Introduction¶

Traditional Banks¶

Banks maintain ledger

Ledger is a record of the

Bank ledgers are not auditable

flowchart LR

subgraph Different Banks
direction LR
A2((A)) -->
ba2[[Bank A]] -->
bb2[[Bank B]] -->
B2((B))
end

subgraph Same Banks
direction LR
A1((A)) -->
ba[[Bank]] -->
B1((B))
end

Bad Incidents¶

Cyprus¶

Take 30% of everyone’s funds, just like that

India demonetization¶

Charge-backs¶

Reversed transaction within 24-48hrs

But counter-party can sue the payer

2008 Recession¶

The taxpayers’ money was used for bailing out banks

Pre-Requisities¶

Symmetric Keys¶

Asymmetric Keys¶

• Public key helps
• encrypt data
• verify signature
• Private key helps
• decrypt data
• sign messages

Steps¶

1. A takes B’s public key
2. A encrypt the file
3. B receives file
4. B uses B’s private key to decrypt the file

Blockchain¶

Continuous database split into blocks

Basically like a doubly-linked list

Concensus¶

Permission

Centralized party cannot edit

Hash Function¶

Compression function that tranforms data into a simpler form

Helps with verification, by serving as signature to data

flowchart LR

gb[Genesis Block] -->
b1[Block 1] -->
b2[Block 2]

Components¶

1. Hash of current block
2. Hash of previous block (except genesis block)
3. Transactions and signatures
4. Sender’s signature, as they are the one initiating the transaction
5. Timestamp
6. Proof of Work

Wallet¶

Front-end that keeps your details and interacts with the blockchain

Bitcoin¶

Peer-to-peer network

Trillion-Dollar Market

Advantages¶

• Resistant to inflation
• Overall supply
• Resistance to fraudulent
• Pseudo-anonymous
• You can find out the
• But you can’t find out who it is
• Low transaction fees

Parts of Blockchain¶

1. Users The ones who send/receive transactions
2. Nodes Autonoumous computers which validate and timestamp transactions
3. Miners Subset of nodes, high computational, confirm transactions Monitor transations

Mining¶

Every transcation has a transaction fee, which depends on

The Bitcoin protocol rewards only the fastest miner solving a ‘hash puzzle’. The difficulty gets automatically adjusted by the network algorithm.

Winner gets a freshly-minted bitcoin and the commission fee by the payer.

There can only be 21M bitcoins total in the total. Every year, the reward gets divided into half. Currently, the reward is \(6.25 \text{ BTC}\)

Protocol is a set of rules

Mempool¶

Memory pool

On every 2 weeks, the difficulty algorithm updates the difficulty level

Limitations¶

• Time-Consuming
• 10 min confirmation time

Solutions¶

Increase the block size¶

• So that more transactions fit into a block
• Introduce a second layer
• But not that great

Lightning Network¶

• Without this, throughput is only 7
• Depends on the internet speed of the nodes
• ~ 3.9M transactions per second

You just need to record 2 transactions

• Opening channel
• Closing channel

Only disadvantage is that it depends on liquidity (of what?) ; hence, it is only recommend only for small transactions

Another features relayed transactions through shortest paths between payer and receiver

Stages of Currency/Digital Currency¶

flowchart LR
1[Collectible] -->
2[Store of Value] -->
3[Medium of Exchange]

Economic Majority¶

Ring Signatures¶

(not relevant here)

Softwares/Websites Used¶

Electrum¶

open /Applications/Electrum.app --args --testnet

Other¶

• mempool.emzy.de
• Bitcoin Testnet Faucet
• Parallel blockchain where developers use it for testing

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