Inside Blockchain, Bitcoin, and Cryptocurrencies

Dr. Niaz Chowdhury is a postdoctoral researcher working with blockchain technology in the European Union funded project QualiChain. His research experience spans over a decade across three British and Irish nations in England, Scotland and Ireland. He presently holds a Research Associate position in the Open Blockchain group of Knowledge Media Institute, a small but renowned and well-regarded research lab within the Open University in England. He also completed two more postdocs before joining this position, one in the Department of Computing and Communication in the same university working for the Big Data and Smart City project MK:Smart while another at his current lab in the Data Science group. Dr. Chowdhury obtained his PhD from the School of Computing Science of the University of Glasgow in Scotland, as a recipient of the prestigious Scottish ORS Scholarship. He was also a research scholar at the School of Computer Science in Trinity College Dublin where he received Government of Ireland IRCSET Embark Initiative Scholarship. His earlier academic achievements include a bachelor and a master degree with gold medal distinction in Computer Science and Engineering from East West University, Bangladesh. Dr. Chowdhury published numerous journal articles, conference papers and book chapters on the blockchain technology, the Internet of Things, wireless networks and data science.

• ContentsList of Figures...............................................................................................xixList of Tables................................................................................................xxvSection I □BLOCKCHAIN AND BIT COIN1 Introduction to Blockchain.....................................................................31.1 The Birth of Bitcoin............................................................................31.1.1 A Mysterious Scientist............................................................41.1.2 What is Bitcoin?.....................................................................41.1.3 Double-Spending Problem.....................................................51.1.4 Nakamotos Solution..............................................................61.2 Blockchain..........................................................................................71.2.1 Motivation.............................................................................71.2.2 Definition of Blockchain........................................................81.2.3 Distributed Ledger.................................................................81.2.4 Key Properties........................................................................91.3 Architectural Overview....................................................................101.3.1 Centralised vs Decentralised Architecture...........................101.3.2 Peer-to-Peer Network...........................................................111.3.3 Characteristics.....................................................................131.4 Block................................................................................................141.4.1 Structure..............................................................................141.4.2 Block Identifier and Height..................................................151.4.3 Genesis Block.......................................................................161.5 Mining.............................................................................................161.5.1 What is Mining?..................................................................161.5.2 Consensus............................................................................161.5.3 Incentivisation.....................................................................171.6 Forks................................................................................................171.6.1 When Does a Fork Occur?...................................................171.6.2 Types of Forks......................................................................181.7 Consensus Mechanisms....................................................................181.7.1 Proof of Work (PoW)...........................................................181.7.2 Alternative Consensus Algorithms.......................................191.7.3 Comparison.........................................................................201.8 Types of Blockchains........................................................................211.8.1 Public and Private Blockchains............................................211.8.2 Consortium, Shared Ledger, Sidechain................................211.8.3 Hybrid Blockchains.............................................................221.8.4 Comparison.........................................................................221.9 Applications......................................................................................231.10 Revisiting the Double-Spending Problem.........................................261.11 Summary..........................................................................................262 Immutability of Blockchain..................................................................272.1 Cryptography...................................................................................272.1.1 What is Cryptography and Cryptanalysis?...........................282.1.2 Background.........................................................................282.1.3 Basic Concepts.....................................................................292.2 Modern Cryptography......................................................................302.2.1 Symmetric-Key Cryptography.............................................312.2.2 Public-Key Cryptography....................................................332.3 Cryptographic Applications..............................................................362.3.1 TLS and SSL........................................................................362.3.2 Cryptographic Hash Function.............................................372.3.3 Digital Signature..................................................................382.4 Elliptic Curve Cryptography (ECC).................................................412.4.1 Basic Concept......................................................................412.4.2 Public and Private Keys....................................................... 422.4.3 How Does ECC Compare to RSA?......................................432.5 Making Blockchain Immutable....................................................... 442.5.1 Block and Block Header..................................................... 442.5.2 Timestamp.......................................................................... 442.5.3 Merkle Tree.........................................................................452.5.4 Building the Chain..............................................................452.6 Summary..........................................................................................483 Consensus Mechanisms of Blockchain..................................................493.1 Distributed Systems and Consensus.................................................493.1.1 Distributed Systems.............................................................503.1.2 Coordination and Agreement..............................................503.1.3 Consensus............................................................................513.2 Byzantine Generals Problem.............................................................523.2.1 Two Generals Paradox..........................................................523.2.2 Byzantine Generals Problem................................................533.2.3 Byzantine Fault Tolerance....................................................553.3 Blockchain’s Consensus Mechanism.................................................563.3.1 Hashcash Proof of Work......................................................563.3.2 Proof of Work in Blockchain...............................................573.3.3 BFT in Blockchain...............................................................583.4 Solving the Double-Spending Problem.............................................593.5 Summary..........................................................................................604 Bitcoin: World’s First Cryptocurrency..................................................614.1 What is Bitcoin?...............................................................................614.2 Brief History of Bitcoin....................................................................634.2.1 Before Bitcoin......................................................................634.2.2 Bitcoin Era.......................................................................... 644.3 Token: BTC.................................................................................... 644.3.1 Bitcoin Mining and Supply..................................................654.3.2 Units of Bitcoin................................................................... 664.4 Bitcoin’s Blockchain........................................................................ 664.4.1 Block Header.......................................................................674.4.2 Timestamp...........................................................................674.4.3 Merkle Tree.........................................................................674.4.4 Hash Generation..................................................................684.4.5 Genesis Block.......................................................................684.5 Bitcoin Address.................................................................................694.5.1 Formats................................................................................714.5.2 Hash Generation..................................................................724.5.3 Address Structure.................................................................724.6 Transactions.....................................................................................734.6.1 Input and Output................................................................744.6.2 Redeeming Tokens.............................................................. 774.6.3 Multi-Signature...................................................................784.6.3.1 Escrow..................................................................784.6.3.2 Cold Storage.........................................................784.6.4 Generation Transaction.......................................................794.6.5 Storing Data........................................................................794.6.6 Contracts.............................................................................794.7 Mining.............................................................................................804.7.1 Method................................................................................804.7.2 Proof of Work......................................................................824.7.3 Target and Difficulty...........................................................834.7.4 Mining Process................................................................... 844.8 Split Coins and Altcoins...................................................................854.8.1 Split Coins...........................................................................854.8.1.1 Bitcoin Cash.........................................................854.8.1.2 Bitcoin Gold.........................................................854.8.1.3 Bitcoin Private.......................................................864.8.2 Altcoins................................................................................864.8.2.1 Namecoin.............................................................874.8.2.2 Litecoin.................................................................874.8.2.3 Peercoin................................................................884.8.2.4 Nxt........................................................................884.8.2.5 Dash.....................................................................884.9 Summary..........................................................................................89Section II □SMART CONT RACTS5 Ethereum and Smart Contracts.............................................................935.1 Introduction to Smart Contracts......................................................935.1.1 Vending Machine Analogy..................................................945.1.2 Nick Szabo and Bit Gold.....................................................955.1.3 Turing-Completeness...........................................................965.2 What is Ethereum?...........................................................................965.3 Token: ETH.....................................................................................975.3.1 Pre-Mining..........................................................................975.3.2 Price.....................................................................................985.3.3 Units....................................................................................985.4 Architecture......................................................................................995.4.1 Ethereum Virtual Machine (EVM).....................................995.4.2 Account.............................................................................1005.4.3 Address..............................................................................1015.4.4 Mist...................................................................................1015.5 Mining...........................................................................................1025.5.1 Mining Process..................................................................1025.5.2 Block-Generation Rate.......................................................1035.5.3 Rewards.............................................................................1035.6 Smart Contracts in Ethereum.........................................................1035.6.1 Transactions.......................................................................1035.6.2 Gas....................................................................................1045.6.3 High-Level Languages.......................................................1045.7 ERC Standards...............................................................................1055.7.1 ERC-20..............................................................................1055.7.2 ERC-223............................................................................1065.7.3 ERC-721............................................................................1065.7.4 Other Standards................................................................1075.8 Comparison to Bitcoin...................................................................1075.9 Summary........................................................................................1076 NEO ..................................................................................................1096.1 What is NEO?................................................................................1096.2 Token: NEO and GAS................................................................... 1106.2.1 Token Generation.............................................................. 1106.2.2 Token Distribution............................................................ 1116.3 Architecture.................................................................................... 1116.3.1 Basic Structure................................................................... 1116.3.2 Advanced Features............................................................. 1116.4 Consensus Mechanism: dBFT........................................................1126.4.1 Algorithm..........................................................................1126.4.2 Procedure...........................................................................1136.4.3 Transaction Validation.......................................................1136.4.4 View Change..................................................................... 1146.4.5 Fault Tolerance and Transaction Time............................... 1146.5 Smart Contracts............................................................................. 1146.6 Summary........................................................................................ 1167 EOS ..................................................................................................1177.1 What is EOS?................................................................................. 1177.2 Token: EOS.................................................................................... 1187.2.1 Initial Coin Offering.......................................................... 1187.2.2 Transaction Fees................................................................ 1197.2.3 Inflation............................................................................. 1197.3 Architecture.................................................................................... 1197.4 Consensus Mechanism: DPoS........................................................1207.4.1 Algorithm..........................................................................1207.4.2 Procedure...........................................................................1217.4.3 Reward..............................................................................1227.5 Smart Contracts.............................................................................1227.6 EOS.IO Operating System.............................................................1237.6.1 Schema-Defined Actions and Database..............................1237.6.2 Separation of Authentication from Applications................1247.6.3 Inter-Blockchain Communication.....................................1247.7 Summary........................................................................................124Section III □FINANCIAL NET WORKS8 Ripple ..................................................................................................1278.1 What is Ripple?..............................................................................1278.2 Token: XRP....................................................................................1288.2.1 Token Generation and Distribution...................................1288.2.2 Bridge Currency.................................................................1298.2.3 Market Capitalisation........................................................1298.3 Architecture....................................................................................1298.3.1 Hawala...............................................................................1308.3.2 XRP Ledger.......................................................................1318.3.3 Transactions.......................................................................1328.4 Consensus Mechanism: RPCA.......................................................1338.4.1 Components......................................................................1338.4.2 Consensus Process.............................................................1348.4.3 Correctness........................................................................1358.5 Codius and Interledger...................................................................1368.6 Real-Time Gross Settlement System...............................................1368.6.1 RippleNet..........................................................................1378.6.2 xCurrent............................................................................1388.6.3 xRapid...............................................................................1398.6.4 xVia....................................................................................1398.7 Partners..........................................................................................1398.8 Summary........................................................................................1419 Stellar ..................................................................................................1439.1 What Is Stellar?..............................................................................1439.2 Token: Lumens (XLM)..................................................................1449.2.1 Generation and Distribution..............................................1449.2.2 Price and Market Cap........................................................1459.2.3 Role of XLM in the Protocol.............................................1459.3 Architecture....................................................................................1469.4 Consensus Mechanism...................................................................1469.4.1 Quorum and Slices............................................................1469.4.2 Agreement..........................................................................1489.5 Applications....................................................................................1489.5.1 Anchors..............................................................................1489.5.2 Distributed Exchange........................................................1499.5.3 Multi-Currency Transactions.............................................1499.6 Partners.......................................................................................... 1539.7 Summary........................................................................................ 153Section IV ADVANCED LEDGERS AND APPLICATION S10 Purpose-Built Distributed Ledgers.....................................................15710.1 Purpose-Built Ledgers and Blockchains.......................................... 15710.2 Internet of Things: IOTA............................................................... 15910.2.1 Overview........................................................................... 15910.2.2 Technical Details............................................................... 15910.2.3 Applications....................................................................... 16110.2.4 Alternatives: IBM Watson and Waltonchain...................... 16110.3 Supply Chain: OriginTrail..............................................................16210.3.1 Overview...........................................................................16210.3.2 Technical Details...............................................................16310.3.3 Applications.......................................................................16310.3.4 Alternatives: VeChain and OpenChain..............................16310.4 Connectivity: Moeco......................................................................16410.4.1 Overview...........................................................................16410.4.2 Technical Details...............................................................16410.4.3 Applications.......................................................................16610.5 Cybersecurity: Naoris.....................................................................16610.5.1 Overview...........................................................................16610.5.2 Technical Details...............................................................16710.5.3 Applications.......................................................................16810.6 Private Network: HydraChain........................................................16810.6.1 Overview...........................................................................16810.6.2 Technical Details...............................................................16810.6.3 Applications.......................................................................17010.7 Framework: Hyperledger................................................................17010.7.1 Overview...........................................................................17010.7.2 Technical Details...............................................................17110.7.3 Application........................................................................17310.8 Emerging Distributed Ledgers........................................................17310.8.1 Medical Services: MediChain and MediLedger.................17310.8.2 Drug Development: BlockPhrama..................................... 17410.8.3 Quality Assurance: Ambrosus............................................ 17410.8.4 Sharing Economy: Slock.it................................................. 17410.8.5 Genomic Data Collection: Nebula Genomics.................... 17410.9 Summary........................................................................................17511 Applications of Blockchain.................................................................17711.1 Hype or Hope?...............................................................................17711.2 Classification..................................................................................18011.2.1 Classifying the Domains....................................................18111.2.2 Classifying the Categories..................................................18111.3 Citizen Services..............................................................................18211.3.1 e-Governance.....................................................................18211.3.2 Healthcare.........................................................................18311.3.3 Education..........................................................................18511.4 Business and Financial Services......................................................18611.4.1 Financial Services...............................................................18611.4.2 Smart Property..................................................................18711.4.3 Exchange and Trading.......................................................18711.5 Online Marketplace........................................................................18711.5.1 e-Commerce......................................................................18811.5.2 Online Betting, Gambling and Gaming............................18911.5.3 e-Auctions and Online Bidding.........................................18911.6 Supply Chain, Production and Provenance..................................... 19111.6.1 Commercial Supply Chain................................................. 19111.6.2 Food Production................................................................ 19111.6.3 Drug Manufacturing.........................................................19211.7 Safety and Security.........................................................................19311.7.1 Cybersecurity.....................................................................19311.7.2 Physical Safety, Security and Tracking...............................19411.8 Smart City......................................................................................19511.8.1 Smart Home......................................................................19511.8.2 Smart Transportation.........................................................19611.8.3 Smart Grid.........................................................................19611.8.4 Citizen Engagement...........................................................19711.8.5 Quality Control.................................................................19711.9 Summary........................................................................................198Section V CRYPTO CURREN CY12 Evolution of Money: From Barter to Bitcoin.......................................20112.1 Money............................................................................................20112.1.1 Functions of Money...........................................................20212.1.2 Properties...........................................................................20212.1.3 Money Supply....................................................................20312.1.4 Central Bank.................................................................... 20412.2 Origin and Early Forms................................................................. 20412.2.1 Barter: The Origin of Money?........................................... 20412.2.2 Commodity and Representative Money............................ 20612.2.3 Coinage.............................................................................20712.2.4 Banknotes..........................................................................20912.3 Fiat Money.....................................................................................21212.3.1 Gold Standard...................................................................21212.3.2 US Dollar Standard...........................................................21212.3.3 Nixon Shock and Creation of Fiat Money..........................21312.4 Digital Money................................................................................21312.4.1 Centralised Digital Money.................................................21312.4.2 Decentralised Digital Money.............................................21412.5 Cryptocurrency.............................................................................. 21512.6 Summary........................................................................................21713 Cryptocurrency Mining......................................................................21913.1 Mining........................................................................................... 21913.1.1 Evolution of Mining......................................................... 22013.1.2 Mining Process................................................................. 22013.1.3 Difficulty...........................................................................22113.1.4 Rewards.............................................................................22113.2 Hash Rate.......................................................................................22113.2.1 Understanding Hash Rate..................................................22113.2.2 Calculating Hash Rate...................................................... 22213.2.3 Hash Rate and Profits....................................................... 22213.3 Mining Hardware.......................................................................... 22213.3.1 Non-Specialised Hardware............................................... 22213.3.2 Specialised Hardware (ASICs)...........................................22413.3.3 Profitability Factors............................................................22513.4 Pooled Mining................................................................................22513.4.1 Pooled Mining Basics.........................................................22513.4.2 Mining Pools.................................................................... 22613.4.3 Reward Sharing................................................................ 22813.5 Mining Nations............................................................................. 22813.6 Criticism of PoW Mining...............................................................22913.7 Summary........................................................................................23114 Cryptocurrency Wallet........................................................................23314.1 Wallet.............................................................................................23314.1.1 Private Key and Address.................................................... 23414.1.2 Transferring Funds........................................................... 23414.2 Types of Wallets.............................................................................23514.2.1 Web Wallet........................................................................23614.2.2 Software Wallet.................................................................23614.2.3 External Storage Media......................................................23814.2.4 Paper Wallet.......................................................................23814.2.5 Hardware Wallet................................................................23914.2.6 Brain Wallet.......................................................................24014.3 Special Wallets...............................................................................24114.3.1 Multi-Signature Wallet......................................................24114.3.2 Cold-Storage Wallet...........................................................24114.3.3 Receive-Only Wallet..........................................................24214.4 Deterministic Wallet......................................................................24214.4.1 Type-1 Wallet....................................................................24214.4.2 Type-2 Wallet....................................................................24314.4.3 HD Wallet........................................................................ 24414.5 Wallet Providers............................................................................ 24614.6 Summary........................................................................................24715 Cryptocurrency Trading and Investment............................................24915.1 Investment......................................................................................24915.1.1 Financial Instruments........................................................25015.1.2 Commodities.....................................................................25115.1.3 Currencies..........................................................................25115.1.4 Derivatives.........................................................................25215.1.5 Status of Cryptocurrency...................................................25315.2 Portfolio.........................................................................................25315.2.1 Funds.................................................................................25315.2.2 Indices...............................................................................25415.2.3 ETFs..................................................................................25615.3 Exchanges and Platforms................................................................25715.3.1 Cryptocurrency Trading Exchange....................................25815.3.2 Derivative Trading Exchanges...........................................25915.3.3 Investment Platforms........................................................ 26015.4 Investment Strategy........................................................................26115.4.1 Day Trading.......................................................................26115.4.2 Buy and Hold....................................................................26215.4.3 Value Investment...............................................................26215.5 Investing in Cryptocurrencies.........................................................26215.5.1 Self-Investment..................................................................26315.5.2 Guided Investment........................................................... 26415.6 Regulation and Tax Affairs.............................................................26515.7 Summary....................................................................................... 26616 Initial Coin Offerings (ICOs)..............................................................26716.1 Overview........................................................................................26716.1.1 The Creation of ICOs....................................................... 26816.1.2 How Do ICOs Work?........................................................26916.2 Token Creation...............................................................................26916.2.1 Token.................................................................................26916.2.2 Platforms............................................................................27016.3 Understanding ICOs......................................................................27116.3.1 ICOs vs IPOs.....................................................................27116.3.2 Signs of Good and Bad ICOs.............................................27216.3.3 Advantages and Disadvantages..........................................27316.4 ICOs in Number............................................................................27416.4.1 Amount Raised..................................................................27416.4.2 Breakdown by Industry......................................................27416.4.3 Biggest Winners and Losers...............................................27516.5 Scams and Criticisms.....................................................................27516.6 Summary........................................................................................277Section VI □SOCIO -ECONO MIC LANDSCAPE17 Economic Outlook of Cryptocurrency................................................28117.1 Classification..................................................................................28117.1.1 Currency............................................................................28217.1.2 Commodity.......................................................................28317.1.3 Stock................................................................................. 28417.2 Price of Bitcoin.............................................................................. 28417.3 Volatility of Bitcoin........................................................................28517.4 Historic Price Predictions...............................................................28717.5 Price Movement of Major Cryptocurrencies...................................28717.5.1 ETH..................................................................................28817.5.2 XRP...................................................................................28817.5.3 XLM..................................................................................28917.5.4 NEO..................................................................................28917.5.5 EOS...................................................................................28917.6 Reception.......................................................................................29017.6.1 Acceptance by Merchants..................................................29017.6.2 Acceptance by Investors.....................................................29117.6.3 Acceptance by Governments..............................................29217.7 Summary........................................................................................29318 Crime, Criminals and Cryptocurrencies.............................................29518.1 Criminal Activities.........................................................................29518.2 Deep Web.......................................................................................29618.2.1 Darknet and Dark Web.....................................................29718.2.2 Onion Routing and Tor.....................................................29718.2.3 Bitcoin: The Missing Piece.................................................29818.3 Darknet-Based Crimes...................................................................29918.3.1 Silk Road...........................................................................29918.3.2 Post-Silk Road Markets......................................................30118.3.3 Assassination Markets....................................................... 30418.3.4 Cybercrimes...................................................................... 30618.4 Financial Crimes........................................................................... 30818.4.1 Money Laundering........................................................... 30818.4.2 Market Manipulation........................................................31018.5 Fraudulent Activities.......................................................................31018.5.1 False Claims....................................................................... 31118.5.2 Scams.................................................................................31218.6 Prevention......................................................................................31218.6.1 Regulation.........................................................................31318.6.2 Cooperation....................................................................... 31418.6.3 Participation...................................................................... 31518.7 Summary........................................................................................31619 Regulations, Laws and Practices.........................................................31719.1 Legality of Blockchain and Cryptocurrency................................... 31719.2 Regulatory Issues............................................................................ 31819.2.1 Misuse of Pre-Mining and ICOs........................................ 31919.2.2 Crackdowns on Mining and Trading................................. 31919.3 Current Landscape.........................................................................32019.3.1 Challenges.........................................................................32019.3.2 Areas..................................................................................32119.3.3 Blockchain-Friendly Nations.............................................32219.4 Regulations for Blockchain Technology and Cryptocurrency.........32319.4.1 The Americas.....................................................................32319.4.2 Europe...............................................................................32419.4.3 Asia....................................................................................32619.4.4 Australia and Africa...........................................................32719.5 Summary........................................................................................32820 Criticism, Scepticism and Support......................................................32920.1 Before It All Started........................................................................32920.2 Early Days of Bitcoin......................................................................33020.3 Bitcoin Grabs Attention..................................................................33120.4 Beginning of the Bull Run.............................................................33220.5 Crazy Price Hike............................................................................33420.6 To Invest or Not to Invest?.............................................................33520.7 $10K and Counting........................................................................33720.8 Nosedive.........................................................................................33820.9 Summary....................................................................................... 344Bibliography.................................................................................................345Index............................................................................................................355