CSE446: Blockchain & Cryptocurrencies

Lecture – 10: Bitcoin-5

Agenda
• Bitcoin components
• Users
• Node & Network
• Blockchain
Bitcoin mining
• Once a valid block is found, the respective miner broadcasts the
block in the network
• All (full and miner) nodes verify if the block is valid
• The rules for checking block validity
• All of its transactions are valid
• The desired double hash value is indeed less than the difficulty target
• They include the block in the blockchain and starts the same
procedure for the next book
 Bitcoin Network

Relaying blocks
B-2 B-1 B-2 B-1 B-2 B-1

Verify B
Node 1 Node 3 Node 4
B- 2 B-1

B-2 B- 1 B-2 B-1

Node 8
Verify B
Node 5 Node 7
B-2 B- 1

B
B

Verify B
Node 2 Node 6
B-2 B- 1 B
 Bitcoin Network

Relaying blocks
B-2 B-1 B-2 B-1 B-2 B- 1 B

Verify B
Node 1 Node 3 Node 4
B- 2 B-1

B-2 B- 1 B-2 B- 1 B

B
Verify B
Node 8 B
Verify B
Node 5 Node 7
B-2 B- 1 B

Verify B
Node 2 Node 6
B-2 B- 1 B
 Bitcoin Network

Relaying blocks
B-2 B- 1 B

B-2 B- 1 B B-2 B- 1 B

Node 1 Node 3 Node 4

B-2 B- 1 B

B-2 B- 1 B B-2 B- 1 B

Node 8
Node 5 Node 7
B-2 B- 1 B

Node 2 Node 6
B-2 B- 1 B
Bitcoin mining
• Solving the puzzle implies that a leader has been implicitly
selected
• Similar to the RAFT’s blockchain leader selection algorithm
• The selected leader has created the block
• All other nodes will follow his instruction to include the block
• However, unlike RAFT, we need to ensure that
• The node is not byzantine
• The block and transaction checking algorithm ensure this
Summary of transaction and block creation

Bitcoin Basics- Gallersdörfer, U., Holl, P., & Matthes, F. (2020). "Blockchain-based Systems Engineering". Lecture Slides. TU Munich.
Difficulty adjustment
• Difficulty is used to implicitly select a leader
• It has another purpose: to ensure that a block is created in 10 minutes in
average
• Why is the block time constant and fixed to 10 minutes?
• > 10 minutes -> Too slow
• Transactions take longer to be included
• Network capacity decreases as a smaller number of transactions are handled
• < 10 minutes -> Too fast
• Higher possibility of chain forking, leading to multiple “realities”
• Empty blocks
Difficulty adjustment
• How to ensure a constant time (in average) for block generation?
• The difficulty is fixed dynamically and adjusted after every 2016 blocks in
around 14 days, (14 x 24 x 6 = 2016)
• The difficulty also reflects the total hashing (computing) power of the nodes
in the network
• For example
• if more blocks were produced in the last 14 days, it implies that the hashing
power has increased, therefore, the difficulty is not enough to produce a block
in 10 minutes
• Solution: increase the difficulty and vice versa
& block time
Difficulty adjustment
e average time between
minutes
be constant? 1 Measure, how long the last 2016
blocks took to get mined. (=T)
onger to be included
ecreases Calculate the factor of speed (two
2
f chain forking, leading to Weeks / T) (=F)

p track of these forks 3 The difficulty gets increased (F >

e orphaned. 1) or decreased (F < 1).

arch puzzle in such way 3a Maximum increase: 4. Maximum

ock time? decrease: 0,25.
fficulty of the puzzle is The process is done every 20161
twork speed. 4
blocks.
idered as the chain with 114 Days x 24 Hours x 6 (every 10 mins) = 2016
difficulty.
Bitcoin Basics- Gallersdörfer, U., Holl, P., & Matthes, F. (2020). "Blockchain-based Systems Engineering". Lecture Slides. TU Munich.
Difficulty adjustment
• What does it mean when F > 1?
• 2016 blocks have been produced in less than 14 days
• When can it happen?
• When the number of node has increased, resulting in more computing (hashing power) in
the network

• In order to ensure the limit of 1 block/10 minutes, difficulty gets increased ensuring
that the next 2016 blocks take more than 14 days
• thus averaging 2016 block in 14 days = 1 block/10 minutes

• Similarly, F < 1 means, the hashing power has decreased, and the miners are finding it
difficult to mine blocks in average 10 minutes
• Solution: reduce the difficulty
Bitcoin reward
• The miner who solves the puzzle is rewarded with new Bitcoins
• Number of reward is halved in every 210000 blocks (~ 4 years)
• Currently, it is 3.125 bitcoin
• It is included as the first (coinbase) transaction which is output to a miner’s
address, or an address selected by the miner
• As rewards get halved in every 210000 blocks
• at some point the rewards will reach towards an asymptotically zero
• This represents a geometric series and we can calculate the maximum of
bitcoin that will be produced before reaching asymptotically zero
• The number is 21 millions bitcoins
Bitcoin reward
• Currently more than 94.5% of bitcoins have already been created
• Thus bitcoin represents a limited resource, much like any natural
resource
• Hence, the creation of bitcoin is coined as mining
• This is why bitcoin is regarded as a deflationary currency as there is no
mechanism to create additional bitcoin once 21M bitcoins are created
• Will bitcoin system cease to function at that point?
Bitcoin reward

https://en.bitcoin.it/wiki/Controlled_supply
Bitcoin mining game
• Bitcoin mining can be a profitable income source
• There can be 450 (3.125 x 6 x 24) bitcoins mined per day (in average)
• Around 38M USD in today’s price
• Let’s assume that there are 10 miners in the network each with equal hashing
power of 10terahash/sec (they have the same h/w for bitcoin mining), 1
terahash/sec = 1 trillion hash/sec
• So each day each miner earns 38M/10 = 3.8M USD
• Now, one miner thinks of increasing his hashing power to 20 Th/sec
• Resulting more blocks mined by him than others
• Others noticing that they also increase their hashing power to 20 th/sec
Bitcoin mining game
• Now the whole network has miners each having a hashing power of 20
th/sec
• All earning the same value of 3.8M USD per day
• As more computing power means more blocks are generated, breaking
the 2016 blocks in 14 days law
• To adjust this, difficulty is increased and so less blocks in next 14 days
• If again some miner wants to increase their computing power
• the same cycle will repeat, resulting in a mining game or arms race
Bitcoin hashrate

https://blockchain.info/charts/hash-rate
 Bitcoin mining game
Mining hardware

2009 2010 2011 2013

CPU GPU FPGA ASIC

CPUs were the first GPUs are faster than FPGA (field programmable ASIC (application-specific
hardware to mine Bitcoins. CPUs. First mining gate array) are much more integrated circuit) are chips
software was introduced in energy effective than specially designed for
2010. GPUs. mining. Fastest mining.

FPGA image taken from https://en.wikipedia.org/wiki/File:Icarus_Bitcoin_Mining_rig.jpg by Xiangfu, cropped. CC BY-SA 4.0

Bitcoin
ASIC Basics-
image Gallersdörfer,
taken U., Holl, P., & Matthes, F. (2020). "Blockchain-based Systems Engineering".
from https://commons.wikimedia.org/wiki/File:Cryptocurrency_Mining_Farm.jpg Lecturenot
by Marco Krohn, Slides. TU Munich.
modified. (CC BY-SA 4.0)
Bitcoin mining game

https://www.businessinsider.in/photo/83808381/worlds-largest-bitcoin-mining-rig-seller-isnt-taking-any-new-orders-for-foreseeable-
future.jpg?imgsize=545771

https://imageio.forbes.com/specials-images/imageserve/610091d201bb5cdbd6af3be5/The-
Belly-of-the-Beast--At-Riot-Blockchain-s-bitcoin-mining-facility-in-Rockdale-
/0x0.gif?height=948&width=711&fit=bounds
Bitcoin mining game
• A miner also receives an additional incentive via fees
• If a transaction does not provide any fee, miners will simply ignore it as it is not
profitable for them
• The effect of this is that users compete with each other to include their
transactions in the block
• This increases the fee over time
Bitcoin mining game

https://privacypros.io/tools/bitcoin-fee-estimator/
Bitcoin blockchain
• The blockchain data structure is an ordered, back-linked list of blocks of
transactions
• The blockchain can be stored as a flat file, or in a simple database
• The Bitcoin software stores the blockchain metadata using Google’s LevelDB
database
• The blockchain is often visualised as a vertical stack, with blocks layered on top
of each other and the first block serving as the foundation of the stack
• Thus creating the notion of "height" to refer to the distance from the first block, and
"top" or "tip" to refer to the most recently added block
• The first block is known as the genesis block
Bitcoin blockchain
Bitcoin consensus
1. Transaction Broadcast: Every node who receives transactions or creates them, broadcasts them
to the network, making everyone aware of new transactions
2. Block Building: Every miner node collects the valid transactions, orders them and creates a new
block containing the transactions
3. Random Node Selection: A miner node is randomly chosen out of the network, e.g. by solving
the PoW puzzle. It is able to propose its block to the network
4. Block Validation: Other nodes receive the block from the randomly chosen node and validate
whether it is correct. A correct block only contains valid transactions
5. Block Acceptance: Other nodes show their acceptance for this block if the nodes build new
blocks on top of the recently proposed block
Bitcoin consensus
• Each node independently extends the blockchain
• Remember that there is no coordination mechanism
• There are also byzantine nodes in the network. Who do you trust?
• What happens when two miners generate valid blocks simultaneously?
• Also a block does not reach every node simultaneously
• There will always be a network propagation delay due to miners residing in
different geographical locations
• Each node initially may have different views of the chain, known as a fork
Bitcoin forks
Bitcoin Network

0 0

Node 1 Node 4
0
0

Node 5
Node 8
Node 7
0

Node 2 Node 6
0
Bitcoin forks
Bitcoin Network

0 0

Node 1 Node 4
0
0

Node 5
Node 8
Node 7
0 1

Node 2 Node 6
0 1
Bitcoin forks
Bitcoin Network

0 0

1 1
Node 1 Node 4
0
0

0
1 1

Node 5
Node 8 1
Node 7
0

1
Node 2 Node 6
0 1
Bitcoin forks
Bitcoin Network

0 1 0 1

Node 1 Node 4
0 1
0 1

0 1

Node 5
Node 8
Node 7
0 1

Node 2 Node 6
0 1
Bitcoin forks
Bitcoin Network

0 1 0 1

Node 1 Node 4
0 1
0 1

0 1

Node 5
Node 8
Node 7
0 1

2
Node 2 Node 6
0 1
Bitcoin forks
Bitcoin Network

0 1 0 1 2
2

Node 1 Node 4
0 1
0 1

0 1
2

2
Node 5
Node 8 2

Node 7
0 1 2
2

Node 2 Node 6
0 1
Bitcoin forks
Bitcoin Network

0 1 2 0 1 2

Node 1 Node 4
0 1 2
0 1 2

0 1 2

Node 5
Node 8
Node 7
0 1 2

Node 2 Node 6
0 1 2
Bitcoin forks
Bitcoin Network

0 1 2 0 1 2

2
2

Node 1 Node 4
0 1 2
0 1 2

0 1 2
2 2

Node 5 2
Node 8
Node 7
0 1 2

Node 2 Node 6
0 1 2
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 2

Node 1 Node 4
2 2

0 1
0 1
2
2 2
0 1

2
Node 5
Node 8
2
Node 7
0 1

Node 2 Node 6 2

0 1

2
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 2

Node 1 Node 4
2 2

0 1
0 1
2
2 2
0 1

2
Node 5
Node 8
2
Node 7
0 1

Node 2 Node 6 2

0 1

2
The network has a fork now!
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 2

Node 1 Node 4
2 2

0 1
0 1
2
2 2
0 1

2
3 Node 5
Node 8
2
Node 7
0 1

Node 2 Node 6 2

0 1

2
A problem arises when the next block is created!
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 2

Node 1 Node 4
2 2

0 1
0 1
2
2 2
0 1

2
3 Node 5
Node 8
2
Node 7
0 1

Node 2 Node 6 2

0 1

2
Which branch to choose? Green or the other??
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 2

Node 1 Node 4
2

The fork must be resolved.

2
0 1
0 1
2
2

The consensus must be achieved

2 0 1

2
3 Node 5
Node 8
2
Node 7
0 1

Node 2 Node 6 2

0 1

2
Bitcoin consensus
• To resolve the fork, each node will add the difficulty value from the
genesis block to the latest block for each branch
• The nodes will select the chain with the most cumulative computation (i.
e. the largest total difficulty value) demonstrated
• Most of the time it represents the longest chain
• If the two branches have the same height having the same difficulty, we
choose one at random
• The chosen block is the one on top of which we mine and/or trust for
transaction confirmation
Bitcoin consensus
• Other miners start extending one of these blocks
• Over time, one of the chains starts growing over the other
• The shortest chain is then abandoned
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 2
3
3
Node 1 Node 4
2 2

0 1
0 1
2
2 2
3 0 1

3 2
Node 5
Node 8 3
2
Node 7
0 1

2 3

3
Node 2 Node 6 2

0 1

2
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 3 2 3

Node 1 Node 4
2 2

0 1
0 1
2
2 2 3
3 0 1

2 3
Node 5
Node 8
2
Node 7
0 1

2 3

Node 2 Node 6 2

0 1

2 3
Bitcoin forks
Bitcoin Network

2 2

0 1 0 1

2 3 2 3

Node 1 Node 4
2 2

0 1
0 1
2
2 2 3
3 0 1

2 3
Node 5
Node 8
2
Node 7
0 1

2 3

Node 2 Node 6 2

0 1

2 3
Bitcoin consensus
• Transactions on the abandoned chain are checked and those are
not already included are put back to the transaction pool
• The discarded blocks are known as orphaned blocks and transactions
in the orphaned block are called orphaned transactions
• Once every nodes agree to a particular chain, a consensus is
achieved in a distributed fashion
Bitcoin consensus
• Order of Transactions/Blocks => Atomic Broadcast!
• New block created => A change of state!
• Every node has to agree to this => Distributed consensus!
Question?