UNIT-II

INTRODUCTION
CRYPTO TO
CURRENCY
WHAT IS BITCOIN?
• Bitcoin is a decentralized digital currency that
allows for peer-to-peer transactions without the
need for intermediaries like banks or
governments.

• It is powered by blockchain technology and is

the first and most widely known cryptocurrency.

• It was created in 2009 by an anonymous

individual or group using the pseudonym
Satoshi Nakamoto.
DIGITAL KEYS AND
ADDRESSES

Digital keys and addresses are

essential components of how
Bitcoin functions, enabling secure
ownership, transfer, and
management of bitcoins.
DIGITAL KEYS
Digital keys are cryptographic tools that allow users to securely interact with the
Bitcoin network.
• Private Key
• A private key is a randomly generated string of numbers and letters.
• It acts as a secret code, granting control over the bitcoins in an associated wallet.
• Role:
Signs transactions to prove ownership.
Must be kept secure and private; if lost or stolen, access to the bitcoins is
permanently lost.
• Example: 5HueCGU8rMjxEXxiPuD5BDu...
(Typically a long hexadecimal or alphanumeric string.)
 • Public
•Key
A public key is derived from the private key using a cryptographic process.
• It is shared with others to receive Bitcoin.
• Role:
Works as an intermediary to generate a Bitcoin address.
Ensures security, as the private key cannot be reverse-engineered from the
public key.
BITCOIN ADDRESSES
• A Bitcoin address is a shortened, user-friendly representation of the public key. It
is used for sending and receiving bitcoins.
• Characteristics of Bitcoin Addresses:
Typically 26–35 alphanumeric characters long.
Start with a prefix, such as 1, 3, or bc1, indicating the type of address.
Example: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa
• Role of Addresses:
Function as identifiers for transactions.
Ensure privacy and ease of use, as users can generate new addresses for each
transaction.
WHAT IS BITCOIN
TRANSACTION?
• Bitcoin transactions are messages that state the
movement of bitcoins from senders to receivers.
Transactions are digitally signed using cryptography and
sent to the entire Bitcoin network for verification.

• Transaction information is public and can be found on

the digital ledger known as the 'blockchain.' The history
of each and every Bitcoin transaction leads back to the
point where the bitcoins were first produced or 'mined.’
TRANSACTION LIFE CYCLE
1. A user/sender sends a transaction using wallet software or some other interface.
2. The wallet software signs the transaction using the sender's private key.
3. The transaction is broadcasted to the Bitcoin network using a flooding algorithm.
4. Mining nodes include this transaction in the next block to be mined.
5. Mining starts once a miner who solves the Proof of Work problem broadcasts the
newly mined block to the network.
6. The nodes verify the block and propagate the block further, and confirmation starts
to generate.
7. Finally, the confirmations start to appear in the receiver's wallet and after
approximately six confirmations, the transaction is considered finalized and
confirmed. However, six is just a recommended number, the transaction can be
considered final even after the first confirmation. The key idea behind waiting for six
confirmations is thatthe probability of double spending is virtually eliminated after six
TYPES OF TRANSACTION
• Pay to Public Key Hash (P2PKH): P2PKH is the most commonly used
transaction type and is used to send transactions to the bitcoin addresses.
Theformat of the transaction is shown as folows: ScriptPubKey: OP_DUP
OP_HASH160 OP_EQUALVERIFY OP_CHECKSIG.
ScriptSig: The ScriptPubKey and ScriptSig parameters are concatenated together
and executed.

• Pay to Script Hash (P2SH): P2SH is used in order to send transactions to a

script hash (that is, the addresses starting with 3) and was standardized in BIP16.
In addition to passing the script, the redeem script is also evaluated and must be
valid. The template is shown as follows:
ScriptPubKey: OP_HASH160 OP_EQUALScriptSig: [...].
 • MultiSig (Pay to MultiSig): M of n multisignature transaction script is a complex type of
script where it is possible to construct a script that required multiple signatures to be valid
in order to redeem a transaction. Various complex transactions such as escrow and deposits
can be built using this script. The template is shown here:
ScriptPubKey: [ . . . ] OP_CHECKMULTISIG
ScriptSig: 0 [ . . . ] Raw multisig is obsolete, and multisig is usually part of the P2SH
redeem
script,mentioned in the previous bullet point.

• Pay to Pubkey: This script is a very simple script that is commonly used in coinbase
transactions. It is nowobsolete and was used in an old version of bitcoin. The public key is
stored within the script in this case, and theunlocking script is required to sign the
transaction with the private key. The template is shown as follows: OP_CHECKSIG Null
data/OP_RETURN: This script is used to store arbitrary data on the blockchain for a fee.The
limit of the message is 40 bytes. The output of this script is unredeemable because
WHAT IS BITCOIN
MINING?
• Bitcoin mining is a computation-intensive process
that uses complicated computer code to generate
a secure cryptographic system. The bitcoin miner
is the person who solves mathematical
puzzles(also called proof of work) to validate the
transaction.

• Mining in Bitcoin is the process through which new

bitcoins are created and transactions are verified
and added to the blockchain. It is a fundamental
part of Bitcoin's decentralized system, ensuring
security, consensus, and the issuance of new
currency.
HOW DOES BITCOIN MINING WORK?
Let’s understand this with the help of an example-
• Suppose Alice wants to transfer 10 BTC to Bob.
• Now the transaction data of A is shared with the miners from the memory pool. A
memory pool is a place where an unconfirmed or unverified transaction waits for
its confirmation.
• Miners start competing with themselves to solve the mathematical riddle in order
to validate and verify the transaction using proof of work.
• The miner who solves the problem first shares his result with other nodes(miners).
• Once maximum nodes agree with the solution, the transaction block is verified
and is then added to the blockchain.
• At the same time, the miner who solved the puzzle gets a reward of 6.25 bitcoins.
• Now, after the addition of the transaction block, the 10 BTC associated with the
transaction data is transferred to Bob from Alice.
PROS OF BITCOIN MINING
• Mining bitcoin helps support the Bitcoin ecosystem.
• Bitcoin mining helps miners to earn rewards in form of
bitcoins.
• It is the only way to release new cryptocurrencies into
circulation.
CONS OF
• It is used BITCOIN
to check MINING
counterfeiting and double spending.

• Mining requires significant energy, raising concerns about

environmental impact.
• Mining is dominated by large operations with specialized hardware
(ASICs), which could lead to centralization.
• As block rewards decrease over time, miners will rely more on
transaction fees for income.
BITCOIN NETWORK
The bitcoin network is a P2P network where nodes exchange transactions and blocks.
There are different types of nodes on the network. There are two main types of nodes, full
nodes and SPV nodes. Full nodes, as the name implies, are implementations of bitcoin core
clients performing the wallet, miner, full blockchain storage, and network routing functions.
However, it is not necessary to perform all these functions. SPV nodes or lightweight clients
perform only wallet and network routing functionality. The latest version of Bitcoin protocol
is 70014 andwas introduced with bitcoin core client 0.13.0.
Bitcoin network is identified by its different magic values. A list is shown as follows
BITCOIN PAYMENTS
• Bitcoins can be accepted as payments using various techniques. Bitcoin is not
recognized as a legal currency in many jurisdictions, but it is increasingly being
accepted as a payment method by many online merchants and e- commerce
websites. There are a numbers of ways in which buyers can pay the business that
accepts bitcoins.
• Forexample, in an online shop, bitcoin merchant solutions can be used, whereas in
traditional physical shops, point of sale terminals and other specialized hardware
can be used. Customers can simply scan the QR barcode with the seller's payment
URI in it and pay using their mobile devices. Bitcoin URIs allow users to make
payments by simply clicking on links or scanning QR codes. URI (Uniform Resource
Identifier) is basically a string that represents the transaction information. It is
defined in BIP21.
• The QR code can be displayed near the point of the sale terminal. Nearly all bitcoin
wallets support this feature. Business can use the following screenshot to advertise
that they can accept bitcoins as payment.
• Bitcoins can be accepted as payments using various techniques. Bitcoin is not
recognized as a legal currency in many jurisdictions, but it is increasingly being
accepted as a payment method by many online merchants and e- commerce
websites. There are a numbers of ways in which buyers can pay the business that
accepts bitcoins.
• Forexample, in an online shop, bitcoin merchant solutions can be used, whereas in
traditional physical shops, point of sale terminals and other specialized hardware
can be used. Customers can simply scan the QR barcode with the seller's payment
URI in it and pay using their mobile devices. Bitcoin URIs allow users to make
payments by simply clicking on links or scanning QR codes. URI (Uniform Resource
Identifier) is basically a string that represents the transaction information. It is
defined in BIP21.
• The QR code can be displayed near the point of the sale terminal. Nearly all bitcoin
wallets support this feature. Business can use the following screenshot to advertise
that they can accept bitcoins as payment.
BITCOIN INVESTMENT AND BUYING AND
SELLING BITCOINS
There are many online exchanges where users can buy and sell bitcoins. This
is a big business on the Internet now and it offers bitcoin trading, CFDs,
spread betting, margin trading, and various other choices. Traders can buy
bitcoins or trade by opening long or short positions to make profit when
bitcoin's price goes up or down. Several other features, such as exchanging
bitcoins for other virtual currencies, are also possible, and many online bitcoin
exchanges provide this function. Advanced market data, trading strategies,
charts, and relevant data to support traders is also available. An example is
shown from CEX.IO here.
WHAT IS BLOCKCHAIN WALLET?
• A blockchain wallet is a special software or a hardware device that
is used to keep the transaction information and personal
information of the user.

• Blockchain wallets do not contain the actual currency. The wallets

are used to keep private keys and maintain a transaction balance.

• Wallets are only a communication tool to communicate to carry

out transactions with other users. The real data or currency is
stored in blocks in the blockchain.
FEATURES OF BLOCKCHAIN WALLET
• Secure: Blockchain wallets are secure as they carry on the private
key that needs to be secured.
• Easy to Use: Blockchain wallets are easy to use as they are just
like any other digital wallets like Paytm that everyone uses in day-
to-day life.
• Low transaction fees: The cost of transferring funds using
blockchain wallets is much lower than that of traditional bank
transactions.
• Instant transactions: Blockchain wallets allow users to instantly
transfer funds across different geographics and these are barrier-
free and without intermediaries.
• Allows multiple cryptocurrencies: Blockchain wallets allow
transactions across multiple cryptocurrencies and thus helping
DISADVANTAGES OF TRADITIONAL
WALLETS
• Traditional wallets have many drawbacks due to which blockchain
wallets have an edge over traditional wallets.
Below are some of the reasons for using blockchain wallets
• Transactions are often slow in traditional banking systems and have
to pass through an intermediary which means that there is a single
central point of failure.
• There is an issue with keeping track of all the transactions, and
accounts, the data can get manipulated or even corrupted across
multiple systems.
• Blockchain wallets reduce all of these problems and hence make the
transactions secure and safe for the users.
HOW DO BLOCKCHAIN WALLETS
WORK?
• The blockchain wallet stores the private keys and public keys for a transaction.
The wallet enables users to sell, and purchase goods using cryptocurrencies.
Let’s understand how a blockchain wallet actually works and what are private
and public keys in a blockchain wallet.
• When a blockchain wallet is created, a public key is generated, and one can
share that public key with anyone in order to receive funds.
• Private keys as the name suggest is a secret key that cannot be shared with
anyone.
• Public keys on the other hand can be shared with anyone.
• They have a relationship similar to a lock and a key. Where a lock can be
opened with a correct matching key only, similarly in a transaction if a public
key matches the private key only then the users can see the value of their
assets.
• No matter how many people have a public key but it will only be useful when it
is paired with the right private key.
Let’s understand this with the concept of the email address.
• To receive an email from someone, the user has to tell his/ her email
address but the received email can only be unlocked using the correct
password for the account.

• Public keys are similar to the email address that can be given to anyone,
and private keys are similar to the account password, that cannot be
shared.

• The private key should not get hacked, if it happened then there is a
possibility that the account is compromised.

• The private key is used to spend funds.

TYPES OF BLOCKCHAIN WALLETS
Hot Storage:

• Hot storage refers to the type of storage that is connected to the

Internet.
• Hot storage, being connected to the Internet, allows the user easy and
quick access to funds. It is helpful in daily transactions.
• But, it also has some disadvantages. It is more vulnerable to hacking and
cybercrime. If the private key is lost then there is no longer access to
coins. Also, if the private key is stolen by someone then it causes to loss
of coins.
• The different types of hot storage wallets are Online(Cloud), Desktop,
and Mobile wallets.
Online(Cloud) Wallets:

• These types of wallets are the most convenient but at the same time,
least secure.
• It is used to store private keys and transaction records online (on another
server). This makes keys vulnerable to hacking as they are being stored
by a third party.
• Online wallets should be used to store less amount of money that is
going to be used for short-term storage i.e. daily transactions in
exchange services.
• Examples: Exchanges like Bittrex or QuadrigaCX, and Online wallets like
Coins.ph and GreenAddress.
Desktop Wallets:

• Desktop wallets provide a better level of security than online wallets as

they are downloaded and installed on a single computer.
• The funds related to an account can only be accessed through that
device which makes it a bit secure at the cost of convenience.
• It is also vulnerable to hacking if the computer gets compromised.
• Examples: Exodus, Multibit, Armory, and Bitcoin Core.
Mobile Wallets:

• Mobile wallets are similar to desktop wallets in terms of providing better

security than online wallets at the cost of convenience.
• It is a bit easier to use than desktop wallets as they are used by installing
an app on a mobile phone which is smaller and simpler than desktop
wallets.
• If the phone will damage then it will not be able to access funds, as in
desktop wallets.
• Examples: Jaxx, BreadWallet, Mycelium, and CoPay.
Cold Storage:

• Cold storage refers to the type of storage that is not connected to the
Internet. It is also known as offline storage.
• Cold storage provides a higher level of security than hot storage. It is
useful for long-term storage, unlike hot wallets. However, a higher level
of security is provided at the cost of convenience. It is not ideal for daily
transactions. Although it is secure, it is vulnerable to external damage
and loss.
• The different types of cold storage wallets are hardware wallets and
paper wallets.
Hardware Wallets:

• Hardware wallets are used to store coins/funds on a hardware device.

• The private keys are stored in an offline device, unlike hot wallets, but
transactions do require an Internet connection to execute.
• It provides a higher level of security than hot wallets as they are stored
offline in a physical device. However, the problem with these wallets is to
trust the company from which buy the devices. It can log private keys
and compromise accounts. Also, one should take extra care not to use
second-hand hardware wallets.
• Examples: Ledger, Trezor, and KeepKey.
Paper Wallets:

• Paper wallets provide the highest level of security than all the other
types of wallets.
• The private keys are stored on paper and then kept in a secure location
that is known only by the people that are trusted.
• Paper wallets are well protected against any type of hacking and
malware. However, one thing to consider when using paper wallets is
that paper can be worn out with time. If they are printed, the printer ink
can leak in case of contact with water or increased temperature.
• Examples: BitAddress.org and Bitcoin Armory allows you to print your
paper wallet.
BITCOIN LIMITATIONS
1. Bitcoins Are Not Widely Accepted
Bitcoins are still only accepted by a very small group of online merchants. This makes it
unfeasible to completely rely on Bitcoins as a currency. There is also a possibility that
governments might force merchants to not use Bitcoins to ensure that users’ transactions can
be tracked.

2. Wallets Can Be Lost

If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Bitcoins have
essentially been “lost”. There is nothing that can done to recover it. These coins will be forever
orphaned in the system. This can bankrupt a wealthy Bitcoin investor within seconds with no
way form of recovery. The coins the investor owned will also be permanently orphaned.
3. Bitcoin Valuation Fluctuates
The value of Bitcoins is constantly fluctuating according to demand. As of June 2nd 2011, one
Bitcoins was valued at $9.9 on a popular bitcoin exchange site. It was valued to be less than $1
just 6 months ago. This constant fluctuation will cause Bitcoin accepting sites to continually
change prices. It will also cause a lot of confusion if a refund for a product is being made. end
becomes important. This might cause spending surges which will cause the Bitcoin economy to
fluctuate very rapidly, and unpredictably.

4. No Buyer Protection
When goods are bought using Bitcoins, and the seller doesn’t send the promised goods, nothing
can be done to reverse the transaction. This problem can be solved using a third party escrow
service like ClearCoin but then, escrow services would assume the role of banks, which would
cause Bitcoins to be similar to a more traditional currency.

5. Risk of Unknown Technical Flaws

The Bitcoin system could contain unexploited flaws. As this is a fairly new system, if Bitcoins
were adopted widely, and a flaw was found, it could give tremendous wealth to the exploiter at
the expense of destroying the Bitcoin economy.
NAME COIN
• Namecoin is a fork of Bitcoin and is based on the code
Bitcoin works on with relatively minor changes. Namecoin is
software used to register domain names. The only difference
is instead of registering a “.com” or “.org” website, the
users can register a “.bit” domain on the network. The
software also stores associated values with that domain
name in the blockchain. Users can then query the database
and retrieve data. These domains are censorship-resistant.

• Namecoin is an experimental protocol based on an open-

source technology that improves the decentralization and
speed of internet infrastructure components like DNS and
identities. The Domain Name System (DNS) is a hierarchical
naming system of the internet and works like a phonebook.
The internet domain names are recorded and translated into
IP addresses via DNS. Namecoin does it by securely
 • Namecoin values are 520 bytes, and the block size limit ranges from 500kb to 1 MB. Blocks
on the blockchain network occur every ten minutes on average.
Namecoin offers various use cases:
• Namecoin can decentralize the internet and protect online free-speech rights by making the
web resistant to censorship.
• Namecoin also provides decentralized TLS certificate validation(like HTTPS), backed by
blockchain consensus. TLS(Transport Layer Security) is a standard protocol that ensures
authentication, privacy, and data integrity between two interacting computer programmes.
• Namecoin can enable users to access websites using the .bit domain.

Namecoin uses a proof-of-work consensus mechanism. NMC is the native coin of the Namecoin
platform. Users need to obtain some NMCs if they want to register “.bit” websites or other
Namecoin names. Namecoin accepts registration fees in NMC. To get NMCs, users need to have
a Namecoin wallet and purchase NMC coins from the exchange. Users can also mine NMCs.
LITECOIN
• Litecoin (LTC) is a cryptocurrency that was created in
2011 by Charlie Lee, a former Google employee. It is a
peer-to-peer digital currency that is based on an open-
source cryptographic protocol, and it operates on a
decentralized network.

• Like Bitcoin, Litecoin uses a public ledger called the

blockchain to record transactions. However, Litecoin is
designed to be faster and more efficient than Bitcoin,
with shorter block times and lower transaction fees.

• Litecoin has gained popularity as a digital currency for

online transactions and micropayments due to its fast
transaction processing times and low fees. It has also
been adopted by some merchants as a payment method,
and it can be traded on various cryptocurrency
• Overall, Litecoin is an alternative cryptocurrency that offers some advantages over Bitcoin,
but it still faces competition from other digital currencies in the cryptocurrency market.

PRIMECOIN
• Primecoin(XPM) is a cryptocurrency that was created in 2013 by a developer named Sunny
King. Primecoin is based on a proof-of-work consensus algorithm that is designed to solve
complex mathematical problems related to prime numbers.

• Unlike other cryptocurrencies that use proof-of-work algorithms to mine for coins, Primecoin's
algorithm is unique in that it searches for prime chains, which are sequences of prime
numbers that are linked by a special mathematical relationship. These prime chains are
useful in cryptography and other areas of mathematics, making Primecoin's mining process
more than just a way to secure its blockchain.

• Primecoin's proof-of-work algorithm is considered to be more energy-efficient than Bitcoin's

proofof-work algorithm, as it can be mined using both CPUs and GPUs. Primecoin
transactions are recorded on a public ledger called the blockchain, which is secured through
• Primecoin can be used as a cryptocurrency for online transactions and micropayments, and it
can be traded on various cryptocurrency exchanges. However, its market capitalization is
relatively small compared to other cryptocurrencies, and it has not achieved the same level
of mainstream adoption.
ZCASH
• ZCASH (ZEC) is a privacy-focused cryptocurrency that was launched in 2016 by a group of
cryptographers and scientists. Zcash is based on the Bitcoin codebase, but it uses a different
cryptographic protocol called zk-SNARKs, which allows for private transactions.

• Zk-SNARKs stands for "Zero-Knowledge Succinct Non-Interactive Argument of Knowledge."

This technology enables Zcash users to send transactions that are encrypted and verified
without revealing any identifying information about the sender, receiver, or transaction
amount. This makes Zcash transactions virtually untraceable and private.

• Zcash transactions are recorded on a public ledger called the blockchain, but the details of
the transactions are only visible to those who have the necessary viewing keys. Zcash also
offers the option of shielded transactions, which are fully private and cannot be viewed on
the blockchain.
• Zcash can be used as a cryptocurrency for online transactions and micropayments,
and it can be traded on various cryptocurrency exchanges. However, its market
capitalization is relatively small compared to other cryptocurrencies.

• Overall, Zcash is a unique cryptocurrency that offers strong privacy protections for
its users. It has gained popularity among those who are concerned about privacy
and security in their online transactions, but it also faces challenges from regulators
who are wary of its anonymity features.
SMART CONTRACT
• A SMART CONTRACT is a self-executing digital contract
that is based on a computer protocol, typically on a
blockchain. Smart contracts are designed to
automatically enforce the terms of an agreement
between parties, without the need for intermediaries
such as lawyers or banks.

• Smart contracts work by using computer code to define

the rules and regulations of an agreement, and by
automatically executing these rules when certain
conditions are met. The code is stored on a blockchain,
which allows for the contract to be securely and
transparently executed and enforced.

• Smart contracts can be used in a wide range of

applications, including financial services, supply chain
management, real estate, and more. They can facilitate
RICARDIAN CONTRACT
• A RICARDIAN CONTRACT is a legal agreement that
combines a traditional legal contract with a digital
representation of the contract terms. It was named after
economist David Ricardo and was introduced by Ian
Grigg in the mid-1990s.

• In a Ricardian contract, the legal contract is written in a

natural language, such as English, and then expressed in
a machine-readable format, such as XML or JSON. The
machine-readable version of the contract contains
cryptographic signatures that verify the authenticity of
the contract and ensure that it has not been tampered
with.

• The advantage of Ricardian contracts is that they can be

read and executed by both humans and machines. This
makes them well-suited for use in smart contracts and
THANK YOU