8. Cryptocurrencies

• Need a centralised institution to handle money transfers for every transaction – fee to this institution

• Privacy concern – this institution has records about how much money is spent where for each client

• Possibility of fraud (fee usually includes insurance against this)

Directy payment -> in online shop, no intermediary, all payment details are stored by the shop, the shop is requesting the payment at your bank than.

Payment through intermediary: Seller doens’t get credit card details, do not need your identity, seller do not deal with financial system,

Buyer and seller may need an account with the same intermediary –multiple intermediaries

A digital currency in which encryption techniques are used to

regulate the generation of units

of currency and

verify the

transfer of funds,

operating independently of a central bank.

In traditional banking, ledgers are maintained by financial institutions such as banks. Banks use ledgers to keep track of account balances and transactions for their customers. Each customer's account is represented by a set of entries in the bank's ledger, which show the account balance and a record of all transactions that have occurred. These ledgers are typically maintained in a centralized database, and they are kept private and confidential.

Hash-based Timestamping: This method involves generating a hash of the document, and then recording the hash value and the current date and time on a trusted timestamping server. The hash value serves as a unique fingerprint of the document, which can later be used to prove the existence of the document at the time it was hashed.

• Its input can be any string of any size

• It produces a fixed-size output

• It is efficiently computable – O(n) for an n-bit string

Collision resistance: A hash function should make it difficult for two different inputs to produce the same output, known as a collision.

Hiding: A hash function should make it difficult to determine the original input from its hash value.

Puzzle-friendliness: A hash function should be suitable for use in cryptographic puzzles, such as proof-of-work systems.

If a hash function is puzzle friendly, then there is no solving strategy for this puzzle that is much better than just trying random values of x

• Only you can make your signature, but anyone who sees it can verify that it is valid

• The signature should be tied to a particular document

• Generate Keys: sk (sekret key) and pk (public key)

• Sign a message

• Validate signature

• Signatures are existentially unforgeable (Signaturen sind existenziell fälschungssicher)

Postoffice

A blockchain ledger is a distributed ledger, which means that it is maintained by a network of computers rather than a central authority.

In the context of eCommerce and cryptocurrencies, a ledger is a digital record-keeping system that is used to track and record transactions. Ledgers are designed to be secure, transparent, and tamper-proof, and they are an essential component of many decentralized systems.

1. Scalability: Bitcoin's blockchain, the decentralized ledger that records all transactions, has a limited capacity for transactions. This can lead to long confirmation times and high transaction fees during periods of high usage.

2. Energy consumption: The process of mining, which is used to create new bitcoins and validate transactions on the blockchain, requires a significant amount of energy. This has led to concerns about the environmental impact of bitcoin mining.

3. Volatility: The value of bitcoin has been known to fluctuate wildly, making it a risky investment for some.

4. Lack of regulation: Bitcoin operates outside of traditional banking systems and is not subject to the same regulations. This lack of oversight has led to concerns about money laundering, tax evasion, and other illegal activities.

5. Security: Despite being decentralized and using advanced cryptography, Bitcoin and other cryptocurrencies have been subject to a number of thefts, hacks and frauds, which have raised questions about their security and resilience.

6. Adoption: Bitcoin is still not widely accepted as a form of payment, and its usage is limited to a specific niche of merchants and consumers.

7. Privacy: Bitcoin transactions are recorded on a public ledger, which allows for transparency, but also raises concerns about privacy and the potential for tracking.

Proof of Work (PoW) is a

consensus algorithm used in the Bitcoin and other blockchain-based networks. It is used to confirm transactions and add new blocks to the blockchain.

In PoW, the nodes, also known as miners, in the network compete to solve a complex mathematical problem, known as the "puzzle".

The first miner to solve the puzzle gets to add the next block to the blockchain and receives a reward in the form of newly minted bitcoins or other cryptocurrency.

The puzzle is designed such that it is difficult to solve but easy to verify, this ensures that only one miner will be able to solve the puzzle and add the block, but all the other nodes in the network can easily check the validity of the solution.

1. Decentralized: Bitcoin operates on a decentralized, peer-to-peer network, which means that there is no central authority controlling the supply or flow of the currency. This can provide greater stability and security compared to a centralized system.

2. Secure: Bitcoin's blockchain technology is designed to be secure, transparent and tamper-proof. Transactions are recorded on a public ledger that is maintained by a decentralized network of computers, which makes it difficult to alter or manipulate the record.

3. Borderless: Bitcoin can be easily transferred across borders, which makes it a convenient option for international transactions. It can be converted into any currency and the transactions can be done globally.

4. Transparent: Bitcoin transactions are recorded on a public ledger, which allows for transparency and can be helpful in tracking and auditing.

5. Accessibility: Bitcoin is accessible to anyone with an internet connection, and it is not subject to the same regulations or restrictions as traditional banking systems, which can make it a useful option for people in countries with unstable or inaccessible banking systems.

6. Control: Bitcoin allows for greater control over personal finances, as users have full control over their own bitcoins and can make transactions without the need for a central authority or intermediary.

7. Innovation: Bitcoin's blockchain technology has the potential to be used for a wide range of applications beyond just digital currency, such as smart contracts, digital identity, and decentralized applications, among others.

• A nonce is a random number used in the mining process of Bitcoin and other blockchain-based systems.

• Miners use the nonce, along with other data, to try and find a solution to a complex mathematical puzzle to validate transactions and add new blocks to the blockchain.

• The nonce is included in the block header and the miners repeatedly change its value.

• The solution found by the miner is broadcast to the network, if the solution is valid, the miner is rewarded and the block is added to the blockchain.

• The nonce is an important component of the mining process as it's used to find the solution by trying different combinations.

Listen for transactions – and validate them

Maintain the block chain and listen for new blocks - validate each block, check the transactions and check the validity of the nonce

Assemble a candidate block –group validated transactions into a block

Find a nonce to make the block valid –requires the most work

Hope your block is accepted –other miners have to have a consensus to accept your block

Profit –Currently this bounty is 6.25 bitcoins, about €100.000 (6.1.2023)