These are my notes of the tenth lecture from Coursera’s Bitcoin and Cryptocurrency Technologies during Dec 2016 – Feb 2017.
Questions answered in this Post:
- What do you have to think about if you’re a miner?
- What is hash rate?
- What is bootstrapping?
- What are some attacks on bitcoin?
- Define and discuss the different types of consensus?
Economics question, is it profitable for a miner to mine?
The generic internet article seems to say “It depends”. I don’t think it is from reading various online posts. But before I rush into it without real proof, what exactly would be considered a profit in bitcoin.
The positive gains in bitcoin come from the block reward (~12 BTC) and transaction fees. This is only worthwhile if it it greater than the negative losses (costs). The losses come form all hardware (fixed costs) and operations (variable costs).
If mining reward (block reward + Tx fees) > hardware + electricity cost -> You profit!
It’s not so simple because reward depends on the rate at which the miners find block whih is linked toward their hash rate to the total global hash rate.
Hash Rate – is the speed at which a computer is completing an operation in the Bitcoin code. A higher hash rate is better when mining as it increases your opportunity of finding the next block and receiving the reward.
~bitcoinsimplified.org/definitions/
Also, the costs will be variable depending on the Bitcoin exchange rate as well as differences other fiat currencies. Also miners technically don’t have to add the block to the larger chain, they could have a another strategy that is not being captured.
Recap Section of Key Topics
Satoshi – smallest denomination 1e-8 BTC
Prior to this recap I’m jotted down my thoughts with how I understand/what I remembered.
Identities: they’re hard and not fixed in bitcoin. We did talk about public keys being identities in week 1 but that seems not to hold since bitcoin has pseudoanonymous nodes
Transactions: combined together to form a block
Single transaction is signed by the one person. Then the transaction does something like transfer the coin to another. The transaction also contains a hash of the history of the previous transactions of that coin.
P2p: Bitcoin is a peer to peer network. When you try to determine consensus regarding the ledger, there is not specialized nodes, everyone is able to participate.
Block chain and consensus: The history of transactions of data structure of a hash pointer is a block chain. Consensus is what allows a block to be added on the distributed ledger
Hash Puzzle Mining: This is how bitcoins are created
The H(nonce | prev_hash | tx | tx … )) The hash of the concatenation must be less than some target value to be considered a valid coin that gets created.
Recap
Identity: no real world identity required, can just create a psudoanonymous
Transactions: messages that broadcast to the Bitcoin P2P network that are instructions to transfer a coin from one address to another
Coin – chain of transactions
P2P – goal to propagate all new transactions to all the new Bitcoin peer nodes, it tries its best effort
The security comes from the blockchain and the consensus protocol
Blockchain – transaction achieves a lot of confirmations and while it will never be 100% you have a high confidence
Orphan blocks –
Alice 100x computing power to Bob
Bob will find 1% of blocks Alice finds
Miners – equal benefit to the cost if they want to maintain their job
How deeply does distributed consensus play into bitcoin? exchange rate of the currency. ownership of coin. creation of blockchain.
Bitcoin has three types of consensus
- value
- state
- rules
Bootstrapping
Bitcoin is a bootstrapped. Bootstrapping is how to get the cryptocurrency started and working/ creating a healthy mining ecosystem.
health of mining ecosystem ->
prerequisite for create largely honest bitcoin network
people will only mine if the value of bitcoin is high while expenditure in dollars
security of blockchain – we want to blockchain to be secure to be viable, then an adversary can’t overwhelm the process and that requires healthy ecosystem
->
value of the currency: if users want to buy Bitcoin trust in the security of the Bitcoin
Thus, there is a circular interplay meaning how does this system get started? Right, so Arvind is really really excited about this which you can tell by the fluctuations of his voice.
Anyway, what was time like before the dinosaurs… before bitcoin became bitcoin. This process has to be done by every altcoin. I didn’t feel like I understood the response. I got that he felt it was amazing but exactly how bootstrapping happens, I’m at a loss.
Potential Attacks
What would happen if consensus failed and there was a malicious node that contained 51%
steal coins from existing address?
Let’s say the 51% creates an invalid block
Suppress these transactions
from the blockchain
from the P2P network
Change the block reward
Destroy confidence in Bitcoin
Can someone steal coins from existing address?
Creates an invalid block with an invalid trxn. While teh attacker can pretend, other honest nodes probably won’t accept it.
Thus there will be a fork in the chain. With the POV from the attacker trying to sell the node. He can tell that even if its the longest branch its not correct.
Subverting consensus is not enough and thus not possible
Can the attacker suppress some transactions?
Let’s say the the 51% suppresses everything Carol does. However, the p2p network does not depend on the block chain, thus the peer to peer network will receive the broadcast and notice that Carol’s blocks are just not getting published
A 51% attacker can potentially:
Make it unprofitable for other miners to mine
Change the block reward
Suppress transactions from the blockchain
Can the 51% attacker change the block reward
No, because the attacker does not contain the Bitcoin software that the honest nodes are using
What about them destroying confidence in bitcoin?
behavior of not extending the longest chain
then the value of the currency will fall
This is possible and likely if this were happen. Apparently this is the main possible threat.
It’s interesting because in my opinion it reminds me of trust in the dollar versus being backed by gold or not.