Blockchain Unit-3 Notes

Introduction to Bitcoin

Introduction:

• Bitcoin is an open-source, Cryptocurrency.
• It is decentralized digital currency or virtual currency developed in 2009.
• Its design is public, nobody owns or controls Bitcoin and everyone can take part without central authority or banks.
• Bitcoin uses peer-to-peer technology to facilitate instant payment
• It is used for the secure transfer money, property, contracts etc. without requiring third party intermediary like bank or Government.
• Blockchain is the backbone of most famous Cryptocurrency named Bitcoin.
• Bitcoin solves the following issues:
1. Bitcoin Blockchain has a distributed ledger.
2. Transaction are immutable, thus cannot be hacked.
3. The ledger is public for all to access.
4. Double spending is not allowed because of the basic structure of block transaction.

3.1 Currency

• It is in the most specific sense is money in any form when in use or circulation as a medium of exchange for example banknotes and coins.
• A store of value is an asset that can maintain its value without depreciating(run down) over time
• Currency has no inherent (natural) value.
• It is unit of measure and medium of exchange that has no original value in and of itself.
• Currency is a representation of money and its value always relative to the money it represents.

3.2 Double Spending

Double spending means spending the same money twice. As we know, any transaction can be processed only in two ways. One is offline, and another is online.

Offline:A transaction which involves physical currency or cash is known as an offline transaction.

Online:A transaction which involves digital cash is known as an online transaction.

Let us consider this example:
You go to Restaurants and order a cappuccino worth $5. You pay in cash. The service provider at Restaurants instantly confirmed that you have paid, and you received your coffee in exchange for the money. Now is it possible to spend the same $5 somewhere else to make another purchase? The answer is NO. But what if the answer is YES? It means the same person can use the same cash more than one times. This type of problem is known as Double Spending Problem.

In a physical currency, the double-spending problem can never arise. But in digital cash-like bitcoin, the double-spending problem can arise. Hence, bitcoin transactions have a possibility of being copied and rebroadcasted. It opens up the possibility that the same BTC could be spent twice by its owner.

How Bitcoin handles the Double Spending Problem?

Bitcoin handles the double-spending problem by implementing a confirmation mechanism and maintaining a universal ledger called blockchain.
Let us suppose you have 1 BTC and try to spend it twice. You made the 1 BTC transaction to Alice. Again, you sign and send the same 1 BTC transaction to Bob. Both transactions go into the pool of unconfirmed transactions where many unconfirmed transactions are stored already. The unconfirmed transactions are transactions which do not pick by anyone. Now, whichever transaction first got confirmations and was verified by miners, will be valid. Another transaction which could not get enough confirmations will be pulled out from the network. In this example, transaction T1 is valid, and Alice will receive the bitcoin.

What happened if both the transactions are taken simultaneously by the miners?

Suppose two different miners will pick both transactions at the same time and start creating a block. Now, when the block is confirmed, both Alice and Bob will wait for confirmation on their transaction. Whichever transaction first got confirmations will be validated first, and another transaction will be pulled out from the network.
Now suppose if both Alice and Bob received the first confirmation at the same time, then there is a race will be started between Alice and Bob. So, whichever transaction gets the maximum number of confirmations from the network will be included in the blockchain, and the other one will be discarded.

3.3 Cryptocurrency

• It is digital or virtual currency designed to work as a medium of exchange.
• It uses cryptography to secure & verify transactions as well as control the creation of new units of a particular Cryptocurrency.
• Bitcoin is exciting because it show how cheap it can be Bitcoin is better than currency.
• Blockchain Cryptocurrency can have several types such as:
1. Bitcoin
2. Ether
3. Litecoin
4. Ripple
• Block chain uses SHA-256 Hashing algorithm.
• The Blockchain Cryptocurrency uses a decentralized system for controlling transactions. It is tools used in virtual exchanges. It use make payments, investments and storage of wealth.
• Cryptocurrency is just types of data that can stored on a Blockchain. The Blockchain contain entire transaction history of a Cryptocurrency as a record.

3.4 P2P Payment Gateway

• P2P machine on the network help in maintain the consistency of the distributed ledger.
• In Blockchain transaction happens between two nodes in a network. There is no third party mediator.
• If there is a financial transaction between two nodes in a Blockchain they can directly facilities the transaction without having to do it through a bank. This is also known as a point (P2P) network where a transaction takes places between two nodes which get verified by all the other nodes in blockchain network. So therefore participants of Blockchain network can make direct & secure transactions within seconds.

3.5 Wallet

A wallet is Blockchain equivalent of bank account

Functions of wallet:
It allows us to receive bitcoins, store them and send to others.

Needs of wallet:

• Allows instant transactions.
• Records all history of all Blockchain transactions.
• Issues in remembering all the various Blockchain accounts & balance.

Features of wallet:

• Security
• Instantaneous transaction
• Currency Conversion
• Accessibility

Different Blockchain Wallets:

Based on the location of Private Key:

Hot wallet
Cold wallet

Based on Devices and clients:

Hardware wallets
Paper Wallets
Desktop Wallets
Mobile Wallets
Web Wallets

Comparing Different Blockchain wallets:

Bitcoin Core:
It is full Bitcoin client and builds the backbone of the network. It offers levels of security, privacy & stability. It takes lot of space and memory.

Trezor:
Most popular hardware Bitcoin wallet. It offers high level of security, privacy & stability. It includes a display & hardware key which offers extra protection and verification. Make secure payments without exposing your private keys to compromised computer.

Electrum:
Electrum focus is speed and simplicity with low resources usage. It uses remote servers that handle the most complicated parts of the bitcoin system. It allows us to recover our wallet from a secret phrase.

3.6 Mining

Steps for Mining Bitcoin:

1. Get Bitcoin wallet:
   When earning bitcoin from mining they go directly into a bitcoin wallet. You cant without wallet.
2. Find a bitcoin exchange:
   When earning bitcoins from mining we may need to sell the coins to pay for power costs. We may also needs to buy coins on exchages.
3. Get the Best Bitcoin Mining Hardware
   You will need to buy mining hardware specifically designed for Bitcoin mining. You can easily buy most Bitcoin mining hardware on Amazon. Bitcoin mining hardware such as graphic processing units (GPUs), field-programmable gate aray (FPGAs), and application-specific integrated circus (ASICs) are significantly essential.
4. Join A Mining Pool
   Once you get your mining hardware you need to select a mining pool. Without mining pool you would only receive a mining payout if you found a block on your own is called is solo mining
5. Bitcoin Mining Software
   We need to use the software to point your hash rate at the pool.
6. Is Bitcoin mining legal in your country? Make sure
7. Is bitcoin mining profitable for you?
   Do you understand what you need to be start? You should run some calculations and see if bitcoin mining will actually be profitable for you.