Block Chain Technologies (AL-802 (A)) Unit 2 Notes

How unit 2 is examined

This unit covers how Bitcoin works end to end and the consensus schemes behind it; marks sit on Proof of Elapsed Time (with Byzantine and digital signature), Proof of Work, coin creation, double spending and HashCash vs Bitcoin PoW.

Creation of coins

Low weight

Definition. Bitcoin is the first application of blockchain: a peer-to-peer digital cash whose transactions are grouped into blocks, chained by hashes, and whose new coins are created only as the mining reward.

Key points.

Bitcoin uses a blockchain as its public ledger; each block holds many transactions and the hash of the previous block, so history cannot be altered.
A user signs a transaction, which is broadcast and waits in the mempool of every node.
Miners pick transactions from the mempool, build a block and solve the PoW puzzle; the winner adds the block and receives the block reward (coinbase transaction, 3.125 BTC since April 2024) plus fees.
Other nodes verify the block, and after about 6 confirmations the coins are treated as final.

Steps of creation. Transaction, mempool, mining, reward (coinbase), confirmation.

Asked: [7 marks] (May 2024) How Bitcoin related with blockchain? Write the various steps of creation in Coins.

Payments and double spending

Definition. Double spending is spending the same digital coin twice, possible because digital data can be copied; Bitcoin prevents it with a public ledger, consensus and confirmations.

Key points.

Physical cash cannot be copied but a digital file can, so digital cash needs a trusted party or a consensus to reject the second spend.
Bitcoin uses the UTXO model: each transaction consumes unspent outputs once, and every node rejects any input already spent.
Miners order transactions in blocks by PoW, so only one of two conflicting transactions is confirmed; waiting for 6 confirmations makes reversal very unlikely.
Double spending is still possible if an attacker controls over 50 percent of hash power (51% attack), wins a race between two conflicting transactions when the merchant accepts zero confirmations, or uses a Finney attack (a miner pre-mines a block containing the conflicting transaction).

Asked: [7 marks] (May 2024) What is Double Spending? Is it possible to double spend in a Blockchain system.

Bit coin Scripts

Definition. Bitcoin Script is a simple, stack-based, non-Turing-complete language in which every output states the conditions needed to spend it.

Key points.

Each transaction output holds a locking script (scriptPubKey) and each input supplies an unlocking script (scriptSig).
The scripts run on a stack; the spend is valid only if the final top value is true.
The standard P2PKH script checks a public key hash and a signature using OP_DUP, OP_HASH160, OP_EQUALVERIFY and OP_CHECKSIG.
It has no loops, which prevents infinite execution; multisig and time-locks are also built from it.

Bit coin P2P Network

Definition. The Bitcoin network is a peer-to-peer overlay of equal nodes, with no central server, that relays transactions and blocks by gossip.

Key points.

A new node finds peers through DNS seeds and then connects to about 8 outgoing peers.
Full nodes store the whole chain and validate everything; lightweight (SPV) nodes store only block headers.
Every node forwards valid transactions and blocks to its neighbours (flooding), so news reaches the network in seconds.
Nodes are anonymous and may join or leave freely, so the network is open and fault tolerant.

Transaction in Bit coin Network

Definition. A Bitcoin transaction transfers value by consuming inputs (earlier unspent outputs) and creating new outputs, and is authorised by a digital signature.

Key points.

Each input refers to a previous output by transaction ID and index and carries the owner's signature.
Each output states an amount and a locking script for the new owner.
Fee = total inputs minus total outputs, and it goes to the miner.
Nodes check the signature, that inputs are unspent and that inputs are at least outputs, then relay the transaction to the mempool.

Block Mining

Definition. Mining is the process by which nodes collect transactions into a block and repeatedly hash the header until it is below the target, earning the reward for adding the block.

Key points.

The miner selects mempool transactions (highest fee first) and adds a coinbase transaction paying itself.
It builds the Merkle root of the transactions and puts it in the block header with previous hash, timestamp, bits and nonce.
It changes the nonce until SHA-256(SHA-256(header)) is below the target.
The first miner to succeed broadcasts the block and collects reward plus fees.

Block propagation and block relay

Definition. Block propagation is the spreading of a newly mined block to all nodes, each of which validates it before relaying it.

Key points.

The miner announces the block with an inv message; peers request it with getdata and receive it.
Each node validates the block before forwarding it, which stops invalid blocks spreading.
Compact block relay sends only short transaction IDs because peers already hold most transactions in their mempool, cutting delay.
Slow propagation causes forks (orphan or stale blocks) and favours large miners, so speed matters.

Distributed consensus in open environments

Definition. In an open environment anyone can join anonymously, so consensus cannot rely on known identities and must be based on a scarce resource such as computation or stake.

Key points.

Classical protocols (Paxos, PBFT) need a known, fixed set of nodes and fail against Sybil attacks where one party fakes many identities.
Open systems tie voting power to a costly resource (hash power in PoW, coins in PoS), not to the number of identities.
Agreement is probabilistic: the chance of reversal falls as more blocks are added.
Nodes follow the rule of the longest (heaviest) valid chain.

Consensus in a Bitcoin network

Definition. Nakamoto consensus is agreement on one ledger by every node following the longest valid chain, where blocks are made costly by proof of work.

Key points.

Nodes independently validate transactions and blocks against the same rules.
Miners compete with PoW, and the winner's block becomes the next block.
Temporary forks are resolved when one branch becomes longer and the other is orphaned.
Incentives (reward and fees) make honest mining more profitable than attacking, as long as honest miners hold over 50 percent of hash power.

Proof of Work (PoW) - basic introduction

Definition. Proof of Work is a consensus method in which a miner must find a nonce so that the hash of the block header is below a target; the work is hard to do but easy for everyone to verify.

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Key points.

Need: in a decentralised network with no trusted party, nodes must agree on one valid block, and validation must be costly to fake.
The miner collects pending transactions and forms a candidate block header (previous hash, Merkle root, timestamp, difficulty target).
It searches for a nonce so that $H(\text{header}) < \text{target}$; only brute force works, since a hash cannot be inverted.
The first to find it broadcasts the block, and other nodes verify with a single hash and append it.
Difficulty adjusts (every 2016 blocks in Bitcoin) so a block appears about every 10 minutes whatever the total hash power.
Security: rewriting a block means redoing its PoW and all later blocks, so an attacker needs more than 50 percent of the computing power.
Drawback: heavy electricity use and slow throughput.

Proof of Stake in one line (for Q6). Validators lock coins as stake and are chosen to propose blocks in proportion to stake; dishonesty costs slashing of the stake, so PoS uses little energy but favours the rich (see Proof of Stake below).

Answer frame. Open with the definition; draw the flow diagram; then develop steps 2-4, then difficulty and security (5-6); close with the drawback. For Q6 add one paragraph on need for validation, then PoW and PoS side by side and a 3-row comparison (resource, energy, attack cost).

Asked: [7 marks] (May 2022) Describe the process of PoW. Asked: [7 marks] (May 2024) What are some common validation techniques used in blockchain systems, such as proof-of-work and proof-of-stake?

Hash Cash PoW

Definition. HashCash (Adam Back, 1997) is a proof-of-work stamp that fights email spam: the sender finds a string whose SHA-1 hash begins with a set number of zero bits, and Bitcoin adopted this idea.

Point	HashCash PoW	Bitcoin PoW
Purpose	Stop spam and denial of service	Agree on the ledger and stop double spending
Puzzle	Partial hash collision (leading zero bits) on a stamp with recipient and date	Double SHA-256 of block header below a target
Difficulty	Fixed by the service	Adjusted every 2016 blocks
Incentive	None; cost is the deterrent	Block reward plus fees
Verified by	The single recipient	Every node in the network
Result	A stamp attached to a message	A block added to the chain

Attacks on PoW are covered in the next-but-two sections below (51%, selfish mining, Sybil, eclipse, race).

Asked: [7 marks] (May 2024) Compare HashCash PoW (Proof of Work) with Bitcoin PoW. Also discuss various types of attacks on PoW.

Bit coin PoW

Definition. Bitcoin PoW is the double SHA-256 hash of the 80-byte block header, which must be below the current target.

Key points.

The header holds version, previous hash, Merkle root, timestamp, bits (target) and a 32-bit nonce.
When the nonce space is used up, miners change the extra nonce in the coinbase or the timestamp.
The chance of a miner winning a block equals its share of total hash rate.
One block is targeted every 10 minutes.

Attacks on PoW and the monopoly problem

Definition. Attacks on PoW try to rewrite or control the chain; the monopoly problem is the concentration of hash power in a few pools or ASIC makers.

Key points.

51% attack: a majority miner rewrites history and double spends.
Selfish mining: a miner hides found blocks and releases them to waste others' work.
Sybil and eclipse attacks: fake identities or isolating a node by controlling all its peers.
Race attack: two conflicting transactions are sent quickly to different nodes.
Monopoly: ASIC hardware and big pools centralise mining, defeating decentralisation.

Proof of Stake

Definition. In Proof of Stake, the validator who creates the next block is chosen according to the coins it locks up as stake, not by computation.

Key points.

Validators deposit coins as stake; larger stake means a higher chance of being picked.
Misbehaviour is punished by slashing the stake, so cheating costs money.
It uses far less energy than PoW and gives faster finality.
Risks are wealth concentration ("rich get richer") and the nothing-at-stake problem.

Proof of Burn and Proof of Elapsed Time

Definition. Proof of Burn: miners send coins to an unspendable address to earn the right to mine; Proof of Elapsed Time (PoET, Intel): each node waits a random time inside a trusted hardware enclave (SGX) and the node whose wait ends first creates the block.

Proof of Burn. Burning coins proves commitment; burnt coins are lost, which acts like buying mining "shares" and wastes no electricity.

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PoET key points.

Every node runs code inside Intel SGX (Software Guard Extensions), a trusted execution environment that cannot be tampered with.
Each node requests a random wait time from the enclave and sleeps for that time, so it uses almost no CPU.
The first node to wake up wins the lottery and proposes the next block, and the enclave issues a signed proof that it really waited.
Other nodes verify the attestation, which is cheap, and accept the block.
It is a fair lottery, energy-efficient and suits permissioned (Hyperledger Sawtooth) networks; the weakness is trust in Intel hardware.

b) Byzantine algorithm. A Byzantine fault tolerant algorithm lets a system reach agreement even when some nodes fail or act maliciously (arbitrarily). With $n$ nodes it tolerates $f$ faulty ones if $n \ge 3f+1$; honest nodes exchange messages, vote and accept the value backed by a majority (for example PBFT). It solves the Byzantine Generals problem.

c) Digital signature. A digital signature is a value computed from a message and the signer's private key, which anyone can verify using the public key.

Keys: the signer holds a private key and publishes the public key.
Signing: hash the message and encrypt the hash with the private key; send message and signature.
Verification: the receiver decrypts the signature with the public key, hashes the message and compares the two hashes.
A match proves authenticity, integrity and non-repudiation (Bitcoin uses ECDSA).

Answer frame. Write three parts a), b), c) as separate mini-answers of about 4-5 lines. For a) give the definition, then n >= 3f+1; for b) draw the PoET lottery diagram and mention SGX; for c) give the sign and verify steps with the two hash comparison. Close each with one use in blockchain.

Pitfall: Do not say PoET needs mining hardware; its whole point is to replace computation with a trusted random wait.

Asked: [14 marks] (May 2024) Explain the following term: a) Byzantine algorithm b) Proof of Elapsed Time c) Digital signature

The life of a Bitcoin Miner

Definition. A miner repeatedly listens for transactions and blocks, builds a candidate block, hashes for a valid nonce, and either wins the reward or restarts on the new chain tip.

Key points.

The miner runs a full node, validates incoming transactions and keeps them in its mempool.
It builds a block with a coinbase transaction and hashes with ASIC hardware.
If it hears of a valid block from someone else first, it drops its work and starts on top of that block.
Rewards halve every 210,000 blocks (about 4 years), so fees become more important over time.

Mining Difficulty

Definition. Mining difficulty is how hard it is to find a hash below the target, and it is adjusted every 2016 blocks to keep the block time near 10 minutes.

Formula. $$\text{New difficulty} = \text{Old difficulty} \times \frac{2016 \times 10\ \text{min}}{\text{actual time for last 2016 blocks}}$$

Key points.

The target time for 2016 blocks is 20,160 minutes (2 weeks).
If blocks came in 1 week, difficulty doubles; if in 4 weeks, it halves.
A single adjustment is limited to a factor of 4 up or down.
Lower target means more leading zeros and a higher difficulty.

Mining Pool

Definition. A mining pool is a group of miners who combine hash power and share the reward in proportion to the work each contributes.

Key points.

A solo miner with small hash power may wait years for a block, so pools give steady small payouts.
The pool manager hands out work; miners submit shares (hashes meeting an easier target) as proof of effort.
Reward is split by share count (schemes such as PPS and PPLNS) after a pool fee.
Large pools threaten decentralisation because a pool near 51 percent could attack the chain.

Last-minute revision

Bitcoin is the first blockchain application; coin creation = transaction, mempool, mining, coinbase reward, confirmation.
Double spending = spending one coin twice; prevented by UTXO, PoW consensus and 6 confirmations; possible by 51%, race or Finney attack.
Bitcoin Script is stack-based with no loops; P2PKH uses OP_DUP, OP_HASH160, OP_EQUALVERIFY, OP_CHECKSIG.
Block header: version, previous hash, Merkle root, timestamp, bits, nonce.
PoW: find nonce so header hash is below target; hard to find, easy to verify.
Difficulty changes every 2016 blocks; block time is 10 minutes; reward halves every 210,000 blocks (3.125 BTC now).
HashCash (Adam Back) was anti-spam with no reward; Bitcoin PoW has adjusted difficulty and rewards.
PoW attacks: 51%, selfish mining, Sybil, eclipse, race.
PoS chooses validators by stake and slashes cheaters; PoB burns coins; PoET uses SGX random wait.
BFT tolerates f faults if n is at least 3f+1.
Digital signature: sign the hash with the private key, verify with the public key.

Memory hooks

Coin creation: "T-M-M-R-C": Transaction, Mempool, Mining, Reward, Confirmation.
Double spend attacks: "51, Race, Finney".
PoW = Work, PoS = Stake, PoB = Burn, PoET = wait (lottery in SGX).
2016 blocks x 10 min = 2 weeks.
Sign with private, verify with public.

Coverage checklist

Creation of coins: Q2.
Payments and double spending: Q4.
Bit coin Scripts: no past question.
Bit coin P2P Network: no past question.
Transaction in Bit coin Network: no past question.
Block Mining: no past question.
Block propagation and block relay: no past question.
Distributed consensus in open environments: no past question.
Consensus in a Bitcoin network: no past question.
Proof of Work (PoW) - basic introduction: Q5, Q6.
Hash Cash PoW: Q3.
Bit coin PoW: no past question.
Attacks on PoW and the monopoly problem: covers the attacks part of Q3.
Proof of Stake: supports Q6.
Proof of Burn and Proof of Elapsed Time: Q1.
The life of a Bitcoin Miner: no past question.
Mining Difficulty: no past question.
Mining Pool: no past question.

Account

Block Chain Technologies (AL-802 (A)) - Unit 2 Short Notes

How unit 2 is examined

Creation of coins

Payments and double spending

Bit coin Scripts

Bit coin P2P Network

Transaction in Bit coin Network

Block Mining

Block propagation and block relay

Distributed consensus in open environments

Consensus in a Bitcoin network

Proof of Work (PoW) - basic introduction

Hash Cash PoW

Bit coin PoW

Attacks on PoW and the monopoly problem

Proof of Stake

Proof of Burn and Proof of Elapsed Time

The life of a Bitcoin Miner

Mining Difficulty

Mining Pool

Last-minute revision

Memory hooks

Coverage checklist