bitcoins project paper

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  • 8/13/2019 Bitcoins Project Paper


  • 8/13/2019 Bitcoins Project Paper




    And the Issues Related with them


    What are Bitcoins?

    Bitcoin is a crypto currency, the laws if transferring of which are controlled

    by an open source cryptographic protocol. They are digital currency and

    the major way in which they are different from other currencies is that they

    have no centralised controlling unit, i.e. no one country has or organisation

  • 8/13/2019 Bitcoins Project Paper



    has complete control over the evaluation, transfer or trade of bitcoins. It is a

    peer-to-peer electronic cash system and are stored by associating an

    address with them known as wallet.

    History of Bitcoins

    The concept of Bitcoins was first proposed over a paper on the internet in

    November 2008, by Satoshi Nakamoto, pseudonymous developer. In

    January 2009, the bitcoin network came into existence with the issuance of

    the first bitcoins. The value of each bitcoin at the time of its launch was less

    than $0.01.

    The value of a bitcoin reached parity with the US dollar in march 2011 and

    by the beginning of 2013, each bitcoin was approximately valued at around

    15$ and currently its worth in excess of 600$.

    *here we write stuff about the regulatory issues of bitcoins and also silk


  • 8/13/2019 Bitcoins Project Paper



    How do Bitcoins work?

    Each user is given a bitcoin address which they can use to purchase

    bitcoins from bitcoin client and also for making transactions from one user

    to another. Once bitcoins have been purchased, they are stored in the

    digitalwalletof the user. A wallet has both a public key and a private key.

    Any transaction from the wallet can only be authorised using a private key.

    However, depositing bitcoins into another ones wallet requires only their

    public key. Since there is no central authority that checks every transaction,

    to avoid the problem of double spending, the earliest transaction is the one

    that counts and the transactions must be publicly announced.

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    Bitcoins simplified

    Theres a room that anyone can access. The room has security cameras

    that anyone can view, and every second of recorded footage is available

    online forever.

    The room is filled with indestructible piggy banks made of transparent

    plastic. Naturally, these piggy banks have coin slots, and everyone can see

    which coins are in which piggy bank. These piggy banks can never leave

    the room.

    Each person has a key that can open their piggy bank. Let s say I want to

    buy a pair of alpaca socks, and you want to sell them.

    First, you tell me which piggy bank is yours. Then, I walk into the room with

    a ski mask on. Anyone in the world can see me on the security cameras,

    but not my face.

    Next, I unlock my piggy bank, take some coins out and then put them into

    your locked piggy bank. I leave the room.

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    Now, everyone in the world knows that your piggy bank has coins that were

    previously in my piggy bank. This is the case with every transaction, so

    everyone knows the history of every coin. [1]

    Mining of Bitcoins


    Technology Issues

    To understand the major issues faced by the bitcoin

    structure, and seek out any possible solutions to these

    issues, we must understand that the whole working of the

    bitcoin as an organization is done via the internet. Hence

    for this very reason most of the technology issues faced

    by bitcoins are related to cyber security. Some of the

    major issues which we discovered and could suggest

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    viable solutions to, have been enlisted below and a

    detailed explanation of both the issue and solution will


    1. WalletVulnerability: The Wallets of users are storedwithout encryption and hence the bitcoins present in

    them are vulnerable to be stolen by an attacker.

    2. Traceability: Tracing a bitcoins history can facilitate an attacker to get the

    information of its previous owners, thus compromising the anonymity of the

    previous owners of that bitcoin.

    3. Lack of Governance: As previously stated, there is no arbitrator or moderator

    present to ensure that both parties involved in a bitcoin transaction have

    completed the deal fairly, hence in case of disputes the lack of an arbitratorposes a great issue.

    4. Lack of Security: Cybercrime is a threat to the smooth functioning of bitcoin as

    techniques used in cybercrimes such as packet sniffing and clogging up the

    network affect the transaction of bitcoins adversely.

    5. Malicious MinersNexus: A cabal of expert miners might form a coalition and

    take advantage of the system used to generate bitcoins and mine bitcoins

    without publishing the results, hence making a profit by cheating the system.

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  • 8/13/2019 Bitcoins Project Paper


  • 8/13/2019 Bitcoins Project Paper


  • 8/13/2019 Bitcoins Project Paper




    The most marketed advantage of bitcoins is the

    anonymity of its users. The process of mining and carrying

    out transactions using bitcoins is structured so that its

    users are completely anonymous. This however is a utopic

    outlook; as analyzing the bitcoin world has lead us to the

    conclusion that bitcoins are really anonymous only if one

    personally mines them. The way bitcoin transactions

    function has been stated before and here we would like to

    add to it. Every bitcoin transaction is carried out via a

    bitcoin exchange and hence every transaction is recorded

    in the logs of the exchange that is used for the transaction.

    Once a bitcoin is transferred from one wallet to the other, it

    is forever associated with the wallet its been placed in,

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    which means that the bitcoin effectively does carry some

    crucial information of the wallet of the user. Hence an

    attacker can match the address of the user to his identity

    by tracing the information associated with a certain bitcoin.

    Gaining access to the identity of a bitcoin user beats the

    whole purpose of the anonymity feature of bitcoins.

    This issue has forced users to start paying extra for newly mined bitcoins,

    hence reducing the probability of their identities being made public.


    Tracing the information associated with a bitcoin is not as easy as it

    sounds. It is a painstakingly lengthy and time consuming task. Hence the

    most effective way of reducing the disadvantages caused by this issue is to

    make transactions through multiple loops. What this means is if user A

    wants to make a payment for some product that is being sold by user B, A

    uses multiple loops to deposit the bitcoins into Bswallet. Using multiple

    loops means that more information gets associated with the bitcoin, hence

    making the process of tracing the bitcoin even more difficult. This method

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    gives this added advantage as opposed to A directly transferring the

    bitcoins to Bswallet as the information linked with the bitcoin would then

    be lesser and hence easier to trace.

    Lack of Governance

    The bitcoin transactions that works on

    the peer-to-peer protocols is completely

    based on the trust between its users.

    Analyzing the working of bitcoins we

    realized that trust between the users of

    bitcoins plays a vital role. This is due to

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    the fact that bitcoins does not make use

    of any arbitrator or mediator. Unlike

    typical bank or credit card transactions,

    in which the user is given 100% fraud

    protection by the bank in case of any

    fraudulent charges, the bitcoin network

    lacks any governance. This means that

    incase a fraud does occur, for example

    if a user makes the deposit of certain

    agreed upon bitcoins into another users

    wallet in exchange of goods, but does

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    not receive those goods, he cannot

    challenge and/or revert the transaction.

    All bitcoin transactions are irreversible

    and they do not have an arbitrator like a

    bank/government to ensure the

    authenticity of the transaction. Hence

    bitcoin transactions are wholly based on

    the trust factor, making the lack of

    governance a major issue.


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    While considering the solution to this

    issue we felt that the anonymity factor

    must be protected. Hence we suggest

    that a feature that lets the users opt in

    for an anonymous arbitrator be made

    available to the users. This feature

    would provide a random anonymous

    arbitrator to a certain transaction once

    both users agree to use one. Its the

    responsibility of the arbitrator to then

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    ensure that a smooth and fair

    transaction takes place. The reward for

    the arbitrator would be a percentage, in

    bitcoins, of the transaction he arbitrates

    payable by both the parties involved in

    the transaction. This suggestion offers a

    solution to the lack of governance

    without compromising on the anonymity


    Lack of Security

  • 8/13/2019 Bitcoins Project Paper



    Since the entire bitcoin industry

    functions via the internet, all the cyber

    threats related to the internet are

    inherent in the bitcoin network. The

    existing bitcoin infrastructure does

    provide some amount of protection from

    these threats and hence we would like

    to discuss the lack of security feature

    that specifically affect bitcoins.

    Ideally bitcoin transactions are meant to

    be carried out using the bitcoin address

  • 8/13/2019 Bitcoins Project Paper



    by the user, but if bitcoin transactions

    are done via IP address, the transaction

    is susceptible to man-in-middleattacks

    and the security of the users can be

    compromised. What this means is, if an

    attacker is monitoring a certain part of

    the network and the activities of certain

    IP addresses (which are public and

    available to anyone that has access to

    the internet), and a bitcoin transaction

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    is taking place using the IP address, the

    attacker can easily tap into the

    transaction and hence effectively steal

    the bitcoins during the transaction.

    Another cyber security related issue

    arises if/when a user is using an

    unprotected and/or public network to

    make transactions. Attackers can make

    use of tools like packet sniffing to gain

    information from the transaction that a

    user undertakes thereby aiding the

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    process of tracing a bitcoin or making a

    wallet vulnerable.


    The security issue caused due to the

    use of IP address has already been

    resolved. The bitcoin exchanges have

    now disabled the option of letting a

    transaction take place via IP address

    hence making it mandatory for the

    users to use their wallet address.

  • 8/13/2019 Bitcoins Project Paper



    Packet sniffing is used at particular

    nodes in the network and by using this

    tool the attacker can gain valuable

    information about the transactions

    being carried out using those nodes.

    Hence to ensure that bitcoin

    transactions are carried out safely the

    nodes can be encrypted thereby

    providing the much needed security to

    the users.

    Malicious MinersNexus

  • 8/13/2019 Bitcoins Project Paper



    I will complete this part on Monday?

    --Who are you red guy???

    Proposed Solutions




  • 8/13/2019 Bitcoins Project Paper





  • 8/13/2019 Bitcoins Project Paper