Homework 5
h5 BitCoin
Task v: Read/watch and summarize
- Nakamoto, Satoshi 2008: Bitcoin: A Peer-to-Peer Electronic Cash System. (A colored HTML version. This is the paper that defined and introduced BitCoin. You can skip “11. Calculations” if you don’t like sigma symbols. URL and email address on top of the paper seem unbeliveable and added by third party.
- Felten et al 2015: Bitcoin and Cryptocurrency Technologies, videos Week 1 (about 1 hour). Requires free registration. If you find it easy to follow, you can also optionally look at week 2 (1,5 h).
Summary
- Satoshi Nakamoto’s paper presents a theory of an electronic payment system based on cryptographic proof rather than trust, allowing any two willing parties to make transactions directly with each other without the need for a trusted third party such as a central bank, which is the currency’s issuer.
- A solution to the double waste problem is presented, based on a distributed peer-to-peer timestamp server, which confirms the chronological order of transactions with its computational proof.
- The system is safe as long as there is more computing power under the combined control of its honest participants than under the control of a group of attackers acting together.
- Participants need to openly publish transactions, as well as be able to come to an agreement on a single order of their sequence.
- The transaction contains a hash of the previous transaction signed by the previous owner of the coin and the public key of the current owner. It is signed with the secret key of the current owner of the coin, which can be verified using his public key.
- Transactions are collected in blocks. Transaction approval is the moment when transactions merge in the found block. One block includes one confirmation, and when it is confirmed by the majority of network participants, the transaction becomes fully confirmed.
- Proof of work: In blockchain mining, miners validate transactions by solving a difficult mathematical puzzle called proof of work. To do that, the primary objective of the miner is to determine the nonce value, and that nonce value is the mathematical puzzle that miners must solve in order to generate a hash starting with a certain number of zero bits. The creator of the block who found a nonce receives a reward.
- The entire chain of blocks can be tracked using Hash pointers to the previous block
- Scrooge coin, unlike Goofy coin, solves the problem of double spending, but does not solve the problem of a centralized currency issuer.
Sources:
Nakamoto, Satoshi 2008: Bitcoin: A Peer-to-Peer Electronic Cash System
Felten et al 2015: Bitcoin and Cryptocurrency Technologies
https://www.simplilearn.com/bitcoin-mining-explained-article
Task a: Value of bit money. How much is one BitCoin (BTC) worth now? Using historical BTC course, show that you could have lost a lot of money investing in BTC. Also show that you could have won a lot of money with BTC.
The value of a currency is a measure of the demand for it and its ability to stimulate trade and business inside and outside the economy. Thus, Bitcoin is not a classic currency, because it is almost not used in retail. Bitcoin is more like gold, its quantity is limited, and its value varies in proportion to the demand for it. Bitcoin demonstrates some of the attributes of a currency, but its main source of value lies in limited supply and growing demand. The Bitcoin price is determined by a complex combination of factors that include production costs, competition, and regulatory developments.
The vast majority of institutional investors are still wary of putting their money into the cryptocurrencies, resulting in less liquidity and more volatility for its ecosystem. However, the rapid growth of the exchange rate attracts small investors and individuals to the market, who do not always have sufficient knowledge to successfully trade in this market. It is quite easy to lose money in the cryptocurrency market due to their high volatility. Thousands of investors jumped only recently when the Bitcoin price and hype reached unprecedented heights.
Investment company 21Shares conducted a study. Based on the timestamps, 21Shares was able to aggregate the base cost for each registered bitcoin transaction. According to the results of the study, as of February 8, 2022, more than half of bitcoin investors are at a loss.
Binance. BTC/USD price 4/2021 – 4/2022.
As can be seen from the graph of bitcoin price changes over the past year, the bitcoin exchange rate is very volatile. On the day of writing the article, the bitcoin exchange rate has fallen by 8% over the past 24 hours. Investors who bought an asset at the peak of popularity lost up to half of their investments, while investors who entered the market a long time ago, when the exchange rate was lower, won.
Sources:
Investopedia. Why Do Bitcoins Have Value?
Investopedia. What Determines the Price of 1 Bitcoin?
Money. More Than Half of Bitcoin Investors Are in the Red, Study Says
Task b: Is it legal to own BitCoin in Finland? Why do you think so?
“It is legal in Finland to buy, sell and use cryptocurrency. On October 4, 2018 the Government of Finland released the Government Proposal 167/2018 (“HE 167/2018”) that proposes to regulate cryptocurrency providers. The Act on Virtual Currency Providers went into effect on May 1, 2019.” (Freeman law)
I believe that if this phenomenon cannot be stopped, then it should be enclosed in the legal framework of the law, which was done in Finland with the adoption of this law.
Sources:
Freeman law: Finland and Cryptocurrency
Task c: What’s a block chain? Give a simple but detailed explanation. (Feel free to use the most narrow and simple definition of blockchain – no need to consider a whole cryptocurrency).
The blockchain contains blocks, and blocks contain transactions.
A transaction in the blockchain is a record of a change in the state of assets when someone also transfers an asset to someone else.
A transaction block is a special structure for recording a group of transactions. In the bitcoin blockchain, each block holds about 3,000 transactions. In addition to transactions, there is a header in the block. It records the hash of all transactions, the hash of the previous block, the time of block creation and other service information.
Several blocks connected in a sequence form a chain. In it you can find the entire history of asset transfers from hand to hand. The block cannot be deleted or changed because the hash of the previous block is written in the header. Thus, the chain becomes consistent and unbreakable. By changing even one transaction, the hashes of all subsequent blocks along the chain will change and such a version of the blockchain will be considered invalid.
Sources:
https://maff.io/block_chain_transaction/
Task d: Not BitCoin. Give examples of some AltCoins, crypto currencies compiting with BitCoin. For each AltCoin: how does it differ, what’s it’s claim for fame?
Altcoin or alternative coin is any other cryptocurrency other than Bitcoin for example Ethereum, Ripple, Litecoin, Dogecoin
Ether (ETH) is the currency of the Ethereum system. In the Ethereum system, where blockchain technology is used to create applications that go beyond the simple use of digital currency.
Ethereum enables the deployment of smart contracts and decentralized applications to be built and run without any downtime, fraud, control, or interference from a third party. Ethereum comes complete with its own programming language that runs on a blockchain, enabling developers to build and run distributed applications.
Key differences from Bitcoin
- Transactions on the Ethereum network may contain executable code, while data affixed to Bitcoin network transactions are generally only for keeping notes.
- Differences in the speed of creating building blocks and thus in the speed of transactions. An ethereum transaction is confirmed in seconds, compared to minutes for bitcoin.
- Bitcoin uses the SHA-256 algorithm while Ethereum uses the Ethash algorithm.
- “Bitcoin and Ethereum networks are different with respect to their overall aims. While bitcoin was created as an alternative to national currencies and thus aspires to be a medium of exchange and a store of value, Ethereum was intended as a platform to facilitate immutable, programmatic contracts and applications via its own currency. ” (Investopedia)
Sources:
Investopedia. Bitcoin vs. Ethereum: What’s the Difference?