RSVP for Data Science Classes at www.nycdatascience.com

1. NYC Data Science Academy
Introduction to BitCoin

2. NYC Data Science Academy
P2P: Peer-to-Peer Network
 A peer-to-peer (P2P) network is a type of
decentralized and distributed network architecture in
which individual nodes in the network (called "peers")
act as both suppliers and consumers of resources, in
contrast to the centralized client–server model where
client nodes request access to resources provided by
central servers.
 Peers are distributed in the whole Internet. It is hard
to control and monitor the network activities. It is
widely used in fields asking for high privacy.
A P2P network
A network based on the
client-server model

3. NYC Data Science Academy
BitCoin
 The fundamental paper by Satoshi Nakamot
 Feature: Based on algorithm and public recognition, Decentralized
 Scarcity, Mining, SHA256, Easy to exam, limit of speed
 Comparing to Gold. Does bitcoin worth it?
 Is BitCoin a Ponzi Scheme?
 BitCoin and Anarchism
 Problems: Copycats, Deflation, Anti-Conservation
 How to maintain and manage the P2P network?

4. NYC Data Science Academy
Blueprint of Electronic Money

5. NYC Data Science Academy
Duplicated transactions
 Solution: An authorized organization to record and exam transactions
 A Mint is an organization that produce valid electronic money(avoid duplicated
transactions). Receiver of a transaction need to send electronic money back to the
mint for validation.
 Pitfall: Relying too much on the central organization
(Breakdown, Attacked, Manipulated, Monitored or Spied)

6. NYC Data Science Academy
Basic Concepts: the system of Bitcoin
 Block: account book
 Transaction
 Bitcoin
 Item: record of transactions
 Transactions are recorded by Items
 A block consists of many items (and other data)
 Many blocks form a chain
 Iterate over the items in the block chain to check account balance and transaction
validity,

7. NYC Data Science Academy
Experiment: Check a block
 http://blockexplorer.com/
 Enter your block number to see the data

8. NYC Data Science Academy
What is inside a Block?

9. NYC Data Science Academy
Transaction

10. NYC Data Science Academy
Block
 Bitcoin system only record blocks but not balance. Balance is calculated from items
(records of transactions) in blocks
 Every block stores all the items from all over the world in ten minutes. And there will
be a new block every ten minutes. The speed is stable.
 Number of items in a block is not stationary
 Every node is producing block but the valid block is unique. We will talk about it later.
 An ideal block:
Block ID
Item 1,
Item 2,
...
Item n
Previous Block ID,
Next Block ID,
Other Information

11. NYC Data Science Academy
Block Chain
 Blocks are connected by doubly linked list according to their generation order. This
structure is convenient for iteration.
 Every node is storing a block chain. Finally these chains are all the same, as the only
valid one in the system.
The 1st Block
Block ID
Prev ID
Next ID
The 2nd Block
Block ID
Prev ID
Next ID
The 3rd Block
Block ID
Prev ID
Next ID

12. NYC Data Science Academy
Bitcoin and block generation
 How to create Bitcoin: generate blocks (Fierce competitions of the generation, that is
what we called 'Mining' .)
 Rules: the first to the 210 thousand-th block worth 50 Bitcoins each, the 210
thousand-th to the 420 thousand-th block woth 25 Bitcoins, and so on. Repeating this
procedure, we will get in total 21Million Bitcoins.
 Because the real-world is always expanding, Bitcoin is determined to meet the
problem of deflation.
 Blocks will be generated cotinuously, because transactions will be charged for the
service.

13. NYC Data Science Academy
Security
 Private key and Public key, digital signature
 SHA256: http://en.wikipedia.org/wiki/SHA-2

14. NYC Data Science Academy
Security
 Private key and Public key, digital signature
 SHA256: http://en.wikipedia.org/wiki/SHA-2

15. NYC Data Science Academy
Security
 Enough money for the transaction (Solved)
 Authenticity of transaction
 Repeat Transactions

16. NYC Data Science Academy
Authenticity of transaction: Digital Signature

17. NYC Data Science Academy
 Calculate a hash number a, from all the data of block A.
 Store a in the next block B.
 Verify that if A is the previous block of B: Calculate a from A again, then compare to
the hash number x stored in B.
 Generate b from B and store it in C. Then we repeat this process and will get a block
chain.
Duplicated Transactions: Timestamp
Block
Previous hash number x
Item Item Item Item
Block
Previous hash number x
Item Item Item Item

18. NYC Data Science Academy
Timestamp
 Do not rely on the local time, only related to the order of blocks
 If there's a center maintaining the chain of valid blocks, it would be easy to check
duplicated transactions.
 How to achieve it in a decentralized network?

19. NYC Data Science Academy
Problems of P2P
 Various network condition
 Nodes are not running 24/7
 No center for management
 May exist evil nodes

20. NYC Data Science Academy
Bitcoin solution of P2P
 Proof of Work
 Controlling of block generation speed
 Block broadcast and valid block chain

21. NYC Data Science Academy
Proof of Work
1. Calculate a hash number from the latest block
2. Keep receive items that are broadcasted but not inside any blocks. Check them and
delete invalid ones(not enough money).
3. Randomly choose a number, Nounce.
4. Group data in step 1~3 and use SHA256 to calculate a 256bit hash number x.
5. Verify if there are enough leading 0s in x. If yes, then verify if this x meets the
difficulty. If yes, then this process is finished.
6. Else, repeat from step 2. If there's a new block from other nodes, we need to restart
the whole process.

22. NYC Data Science Academy
Difficulty of Proff-of-Work
 https://en.bitcoin.it/wiki/Difficulty

23. NYC Data Science Academy
Difficulty
 Controlling the speed of block generation. Updated every 2016 blocks (2 weeks) .
 Difficulty = maximum_target / current_target
 The target is a 256-bit number (extremely large) that all Bitcoin clients share. The SHA-
256 hash of a block's header must be lower than or equal to the current target for the
block to be accepted by the network. The lower the target, the more difficult it is to
generate a block.
 Max target:
00000000FFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFF
 Current target (this is changing):
0000000000000000B3AA00000000000000000000000000000000000000000000

24. NYC Data Science Academy
Bits
 Each block stores a packed representation (called "Bits") for its actual hexadecimal
target. The target can be derived from it via a predefined formula. For example, if the
packed target in the block is 0x1b0404cb, the hexadecimal target is
 0x0404cb * 2**(8*(0x1b - 3)) =
0x00000000000404CB000000000000000000000000000000000000000000000000

25. NYC Data Science Academy
Difficulty is a Global parameter
 If there's the only valid block chain, every node will get the same difficulty.
 Difficulty is controlling the speed of block generation
 Difficulty is also useful when checking a block's validity.

26. NYC Data Science Academy
Meaning of Difficulty
 Control the speed and avoid inflation. A rapid increase in computation power is not
affecting the generation speed.
 Increase the cost of cheating.
 The P2P netword need a lot of nodes to ensure the security (avoid manipulation).
Difficulty is what drives nodes running.

27. NYC Data Science Academy
Temporal Block
 Content of the block:
1. x genereted from SHA256, as the block ID
2. All the collected valid items
3. Random Number n
4. The latest hash number from the global block chain
5. Other informations
 Broadcast this block to the P2P network
 What will other nodes do:
Duplication transactions and Validation

28. NYC Data Science Academy
Validation
 Get items in the block
 Check if there's duplicated items
 Other validation steps
 Link this block to the end of the locally stored 'Global Block Chain' . It is not formally
added to the global block chain yet.

29. NYC Data Science Academy
Braches
 A node will receive many new blocks generated from a common global chain.
 For each block, generate braches locally.
 Nodes are receiving blocks in different time points, and this leads to different local
braches.
 When there comes a longer chain, a node will turn to the longer one and discard the
shorter one.
 This algorithms will ensure the convergence to the longest chain.

30. NYC Data Science Academy
Example of Braches
 The Green block is the 1st block of the world.
 Black blocks represents the longest block
chain, and validated to be the global chain.
 Grey blocks are blocks on local braches, and
discarded finally.

31. NYC Data Science Academy
Example of Braches
1. The form of two braches.
2. The right brach receive a new block and we discard the left one.
3. Again, different blocks linked to the end of global chain.

32. NYC Data Science Academy
Example of Braches
4. Firstly we receive two more blocks on the right brach
5. And another two blocks on the left brach, now these two
braches are still of the same length.
6. Receive another block and we finally discards the right one.

33. NYC Data Science Academy
Example of Braches
7. The left brach receives another block.
8. Another one added to the left branch.

34. NYC Data Science Academy
Example of Braches
 Finally, we have our longest block chain.

35. NYC Data Science Academy
Confirm the Transaction
 To confirm a transaction, we need to add it to a newly generated block, and after 5
more blocks, this transaction could be finally confirmed and the transaction is
successfully recorded.
 After 6 blocks added to the global chain, it is nearly impossible to cheat or attack the
original chain. The cheater cannot find a cluster that overwhelms all the other honest
nodes and add 6 more fake blocks to the global chain.
 Once the transaction is confirmed, it is almost impossible to modify or cancel.

36. NYC Data Science Academy
Summary of security of Bitcoin
 All nodes in a P2P network monitor and save the global unique transaction backup
 Timestamp ensure the order of blocks is valid
 SHA256 ensure the generation of a block is hard, but validation is easy.
 Proof-of-Work ensure the majority (honest nodes) have the true transaction record.

37. NYC Data Science Academy
Problems of Bitcoin system
 Privacy
 Transaction needs a lot of time to be confirmed
 Deflation
 Anti Conservation
 Increasing amount of data

38. NYC Data Science Academy
Bitcoin in Action!
 How to register?
 How to mine?
 How to trade Bitcoin?
 How to pay with Bitcoin?

39. NYC Data Science Academy
The official website
 https://bitcoin.org/en/

40. NYC Data Science Academy
What? There's official website?
 https://bitcoin.org/en/about-us

41. NYC Data Science Academy
Bitcoin Wallet
 MultiBit

42. NYC Data Science Academy
Need Screenshot from Mac or just
demonstration in real time
 Need Screenshot from Mac or just demonstration in real time

43. NYC Data Science Academy
Bitcoin Miner
 GUIMiner

44. NYC Data Science Academy
Popular Mining Website
 Deepbit
 BTCGuild
 BMP

45. NYC Data Science Academy
Need Screenshot from Mac or just
demonstration in real time
 Need Screenshot from Mac or just demonstration in real time

46. NYC Data Science Academy
Bitcoin exchange
 Mt.Gox: It was the largest website, but closed in February 2014.
 BTC-E: https://btc-e.com/
 Bitstamp: https://www.bitstamp.net/

47. NYC Data Science Academy
Pay with Bitcoin
 Bitcoin is told to be the best currency for illegal missions.
 But publicly it is not very popular.
 Donate bitcoin to personal projects is more popular. As in the popular game 2048.

48. NYC Data Science Academy
FAQ
FAQ