An introduction to the basic working mechanism of bitcoin and blockchain: how bitcoin works, bitcoin network, nodes, miners, hashing, difficulty and nonce, etc, why bitcoin mining consumes so much energy. Variations of blockchain, MDL.

1. BITCOIN, BLOCKCHAIN AND
ITS APPLICATIONS
Dr. Len Mei
2019/08
1

2. BITCOIN PRICE 2010 ~2017

3. 3
2017/12/17
19,783.06
All time high
https://www.buybitcoinworldwide.com/price/

4. WHAT IS BITCOIN?
4

5. BITCOIN IS A COMPUTER FILE…
5
Blockchain
• Transferrable
• Unique
• Trustworthy
• Can be copied

6. SATOSHI NAKAMOTO WHITE PAPER 2008
DECEMBER
6

7. GENESIS BLOCK
 January 3, 2009: Satoshi created 1st 50 bitcoins.
 Today, it is worth >$500,000.
7

8. BITCOIN TRANSACTIONS IN 2009
8
2009/10/12
2010/5/22
2009/1/10

9. IF YOU HAVE A BITCOIN……
 Bitcoin is the receipt of transaction that you
received the bitcoin.
 Bitcoin transaction is recorded in the blockchain.
 You can print a copy or keep in your computer
(cold storage) or keep on-line (hot storage). 9
You have an address (public key) and password
(private key) as proof that you have the bitcoin.

10. IF YOU LOSE THE PRIVATE KEY, YOU LOSE THE
BITCOIN….
10

11. POST OFFICE BOX
11
• address
• key
Receiver creates a bitcoin address by
downloading a bitcoin wallet software.

12. PUBLISH
 To announce the transaction to the bitcoin network
that payer’s address is used and no longer valid.
 This is to prevent the same bitcoin used twice.
12
tx
tx
Nodes are computers running bitcoin software.

13. BITCOIN NETWORK
 Bitcoin network is a part of internet.
 It is formed by the computers running bitcoin
software.
 These computers are called nodes.
 There are two types of nodes:
 Miners – validate transactions and build blocks.
 Full nodes – keep a copy of blockchain and verify
blocks.
13

14. MINERS VALIDATE AND RECORD
TRANSACTIONS
 Miners collect transactions and validate them.
 After validation, miners record them in the ledger
called “block”.
 Block can fit up to 3,000 transactions and takes 10
min.
14
 The first miner to complete
the block sends the new
block to all nodes in the
network.
 All other miners stop working
on the block.

15. FULL NODES VERIFY BLOCKS
 Nodes verify the block to make sure that all
transactions in the block are valid.
 If a node finds that the miner cheats, he rejects the
block.
 They can do so because all nodes keep a complete
copy of the bitcoin blockchain.
 If majority of the nodes accept the new block, it is
then attached to the blockchain.
 This process is called consensus.
 The transactions included in the block are then
eliminated from the network. 15

16. HOW BITCOIN IS CREATED?
 When miner builds a block, the bitcoin software
creates new bitcoins as reward to him.
 In the first 4 years, the reward was 50 bitcoins.
 Every 4 years, the reward is reduced by half.
 Now the reward is 12.5 bitcoins.
 This limits the total bitcoin that can be created by
21 million.
16

17. TOTAL BITCOIN SUPPLY
17

18. WHO CAN RUN NODE?
 Nodes are voluntary. The requirements are:
 Node computer needs 300 GB of disk space, 2GB of
RAM, and a fast internet connection.
 Download a copy of Bitcoin Core software.
 All nodes carry a complete copy of the blockchain (in
Jan., 2019 ~225GB)
 Currently, there are 10,000 bitcoin nodes.
 https://bitcoin.org/en/download
18

19. How miners build blocks?
19

20. SATOSHI’S TRANSACTION
20
Jone’s bitcoin + John’s private key + Mary’s public key =
Owner 2’s bitcoin
Owner 1 – John
Owner 2 - Mary

21. HASHING – A CRYPTOGRAPHIC
FUNCTION
 Hashing is to encrypt data.
 Hash is like “fingerprint”, is difficult to make but
easy to verify.
21

22. A SIMPLE HASH FUNCTION
=1.73205080756888
=1.73207967484178
=1.73202193981485
=207.66078108299600
22
Square root function can be a hash for
the numbers.

23. SHA-256 HASH
23
SHA means Secured Hash Algorithm.
There are 2256 possible combinations of Hash value
(1.15792 x 1077)
https://www.xorbin.com/tools/sha256-hash-calculator

24. 24

25. DIFFICULTY AND NONCE
25
 Requiring more 0’s at the beginning of hash
makes hash number smaller and
needs more iterations to get hash

26. WHY INCREASES DIFFICULTY?
 To offset increasing computing power in the
bitcoin network
 In Aug.,2019, a valid bitcoin hash starts with 19
zeros.
 Difficulty = block 0 difficulty / current target difficulty
 Difficulty is adjusted every 2016 blocks to
maintain one block output per 10 minutes.
 Or, average time to build a block * hash rate =
constant
26

27. WHY NONCE?
 Nonce is a random number.
 It makes the number of iterations of hash change
randomly.
 It is like lottery.
 The chance of winning becomes proportional to the
hashing power.
 This is to equalize the chance of winning the
reward.
27

28. 28
CPU
CPU+FPGA
ASIC
Tera
Giga
28
CPU
CPU+FPGA
ASIC
Tera
Giga

29. HASH RATE 2017~2019
29
80 million tera (1012 ) -hash/s or 80 exa (1018 ) -hash/s

30. THREE WAYS TO MINE BITCOINS
 Solo miners
 Join mining pool
 Cloud mining
30https://www.buybitcoinworldwide.com/mining/pools/

31. MINING BITCOIN WITH PC
 Intel Pentium Core i5 PC ~ 20 M (106 ) hash/s
31
https://www.buybitcoinworldwide.com/mining/calculator/

32. BITCOIN MINING
 Mining is a computation-intensive work.
32

33. BITCOIN MINING
33

34. BLOCK CONSISTS OF HASHES OF TRANSACTIONS
 Merkle tree is the hash of multiple transactions
34

35. BLOCK HEADER
35
New
block
header
Noncenonce
Block related information
Merkle root hash and
Time stamp
Difficulty
Guessing number

36. LATEST BLOCK AT 14:08 2019/8/4
36

37. PROOF OF WORK
 All the above tasks performed by the miners is
called Proof of Work.
 PoW is energy intensive.
 Bitcoin mining consumes 30 TWh in 2017 alone,
more energy than 159 countries.
 PoW makes the bitcoin trustable.
 Any process which builds trust in a blockchain is
called consensus.
37

38. BITCOIN IS DIVISABLE
38
5 Bitcoins
In address 1
3 Bitcoins
In address 2
2 Bitcoins
In address 3
John Mary
John
 When John pays out of address 1, address 1 is no longer
valid.
 Mary created address 2 to receive 3 bitcoins.
 John created address 3 to receive 2 bitcoins as change.
 If John does not create address 3, miner will create address 3
to receive the difference.
 It is considered as transaction fee.
INPUT OUTPUT

39. Blockchain beyond bitcoin
39

40. BLOCKCHAIN IS
 Distributed database – to make the database
immutable
 Cryptography – to make the database safe
 Consensus – to allow database to obey
established protocol
 Blockchain is also known as Mutual Distributed
Ledger (MDL).
40

41. BLOCKCHAIN APPLICATIONS
 Cryptocurrencies.
 There are more than 1,000 cryptocurrencies today.
 Since blockchain is a database, it can be used for
all database applications.
 Most important applications are in financial area –
Fintech.
41

42. CURRENT FINANCIAL TECHNOLOGY
42
2019
2018

43. FINTECH USING BLOCKCHAIN
 Fintech gets a boost from blockchain technology.
 Secure
 Fast
 Built-in trust
 Indestructible
 Immutable
 New applications
43

44. VARIATIONS OF BLOCKCHAIN
 Different applications of blockchain require different
characteristics
 Decentralized vs. centralized
 Permissionless vs. permissioned
 Different levels of permission
44

45. BLOCKCHAIN APPLICATIONS
 Smart contract (Ethereum, Microsoft)
 Land registration (Japan, Sweden, Ukraine, Ghana,
Georgia, etc)
 Commodity trading (Mercuria, Gunvor, Trafigura,
Cargill, Dreyfus, Olam etc)
 Asset digitization (ACC)
 Banking and payment (HSBC, Citi, Barclays, ING,
Standard Chartered, etc)
 Supply chain management (IBM, Alibaba etc)
 Cloud data storage (Storj, Sia)
 5G (Huawei)
45

46. SMART CONTRACT
 Contract is a document, which can be stored in the
database.
 A smart contract is computerized transaction
protocol that executes the terms of a contract.[
 Smart contracts allow the performance of credible
transactions without third parties.
46

47. ETHEREUM – BLOCKCHAIN WITH SMART CONTRACT
 Ethereum is programmable blockchain.
 These decentralized applications (or “dapps”) have
the benefits of cryptocurrency and blockchain
technology.
 The Ethereum community is the largest and most
active blockchain community in the world.
47

48. ETHEREUM DAPPS
48

49. MDL IS VARIATION OF BLOCKCHAIN
 Independent MDL’s can work with each other.
 MDL has all the quality of blockchain
 Different organizations can have different MDL’s
and they can share data.
49

50. THREE TYPES OF MDL
 Identity MDL
 National ID, driver license, passport, tax ID, insurance card,
library card, fingerprint, face photo, etc. all in one with
security, immutability
 Transaction MDL
 All events require ID
 Doctor visit, traffic ticket, boarding airplane, bank activity
 Content MDL
 Each entity has its own content MDL
50

51. Headlines of blockchain
51

52. GOLDMAN SACHS INVESTS IN BLOCKCHAIN
52

53. BLOCKCHAIN AND BANKS
53

54. BLOCKCHAIN REVOLUTIONISES INSUARANCE
54

55. BLOCKCHAIN AND ENERGY
55

56. ALIBABA INTRODUCES BLOCKCHAIN FOR FOOD
FRAUD
56

57. IBM OFFERS BLOCKCHAIN SERVICES
57

58. HUAWEI UNVEILS BLOCKCHAIN SERVICE
58

59. GOOGLE DEVELOPS BLOCKCHAIN
59

60. CONCLUSION
 Blockchain is a revolutionary invention.
 We are at the starting point to see the impact of
blockchain in all aspects of the financial industry.
 For more detail, refer to the book “Bitcoin,
blockchain and fintech” by Len Mei in Amazon
online bookstore.
 https://www.amazon.com.br/dp/B07MJW4QPX
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