Bitcoin and Cryptocurrency Technologies Lecture 3 Notes

Having a capstone project that I have to finish up and a lot of other random stuffs to deal with; was a little slow on my progress on finishing this course. Anyway, here is lecture 3.

Grab the PDF version if you want better readability or archive!

Mechanics of Bitcoin

Part 1 Bitcoin Transactions

Recap: Bitcoin consensus

Bitcoin consensus gives us:

  • Append-only ledger
  • Decentralized consensus
  • Miners to validate transactions

Assuming a currency exists to motivate miners

An account-based ledger (not Bitcoin)

account-based ledger

  • We have to look over all transactions back there till the beginning of time to figure out if Alice has enough coins.
  • Even if we put some data structure to keep track of Alice's balance, there is a lot more housing keeping despite the blockchain itself.
  • So bitcoin does not use this model.

An transaction-based ledger (Bitcoin)

transaction-based ledger

  • Always completely consume the input by giving an equal output.
  • Can trace back much easier by looking at the input pointer to check if the transaction is valid
  • Implemented with hash pointers

Joint Payments


  • Consume two inputs to joint pay David
  • So needs two signatures as came from two different people

Real deal: a Bitcoin transaction(very very close version)

bitcoin transaction







Part 2 Bitcoin Scripts

Output “addresses” are really scripts (scriptPubKey)


Input “addresses” are also scripts (scriptSig)



TO VERIFY: Concatenated script must execute completely with no errors

Bitcoin scripting language (“Script”)

Design goals:

  • Built for Bitcoin (inspired by Forth — an old stack-based language)
  • Simple, compact
  • Support for cryptography
  • Stack-based
  • Limits on time/memory
  • No looping
  • Not Turing-complete languages (As designed to prevent over-powerful miners)



  • <> indicates data instructions
    • If seen just push to stack
    • Only memory interaction
  • <sig> <pubKey>
    • Are the signature and the public key used to generate that signature
    • Specified by the recipient in that script sig component or input script
  • OP_DUP make a copy of top of stack and push to stack
  • OP_HASH160 takes the top of stack and compute a cryptographic hash of it.
  • <pubKeyHash?> specified by the sender of the coins.
    • Compare top 2 elements of the stack
    • If false, throw error and exist
    • Otherwise, pop top 2 elements
    • Check signature of the entire transaction
    • If true, pop the remaining elements of the stack <sig> <pubKey>
    • Otherwise, throw error

If we have no errors, we simply return True. Every Bitcoin script has only 2 outcomes: Successful or Error. If any error occurs, the transaction is invalid and should not be accepted.

Bitcoin script instructions

256 opcodes total (15 disabled, 75 reserved)

  • Arithmetic
  • If/then
  • Logic/data handling
  • Crypto instructions
    • Hashes
    • Signature verification
    • Multi-signature verification
      • Built-in support for joint sigatures
      • Specify n pubKeys
      • Speicify t — a threshold
      • Verification requires t signatures (t of n should be valid)
      • BUG ALERT: Extra data value posed from the stack and ignored

Bitcoin scripts in practice (as of 2014)

  • Most nodes whitelist now scripts
  • 99.9% are simple signature checks (like shown above in example)
  • ~0.01% are MULTISIG
  • ~0.01% are Pay-to-Script-Hash
  • Remainder are errors, proof-of-burn
    • proof-of-burn is never going to redeem
    • To write arbitrary data into the blockchain
    • Destroy a small amount of currency to store a little bit of information on the network forever
    • To destroy coins to get coins in the new system


Should senders specify scripts?

pay to hash

  • As consumers we want to the transaction is easy

  • So instead we allow pay to a hash address instead of pubKey

  • Idea: use the hash of redemption script

    <<pubkey> OP_CHECKSIG> #contains a second step that deserialized to be a script itself
    <hash of redemption script>
  • Added after the original specification

  • Benefits:

    • Removes the complexity of sender(consumer), only needs to send to an address
    • Efficiency gains we will talk laterpay to script hash 2

Part 3 Applications of Bitcoin Scripts

Example 1: Escrow Transactions

  • PROBLEM: Alice wants to buy online fromBob. Alice doesn’t want to pay until after Bob ships. Bob doesn’t want to shop until after Alicepays.

  • Solutions (Introduce a third party Judy with MULTISIG):

    • Alice signs the statement: Pay x to 2-of-3 of Alice, Bob, Judy with MULTISIG

    • IfAlice and Bob are both honest

      • Alice and Bob together sign the statement Pay x to Bob
      • The good thing here is Judy doesn’t need to get involved in this case
    • Otherwise, in case someone cheated

      • Aliceand Bob is never going to sign a statement together to pay to Bob
      • Aliceand Bob is never going to sign a statement together to pay to Alice
      • Now Judy comes along and decide which one has cheated
        • Sign the payment with Bob to Bob if Judy think Alice is cheating
        • Otherwise, Sign the payment with Alice to Alice if Judy think Bob is cheating

      Judy has the full power here, the nice thing here is that she only needs to get involved when there is a dispute.

Example 2: Green addresses

  • PROBLEM: Alice wants to pay bob. Bob can’t wait 6 verifications to guard against double-spends or is offline completely.


  • Trust a third party Bank to transfer the payment

Example 3: Efficient Micro-payments

  • PROBLEM: Alice wants to pay Bob for each minute of phone service. She doesn’t want to incur a transaction fee every time.

  • Combine small payments into a big new paymentmicropayments

  • All these transactions could be double spends if signed by both Alice and Bob

  • Bob sign only the last transaction if Bob is honest

  • What if Bob never signs? This is when lock_time comes into play

    loc_time is the block index or real-word timestamp before which this transaction can’t be published, like a timed refund.


More advanced scripts

  • Multiplayer lotteries
  • Hash pre-image challenges
  • Coin-Swapping protocols
    • More on this in lecture on anonymity!
  • “Smart contracts”

Part 4 Bitcoin Blocks

Why bundle transactions together

  • Single unit of work for miners
  • Limit length of hash-chain of blocks
    • Faster to verify history

Bitcoin block structure (high-level)

block structure

Close-up look of a Block

closeup of a block

Block header


  • Here the hash of block has to start with a number of 0s
  • Only header is hashed during mining
  • Only includes the root node of the Merkle tree

Coinbase transaction


  • Coinbase: a special parameter to put any arbitrary info, no limit what miners put there

Part 5 The Bitcoin Network

Bitcoin P2P network

  • Ad-hoc protocol (runs on TCP port 8333)
  • Ad-hoc network with random topology
  • All nodes are equal
  • New nodes can join at any time
  • Forget non-responding nodes after 3hr

Joining the Bitcoin P2P network

bitcoin p2p

  1. Find a seed node in the network
  2. Talk to seed node and request its peers
  3. Talk to those peers recursively until you have a list of nodes to connect to
  4. Will end up with a random set o nodes connected to

Transaction propagation (flooding)


  • Each node has a pool of transactions they heard about
  • Suppose node 4 heard a transaction From Alice to Bob
  • Node 4 talks to its peers and this is carried on recursively
  • It won’t loop around the network forever as transaction can be uniquely identified by hash
  • This is often referred as the gossip protocol

Node: should I relay a proposed transaction?

  • Transaction valid with current blockchain

  • (default) script matches a whitelist

    • Avoid unusual scripts
  • Haven’t seen before

    • Avoid infinite loops
  • Doesn’t conflict with others I’ve relayed

    • First come first served!
  • Avoid double-spends
  • These avoids are just sanity checks, some nodes may ignore them

Nodes may differ on transaction pool (Race conditions)

different transaction pool

Transactions or blocks may conflict

  • Default behavior: accept what you hear first
  • Network position matters
  • When one of the conflicting transactions made into the block then other nodes know their transactions are never going to make it to the block, they will discard it (as they are double spends now)
  • Miners may implement other logic
    • Stay tune for lecture on mining.

Block propagation nearly identical

Relay a new block when you hear it if :

  • Block meets the hash target
  • Block has all valid transactions
    • Run all scripts even if you wouldn’t relay
  • Block builds on current longest chain
    • Avoid forks

Propagation Times

block propagation times

  • Average at 30s which is really slow in Internet
  • Node Topology is not optimized for speed
  • Decentralized is ensured but sacrificed in terms of speed/efficiency

How big is the network

  • Impossible to measure exactly

  • Estimates: up to 1M IP address/month

  • Only about 5~10k full nodes

    • Permanently connected
    • Fully-validate
      • Permanently connected
      • Store entire block chain
      • Active network to hear and forward every node/transaction
      • Tracking the UTXO set
        • Stands for Unspent Transaction Output
          • Everything else can be sorted on disk
        • Currently ~12M UTXOs
          • Out of 44M transactions
        • Small enough to fit into RAM (less than 1GB for now)
    • This number is dropping
  • Vast majority are instead lightweight nodes, or simple payment verification clients (often referred as Thin/SPV clients )

    • Some personal wallet can just be simple payment verification clients, only checking if transactions coming to you are valid
    • Store block headers only
    • Request transactions as needed
      • To verify incoming payment
    • Trust fully-validating nodes
      • Not bad security tradeoff
      • As miners will always make sure the node is valid so it has a chance to get included in the main chain
    • 1000x cost savings (23MB v.s. 20GB)
  • Size of entire blockchain is about 20GB

    blockchain size

Part 6 Limitations & Improvements

Hard-coded limits in Bitcoin

  • 10 min average creation time per block
  • 1M bytes in one block
  • 20,000 signature operatios per block
  • These affect enomoic balance of power too much to change now, even though it might not be a wise choice.
    • 100M satoshi per bitcoin (1 bitcoin can be divided into the 100M of smaller units called satoshi)
    • 21M total bitcoins maximum
    • mining reward of $\frac{50}{n^i}$ bitcoins where $i$ increases every 4 years

Throughout limits in Bitcoin

  • 1M bytes/block (10min)
  • > 250 bytes per transaction
  • 7 transactions per sec (which is a really small volume)
    • compare to
    • VISA: 2000~10000 transactions per sec
    • Paypal: 50~100 transactions per sec

Cryptographic limits

  • Only 1 signature algorithm (ECDSA/P256)
  • Hardcoded hash functions
  • Crypto primitives might break by 2040

“Hard-forking” changes to Bitcoin

  • Def: So what would it look to make a change like this where we just said, we had a problem with Bitcoin, we’re going to release a new version of the software, and everybody is going to have to switch. This is referred as a hard-forking change.
  • We can’t be sure that every node in the network would upgrade
  • Some nodes might refuse the new block and hence creates a diverge
  • hard_fork

Soft forks

  • Observation: we can add new features which only limit the set of valid transactions. i.e. only more strict and limiting rules
  • Need majority of nodes to enforce new rules
  • Old nodes will approve.
  • Risk: old nodes might min now-invalid blocks which will be rejected by the network

    Soft fork example: pay to script hash

soft fork example

Soft fork possiblities

  • New signature schemes
  • Extra per-block metadata
    • Shove in the coinbase parameter
    • Commit to UTXO tree in each block

Hard forks

  • New op codes
  • Changes to size limits
  • Changes to mining rate
  • Many small bug fixes

Currently seem very unlikely to happen, but will get solved in other alternative coins!

Human Beings aren’t Bitcoin nodes

  • How do people interact with the network?
  • How do people exchange bitcoins for cash?
  • How do people securely store bitcoins?

Currency needs to work for people, not for nodes or softwares.

大佬请我喝维他柠檬茶吧 Buy me some Vita lemon tea!