Table 2 Security of e-commerce 2 Problems that

Table of contentsIntroduction 2Motivation and development of Bitcoin 2Growth of electronic commerce 2Security of e-commerce 2Problems that Bitcoin addresses 3Development history of Bitcoin 3Features and usage of Bitcoin 5Unique properties 5Underlying techniques 6Usage of Bitcoin 7Future development 8MAST 8Schnorr signatures 9Bulletproofs 9Confidential Transactions 9Sidechains 9Mimblewimble 10View on Bitcoin 11References (IEEE) 11?IntroductionIn the past few years, the cryptocurrency has become increasingly popular on the Internet, and extended to people’s daily life. Some financial institutions have already adopted these cryptocurrencies such as Bitcoin and Ethereum in their business as the latest trend of technology.

In this study report, we are going to discuss the first cryptocurrency – Bitcoin, which was introduced in 2009. It is first to analyze the motivation of Bitcoin, problems it addressed and its historical development. In addition, the features, underlying techniques and usage of Bitcoin will be explained and then to examine its future development plan. Finally, it is to present a view on Bitcoin such as competitions, problems, potential improvements and use cases.Motivation and development of BitcoinGrowth of electronic commerceThe rapid spread of the Internet has triggered the concept and practice of electronic commerce (e-commerce), which has become a common phenomenon in today’s world. E-commerce is a huge platform that has grown at an unprecedented rate around the world. People from all ages, whether children, millennials or the elderly, like to shop from different electronics stores. Online shopping offers more convenience and happiness than bricks-and-mortar stores.

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It is because we have a lot of websites and applications that focus on e-commerce, it is easy to discover anything you want to buy right now in the e-shop. In 2017, there is a global estimation of 1.66 billion people shopping online. In the same year, global e-retail sales reached 2.3 trillion US dollars, and it is expected to grow by 4.48 trillion US dollars by 2021 1. For most online transaction-mediating systems, such as PayPal and AliPay, rely on trusted third-party mediators like banking institutions.

The credit card holders often need to wait for transactions to be verified as the completion of authentication, especially for each bank’s ecosystem and customers outside of overseas customers. The user gives a large piece of control to a third-party financial institution to ensure that the transaction security is handled by the clunk bank bureaucracy.Security of e-commerceThe Internet user require security to ensure their transactions: they cannot be forged or altered before, during or after the transaction; they are private, the recipient/sender information is for use only by the relevant parties; and user-friendly, unrestricted Computer defects, such as double consumption or disappearing dollars. In traditional e-commerce formats, users securely secure transactions through traditional banking formats and abandon privacy to include third-party mediators in processing user information. The traditional credit card protocol is improved from Secure Sockets Layer (SSL) to Secure Electronic Transaction (SET), which has enhanced the level of non-disclosure of customer’s information to other parties such as the merchant and the issuer bank. Problems that Bitcoin addressesHowever, since the financial institutions cannot avoid the mediating disputes, there may be reversible transaction existing. This produces the cost of mediation which will increase the transaction cost, limit the minimum actual transaction size and cut off the possibility of small temporary transactions, and the cost of losing irreversible payments for irreversible services is higher. Because of the possibility of reversal, the need for trust will spread.

Merchant must be wary of their customers and harass them to get more information than they originally needed. A certain percentage of fraud is considered inevitable. These costs and payment uncertainties can be avoided personally by using physical currency, but there is no mechanism to pay through communication channels without a trusted party. Therefore, an innovative electronic payment system is strongly demanded which is based on cryptographic proof instead of trust, allowing any two parties to make direct transactions without the need of a trusted third party. A computationally irreversible transaction will protect the seller from fraud and can easily implement a routine hosting mechanism to protect the buyer. This is Bitcoin we hear about.

Development history of BitcoinPre-Bitcoin period In 1982, the first concept of electronic cash called e-Cash was proposed by David Chaum 2, which pointed out that the blind signature could realize an untraceable payment system in order to offer improved auditability and higher personal privacy. In 1990, David applied his idea to create DigiCash, but it never be caught on and went bankrupt later. In 1997, a proof-of-work system called hashcash was invented by Adam Back 3, which is very similar to what Bitcoin uses as the core concept. In 1998, two important cryptocurrency ideas were realized by Wei Dai’s b-money 4 and Nick Szabo’s bit gold 5. B-money is an anonymous, distributed electronic cash system and included two protocols: 1. creating money by the use of proof of work and 2. the transfer of money by broadcasting to the network and then verification by the participant. Bit gold intended to solve the creation of money without the trust of a third party and the double-spending problem by the proof of work.

Although the above proposals were not realized, they have made vital contribution to the construction of Bitcoin.Bitcoin beginsIn 2008, Satoshi Nakamoto published a whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System.” It is an innovative concept of transactions on a chain which is based on the hash function for proof-of-work process and secure digital signature and then the whole process does not need the trust of a third party.

In 2009, Bitcoin software was available to the public and the first block of Bitcoins, known as genesis block, was mined by the hash function in the proof of work scheme. In addition, Nakamoto made the first transaction of 10 Bitcoins (BTC) to computer programmer Hal Finney. In 2010, an actual transaction of Bitcoin was implemented after the exchange rate was established. It was a purchase of two pizzas valued at $25 by sending 10,000 BTC to the seller 6. After that time, Bitcoin started to be valued and connected to the real market for different types of transactions.Development of BitcoinIn 2011, Bitcoin became more and more popular and the idea of decentralized and cryptocurrencies was concerned by the public, which led to a sharp increase in its price. In addition, there were a variety of alternative cryptocurrencies such as Namecoin and Litecoin, emerging to the crypto market that compete with Bitcoin.

In 2013, the price of Bitcoin fell from $1,000 to $300 and then struggled below $1,000 for a few years. One of serval risks was the largest Crypto exchange Mt. Gox going bankrupt and shutting down that caused the owners to suffer from a loss of 850,000 bitcoins missing. In 2017, it was the biggest and busiest year for Bitcoin which reached at the highest price of around $19,351. However, it began to drop with the starting of 2018 and then continued to go down to be around $4,500 on 23 November 2018 7. As a result, it is seemed that the price of Bitcoin is highly fluctuated in the market and still needs time to be stable.Features and usage of BitcoinUnique properties1. DecentralizedBitcoin is independent of any regulatory and governing bodies which means that each transaction only involves the sender and the receiver, and the transactions will be verified by others after it is broadcasting to the network.

It is designed to make everybody, business, and every machine involved in mining and transaction verification a part of a vast network 8. In addition, the money will continue to move ahead, even though if some parts of the blockchain network fail.2. AnonymousNowadays, financial institutions like banks know all the intentions and purposes of their customers such as home address, phone number, credit history and money transaction history. This is completely different from Bitcoin because the wallet does not need to be connected to any clearly personal data.

This means that transactions of Bitcoins provide high privacy to the users which keep their personal data confidential by its hash function 8.3. TransparentThe anonymity of Bitcoin is only relative, because every Bitcoin transaction that occurs is stored in the blockchain. In theory, if your wallet address is publicly available, anyone can judge how much money there is by carefully studying the blockchain ledger.

However, tracking a particular bitcoin address is still almost impossible. People who want to keep anonymous transactions can take steps to stay alert. Some types of wallets prioritize opacity and security, but the easiest measure is to use multiple addresses instead of transferring large amounts of money into a single wallet.

4. Non-repudiableOnce you send Bitcoin to someone, you will not be able to retrieve Bitcoin unless the beneficiary sends it back to you. This ensures the receipt of payments, which means that no one who deals with you can deceive you by claiming that they have never received the money.5. Fast peer-to-peer transactionsThe Bitcoin network handles payments almost instantly and people on the other side of the world usually receive payments in just a few minutes, since the transaction process only includes the signer and the receiver without the verification of a trusted third party while normal bank transfers can take several days.Underlying techniquesIn fact, there are two main cryptographic technologies to support the infrastructure of Bitcoin: public-key cryptography (also known as asymmetric cryptography) 9 and hashcash function (SHA-256) 3. Public-key cryptography is used to prove the ownership of Bitcoin and ensure the success of transactions. The signature generation and verification is involved a double hash function during the transaction.

Hashcash function is a proof-of-work system which is applied in the mining process and the integrity of blockchain.1. Public-key cryptographyDigital signature scheme used in Bitcoin is Elliptic Curve Digital Signature Algorithm (ECDSA) 10 to ensure that money can only be spent by their rightful owners. Each coin is associated with its current owner’s public ECDSA key. When you send some bitcoin to someone, you create a message (transaction), attach the new owner’s public key to this number of coins, and sign it with your private key. When this transaction is broadcast to the Bitcoin network, this lets everyone know that the new owner of these coins is the owner of the new key.

Your signature on the message verifies that everyone’s email is trustworthy. Everyone retains a complete transaction history, so anyone can verify who is the current owner of any particular coin group.Signature generation: Signature verificationTo Sign message m1. Compute e = SHA256(SHA256(m))2. Pick j from {1, …, n-1}3. Compute jP = (x, y), r = x mod n4. Compute s = j-1(e + kr) mod n5. Output (r, s) as the signature on m Given message m, signature (r, s), public key U,1.

Compute e = SHA256(SHA256(m))2. Compute w = s-1 mod n3. Compute u = ew mod n, v = rw mod n4. Compute Q = uP + vU := (x, y) // remember, Q is a point5.

Accept if and only if r = x mod nThe owner needs to solve the challenge scripts of outputs of a previous block by his signature if he wants to spend the money from the input of a regular block.2. Hashcash functionIt is a proof-of-work system which is used in the mining process for Bitcoin. In order to make it difficult to generate bitcoin, the hashcash cost function 3 is used to generate a fixed-length value.

The workload size is represented by calculating the hash hash value of the bitcoin block header that meets a certain standard, for example, the number of leading zero. The node that tries to compete for the accounting right is called the mining node. The mining node will verify the transaction sent by the network node, and then save it into the buffer to form a certain transaction storage structure and put it in the block. The block header is then constructed based on the basic information of the block, which typically contains the hash hash value of the previous block, the Merkle root, the timestamp, the difficulty target, and a padded random value. For the bookkeeping of blockchain, only the longest chain is accepted by all the entities in the blockchain as an honest chain.

If a miner wants to add a new block to the previous one to become a chain, the measured duration must be the shortest which is calculating for the candidate block whose hash value is not more than the target threshold (Target threshold, T is a 256-bit unsigned integer, nBits.) T(new) = T(old) x (Measured duration for finding 2016 blocks in seconds) / (2016 x600)In addition, the duration should fulfill these two requirements: the time is greater than the median value of the previous 11 blocks and the time is less than 2 hours of the receiving node’s network adjusted time.Usage of BitcoinDue to the unique characteristics of Bitcoin like decentralization and anonymity, it is becoming extremely popular in the criminal activities such as child pornography, murder-for-hire services and weapons trade on the black market, especially drug trades on a single dark web drugs market, Silk Road 9. In the Ponzi scheme of using Bitcoin, Bitcoin savings and trust funds promise investors up to 7% interest per week and raise at least 700,000 bitcoins between 2011 and 2012.

In July 2013, the US Securities and Exchange Commission accused the company and its founders of “frauding investors to participate in Ponzi schemes involving bitcoin” in 2013 11. Since the use of bitcoin by criminals has attracted the attention of financial regulators, legislatures, law enforcement agencies and the media, few countries accept it as a legal currency and even some countries have banned it 12 which could be used in money laundering and those crimes on the dark web. There are only a few cases for accepting Bitcoin as an electron cash on the market such as online payment system company – Stripe and online game sales platform – Stream.

However, both of them had stopped accepting Bitcoin as exchange of medium for payments due to its high fluctuation, increasing transaction fee and longer verification time for transaction. Although many countries are increasingly strict with cryptocurrency regulation, the United States had announced that staring 26 November 2018, business in the state of Ohio will be able to pay taxes in Bitcoin through a new online platform: 13. This is the first state which will accept Bitcoin for payment and it is handled by a third-party blockchain payment services company – BitPay. It could be practical for Bitcoin and other cryptocurrencies used as a legitimate form of currency in the future.Future development MASTMerkelized Abstract Syntax Trees (MAST) 14 aims to improve Bitcoin by changing the way smart contracts are written to the blockchain and splitting smart contracts into their individual parts. Smart contracts allow the users to put restrictions on when and how their bitcoins can be spent.

For instance, a transaction can require multiple signatures or have a time requirement. Currently, when such a transaction is created, the entirety of that smart contract is written to the Bitcoin blockchain when the coins are spent. With MAST, only those parts of the smart contract which are fulfilled are put on the blockchain, with the rest remaining hidden until the conditions are met. MAST enhances privacy by keeping hidden unused parts of smart contracts and tying less information to public keys.

It also reduces transaction size because only the fulfilled parts of a smart contract are written to the blockchain. Finally, it allows larger smart contracts through splitting the contracts into pieces and writing them to the blockchain in multiple transactions. This could eliminate the limitation of script size and then maximize the size of contract.Schnorr signatures Schnorr signatures are a proposal invented by Claus-Peter Schnorr 15, which replace Bitcoin’s current digital signature algorithm (ECDSA) for a more efficient one. They will first improve the bitcoin protocol by aggregate multiple transaction signatures into a single signature. It is practical for a person to make a transaction funded by three different accounts to a single receiver, which can only send one signatuer instead of three signatures in the transaction.

Therefore, this smaller size of transaction could reduce transaction’s use of storage and bandwidth of the Bitcoin network by around 25% and increase the privacy of multi-signature transactions as less exposure of original signatures. It couldalso make spam attacks less effective, since these types of transactions would be smaller. Finally, implementations of Schnorr signatures could allow for smart contracts, also known as “Scriptless Scripts” to Bitcoin.BulletproofsBulletproofs promise to improve the privacy of Bitcoin by concealing quantities of transactions, when only leaving the sender’s and receiver’s wallet addresses public 16.

They are zero-knowledge proofs which means that they do not require a trusted third pary. They have already attracted attention from other cryptocurrencies such as Monero and Litecoin, since they are lightweight and do not require massive amount computational power to process transactions. Thus, it is secure to implement this protocol on the blockchain.

Confidential Transactions Confidential Transactions (CT) will make the amounts of Bitcoin transactions visible only to the parties involved in the transaction 17. It is important to provide higher privacy to the users while transactions are changing from normal to confidential and also for later transactions.SidechainsSidechains 18 intends to allow other blockchains to connect to the bitcoin network using separate coins bound to bitcoin. This means that each sidechain is a separate blockchain that can have different rules from the Bitcoin mainframe while still staying connected. Several different sidechain proposals are currently being developed: Liquid Network, RSK and Drivechain.MimblewimbleMimblewimble is a proposal for a bitcoin-like blockchain that aims to provide higher security than the current Bitcoin protocol, improved scalability, a different kind of cryptographic security and ASIC-resistant mining algorithm to encourage mining decentralization 19.

It is being implemented by a project called Grin. Transactions would be completely fungible, meaning the amounts of Bitcoin transactions would be concealed, as would the public keys of the participants. The improvements do come at a cost, however, as Mimblewimble would not support scripts like Bitcoin does. As Mimblewimble is quite different from the Bitcoin protocol, it would likely be implemented as a sidechain, or even a separate altcoin.?View on Bitcoin4.

Your view on the chosen cryptocurrency, including competitions, problems, potential improvements and/or use cases.


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