Cryptocurrency

By
Sagar Patil
 History
• Digital Currencies Before Bitcoin :
• Two fundamental questions for anyone accepting digital money
are:
• 1. Can I trust the money is authentic and not counterfeit?
• 2. Can I be sure that no one else can claim that this money belongs
to them and not me? (aka the “double-spend” problem)
• For digital money, which cannot take advantage of esoteric inks or
holographic strips, cryptography provides the basis for trusting the
legitimacy of a user’s claim to value.
• they were centralized and as a result they were easy to attack by
governments and hackers. Early digital currencies used a central
clearing house to settle all transactions at regular intervals,
• a decentralized digital currency was needed to avoid a single point
of attack. Bitcoin is such a system, completely de-centralized by
design, and free of any central authority or point of control that
can be attacked or corrupted.
• four key innovations brought together in a unique and powerful
combination. Bitcoin consists of:
• A de-centralized peer-to-peer network (the bitcoin protocol);
• A public transaction ledger (the blockchain);
• A de-centralized mathematical and deterministic currency issuance
(distributed mining), and;
• A de-centralized transaction verification system (transaction script).
• The bitcoin network started in 2009, based on a reference
implementation published by Nakamoto and since revised by
many other programmers.
• Satoshi Nakamoto combined several prior inventions such as
b-money and HashCash etc.
• Satoshi Nakamoto withdrew from the public in April of 2011,
leaving the responsibility of developing the code and network to a
thriving group of volunteers.
 Distributed Ledger
• a distributed ledger is a broad term describing shared databases;
• blockchain is a "distributed ledger," which means that a ledger is
spread across the network among all peers in the network, and
each peer holds a copy of the complete ledger.
• a distributed ledger does not necessarily consist of blocks of
transactions to keep the ledger growing.
• Although all blockchains are fundamentally distributed ledgers, all
distributed ledgers are not necessarily blockchains.
• Corda is a distributed ledger that is developed to record and
manage agreements and is especially focused on the financial
services industry.
• On the other hand, more widely known blockchains like Bitcoin
and Ethereum make use of blocks to update the shared database.
• Fabric- Hyperledger Fabric is a blockchain project that was
proposed by IBM and Digital Asset Holdings (DAH).
• Sawtooth - Hyperledger Sawtooth is a blockchain project
proposed by Intel in April 2016.
• Iroha - Iroha was contributed by Soramitsu, Hitachi, NTT Data, and
Colu in September 2016.
• Indy - Indy has its own distributed ledger and uses Redundant
Byzantine Fault Tolerance (RBFT) for consensus.
• Besu - Besu is a Java-based Ethereum client.
• Burrow- This project is currently in the incubation state.
Hyperledger Burrow was contributed by Monax, who develop
blockchain development and deployment platforms for business.
• Burrow uses Proof of Stake (PoS) and a Byzantine fault-tolerant
(BFT) Tendermint consensus mechanism.
 Bitcoin protocols
• Segregated Witness - The SegWit or
Segregated Witness is a soft fork-based
upgrade of the Bitcoin protocol that addresses
weaknesses such as throughput and security
in the Bitcoin protocol.
• Bitcoin Cash
• Bitcoin Unlimited
• Bitcoin Gold
 Mining strategy
and rewards
• There are also some interesting strategic considerations that every miner has to
make before they pick which blocks to work on.

1. Which transactions to include. Miners get to choose which transactions they include
in a block. The default strategy is to include any transaction which includes a
transaction fee higher than some minimum.
2. Which block to mine on. Miners also get to decide on top of which block they want
to mine. The default behavior for this decision is to extend the longest known valid
chain.
3. Choosing between blocks at the same height. If two different blocks are mined and
announced at around the same time, it results in a 1-block fork, with either block
admissible under the longest valid chain policy. Miners then have to decide which
block to extend. The default behavior is to build on top of the block that they
heard about first.
4. When to announce new blocks. When they find a block, miners have to decide when
to announce this to the Bitcoin network. The default behavior is to announce it
immediately, but they can choose to wait some time before announcing it.
 Forking attack .

• Is 51% necessary?
• Attacks and the exchange rate.
 Forking attack via bribery.
• Buying enough hardware to control the
majority of the hash power appears to be an
expensive and difficult task.
• Whatever the mechanics of the bribing are,
the idea is the same: instead of actually
acquiring all the mining capacity directly, the
attacker just pays those who already have it to
help their fork overcome the longest chain.
Temporary block-withholding attacks
 Blacklisting and punitive forking
• Say a miner wants to blacklist transactions from
address X . In other words, they want to freeze the
money held by that address, making it unspendable.
• Feather-forking. Punitive forking doesn’t appear to
work without a majority of the network hash power. By
announcing that you'll refuse to mine on any chain
that has certain transactions,
• So it's not safe to assume that a miner who doesn't
control 50 percent of the network doesn't have
anything to gain by switching to an alternate strategy.
• Transitioning to mining rewards dominated by
transaction fees.
 Ethereum
• Ethereum is a blockchain that allows you to run
programs in its trusted environment.
• contrasts with the Bitcoin blockchain, which only allows
you to manage cryptocurrency.
• Ethereum has a virtual machine -- Ethereum Virtual
Machine (EVM).
• The EVM allows code to be verified and executed on
the blockchain,
• providing guarantees it will be run the same way on
everyone's machine.
• This code is contained in "smart contracts"
• Ethereum maintains the state of the EVM on the
blockchain.
• All nodes process smart contracts to verify the integrity
of the contracts and their outputs.
Components of the Ethereum
ecosystem
 The Ethereum network
• The mainnet - The mainnet is the current live
network of Ethereum. Its network ID is 1 and its
chain ID is also 1.
• Testnets- There is a number of testnets available
for Ethereum testing. The aim of these test
blockchains is to provide a testing environment for
smart contracts and DApps before being deployed
to the production live blockchain.
• Private nets- As the name suggests, these are
private networks that can be created by
generating a new genesis block.
 DAO
• decentralized autonomous organization (DAO) is a
computer program that runs on top of a blockchain, and
embedded within it are governance and business logic rules.
• DAOs are autonomous, which means that they are fully
automated and contain artificially intelligent logic.
• DOs, on the other hand, lack this feature and rely on human
input to execute business logic.
• Ethereum blockchain led the way with the introduction of
DAOs.
• The most famous DAO project is The DAO, The DAO project
was designed to be a venture capital fund aimed at
providing a decentralized business model with no single
entity as owner.
• Currently, DAOs do not have any legal status
• Due to a bug, called the reentrancy bug, in the code, it
was hacked in June 2016.
• The smart contract did what it was asked to do but due
to the vulnerabilities in the smart contracts, the
attacker was able to exploit it.
• The notion of code is the law or unstoppable smart
contracts should be viewed with some skepticism
• The DAO attack highlights the dangers of not formally
and thoroughly testing smart contracts
• Vyper is another language that aims to provide a
secure language for developing smart contracts for
EVM.
 Smart Contract
• A smart contract is a secure and unstoppable computer program
representing an agreement that is automatically executable and
enforceable.
• they should work on the principle that code is the law, which
means that there is no need for an arbitrator or a third party to
enforce, control, or influence the execution of a smart contract.
• they are secure and unstoppable
• However, if deviate from the usual or expected state, the program
may react arbitrarily or abort.
• The legality of smart contracts is uncertain in many jurisdictions
• smart contract code and natural language contracts through
linking This is achieved using a markup language called the Legal
Knowledge Interchange Format (LKIF),
a smart contract has the following properties:
• Automatically executable: It is self-executable on a blockchain without
requiring any intervention.
• Enforceable: This means that all contract conditions are enforced
automatically.
• Secure: This means that smart contracts are tamper-proof (or
tamper-resistant) and run with security guarantees. The underlying
blockchain usually provides these security guarantees; however, the
smart contract programing language and the smart contract code
themselves must be correct, valid, and verified.
• Deterministic: The deterministic feature ensures that smart contracts
always produce the same output for a specific input. Even though it
can be considered to be part of the secure property, defining it here
separately ensures that the deterministic property is considered one
of the important properties.
• Semantically sound: This means that they are complete and meaningful
to both people and computers.
• Unstoppable: This means that adversaries or unfavorable conditions
cannot negatively affect the execution of a smart contract. When the
smart contracts execute, they complete their performance
deterministically in a finite amount of time.
 Deploying smart contracts
• Smart contracts may or may not be deployed on a
blockchain
• Ethereum is an example of a blockchain platform that
natively supports the development and deployment of
smart contracts.
• Various other blockchain platforms support smart
contracts such as Monax, Lisk, Counterparty, Stellar,
Hyperledger Fabric, Axoni core, Neo, EOSIO, and Tezos.
• Smart contracts can be developed in various
languages, either DSLs or general-purpose languages,
Solidity, JavaScript, Golang, Java, C++.
 GHOST
• The consensus mechanism in Ethereum is based on the
Greedy Heaviest Observed Subtree (GHOST) protocol.
• Ethereum uses a simpler version of this protocol, where the
chain that has the most computational effort spent on it to
build it is identified as the definite version.
 Attacks & Vulnerability
• Sybil attack
• Collision attack
• replay attack
• brute force attack
• double-spending attack
• 51% attack
• denial of service attack
• DAO attack
• eclipse attacks
 Vulnerability
• The DAO attack exploited a vulnerability
(reentrancy bug) in the DAO code where it was
possible to withdraw tokens from the DAO
smart contract repeatedly before giving the
DAO contract a chance to update its internal
state to indicate that how many DAO tokens
have been withdrawn.
• Timestamp dependence is another
vulnerability
 Sidechain
• "pegged sidechains," this is a concept whereby coins can be
moved from one blockchain to another and then back again.
• Typical uses include the creation of new altcoins (alternative
cryptocurrencies) whereby coins are burnt as a proof of an
adequate stake.
• This mechanism is also called "Proof of Burn"
• one-way pegged sidechain.
• two-way pegged sidechain
• This process enables the building of smart contracts for the
Bitcoin network.
• Rootstock is one of the leading examples of a sidechain
 Namecoin
• Could we modify Bitcoin’s design to support other
applications of secure global databases, such as a
naming system?
• We’ll need a few ground rules
• only the user who initially created the entry for a
particular name is allowed to make updates to that
name.
• It’s a global name/value store where each user can
register one or more names (for a nominal fee) and
then issue updates to the values of any of their names.
• Namecoin’s goal is to provide a decentralized version
of the Domain Name System (DNS), Ex. example.bit