Bitcoin And Cryptocurrency Technologies – A 300 Page -Ebook For Nerds

Bitcoin And Cryptocurrency Technologies

Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller, Steven Goldfeder with a preface by Jeremy Clark

Draft — Feb 9, 2016

Feedback welcome! Email [email protected]

For the latest draft and supplementary materials including programming assignments, see our Coursera course .

The official version of this book will be published by Princeton University Press in 2016.

If you’d like to be notified when it’s available, please sign up here .

Introduction to the book

There’s a lot of excitement about Bitcoin and cryptocurrencies. Optimists claim that Bitcoin will fundamentally alter payments, economics, and even politics around the world. Pessimists claim Bitcoin is inherently broken and will suffer an inevitable and spectacular collapse.

Underlying these differing views is significant confusion about what Bitcoin is and how it works. We wrote this book to help cut through the hype and get to the core of what makes Bitcoin unique.

To really understand what is special about Bitcoin, we need to understand how it works at a technical level. Bitcoin truly is a new technology and we can only get so far by explaining it through simple analogies to past technologies.

We’ll assume that you have a basic understanding of computer science — how computers work, data structures and algorithms, and some programming experience. If you’re an undergraduate or graduate student of computer science, a software developer, an entrepreneur, or a technology hobbyist, this textbook is for you.

In this book we’ll address the important questions about Bitcoin. How does Bitcoin work? What makes it different? How secure are your bitcoins? How anonymous are Bitcoin users? What applications can we build using Bitcoin as a platform? Can cryptocurrencies be regulated? If we were designing a new cryptocurrency today, what would we change? What might the future hold? Each chapter has a series of homework questions to help you understand these questions at a deeper level. In addition, there is a series of programming assignments in which you’ll implement various components of Bitcoin in simplified models. If you’re an auditory learner, most of the material of this book is also available as a series of video lectures. You can find all these on our Coursera course . You should also supplement your learning with information you can find online including the Bitcoin wiki, forums, and research papers, and by interacting with your peers and the Bitcoin community.

After reading this book, you’ll know everything you need to be able to separate fact from fiction when reading claims about Bitcoin and other cryptocurrencies. You’ll have the conceptual foundations you need to engineer secure software that interacts with the Bitcoin network. And you’ll be able to integrate ideas from Bitcoin into your own projects.

A note of thanks

We’re immensely grateful to the students who helped develop programming assignments and to everyone who provided feedback on the drafts of this book. Princeton students Shivam Agarwal, Miles Carlsten, Paul Ellenbogen, Pranav Gokhale, Alex Iriza, Harry Kalodner, and Dillon Reisman, and Stanford students Allison Berke, Benedikt Bünz, and Alex Leishman deserve special praise. We’re also thankful to Dan Boneh and Albert Szmigielski.

Preface – The Long Road to Bitcoin

The path to Bitcoin is littered with the corpses of failed attempts. I’ve compiled a list of about a hundred cryptographic payment systems, both e-cash and credit card based technologies, that are notable in some way. Some are academic proposals that have been well cited while others are actual systems that were deployed and tested. Of all the names on this list, there’s probably only one that you recognize — PayPal. And PayPal survived only because it quickly pivoted away from its original idea of cryptographic payments on hand-held devices!

There’s a lot to learn from this history. Where do the ideas in Bitcoin come from? Why do some technologies survive while many others die? What does it take for complex technical innovations to be successfully commercialized? If nothing else, this story will give you an appreciation of how remarkable it is that we finally have a real, working payment mechanism that’s native to the Internet.

Bitcoin And Cryptocurrency TechnologiesBitcoin And Cryptocurrency Technologies

Traditional financial arrangements

Back in time before there were governments, before there was currency, one system that worked for acquiring goods was barter. Let’s say Alice wants a tool and Bob wants medicine. If each of them happen to have what the other person needs, then they can swap and both satisfy their needs.

On the other hand, let’s say Alice has food that she’s willing to trade for a tool, while Bob, who has a tool, doesn’t have any need for food. He wants medicine instead. Alice and Bob can’t trade with each other, but if there’s a third person, Carol, who has medicine that she’s willing to trade for food, then it becomes possible to arrange a three-way swap where everyone gets what they need.

The drawback, of course, is coordination — arranging a group of people, whose needs and wants align, in the same place at the same time. Two systems emerged to solve coordination: credit and cash. Historians, anthropologists, and economists debate which of the two developed first, but that’s immaterial for our purposes.

In a credit-based system, in the example above, Alice and Bob would be able to trade with each other. Bob would give Alice the tool and Bob gets a favor that’s owed to him. In other words, Alice has a debt that she needs to settle with Bob some time in the future. Alice’s material needs are now satisfied, but she has a debt that she’d like to cancel, so that’s her new “want”. If Alice encounters Carol in the future, Alice can trade her food for Carol’s medicine, then go back to Bob with the medicine and cancel the debt.

On the other hand, in a cash-based system, Alice would buy the tool from Bob. Later, she might sell her food to Carol, and Carol can sell her medicine to Bob, completing the cycle. These trades can happen in any order, provided that the buyer in each transaction has cash on hand. In the end, of course, it’s as if no money ever changed hands.

Neither system is clearly superior. A cash-based system needs to be “bootstrapped” with some initial allocation of cash, without which no trades can occur. A credit-based system doesn’t need bootstrapping, but the drawback is that anyone who’s owed a debt is taking on some risk. There’s a chance that the other person never comes back to settle the debt.

Cash also allows us to be precise about how much something is worth. If you’re bartering, it’s hard to say if a tool is worth more than medicine or medicine is worth more than food. Cash lets us use numbers to talk about value. That’s why we use a blended system today — even when we’re using credit, we measure debt in the amount of cash it would take to settle it.

These ideas come up in many contexts, especially online systems where users trade virtual goods of some kind. For example, peer-to-peer file-sharing networks must deal with the problem of “freeloaders,” that is, users who download files without sharing in turn. While swapping files might work, there is

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Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. The information does not constitute investment advice or an offer to invest.