How unit 2 is examined
This unit covers how Bitcoin works (coins, payments, network, mining), how consensus is reached in an open network, Proof of Work and its attacks, alternatives (PoS, PoB, PoET) and the miner's role; no topic was asked in the supplied papers, so each is short but complete.
Bit coin and Block chain: creation of coins, payments and double spending, Bit coin scripts
<span style="display:inline-block;padding:.16em .6em;border:1.5px solid currentColor;border-radius:999px;font-size:.68em;font-weight:700;letter-spacing:.06em;text-transform:uppercase;opacity:.75">Not asked since 2022</span>
Definition. <mark>Bitcoin is a decentralised digital currency whose transactions are recorded on a public blockchain, with new coins created only as a reward for mining blocks.</mark>
Key points.
- Coins are created by the coinbase transaction, the first transaction in each block, which pays the block reward to the miner (50 BTC at start, halved every 210,000 blocks, capped at 21 million).
- A payment spends the unspent outputs (UTXOs) of earlier transactions and is authorised by the owner's digital signature.
- Double spending means spending the same coin twice; the blockchain prevents it because miners accept only the first transaction that spends a UTXO and reject later ones.
- Bitcoin Script is a simple stack-based, non-Turing-complete language; a locking script (scriptPubKey) sets spending conditions and an unlocking script (scriptSig) supplies the signature and public key, as in Pay-to-Public-Key-Hash (P2PKH).
Bit coin P2P network, transactions, block mining, block propagation and relay
<span style="display:inline-block;padding:.16em .6em;border:1.5px solid currentColor;border-radius:999px;font-size:.68em;font-weight:700;letter-spacing:.06em;text-transform:uppercase;opacity:.75">Not asked since 2022</span>
Definition. <mark>The Bitcoin network is a peer-to-peer network of equal nodes that flood transactions and blocks to one another without any central server.</mark>
Key points.
- A new transaction is broadcast to neighbouring nodes, each of which validates it and forwards it, so it reaches most nodes within seconds.
- Miners collect valid transactions from the mempool into a candidate block and search for a nonce that makes the block hash fall below the target.
- The miner who finds it broadcasts the block; every node checks it and relays it onward, which is block propagation and relay.
- Compact-block relay sends only short transaction IDs, since peers already hold most transactions, so propagation delay and accidental forks are reduced.
Working with consensus in Bit coin: distributed consensus in open environments, consensus in a Bitcoin network
<span style="display:inline-block;padding:.16em .6em;border:1.5px solid currentColor;border-radius:999px;font-size:.68em;font-weight:700;letter-spacing:.06em;text-transform:uppercase;opacity:.75">Not asked since 2022</span>
Definition. <mark>Distributed consensus in an open environment means unknown, anonymous nodes that may join or leave freely still agree on one ledger, which Bitcoin achieves by making agreement depend on computing power instead of identity.</mark>
Key points.
- In an open network anyone can join, so voting by node count fails because one person could create many fake identities (Sybil attack).
- Bitcoin lets nodes vote with hash power: the block that costs the most work to produce is the one honestly accepted.
- Every node independently validates blocks and follows the longest (most-work) valid chain; a temporary fork is resolved when one branch becomes longer.
- Consensus is probabilistic: a transaction becomes safer with each block added on top, and about 6 confirmations is treated as final.
Proof of Work (PoW): basic introduction, Hash Cash PoW, Bit coin PoW
<span style="display:inline-block;padding:.16em .6em;border:1.5px solid currentColor;border-radius:999px;font-size:.68em;font-weight:700;letter-spacing:.06em;text-transform:uppercase;opacity:.75">Not asked since 2022</span>
Definition. <mark>Proof of Work requires a node to show it has spent computation by finding a value whose hash meets a difficulty condition, which is costly to find but trivial to verify.</mark>
Key points.
- Hashcash (Adam Back) was designed against email spam: the sender finds a nonce so that the hash of the message and nonce starts with a set number of zero bits.
- Bitcoin PoW applies double SHA-256 to the block header and needs $H(\text{header}) < \text{target}$; only trial and error with the nonce can find it.
- Verification takes one hash, so other nodes check a block instantly.
- The work makes rewriting history expensive, because changing one block forces redoing PoW for all later blocks.
Attacks on PoW and the monopoly problem
<span style="display:inline-block;padding:.16em .6em;border:1.5px solid currentColor;border-radius:999px;font-size:.68em;font-weight:700;letter-spacing:.06em;text-transform:uppercase;opacity:.75">Not asked since 2022</span>
Definition. <mark>A 51% attack occurs when one party controls more than half of the network hash power and can therefore override the honest chain.</mark>
Key points.
- The attacker can mine a private longer chain and release it to reverse its own recent payments, i.e. double spend, and can censor others' transactions.
- Such an attacker cannot steal others' coins or forge signatures, because these need private keys.
- The monopoly problem is that mining pools and specialised ASIC hardware concentrate hash power in a few hands, which moves Bitcoin towards centralisation.
- Other attacks are selfish mining (withholding found blocks) and the Sybil attack.
Proof of Stake, Proof of Burn and Proof of Elapsed Time
<span style="display:inline-block;padding:.16em .6em;border:1.5px solid currentColor;border-radius:999px;font-size:.68em;font-weight:700;letter-spacing:.06em;text-transform:uppercase;opacity:.75">Not asked since 2022</span>
Definition. <mark>These are energy-saving alternatives to PoW that select the block creator by stake held, coins destroyed, or a random trusted wait time.</mark>
Key points.
- Proof of Stake (PoS) picks the validator in proportion to the coins it locks as stake, and a dishonest validator loses its stake.
- Proof of Burn (PoB) makes miners send coins to an unspendable address; the burnt amount buys the right to mine, so it is a virtual mining cost.
- Proof of Elapsed Time (PoET, Intel SGX) gives each node a random wait time generated inside a trusted enclave, and the node whose timer ends first creates the block.
- All three avoid PoW's heavy electricity use; PoS risks favouring the rich, and PoET relies on trusted hardware.
The life of a Bitcoin miner, mining difficulty, mining pool
<span style="display:inline-block;padding:.16em .6em;border:1.5px solid currentColor;border-radius:999px;font-size:.68em;font-weight:700;letter-spacing:.06em;text-transform:uppercase;opacity:.75">Not asked since 2022</span>
Definition. <mark>A miner is a node that collects transactions, builds a block and repeatedly hashes it to win the block reward plus fees; difficulty adjusts to keep one block per about 10 minutes.</mark>
Key points.
- A miner's cycle is: validate transactions, build a candidate block with the coinbase, vary the nonce until the hash is below target, then broadcast the block and collect the reward and fees.
- Difficulty is retargeted every 2016 blocks (about two weeks): if blocks came faster than 10 minutes the difficulty rises, if slower it falls.
- A mining pool joins many miners who share the work and split the reward in proportion to shares submitted, giving small miners a steady income.
- Pools reduce income variance but concentrate power in the pool operator, which links back to the monopoly problem.
Last-minute revision
- Bitcoin coins are created only through the coinbase transaction in each mined block.
- Block reward halves every 210,000 blocks; total supply is capped at 21 million BTC.
- Double spending is prevented by accepting only the first spend of a UTXO and confirming it in the longest chain.
- Bitcoin Script is stack-based and not Turing complete; P2PKH is the standard payment script.
- Bitcoin consensus is by longest (most-work) chain; about 6 confirmations are treated as final.
- Bitcoin PoW uses double SHA-256 with the condition hash < target; Hashcash was designed against spam.
- Target block time is 10 minutes; difficulty retargets every 2016 blocks (about 2 weeks).
- A 51% attack allows double spending and censorship but not stealing coins.
- PoS uses stake, PoB uses burnt coins, PoET uses a random trusted wait time.
- Mining pools share rewards in proportion to work but centralise hash power.
Memory hooks
- Coinbase = the miner's pay slip; it is the only place new coins appear.
- Hard to find, easy to check: this is PoW in one line.
- 2016 blocks x 10 minutes = 2 weeks, which is the difficulty cycle.
- Stake = lock it, Burn = destroy it, Elapsed = wait for it.
- 51% means the majority controls the chain.
Coverage checklist
- Bit coin and Block chain: Creation of coins, Payments and double spending, Bit coin Scripts (no past questions)
- Bit coin P2P Network, Transaction in Bit coin Network, Block Mining, Block propagation and block relay (no past questions)
- Working with Consensus in Bit coin: Distributed consensus in open environments, Consensus in a Bitcoin network (no past questions)
- Proof of Work (PoW) – basic introduction, Hash Cash PoW, Bit coin PoW (no past questions)
- Attacks on PoW and the monopoly problem (no past questions)
- Proof of Stake, Proof of Burn and Proof of Elapsed Time (no past questions)
- The life of a Bitcoin Miner, Mining Difficulty, Mining Pool (no past questions)