Unit 2 Bitcoin

Key Points about Bitcoin

1. Introduced in 2008 by Satoshi Nakamoto.
2. It is a decentralized digital currency – no central bank or government control.
3. Works on a peer-to-peer (P2P) network where users directly exchange bitcoins.
4. Transactions are stored in a public ledger called Blockchain.
5. Uses cryptography (Elliptic Curve Cryptography + SHA-256) for security.
6. Private key (secret) and public key (shared) are used for ownership & verification.
7. A Bitcoin address is like an account number, derived from the public key.
8. Every transaction has inputs, outputs, and a digital signature.
9. Mining validates transactions, secures the network, and creates new bitcoins.
10. Total supply is limited to 21 million bitcoins.
11. The smallest unit is a Satoshi (0.00000001 BTC).
12. Used for payments, trading, and investment worldwide.

Elements of Bitcoin ( KATBMNW)

Your PPT lists the following main components of Bitcoin:
 Digital Keys
 Addresses
 Transactions
 Blockchain
 Miners
 Bitcoin Network
 Wallets

1. Digital Keys
Bitcoin uses public and private keys to manage ownership and transactions.
 Based on Elliptic Curve Cryptography (ECC).
 Private Key: ( Like ATM PIN )
o A 256-bit randomly generated number.
o Proves ownership of Bitcoins.
o Must be kept secret.
o Used to digitally sign transactions.
o Often encoded in Wallet Import Format (WIF) for ease.
o Example: A3ED7EC8A03667180… (hexadecimal).
  Public Key: ( ATM Card )
o Derived mathematically from the private key.
o Shared with everyone.
o Used by others to verify that the signature is valid.
o Available in compressed or uncompressed format.
👉 In simple words: Private key = password, Public key = username.

2. Bitcoin Addresses ( bank account number )

 A Bitcoin address is like an account number.

 Created by hashing the public key twice:
o First with SHA-256, then with RIPEMD-160.
 Encoded using Base58Check to avoid confusing characters (0, O, I, l).
 Length: 26–35 characters, starting with 1 or 3.
 Types:
o P2PKH (Pay-to-Public-Key-Hash) → addresses starting with “1”.
o P2SH (Pay-to-Script-Hash) → addresses starting with “3”.
 Special Addresses:
o Vanity addresses → customized readable addresses (e.g., 1LOVE…).
o Multisignature (M-of-N MultiSig) → need multiple keys to release funds.
👉 In simple words: Address = bank account number for Bitcoin.

3. Transactions
 A transaction is a transfer of Bitcoin from one address to another.
 Includes sender’s address, receiver’s address, amount, and digital signature.
 Steps:
1. Sender enters receiver’s address (or scans QR code).
2. Transaction is signed with sender’s private key.
3. Broadcasted to the Bitcoin network.
 4. Miners verify and include it in a block.
 Transaction fees (in Satoshis/byte) are paid to miners for faster confirmation.
👉 In simple words: Transaction = sending Bitcoin, verified and stored in blockchain.

4. Blockchain
 The blockchain is the public ledger of all Bitcoin transactions.
 Each block contains:
o List of verified transactions.
o Reference to the previous block (hash).
o Nonce (for mining).
o A nonce is a trial number that miners keep changing until they find a hash that
meets Bitcoin’s difficulty target.
 Ensures immutability: once added, data cannot be changed.

5. Mining
 Mining = process of validating transactions and adding them to blockchain.
 Miners compete to solve a mathematical puzzle (Proof of Work).
 The winner gets:
o Block reward (newly minted Bitcoins).
o Transaction fees.
 Mining makes the network secure but requires heavy computational power.

6. Bitcoin Network
 A peer-to-peer (P2P) distributed network of nodes.
 Every node keeps a full copy of the blockchain.
 Nodes verify and relay transactions.
 Eliminates the need for central control.

7. Wallets
 Wallet = software that stores private keys and manages transactions.
 Types:
o Hot wallets → online (e.g., mobile apps).
o Cold wallets → offline (e.g., hardware wallets, paper wallets).
 Wallets generate keys, store addresses, calculate fees, and broadcast transactions.
👉 In simple words: Wallet = your personal bank app for Bitcoin.
Transactions
 A transaction = transfer of bitcoins from one address to another.
 Each transaction has:
o Inputs → Where the money comes from (previous unspent coins).
o Outputs → Where the money goes (receiver’s address).
o Signature → Sender signs with private key to prove ownership.
 Transactions are broadcast to the network.
 Miners validate and put them into blocks.
⚡ Transaction Lifecycle:
1. User creates a transaction in wallet software.
2. Transaction is digitally signed with sender’s private key.
3. Transaction is broadcasted to the network.
4. Miners check validity and add it to a block.
5. After confirmations (3–6 blocks) → it’s considered final.
💰 Transaction Fee:
 Small fee paid to miners for including your transaction.
 Higher fee → faster confirmation.

The Structure of a Block (Blockchain)

A block = container of transactions.
 Block Header contains:
o Version
o Previous block’s hash
o Merkle root (hash of all transactions inside block)
o Timestamp
o Difficulty target
o Nonce
 Block Body contains:
o Transactions list.
🔗 Each block links to the previous one → forming a chain (Blockchain).
 Genesis Block = First block (mined in Jan 2009).
 This linking makes data immutable (cannot be changed).
Mining
Mining = process of:
1. Validating transactions.
2. Solving a mathematical puzzle (Proof of Work) by finding a nonce.
3. Adding the new block to the blockchain.
4. Reward: Miners get new bitcoins + transaction fees.
 Mining requires huge computational power.
 Originally done on CPUs, then GPUs, now mostly ASICs (special hardware).
 Purpose:
o Keeps network secure.
 o Prevents double spending.
o Releases new bitcoins into the system.

Bitcoin Network (from PPT in simple words)

 The Bitcoin network is a peer-to-peer (P2P) network where all nodes (computers)
exchange transactions and blocks.
 There are two main types of nodes:
1. Full Nodes →
 Store the complete blockchain.
 Work as wallet, miner, validator, and router.
2. SPV (Simple Payment Verification) Nodes →
 Lightweight clients.
 Do not store the full blockchain, only block headers.
 Used mostly in mobile wallets.
 The network uses the Stratum protocol → a line-based protocol using plain TCP
sockets and JSON-RPC messages.
 Stratum is often used to connect mining pools.
Bitcoin Wallets (Brief)
 Wallets store private keys, public keys, and addresses.
 They do not store coins, only keys to access them.
 Main types:
1. Non-deterministic → random keys, hard to manage.
2. Deterministic → keys from a seed (mnemonic words).
3. HD Wallets → tree structure of keys, easy recovery.
4. Brain Wallets → derived from memorized password.
5. Paper Wallets → keys printed on paper.
6. Hardware Wallets → physical devices (Trezor, Ledger).
7. Online Wallets → stored in cloud (e.g. GreenAddress).
8. Mobile Wallets → phone apps (Blockchain, Breadwallet, Copay).

Bitcoin Payments (from PPT in simple words)

 Bitcoins can be accepted as payments using different techniques.
 Bitcoin is not recognized as legal currency in many countries, but many online
merchants and e-commerce websites accept it.
 Bitcoin URIs (Uniform Resource Identifiers) allow users to make payments by
clicking a link or scanning a QR code. (Defined in BIP-21).
 The QR code is usually displayed near the Point of Sale (POS) terminal.

📌 Process of Bitcoin Payment at POS (from PPT)

1. The seller enters the amount in fiat currency (e.g., USD).
 2. The system/terminal prints a receipt with a QR code.
3. The customer scans the QR code using their mobile Bitcoin wallet.
4. The payment is sent to the seller’s Bitcoin address inside the QR code.
5. Once the payment is received, a receipt is printed as proof of sale.

📌 Commercial Payment Solutions (from PPT)

 Examples: XBTerminal, 34 Bytes POS terminal.
 These devices make it easy for businesses to accept Bitcoin.

📌 Online Payment Processors (from PPT)

 Many online service providers help websites accept Bitcoin as payment.
 Some providers also allow secure storage of bitcoins.

✅ In short (from PPT):

Bitcoin payments are made using URIs and QR codes. Businesses use POS devices and
payment processors to accept Bitcoin easily. Payments are quick, borderless, and recorded on
the blockchain.

🔹 Innovation in Bitcoin
 Many e-commerce sites now accept Bitcoin.
 Bitcoin URIs + QR codes make payments faster and user-friendly.
 Bitcoin POS devices exist for shops (scan & pay).
 Online services provide integration with websites to accept Bitcoin.
 Some services also allow secure storage of bitcoins.

Bitcoin Denominations
 Smallest unit: 1 Satoshi = 0.00000001 BTC.
 Other denominations: mBTC (milli), μBTC (micro).

🔹 Bitcoin Clients
 A Bitcoin client is software that allows users to interact with the Bitcoin network.
 It performs functions like:
o Storing private keys.
o Sending and receiving transactions.
o Communicating with other nodes.
  Examples: Bitcoin Core (the original full client), lightweight clients, and mobile wallet
clients.

🔹 Bitcoin APIs
 APIs (Application Programming Interfaces) allow developers to connect applications
or websites with the Bitcoin network.
 They can be used for:
o Accessing blockchain data (transactions, blocks, balances).
o Creating or broadcasting transactions.
o Integrating Bitcoin payments into websites or apps.

🔹 Bitcoin Installation (from PPT)

 To install the official Bitcoin software, go to:
🔗 https://bitcoin.org/en/download
 The software package includes the Bitcoin Core client.
 Once installed, the client downloads the blockchain and connects the user to the Bitcoin
network.

Alternative Coins
 Inspired by Bitcoin but with variations.
 Examples: Litecoin, Ethereum, Ripple.
Introduction
 Bitcoin was the first cryptocurrency, but it has some limitations such as:
o Slow transaction speed.
o High energy consumption due to mining.
o Scalability problems (~7 transactions per second).
o Limited functionality (mainly for payments only).
 To overcome these issues, many other cryptocurrencies were created.
 These are called Altcoins (Alternative Coins).
👉 Definition:
Altcoins are all cryptocurrencies other than Bitcoin. They are built on blockchain technology but
have different features, consensus mechanisms, and use cases.

Types and Examples of Bitcoin Alternatives

1. Litecoin (LTC)
o Created in 2011 by Charlie Lee.
o Known as the “silver to Bitcoin’s gold.”
 o Faster block time (2.5 minutes vs Bitcoin’s 10 minutes).
o Uses Scrypt algorithm, making mining easier for normal computers.
o Lower transaction fees than Bitcoin.
👉 Litecoin = faster and cheaper version of Bitcoin.

2. Ethereum (ETH)
o Introduced in 2015 by Vitalik Buterin.
o More than currency – supports Smart Contracts and DApps (Decentralized
Apps).
o Runs on Ethereum Virtual Machine (EVM).
o Recently shifted from Proof of Work to Proof of Stake (energy-efficient).
👉 Ethereum = programmable blockchain, not just payments.

3. Ripple (XRP)
o Focus on fast, low-cost cross-border payments.
o Designed mainly for banks and financial institutions.
o Transactions confirmed within seconds, with very low fees.
o No mining; uses Ripple Consensus Protocol.
👉 Ripple = blockchain system for banks and international transfers.

4. Monero (XMR)
o Launched in 2014.
o Special focus on privacy and anonymity.
o Hides sender, receiver, and amount using cryptography.
o Transactions cannot be easily traced (unlike Bitcoin).
👉 Monero = complete privacy coin.

5. Dash
o Created in 2014 (originally called Darkcoin).
o Focus on fast and cheap digital payments.
o Features: InstantSend (fast) and PrivateSend (anonymous).
o Uses a two-tier network (miners + masternodes).
👉 Dash = quick and private digital cash.

6. Other Altcoins
o Zcash → privacy-focused like Monero.
o Dogecoin → started as a meme coin, now used for tips & micro-payments.
 o Cardano → research-driven blockchain with Proof of Stake.

General Features of Altcoins (vs Bitcoin)

 Faster block generation (Litecoin).
 Support for smart contracts (Ethereum).
 Banking/finance focused (Ripple).
 Privacy and anonymity (Monero, Zcash).
 Community-driven & fun (Dogecoin).

Conclusion
 Bitcoin started the cryptocurrency revolution, but due to its limitations, many Altcoins
were developed.
 Each Altcoin improves on Bitcoin in different ways – speed, privacy, smart contracts,
or finance.
 Together, Altcoins expand blockchain use beyond just payments into many industries.
👉 Final exam line:
“While Bitcoin remains the pioneer, alternatives like Litecoin, Ethereum, Ripple, Monero, and
Dash have improved upon its drawbacks and opened new use-cases, making blockchain
technology more versatile.”

Bitcoin Limitations
1. Scalability issues → limited transactions per second.
2. High transaction fees during peak usage.
3. Energy consumption due to mining.
4. Volatility in value.
5. Security risks (attacks like Sybil, transaction malleability, selfish mining).
o Some solved (e.g., Segregated Witness upgrade fixed malleability).

✅ Summary for Exams:

Bitcoin is a decentralized digital currency relying on blockchain, keys, addresses, transactions,
miners, and wallets. It enables peer-to-peer payments without intermediaries but faces
challenges like scalability, fees, and energy usage.