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Understanding Bitcoin

Understanding Bitcoin Cryptography, Engineering and Economics

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9781119019169
  • Published In: November 2014
  • Format: Hardback , 288 pages
  • Jurisdiction: International ? Disclaimer:
    Countri(es) stated herein are used as reference only

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  • Description 
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    Discover Bitcoin, the cryptocurrency that has the finance world buzzing

    Bitcoin is arguably one of the biggest developments in finance since the advent of fiat currency. With Understanding Bitcoin, expert author Pedro Franco provides finance professionals with a complete technical guide and resource to the cryptography, engineering and economic development of Bitcoin and other cryptocurrencies. This comprehensive, yet accessible work fully explores the supporting economic realities and technological advances of Bitcoin, and presents positive and negative arguments from various economic schools regarding its continued viability.

    This authoritative text provides a step-by-step description of how Bitcoin works, starting with public key cryptography and moving on to explain transaction processing, the blockchain and mining technologies. This vital resource reviews Bitcoin from the broader perspective of digital currencies and explores historical attempts at cryptographic currencies. Bitcoin is, after all, not just a digital currency; it's a modern approach to the secure transfer of value using cryptography. This book is a detailed guide to what it is, how it works, and how it just may jumpstart a change in the way digital value changes hands.

    • Understand how Bitcoin works, and the technology behind it
    • Delve into the economics of Bitcoin, and its impact on the financial industry
    • Discover alt-coins and other available cryptocurrencies
    • Explore the ideas behind Bitcoin 2.0 technologies
    • Learn transaction protocols, micropayment channels, atomic cross-chain trading, and more

    Bitcoin challenges the basic assumption under which the current financial system rests: that currencies are issued by central governments, and their supply is managed by central banks. To fully understand this revolutionary technology, Understanding Bitcoin is a uniquely complete, reader-friendly guide.

  • About the Author xi

    Acknowledgments xiii

    Foreword xv

    Prologue xvii

    Preface xix

    PART ONE: INTRODUCTION AND ECONOMICS 1

    CHAPTER 1 Foundations 3

    1.1 Decentralized 4

    1.2 Open Source 6

    1.3 Public Asset Ledger 8

    1.4 It’s Not Only the Currency, It’s the Technology 9

    CHAPTER 2 Technology (Introduction) 11

    2.1 Centralized Database 11

    2.2 Addresses, Transactions 13

    2.3 Distributed Database, the Blockchain 15

    2.4 Wallets 17

    2.5 The Different Meanings of Bitcoin 18

    CHAPTER 3 Economics 21

    3.1 Medium of Exchange 22

    3.1.1 Pros 25

    3.1.2 Cons 26

    3.2 Store of Value 27

    3.2.1 Bitcoin as Investment 29

    3.2.2 Pros 30

    3.2.3 Cons 31

    3.3 Unit of Account 32

    3.4 Deflation 32

    3.5 Volatility 33

    3.6 Effect on the Financial Industry and Monetary Policy 35

    3.7 Regulation 37

    CHAPTER 4 Business Applications 39

    4.1 Money Transfer 39

    4.2 Exchanges 40

    4.3 Payment Processors 43

    4.4 Web Wallets 43

    4.5 Multisignature Escrow Services 45

    4.6 Mining 46

    4.7 ATMs 48

    PART TWO: BITCOIN TECHNOLOGY 49

    CHAPTER 5 Public Key Cryptography 51

    5.1 Public Key Encryption 53

    5.2 Digital Signatures 56

    5.3 RSA 59

    5.4 Elliptic Curve Cryptography 62

    5.4.1 Elliptic Curve Summary 63

    5.4.2 Elliptic Curve Theory 64

    5.5 Other Cryptographic Primitives 71

    5.5.1 Blind Signatures 71

    5.5.2 Shamir Secret Sharing 72

    5.6 Bitcoin Addresses 73

    CHAPTER 6 Transactions 77

    6.1 Transaction Scripts 80

    6.2 Pay-to-address and Pay-to-public-key Transactions 82

    6.3 Multisignature (m-of-n) Transactions 84

    6.4 Other Transaction Types 85

    6.5 Transaction Signature 86

    6.6 Pay-to-script-hash (P2SH) 89

    6.7 Standard Transactions 92

    CHAPTER 7 The Blockchain 95

    7.1 Hash Functions 95

    7.2 Time-stamp 99

    7.3 Proof-of-work 101

    7.4 The Blockchain 105

    7.5 Double-spend and Other Attacks 113

    7.5.1 Race Attack 115

    7.5.2 Finney Attack 116

    7.5.3 Transaction Spamming 116

    7.6 Merkle Trees 117

    7.6.1 Transaction Malleability 119

    7.7 Scalability 120

    CHAPTER 8 Wallets 123

    8.1 Symmetric-key Cryptography 125

    8.2 Offline Wallets 126

    8.2.1 External Storage Media 127

    8.2.2 Paper Wallets 127

    8.2.3 Offline Devices 129

    8.2.4 Hardware Wallets 130

    8.3 Web Wallets 131

    8.4 Brain Wallets 132

    8.5 Deterministic Wallets 132

    8.5.1 Message Authentication Code (MAC) 134

    8.5.2 Hierarchical Deterministic Wallets 135

    8.6 Multisignature Wallets 136

    8.7 Vanity addresses 137

    8.8 Simplified Payment Verification (SPV) 139

    8.9 The “Payment Protocol” (BIP 70) 141

    CHAPTER 9 Mining 143

    9.1 Mining Technology 146

    9.2 Pooled Mining 149

    9.3 Transaction Fees 154

    9.4 Selfish Mining 156

    PART THREE: THE CRYPTOCURRENCIES LANDSCAPE 159

    CHAPTER 10 The Origins Of Bitcoin 161

    10.1 David Chaum’s Ecash 162

    10.2 Adam Back’s Hashcash 163

    10.3 Nick Szabo’s bit gold and Wei Dai’s b-money 164

    10.4 Sander and Ta-Shma’s Auditable, Anonymous Electronic Cash 165

    10.5 Hal Finney’s RPOW 167

    10.6 Satoshi Nakamoto 168

    CHAPTER 11 Alt(ernative) Coins 171

    11.1 Litecoin 172

    11.2 PeerCoin 173

    11.3 Namecoin 174

    11.4 Auroracoin 175

    11.5 Primecoin 175

    11.6 Dogecoin 176

    11.7 Freicoin 177

    11.8 Other Alt-coins 177

    11.9 The Case For/Against Alt-coins 178

    CHAPTER 12 Contracts (the Internet of Money or Cryptocurrencies 2.0) 183

    12.1 Digital Assets 183

    12.2 Smart Property 185

    12.3 Micropayments 186

    12.4 Autonomous Agents 187

    12.5 Other Applications 189

    12.5.1 Crowd-funding 189

    12.5.2 External State Contract 190

    12.5.3 Contract for Differences 190

    12.5.4 Distributed Exchange 191

    12.5.5 Deposits 191

    12.5.6 Saving Addresses 192

    12.6 Inserting Data into the Blockchain 192

    12.7 Meta-coins 194

    12.7.1 Colored Coins 196

    12.7.2 Counterparty 197

    12.7.3 Ethereum 199

    12.7.4 Mastercoin 202

    12.7.5 Nxt 203

    12.7.6 Ripple 204

    CHAPTER 13 The Privacy Battle 209

    13.1 Network Analysis 209

    13.2 Laundry Services 212

    13.3 Greenlisting 213

    13.4 Privacy-enhancing Technologies 214

    13.4.1 CoinJoin 214

    13.4.2 CoinSwap 215

    13.4.3 Stealth Addresses 217

    13.4.4 Merge Avoidance 219

    13.4.5 Committed Transactions 220

    13.5 Fully Anonymous Decentralized Currencies 221

    13.5.1 Zero-knowledge Proofs 221

    13.5.2 Zero-knowledge Proof of Graph 3-colorability 221

    13.5.3 Zero-knowledge Proof for the Discrete Logarithm 223

    13.5.4 Non-interactive Zero-knowledge Proofs 224

    13.5.5 Accumulators 225

    13.5.6 Zerocoin 226

    13.5.7 Zerocash 228

    CHAPTER 14 Odds and Ends 231

    14.1 Other Transaction Protocols 231

    14.1.1 Micropayment Channels 231

    14.1.2 Atomic Cross-chain Trading 232

    14.2 Alternatives to Proof-of-work 233

    14.2.1 Proof-of-stake 234

    14.2.2 Proof-of-burn 236

    14.3 Merged Mining 237

    14.4 Side-chains 238

    14.5 Open Transactions 240

    14.6 Quantum Computing 242

    14.7 Recent Advances in Cryptography 244

    14.7.1 Homomorphic Encryption 244

    14.7.2 Obfuscation 245

    Bibliography 247

    Index 259

  • PEDRO FRANCO holds an MSc in Electrical Engineering from ICAI, a BSc in Economics and an MBA from INSEAD. He has been a consultant with McKinsey and Boston Consulting Group, as well as a researcher with IIT, prior to gaining more than 10 years of experience in financial markets, holding Quant and Trading positions in Credit, Counterparty Risk, Inflation and Interest Rates. He has created various mathematical libraries for financial derivatives, and managed teams of software developers. 

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