Unit 5

5.1 Bitcoin Consensus

Bitcoin's consensus mechanism is a fascinating aspect of its design. It relies on a
decentralized and trustless system called Proof of Work (PoW). In simple terms,
miners compete to solve complex mathematical puzzles, and the first one to solve
it gets the opportunity to add a new block to the blockchain. This process is
resource-intensive and time-consuming, making it difficult for any single entity to
control the network.
The consensus achieved through PoW ensures that all participants agree on the
state of the blockchain. Once a block is added, it's extremely difficult to alter
previous blocks, adding a layer of security to the entire system. This immutability
is one of the key strengths of Bitcoin

5.2 Bitcoin Wallet

A Bitcoin wallet is like a digital pocket for your cryptocurrency holdings. It's the
tool that allows you to send, receive, and manage your Bitcoins securely. Wallets
come in various forms, each catering to different needs and preferences.

1. Software Wallets:

Desktop Wallets: Installed on your computer, they provide you with full
control over your Bitcoin.

Mobile Wallets: Apps for your smartphone, offering convenience for on-
the-go transactions.

Web Wallets: Accessed through a web browser, they are user-friendly but
may pose security risks.

2. Hardware Wallets:

Physical devices designed specifically for storing Bitcoins offline, away

from potential online threats. They are considered one of the most secure
options.

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 3. Paper Wallets:

A physical document containing your Bitcoin address and private key.

While secure from online hacks, they can be vulnerable to physical
damage or loss.

5.3 Bitcoin Blocks

The blocks that make up the Bitcoin blockchain’s ongoing sequence of
transactions are intended to be structurally identical.

Each block contains a block header as well as transaction data — two crucial sets
of information integral to the network’s proper function and ability to transfer value

The overall structure of a Bitcoin block always includes the following elements:

Magic number: This 4-byte field always contains the value 0xD9B4BEF9,
which indicates that the file format adheres to a data structure that
corresponds to the Bitcoin network.

Blocksize: This 4-byte field sets a cap on the amount of data that can be
contained in a block. The Bitcoin block size is limited to one megabyte (MB).

Block header: This 80-byte field consists of six individual components,

discussed in more detail below.

Transaction counter: This field can range in size from one to nine bytes and is
a positive integer that represents the number of transactions contained in the
Bitcoin block.

Transactions: This variable size field contains the list of all transactions
contained in the block and is typically filled with enough transactions to fill the
1MB Bitcoin block size limit.

The block header and the transaction data represent the two main categories of
data in any given block — though these two sections are further broken down into

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 individual components.

5.4 Merkle Tree

Merkle trees are also known as Binary Trees that uses hashtree. It is a kind of data
structure which uses sorting algorithm respectively. In the merkle tree each of leaf
node is labelled with cryptographic hash.

In Bitcoin and Cryptocurrencies Merkle trees are used to encrypt blockchain data
effectively. Mathematical Hashes are used for transaction in a blockchain. It also
enables the quick and secure verification on larger dataset and verifies
consistency of data.

Merkle Root
A Merkle root is a simple mathematical method for confirming the facts on a
Merkle tree.

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 They're used in cryptocurrency to ensure that data blocks sent through a peer-to-
peer network are whole, undamaged, and unaltered.
They play a very crucial role in the computation required to keep cryptocurrencies
like bitcoin and ether running.

Working of Merkle Trees

A Merkle tree totals all transactions in a block and generates a digital fingerprint of
the entire set of operations, allowing the user to verify whether it includes a
transaction in the block.

Merkle trees are made by hashing pairs of nodes repeatedly until only one
hash remains; this hash is known as the Merkle Root or the Root Hash.

They're built from the bottom, using Transaction IDs, which are hashes of
individual transactions.

Each non-leaf node is a hash of its previous hash, and every leaf node is a
hash of transactional data.

Benefits of Merkle Tree in Blockchain

Merkle trees provide four significant advantages -

Validate the data's integrity: It can be used to validate the data's integrity
effectively.

Takes little disk space: Compared to other data structures, the Merkle tree
takes up very little disk space.

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 Tiny information across networks: Merkle trees can be broken down into small
pieces of data for verification.

Use-Cases of Merkle Tree in Blockchain

There are many Merkle tree implementations out there:

Git, a distributed version control system, is one of the most widely used. It is
used to handle projects by programmers from all around the world.

Interplanetary File System, a peer-to-peer distributed protocol, is another

suitable implementation. It's also open-source, allowing computers to join and
use a centralized file system.

It's part of the technique that generates verifiable certificate transparency

logs.

5.5 Bitcoin Hardness of Mining

For cryptocurrencies that use a Proof-of-Work (PoW) validation system, creating
new cryptocurrencies involves “miners” using their computers to solve complex
mathematical puzzles.

In the case of Bitcoin, miners’ computers, also called nodes, collect and bundle
individual transactions into blocks every ten minutes, which is the fixed “block
time” of Bitcoin. The computers then compete to solve a complex cryptographic
puzzle to be the first to validate the new block for the blockchain.

As a cryptocurrency like Bitcoin becomes more popular, the number of computers

participating in this peer-to-peer validation network increases. With more
participants and more computing power, the so-called “hashpower” of the entire
network increases accordingly. This is also referred to as the mining difficulty.
Mining difficulty in the Bitcoin network is adjusted automatically after 2,016 blocks
have been mined in the network. An adjustment of difficulty upwards or
downwards depends on the number of participants in the mining network and
their combined hashpower.

5.6 Bitcoin transaction verifiability

What does Bitcoin transaction confirmation do?

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 A Bitcoin transaction, or any cryptocurrency transaction must be confirmed on a
blockchain to verify that the transaction is legitimate. A confirmed transaction
means that the transaction has been included in a block, and therefore included in
the blockchain.

How does Bitcoin transaction confirmation work?

1. Every time you make a Bitcoin transaction, you will be given a ‘private key’ to
make the request. Only you have access to this key, and the key is
automatically generated and unique for each transaction.

2. You’ll use the private key to request the transaction, and the transaction
request will then be broadcast on the Bitcoin network.

3. Miners will then take your request, along with many others, and privately mine
the coded request to ‘solve it’.

4. Once it has been solved by a miner, the miner adds it to their own version of
the blockchain ledger.

5. Then, other miners and other users known as nodes will verify that the first
miner’s proposal is correct and valid, and the new block containing all of those
transactions will then be added to the public blockchain.

By being added as part of a block to the blockchain, your transaction is now

confirmed.Each block in the blockchain is mathematically connected to the block
that came before it.

5.7 Bitcoin Fork

What Does Bitcoin Fork Mean?

A Bitcoin fork is a split in the Bitcoin network whereby two separate ‘branches’ are
created, each with its own protocol. One branch will continue to follow the pre-
fork protocol, while the other will follow a new protocol with different rules.

Bitcoin forks can be ‘soft’ or ‘hard’ forks.

A soft fork is a way in which the Bitcoin blockchain is upgraded or amended

without creating a whole new blockchain. The key trait of soft forks is that they

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 are backwards compatible. No new digital currency is created, so users don’t
need to choose between using the old or new blockchain.

A hard fork is significantly different to a soft fork since a whole new

blockchain and digital currency are created. The new blockchain is not
backwards-compatible with the old blockchain, although it will mirror it in
many ways. Due to this, network users must decide whether to stick with the
old blockchain or transition to the new one.

Most Bitcoin forks are created to upgrade the network, whether through
increasing transaction speed or enlarging block size. However, not all Bitcoin forks
are immediately adopted, and there’s often debate within the community over
whether the original or new branches should be used.

Popular Bitcoin Forks

Since launching in 2009, the Bitcoin network has experienced several hard forks –
some more successful than others. These include:

Bitcoin Cash – This fork occurred in August 2017 and aimed to tackle the
scalability issues that surrounded Bitcoin. The Bitcoin Cash blockchain does
not use BTC and instead uses BCH as its native digital currency.

Bitcoin Gold – The Bitcoin Gold fork occurred in October 2017 and aimed to
improve the accessibility of the mining process. The Bitcoin Gold network
uses BCG as its native digital currency.

5.8 Double Spending

Double-spending means that the same units of a cryptocurrency could potentially
be spent twice, thus it is crucial to technologically eliminate this possibility. The
potential to execute double-spending would fundamentally undermine the trust in
a cryptocurrency like Bitcoin or any other blockchain database.

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 Blockchain technology prevents double-spending through peer-to-peer file-
sharing technology combined with public-key cryptography.

5.9 Altcoins
Altcoins are generally defined as all cryptocurrencies other than Bitcoin (BTC).
Some altcoins use different consensus mechanisms to validate transactions, open
new blocks, or attempt to distinguish themselves from Bitcoin by providing new or
additional capabilities or purposes.

The first Altcoin was launched in 2011 and reason behind to launch is to improve
aspects of Bitcoin such as transaction speed and energy efficiency

Types of Altcoins

1. Stable Coin

They are designed to follow the price of any asset. Stable coins are used in
cryptocurrency investment esp in USA. People use stable coins for saving or to
send money to other party

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 2. Mining Based

This type of cryptocurrency is used to process in mining for verifying

transacations and more coins to supply. Mining coins are associated with minors
that uses the devices to solve mathematical equation.

3. Staking based

This cryptocurrency uses process called staking to verify transaction and add
more coins to stake. This cryptocurrency blockchain protocol chooses
participants to verify block transaction and participants receive crypto rewards.
An early Altcoin was known as Peercoin that uses the concept of staking.

4. Governance based

The governance tokens are cryptocurrencies that give holders the voting right.
Each holder has access to common information on decentralised network.

Pros and Cons

Pros

Altcoins are "improved versions" of the cryptocurrency they derived from

because they aim to plug perceived shortcomings.

Altcoins with more utility have a better chance of surviving because they have
uses, such as Ethereum's ether.

Investors can choose from a wide variety of altcoins that perform different
functions in the crypto economy.

Cons

Altcoins have a smaller investment market compared to Bitcoin. Bitcoin has

generally remained above 40% of the global cryptocurrency market since May
2021

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 The altcoin market is characterized by fewer investors and less activity,
resulting in thin liquidity.

It is not always easy to distinguish between different altcoins and their

respective use cases, making investment decisions even more complicated
and confusing.

Several "dead" altcoins ended up sinking investor dollars.

Examples of Altcoin

Namecoin (NMC) is a cryptocurrency originally forked from bitcoin software. It

uses proof-of-work algorithm. Like bitcoin, it is limited to 21 million. Namecoin can
store data within its own blockchain transaction database.

Ethereum (ETH) is a decentralized blockchain with smart contract functionality.

Ether is the native cryptocurrency of the platform. Among cryptocurrencies, ether
is second only to bitcoin in market capitalization.

USD Coin (USDC) is a digital stablecoin pegged to the United States dollar. USD
Coin is managed by a consortium called Centre, which was founded by Circle and
includes members from the cryptocurrency exchange

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