Bitcoin network

The bitcoin network is a peer-to-peer payment network that

operates on a cryptographic protocol. Users send and receive
bitcoins, the units of currency, by broadcasting digitally signed
messages to the network using bitcoin cryptocurrency wallet
software. Transactions are recorded into a distributed, replicated
public database known as the blockchain, with consensus achieved
by a proof-of-work system called mining. Satoshi Nakamoto, the
designer of bitcoin, claimed that design and coding of bitcoin
began in 2007. The project was released in 2009 as open source A diagram of a bitcoin transfer
software.

The network requires minimal structure to share transactions. An

ad hoc decentralized network of volunteers is sufficient. Messages
are broadcast on a best-effort basis, and nodes can leave and rejoin
the network at will. Upon reconnection, a node downloads and
verifies new blocks from other nodes to complete its local copy of
the blockchain.[2][3]

Number of bitcoin transactions per

month (logarithmic scale)[1]
Contents
Transactions
Mining
Difficulty and mining pools
Energy sources and consumption
Process
Mined bitcoins
Security
Unauthorized spending
Double spending
Race attack
History modification
Deanonymisation of clients
Payment verification
Data in the blockchain
Alleged criminal activity
Black markets
Money laundering
Ponzi scheme
See also
References
Transactions
A bitcoin is defined by a sequence of
digitally signed transactions that began with
the bitcoin's creation, as a block reward.
The owner of a bitcoin transfers it by
digitally signing it over to the next owner
using a bitcoin transaction, much like
endorsing a traditional bank check. A payee
can examine each previous transaction to
verify the chain of ownership. Unlike
traditional check endorsements, bitcoin An actual bitcoin transaction
transactions are irreversible, which including the fee from a web-based
eliminates risk of chargeback fraud. cryptocurrency exchange to a
hardware wallet.
Although it is possible to handle bitcoins
individually, it would be unwieldy to
require a separate transaction for every bitcoin in a transaction. Transactions are
The best chain therefore allowed to contain multiple inputs and outputs, allowing bitcoins to be split
consists of and combined. Common transactions will have either a single input from a larger
the longest series previous transaction or multiple inputs combining smaller amounts, and one or two
of transaction outputs: one for the payment, and one returning the change, if any, to the sender.
records from the Any difference between the total input and output amounts of a transaction goes to
genesis block
miners as a transaction fee.[2]
to the current
block or record.
Orphaned records Mining
exist outside
of the best chain. To form a distributed timestamp server as a
peer-to-peer network, bitcoin uses a proof-
of-work system.[3] This work is often called
bitcoin mining.

Requiring a proof of work to accept a new block to the blockchain

was Satoshi Nakamoto's key innovation. The mining process
involves identifying a block that, when hashed twice with SHA-
256, yields a number smaller than the given difficulty target. While GPU-based mining rig, 2012
the average work required increases in inverse proportion to the
difficulty target, a hash can always be verified by executing a
single round of double SHA-256.

For the bitcoin timestamp network, a valid proof of work is found

by incrementing a nonce until a value is found that gives the
block's hash the required number of leading zero bits. Once the
hashing has produced a valid result, the block cannot be changed
without redoing the work. As later blocks are chained after it, the
work to change the block would include redoing the work for each
subsequent block. If there is a deviation in consensus then a
blockchain fork can occur.
A Bitcoin mining farm, 2018
Majority consensus in bitcoin is represented by the longest chain, which required the greatest amount of
effort to produce. If a majority of computing power is controlled by honest nodes, the honest chain will
grow fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the
proof-of-work of that block and all blocks after it and then surpass the work of the honest nodes. The
probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added.[3]

To compensate for increasing hardware speed and varying interest

in running nodes over time, the difficulty of finding a valid hash is
adjusted roughly every two weeks. If blocks are generated too
quickly, the difficulty increases and more hashes are required to
make a block and to generate new bitcoins.[3]

Difficulty and mining pools Mining difficulty has increased

significantly
Bitcoin mining is a competitive endeavor. An "arms race" has been
observed through the various hashing technologies that have been
used to mine bitcoins: basic central processing units (CPUs), high-
end graphics processing units (GPUs), field-programmable gate
arrays (FPGAs) and application-specific integrated circuits
(ASICs) all have been used, each reducing the profitability of the
less-specialized technology. Bitcoin-specific ASICs are now the
primary method of mining bitcoin and have surpassed GPU speed
by as much as 300-fold. The difficulty within the mining process
involves self-adjusting to the network's accumulated mining
power. As bitcoins have become more difficult to mine, computer The largest Bitcoin mining pools as
hardware manufacturing companies have seen an increase in sales of April 2020 by nation they're based
of high-end ASIC products.[4] in

Computing power is often bundled together or "pooled" to reduce

variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of
transactions and receive payment. In a pool, all participating miners get paid every time a participating
server solves a block. This payment depends on the amount of work an individual miner contributed to help
find that block.[5]

Energy sources and consumption

In 2013, Mark Gimein estimated electricity consumption to be

about 40.9 megawatts (982 megawatt-hours a day).[7] In 2014,
Hass McCook estimated 80.7 megawatts (80,666 kW). As of
2015, The Economist estimated that even if all miners used modern
facilities, the combined electricity consumption would be 166.7
megawatts (1.46 terawatt-hours per year).[8] The Cambridge
Bitcoin electricity consumption as of Bitcoin Electricity Consumption Index estimates the energy use of
2021[6] the bitcoin network grew from 1.95 terawatt-hours per year at the
end of 2014, to 77.1 terawatt-hours per year by the end of 2019.[6]

Seeking lower electricity costs, some bitcoin miners have set up in places like Iceland where geothermal
energy is cheap and cooling Arctic air is free.[9] Chinese bitcoin miners are known to use hydroelectric
power in Tibet to reduce electricity costs.[10] North American companies are utilizing stranded gas as a
cost-effective source of energy for bitcoin mining.[11] In West Texas, wind powers bitcoin mining.[12] As
of April 2021, at least one-third of Bitcoin mining was powered by coal in China's Xinjiang region.[13]
A 2021 study found that carbon emissions from Bitcoin mining in China – where a majority of the proof-
of-work algorithm that generates current economic value is computed – have accelerated rapidly, are largely
fueled by nonrenewable sources and would soon exceed total annual emissions of countries like Italy and
Spain during 2016, interfering with international climate change mitigation commitments.[14][15]

Process

A rough overview of the process to mine bitcoins involves:[3]

1. New transactions are broadcast to all nodes.

2. Each miner node collects new transactions into a block.
3. Each miner node works on finding a proof-of-work code
for its block.
4. When a node finds a proof-of-work, it broadcasts the
block to all nodes. Avalon ASIC-based mining machine
5. Receiving nodes validate the transactions it holds and
accept only if all are valid.
6. Nodes express their acceptance by moving to work on the next block, incorporating the hash
of the accepted block.

Mined bitcoins

By convention, the first transaction in a block is a special

transaction that produces new bitcoins owned by the creator of the
block. This is the incentive for nodes to support the network.[2] It
provides the way to move new bitcoins into circulation. The
reward for mining halves every 210,000 blocks. It started at 50
Diagram showing how bitcoin bitcoin, dropped to 25 in late 2012 and to 12.5 bitcoin in 2016.
transactions are verified The most recent halving, which occurred in May 2020 (with block
number 630,000), reduced the block reward to 6.25 bitcoin. This
halving process is programmed to continue a maximum 64 times
before new coin creation ceases.[16]

Security
Various potential attacks on the bitcoin network and its use as a payment system, real or theoretical, have
been considered. The bitcoin protocol includes several features that protect it against some of those attacks,
such as unauthorized spending, double spending, forging bitcoins, and tampering with the blockchain.
Other attacks, such as theft of private keys, require due care by users.[17][18]

Unauthorized spending

Unauthorized spending is mitigated by bitcoin's implementation of public-private key cryptography. For

example, when Alice sends a bitcoin to Bob, Bob becomes the new owner of the bitcoin. Eve, observing
the transaction, might want to spend the bitcoin Bob just received, but she cannot sign the transaction
without the knowledge of Bob's private key.[18]
Double spending

A specific problem that an internet payment system must solve is double-spending, whereby a user pays the
same coin to two or more different recipients. An example of such a problem would be if Eve sent a bitcoin
to Alice and later sent the same bitcoin to Bob. The bitcoin network guards against double-spending by
recording all bitcoin transfers in a ledger (the blockchain) that is visible to all users, and ensuring for all
transferred bitcoins that they have not been previously spent.[18]:4

Race attack

If Eve offers to pay Alice a bitcoin in exchange for goods and signs a corresponding transaction, it is still
possible that she also creates a different transaction at the same time sending the same bitcoin to Bob. By
the rules, the network accepts only one of the transactions. This is called a race attack, since there is a race
which transaction will be accepted first. Alice can reduce the risk of race attack stipulating that she will not
deliver the goods until Eve's payment to Alice appears in the blockchain.[19]

A variant race attack (which has been called a Finney attack by reference to Hal Finney) requires the
participation of a miner. Instead of sending both payment requests (to pay Bob and Alice with the same
coins) to the network, Eve issues only Alice's payment request to the network, while the accomplice tries to
mine a block that includes the payment to Bob instead of Alice. There is a positive probability that the
rogue miner will succeed before the network, in which case the payment to Alice will be rejected. As with
the plain race attack, Alice can reduce the risk of a Finney attack by waiting for the payment to be included
in the blockchain.[20]

History modification

Each block that is added to the blockchain, starting with the block containing a given transaction, is called a
confirmation of that transaction. Ideally, merchants and services that receive payment in bitcoin should wait
for at least one confirmation to be distributed over the network, before assuming that the payment was
done. The more confirmations that the merchant waits for, the more difficult it is for an attacker to
successfully reverse the transaction in a blockchain—unless the attacker controls more than half the total
network power, in which case it is called a 51% attack.[21]

Deanonymisation of clients

Deanonymisation is a strategy in data mining in which anonymous data is cross-referenced with other
sources of data to re-identify the anonymous data source. Along with transaction graph analysis, which
may reveal connections between bitcoin addresses (pseudonyms),[17][22] there is a possible attack[23]
which links a user's pseudonym to its IP address. If the peer is using Tor, the attack includes a method to
separate the peer from the Tor network, forcing them to use their real IP address for any further
transactions. The attack makes use of bitcoin mechanisms of relaying peer addresses and anti-DoS
protection. The cost of the attack on the full bitcoin network is under €1500 per month.[23]

Payment verification
Each miner can choose which transactions are included in or exempted from a block.[24] A greater number
of transactions in a block does not equate to greater computational power required to solve that block.[24]
Upon receiving a new transaction a node must validate it: in particular, verify that none of the transaction's
inputs have been previously spent. To carry out that check, the node needs to access the blockchain. Any
user who does not trust his network neighbors, should keep a full local copy of the blockchain, so that any
input can be verified.

As noted in Nakamoto's whitepaper, it is possible to verify bitcoin payments without running a full network
node (simplified payment verification, SPV). A user only needs a copy of the block headers of the longest
chain, which are available by querying network nodes until it is apparent that the longest chain has been
obtained; then, get the Merkle tree branch linking the transaction to its block. Linking the transaction to a
place in the chain demonstrates that a network node has accepted it, and blocks added after it further
establish the confirmation.[2]

Data in the blockchain

While it is possible to store any digital file in the blockchain, the larger the transaction size, the larger any
associated fees become. Various items have been embedded, including URLs to websites, an ASCII art
image of Ben Bernanke, material from the Wikileaks cables, prayers from bitcoin miners, and the original
bitcoin whitepaper.[25]

Alleged criminal activity

The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law
enforcement, and the media.[26] The FBI prepared an intelligence assessment,[27] the SEC has issued a
pointed warning about investment schemes using virtual currencies,[26] and the U.S. Senate held a hearing
on virtual currencies in November 2013.[28]

Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to
purchase illegal goods.[29][30] In 2014, researchers at the University of Kentucky found "robust evidence
that computer programming enthusiasts and illegal activity drive interest in bitcoin, and find limited or no
support for political and investment motives."[31]

Black markets

A Carnegie Mellon University researcher estimated that in 2012, 4.5% to 9% of all transactions on all
exchanges in the world were for drug trades on a single dark web drugs market, Silk Road.[32] Child
pornography,[33] murder-for-hire,[34] and weapons[35] are also allegedly available on black market sites
that sell in bitcoin. Due to the anonymous nature and the lack of central control on these markets, it is hard
to know whether the services are real or just trying to take the bitcoins.[36]

Several deep web black markets have been shut by authorities. In October 2013 Silk Road was shut down
by U.S. law enforcement,[37][38][39] leading to a short-term decrease in the value of bitcoin.[40] In 2015,
the founder of the site was sentenced to life in prison.[41] Alternative sites were soon available, and in early
2014 the Australian Broadcasting Corporation reported that the closure of Silk Road had little impact on the
number of Australians selling drugs online, which had actually increased.[42] In early 2014, Dutch
authorities closed Utopia, an online illegal goods market, and seized 900 bitcoins.[43] In late 2014, a joint
police operation saw European and American authorities seize bitcoins and close 400 deep web sites
including the illicit goods market Silk Road 2.0.[44] Law enforcement activity has resulted in several
convictions. In December 2014, Charlie Shrem was sentenced to two years in prison for indirectly helping
to send $1 million to the Silk Road drugs site,[45] and in February 2015, its founder, Ross Ulbricht, was
convicted on drugs charges and given a sentence of double life imprisonment plus 40 years.[46]
Some black market sites may seek to steal bitcoins from customers. The bitcoin community branded one
site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an alleged bitcoins
theft.[47] In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market
were hacked in early 2014.[48]

According to the Internet Watch Foundation, a UK-based charity, bitcoin is used to purchase child
pornography, and almost 200 such websites accept it as payment. Bitcoin is not the sole way to purchase
child pornography online, as Troels Oertling, head of the cybercrime unit at Europol, states, "Ukash and
paysafecard... have [also] been used to pay for such material." However, the Internet Watch Foundation
lists around 30 sites that exclusively accept bitcoins.[33] Some of these sites have shut down, such as a deep
web crowdfunding website that aimed to fund the creation of new child porn.[49] Furthermore, hyperlinks
to child porn websites have been added to the blockchain as arbitrary data can be included when a
transaction is made.[50][51]

Money laundering

Bitcoins may not be ideal for money laundering, because all transactions are public.[52] Authorities—
including the European Banking Authority,[53] the FBI,[27] South African Reserve Bank and the Financial
Action Task Force of the G7[54]—have expressed concerns that bitcoin may be used for money laundering.
In early 2014, an operator of a U.S. bitcoin exchange, Charlie Shrem, was arrested for money
laundering.[55] Subsequently, he was sentenced to two years in prison for "aiding and abetting an
unlicensed money transmitting business".[45] Alexander Vinnik, an alleged owner of BTC-e, was arrested
in Greece on July 25, 2017, on $4 billion money laundering charges for flouting anti-money laundering
(AML) laws of the US. A report by the UK's Treasury and Home Office named "UK national risk
assessment of money laundering and terrorist financing" (October 2015) found that, of the twelve methods
examined in the report, bitcoin carries the lowest risk of being used for money laundering, with the most
common money laundering method being the banks.[56]

Ponzi scheme

In a Ponzi scheme using bitcoins, the Bitcoin Savings and Trust promised investors up to 7% weekly
interest, and raised at least 700,000 bitcoins from 2011 to 2012.[57] In July 2013, the U.S. Securities and
Exchange Commission charged the company and its founder in 2013 "with defrauding investors in a Ponzi
scheme involving bitcoin".[57] In September 2014 the judge fined Bitcoin Savings & Trust and its owner
$40 million.[58]

See also
Lists of network protocols
List of bitcoin organizations
Economics of bitcoin

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