous transaction or multiple inputs combining smaller amounts, and at most two
outputs: one for the payment, and one returning the change, if any, back to the sender.
It should be noted that fan-out, where a transaction depends on several transactions, and those
transactions depend on many more, is not a problem here. There is never the need to extract a
complete standalone copy of a transaction's history.
5
Transaction
In
...
In Out
...
Hash01
Hash2 Hash3
Hash23
Merkle Root
Prev Hash Nonce
Merkle Root
Prev Hash Nonce
Merkle Root
Prev Hash Nonce
Merkle Branch for Tx3
Longest Proof-of-Work Chain
Tx3
10. Privacy
parties involved and the trusted third party. The necessity to announce all transactions publicly
precludes this method, but privacy can still be maintained by breaking the flow of information in
another place: by keeping public keys anonymous. The public can see that someone is sending
an amount to someone else, but without information linking the transaction to anyone. This is
similar to the level of information released by stock exchanges, where the time and size of
individual trades, the "tape", is made public, but without telling who the parties were.
As an additional firewall, a new key pair should be used for each transaction to keep them
from being linked to a common owner. Some linking is still unavoidable with multi-input
transactions, which necessarily reveal that their inputs were owned by the same owner. The risk
is that if the owner of a key is revealed, linking could reveal other transactions that belonged to
the same owner.
11. Calculations
We consider the scenario of an attacker trying to generate an alternate chain faster than the honest
chain. Even if this is accomplished, it does not throw the system open to arbitrary changes, such
as creating value out of thin air or taking money that never belonged to the attacker. Nodes are
not going to accept an invalid transaction as payment, and honest nodes will never accept a block
containing them. An attacker can only try to change one of his own transactions to take back
money he recently spent.
The race between the honest chain and an attacker chain can be characterized as a Binomial
Random Walk. The success event is the honest chain being extended by one block, increasing its
lead by +1, and the failure event is the attacker's chain being extended by one block, reducing the
gap by -1.
The probability of an attacker catching up from a given deficit is analogous to a Gambler's
Ruin problem. Suppose a gambler with unlimited credit starts at a deficit and plays potentially an
infinite number of trials to try to reach breakeven. We can calculate the probability he ever
reaches breakeven, or that an attacker ever catches up with the honest chain, as follows [8]:
p = probability an honest node finds the next block
q = probability the attacker finds the next block
q
z
= probability the attacker will ever catch up from z blocks behind
q
z
=
{
1 if pq
q / p
z
if pq
}
6
Identities Transactions
Trusted
Third Party
Counterparty Public
Identities Transactions Public
New Privacy Model
Given our assumption that p > q, the probability drops exponentially as the number of blocks the
attacker has to catch up with increases. With the odds against him, if he doesn't make a lucky
lunge forward early on, his chances become vanishingly small as he falls further behind.
We now consider how long the recipient of a new transaction needs to wait before being
sufficiently certain the sender can't change the transaction. We assume the sender is an attacker
who wants to make the recipient believe he paid him for a while, then switch it to pay back to
himself after some time has passed. The receiver will be alerted when that happens, but the
sender hopes it will be too late.
The receiver generates a new key pair and gives the public key to the sender shortly before
signing. This prevents the sender from preparing a chain of blocks ahead of time by working on
it continuously until he is lucky enough to get far enough ahead, then executing the transaction at
that moment. Once the transaction is sent, the dishonest sender starts working in secret on a
parallel chain containing an alternate version of his transaction.
The recipient waits until the transaction has been added to a block and z blocks have been
linked after it. He doesn't know the exact amount of progress the attacker has made, but
assuming the honest blocks took the average expected time per block, the attacker's potential
progress will be a Poisson distribution with expected value:
=z
q
p
To get the probability the attacker could still catch up now, we multiply the Poisson density for
each amount of progress he could have made by the probability he could catch up from that point:
k =0
k
e
−
k!
{
q / p
zk
if k z
1 if k z
}
Rearranging to avoid summing the infinite tail of the distribution...
1
k =0
z
k
e
−
k!
1q / p
z k
Converting to C code...
#include <math.h>
double AttackerSuccessProbability(double q, int z)
{
double p = 1.0 - q;
double lambda = z * (q / p);
double sum = 1.0;
int i, k;
for (k = 0; k <= z; k++)
{
double poisson = exp(-lambda);
for (i = 1; i <= k; i++)
poisson *= lambda / i;
sum -= poisson * (1 - pow(q / p, z - k));
}
return sum;
}
7
Running some results, we can see the probability drop off exponentially with z.
q=0.1
z=0 P=1.0000000
z=1 P=0.2045873
z=2 P=0.0509779
z=3 P=0.0131722
z=4 P=0.0034552
z=5 P=0.0009137
z=6 P=0.0002428
z=7 P=0.0000647
z=8 P=0.0000173
z=9 P=0.0000046
z=10 P=0.0000012
q=0.3
z=0 P=1.0000000
z=5 P=0.1773523
z=10 P=0.0416605
z=15 P=0.0101008
z=20 P=0.0024804
z=25 P=0.0006132
z=30 P=0.0001522
z=35 P=0.0000379
z=40 P=0.0000095
z=45 P=0.0000024
z=50 P=0.0000006
Solving for P less than 0.1%...
P < 0.001
q=0.10 z=5
q=0.15 z=8
q=0.20 z=11
q=0.25 z=15
q=0.30 z=24
q=0.35 z=41
q=0.40 z=89
q=0.45 z=340
12. Conclusion
We have proposed a system for electronic transactions without relying on trust. We started with
the usual framework of coins made from digital signatures, which provides strong control of
ownership, but is incomplete without a way to prevent double-spending. To solve this, we
proposed a peer-to-peer network using proof-of-work to record a public history of transactions
that quickly becomes computationally impractical for an attacker to change if honest nodes
control a majority of CPU power. The network is robust in its unstructured simplicity. Nodes
work all at once with little coordination. They do not need to be identified, since messages are
not routed to any particular place and only need to be delivered on a best effort basis. Nodes can
leave and rejoin the network at will, accepting the proof-of-work chain as proof of what
happened while they were gone. They vote with their CPU power, expressing their acceptance of
valid blocks by working on extending them and rejecting invalid blocks by refusing to work on
them. Any needed rules and incentives can be enforced with this consensus mechanism.
8
References
[1] W. Dai, "b-money," http://www.weidai.com/bmoney.txt, 1998.
[2] H. Massias, X.S. Avila, and J.-J. Quisquater, "Design of a secure timestamping service with minimal
trust requirements," In 20th Symposium on Information Theory in the Benelux, May 1999.
[3] S. Haber, W.S. Stornetta, "How to time-stamp a digital document," In Journal of Cryptology, vol 3, no
2, pages 99-111, 1991.
[4] D. Bayer, S. Haber, W.S. Stornetta, "Improving the efficiency and reliability of digital time-stamping,"
In Sequences II: Methods in Communication, Security and Computer Science, pages 329-334, 1993.
[5] S. Haber, W.S. Stornetta, "Secure names for bit-strings," In Proceedings of the 4th ACM Conference
on Computer and Communications Security, pages 28-35, April 1997.
[6] A. Back, "Hashcash - a denial of service counter-measure,"
http://www.hashcash.org/papers/hashcash.pdf, 2002.
[7] R.C. Merkle, "Protocols for public key cryptosystems," In Proc. 1980 Symposium on Security and
Privacy, IEEE Computer Society, pages 122-133, April 1980.
[8] W. Feller, "An introduction to probability theory and its applications," 1957.
9
403 error on that link Joao, any other links? I don't think Satoshi intended one-ASIC 50,000+ votes Is this the only purpose of the timestamp? To understand better this concept of process of work there is this video: https://www.youtube.com/watch?v=bBC-nXj3Ng4&list=WL&index=162 Highlighted for importance This is the step at which we are checking for any double spending. What is proof of work? Any PoW system can be used to fight spam. It is in Hashcash that you are looking for a nonce such that the hash has many leading zeroes. that's not possible, and is part of the transaction validation the miners are doing. The "longest" chain isn't necessarily the one with the most blocks in it, but the one which represents the greatest amount of work. The double spending problem in a cryptocurrency is about a user being able to successfully spend the same digital token multiple times. If you were designing a system relying on a central, trusted authority this issue could be simply solved by just always checking with that authority before accepting a token from another user. In this case, the central authority has a global view of all transactions happening in the system and can therefore prevent a user from spending the same token twice. In a decentralized system, this problem is much harder to solve. Bitcoin proposes a solution that is efficient and makes use of a peer-to-peer network instead of a trusted authority. I have explained it further below on page 3. *Hashcash* is a proof-of-work system that can be used for instance to fight email spam. The idea is that in order to send an email the sender has to spend some CPU resource (i.e. perform a costly operation) to come up with a value that is attached to the email header. This will not affect you much if you are a regular user using email in a legitimate way. However, a spammer, who might be sending millions of emails per day, cannot afford to spend the aggregate amount of CPU power necessary to send all of those emails (it would just be too expensive to have that many computers computing all of the proofs of work necessary to send the emails) In a proof of work you usually have a challenge string *c* and you are looking for a nonce *n* such that $hash(c + n)$ will result in a string with a certain number of leading zeroes. Let’s say our challenge string was *“Hello, world!”* and our target was to get a *SHA-256* hash beginning with ‘000’. One way to go about it is to start with a nonce of ‘0’ and progressively increment it until you get an hash starting with ‘000’. In this case that would take 4251 tries (which happens to have 4 leading zeroes):  SHA-256("Hello, world!0") = 1312af17... SHA-256("Hello, world!1") = e9afc424... ... SHA-256("Hello, world!4249") = c004190b... SHA-256("Hello, world!4250") = 0000c3af...  Computing 4251 hashes on a modern computer is not that much work, however you can easily ramp up the difficulty by increasing the leading number of zeroes required for the proof of work. A quick resource for understanding Merkle Trees: https://hackernoon.com/merkle-trees-181cb4bc30b4 The risk that a digital currency can be spent twice. Double-spending is a problem unique to digital currencies because digital information can be reproduced relatively easily. Physical currencies do not have this issue because they cannot be easily replicated, and the parties involved in a transaction can immediately verify the bona fides of the physical currency. With digital currency, there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original. Read more: Double-Spending Definition | Investopedia https://www.investopedia.com/terms/d/doublespending.asp#ixzz50lZqicke Satoshi Nakamoto is the name used by an unknown person or persons. The exact identity is unknown. One important thing to understand here is that each transaction can only be forwarded as a whole and cannot be broken into smaller parts. Imagine that you just got your bitcoin wallet and a friend of yours sent you 10 bitcoins (let’s call it Transaction 0 - $Tx_0$). Now you want to send 2 bitcoins to Alice (which will be $Tx_1$). In order to only send 2 bitcoins to Alice you will setup $Tx_1$ with one input -$Tx_0$ and with two outputs: * *Output 0* - sends 2 bitcoins to Alice * *Output 1* - sends 8 bitcoins back to you Doesn't the specific attack mentioned in that post still require amassing enough computing power to generate a substitute blockchain, and will affect you regardless of whether you do this pruning? As far as I understand, the argument metioned there is basically -- say the value of your transaction is small compared to the cost of generating an alternate blockchain without your transaction in it. Even then, an attacker may find it profitable to fool many others such as you at the same exact time, so that the combined profit from small transactions is greater than the cost of overtaking the network for a certain amount of time. As such, you cannot actually rely on the insignificance of your own transaction to assume that nobody would bother to undo it. As Mike Hearn says in the end, this seems to be discussing a different problem than the transaction pruning mentioned here. This nicely — and correctly — shows crypto systems are alternatives to trust. What, in the case of bitcoin, is the *challenge string* exactly? Here I give a quick overview of a few concepts important for a good understanding of bitcoin. **Public-keys and Private-keys** The concept of public-key and private-key come from Public-key cryptography. Public-key cryptography is a set of cryptographic protocols based on algorithms that require two separate keys: - Private-key - which as the name indicates is meant to be secret - Public-key - which is public / visible to others These two keys are mathematically linked. In public-key cryptography the public key is used to encrypt plaintext, where the private key is used to decrypt cipher text. Every node in the bitcoin network has a public-key and a private-key. **Digital Signatures** Digital signatures make heavy use of public-key cryptography. You can think of a digital signature as somewhat similar to a physical signature. A digital signature is also used to prove the authenticity of a document/digital message. A digital signature binds an identity to a message. Only the person with the private key can produce valid signatures. Anybody with access to the public key can test the validity of the signatures. Say alice wants to digitally sign a message *m*. In order to do that Alice must have: - Private-key (signing key) - $KEY_{private}$ - Public-key (verification key) - $KEY_{public}$ Alice then uses the *signing* function to produce a valid signature: $$signing(message, KEY_{private}) \rightarrow signature$$ Don’t worry about the internals of the *signing* function. What you need to know is that it takes a *message* and the Private-key and it will produce a signature (a short string). Again, only a person who possesses a private key can produce a valid signature. Anyone can use the public key to verify the signature: $$verify(m,signature,KEY_{public}) \rightarrow true\ or\ false$$ **Hash Functions** A hash function takes a string of characters of arbitrary length (called message) and maps it to another string of characters of fixed length (called a hash value or simply hash). Bitcoin uses a hash function called SHA-256. Let’s look at an example: $$SHA-256(fermat) = 5e494e69...139dab5e$$ In this example the input/message is ‘fermat’ and the output/hash is 32 byte hash (I omitted part of the hash). Note that the length of the output/hash is always the same regardless of the size of the input. If you are an OS X user you can compute the SHA-256 hash value of 'fermat' by running the following command in your terminal:  echo -n fermat | shasum -a 256  Here are 4 properties of a hash function that are important to note: - it is easy to compute the hash value for any given message - it is infeasible to generate a message from its hash - it is infeasible to modify a message without changing the hash - it is infeasible to find two different messages with the same hash. $k$ is the number of blocks the attacker has already mined in secret. If the attacker has mined more blocks than the current $z$ blocks in the blockchain, then he has already won. This is an example of a block from the bitcoin blockchain: [link](https://blockexplorer.com/block/0000000000000000048c10bad98d5928f0874f751cd5adfd638379a04eb21dbf) the difficulty scaling was chosen in such a way, that it support it. also, even in 2009 he did foresee an arms race and called for gentlemen agreement to postpone it a bit https://bitcointalk.org/index.php?topic=12.msg54#msg54 Amos, thank you for your clarification. I have another question: what happens to all of the transactions that were approved in the "loser" blockchain (i.e.: say three blocks were mined and coins minted on two simultaneous chains, and 30 minutes later, one chain turns out to be the one with more proof of work, thereby rendering the other one a dud. Do all transactions and minted coins from the losing chain automatically fail)? Can escrow be used to prevent charge-back fraud for credit cards? More broadly, can escrow (or a similar scheme) be used to enable completely non-reversible transactions in traditional, centralized finance? Simplified Payment Verification (SPV) is about verifying that a transaction has been accepted into the blockchain without having to download the entire blockchain. With SPV the client downloads only the block headers and not the transactions themselves. In the diagram, we can see a sequence of block headers. We are trying to check if transaction $Tx_{3}$ is part of the second block (block 2). In order to do that the client performing SPV needs to request a few more nodes of block 2’s Merkle tree from some other bitcoin client that has the whole blockchain locally. We only need to request *Hash01* and *Hash2*. Then we can use *Hash2* and *Hash3* (which we got from $Tx_{3}$) to compute *Hash23* and then we can use *Hash23* and *Hash01* to compute the Merkle Root hash. Finally, we compare the computed Merkle Root hash against the one referenced on block 2’s header. If those values match, $Tx_{3}$ has been accepted into the blockchain. If you want to learn more about SPV I suggest you check out [Bitcoin and the Blockchain - Chapter 6. The Bitcoin Network](http://chimera.labs.oreilly.com/books/1234000001802/ch06.html#spv_nodes) "Peer-to-Peer" is an important concept in Bitcoin. It means that Bitcoin does not require a trusted, central authority that oversees all transactions, but instead relies solely on the network of machines participating in the bitcoin protocol. Analysis to show that as long as an attacker possesses less than 50% of the computational power in the network, he produces blocks at a lower expected rate than the rest of the nodes, and so the probability of a successful attack on a given transaction decreases exponentially as more blocks are added to the chain on top of it. I will like to point out that João sentence starts with "As it stands", validation comes later. Can you elaborate please? Are these two almost the same concept? How the Bitcoin nodes calculate the chain with the greatest amount of work? Would we even know if that has happened? Doesn't this jeopardise Satochi's initial idea of a currency for small transactions free of charge? Is this transaction fee a percentage or a fixed rate? As it stands, the system is still vulnerable to double spending. Say that Owner 1 just completed the transaction to Owner 2. Right after he does this, nothing prevents him from approaching another person, Owner 4, and repeating the exact same process, reusing the funds he got from Owner 0. In order words, Owner 1 would do exactly the same thing he did for the transaction to Owner 2, but he would instead use Owner 4’s public key. The miners need to be rewarded for their work. In bitcoin that is accomplished via the mining reward and transaction fees. As the mining reward gets smaller (it halves approximately every 4 years), transaction fees will increasingly become the way miners get paid. The transaction fees are voluntary and set by the person that wants to execute the transaction. Nevertheless miners are not obliged to accept a specific transaction and include it in the block. Therefore transaction fees work as an incentive on the part of the bitcoin user to make sure that a specific transaction will be included in the next block. The purpose of the timestamp server is to prove (or disprove) the existence of a piece of data at a certain point in time. To do that the timestamp server calculates the hash of the data and publishes it widely. The timestamp server is therefore a series of $(hash, timestamp)$ pairs. One can confirm the existence of a piece of data at a certain point in time by recomputing the hash of the data and checking it against the one published by the timestamp server. Here, I believe escrows can only help the buyers but merchants still have the problem of not getting paid with escrows. In case it wasn't clear: Alice has 3 Bitcoins and wants to send Bob 1 of them. She generates a new identity Charlie and publishes the transaction -- 3 Bitcoins from Alice, 1 to Bob, 2 to Charlie. By only looking at the transaction, you would not be able to tell that the person behind "Charlie" is the same as the person behind "Alice," thus providing an additional layer of anonymity. Here the author describes a way to develop bitcoin clients that don’t need to have the complete block chain on disk. The main reason for this would be to conserve disk space (e.g. perhaps you want to have a bitcoin client on your phone but you don’t want it to take up multiple gigabytes of disk space). Using this scheme does make the user vulnerable to a specific type of [attack](http://sourceforge.net/p/bitcoin/mailman/message/28618979/), which is not possible if you have the entire blockchain locally. A [block](https://en.bitcoin.it/wiki/Block) is a record of a number of transactions in the bitcoin network. A block contains: * The transactions that happened during a period of time * A number of metadata fields such as: * Timestamp * Nonce (the solution to the proof-of-work problem) * The current difficulty (how hard it is to solve the proof-of-work problem) * Reference to the previous block * The root hash of the [Merkle tree](https://en.wikipedia.org/wiki/Merkle_tree) of all transactions in the block Consider an attacker that has paid some merchant, has had its transaction embedded in the block chain, but wishes to reverse it (after obtaining some goods in return). The attacker may then use the fact that nodes will adopt an alternative version of the block chain if it is longer than their current one. It can try to create a fork of the current chain that splits off just before the block containing his transaction, and extend this fork in the chain until it is longer than the current chain. Once published, this alternative chain will take over as the accepted version of events and the attacker's original transaction will be discarded along with the block that contained it. **Reversible Transactions** Credit card payments are monitored by a central authority (the credit card networks). The central authority reserves the right to reverse a transaction under some situations - e.g. fraud. Being able to reverse a transaction can be useful in some situations but it also has some disadvantages. The reversible nature of credit card payments puts businesses at risk of charge-back fraud - e.g. a consumer initiates a payment reversal by falsely claiming that the item they bought was never delivered. Merchants can therefore lose the payment for the item after sending the item to the customer, and also have to pay a fee for the charge-back. Bitcoin transactions are non-reversible, meaning that after a transaction has been successfully completed there is no entity that can undo that transaction. When we talk about 'modifying a block' we are not talking about changing the bits of a block that is already in the blockchain. In order to 'change' a block, and 'rewrite history' an attacker has to generate an alternative chain of blocks which contains the manipulated blocks and is longer than the existing chain. If the attacker manages to do this his alternative chain will be the one that gets accepted by the other nodes. This diagram can be hard to understand at first. The diagram is illustrating the transaction flow from Owner 0 to Owner 1 to Owner 2. The idea is that before Owner 2 can accept the transaction from Owner 1, Owner 1 needs to show proof that he is entitled to the funds. In this case, that proof is a record showing that Owner 1 got the funds from Owner 0. In the first transaction box of the diagram we can see that Owner 0 takes the previous transaction (arrow coming from the left), adds Owner 1’s public key (the public key of the person Owner 0 wants to transfer funds to) and hashes the result. The output of the hash is then digitally signed by Owner 0 using his private key (which proves that Owner 0 was indeed the person that put together the transaction). Then Owner 0 sends this transaction to Owner 1. Owner 1 follows the same process and sends the transaction to Owner 2. Each block contains a nonce that is hashed together with the actual data in the block to produce a final hash containing $n$ leading zeros. As noted above in the explanation of Hashcash, the greater $n$ is, the more exponentially hard it is to generate such a hash. The greater the difficulty, the more work has to be put into finding a nonce that generates such a hash. As such, by looking at the number of leading zeros there are, one can determine the difficulty and thus estimate the amount of work put into generating said blocks. So a single block with ten leading zeros for its hash would represent more work than ten blocks with one leading zero for their hashes. Daniel, lets say there is t1, t2 and t3 transactions were made at 10 min. When two nodes create the blocks, both of the block will contain t1, t2 and t3, only the order might be differ. Even if one of them fails, all the transactions will be processed, of course if the transactions are valid.