Bitcoin’s Key Challenge

• Key Technical challenge of a distributed eCash System is Distributed consensus

Why distributed consensus? 

• Reliability required in distributed systems. 10 or 15 different nodes, all of them record the action or none of the nodes should record it. If we were able to build a distributed key value store it would enable a lot of applications
• Examples
  • Distributed domain name system
    • IP address to domain name
  • Public Key directory
    • Email address to Public Key
  • Stock Trades
    • Who has transferred money to whom

Solutions to related problems ; Altcoins are built on bitcoin like principles to achieve slighty different goals

Defining distributed consensus

• Fixed number of nodes n each having an input value
• Protocol should terminate
• All correct nodes should decide on the same value
• Value agreed must have been proposed by some correct node

Bitcoin is a peer to peer system

• When Alice wants to pay Bob
  • Transaction contains
    • Alice’s signature
    • Hash function: Way for Alice to link together this transaction or coin to the receipt of the coin from someone else
    • Public Key of Bob (his address)
    • Bob’s computer is nowhere in the picture, his listening is not necessary for him to receive the coin

What consensus were required? 

• Which transactions were broadcasted?
• Order in which transactions occurred?

How consensus could work? 

• All nodes have a sequence of blocks of transactions they’ve reached consensus on
• Each node has a set of outstanding transactions it’s heard about
• p2p network is not perfect
• Ok to select any valid block, even if proposed by only one node (left out transaction would get added in a later block)
• Nodes might crash or become malicious

Why consensus is hard? 

• Nodes may crash or be malicious
• Network is imperfect
  • Not all pairs of nodes connected
  • Faults in network
  • Latency (No notion of global time)
    • Take the node that sent the first message in Step 1 and have that node do something in Step 2. Which node sent the first message in Step 1?

Many impossibility results

• Byzantine generals problem
• Some well known protocols: Paxos
  • Protocol can get stuck & fail to make progress
  • Never produces inconsistent results
• Understanding impossiblity results
  • Bitcoin consensus works better in practice than in theory
  • But theory is important, can help predict unforeseen attacks and help provide strong guarantees on the nature of consensus and security
  • What bitcoin does differently? 
    • Incentive: Possible only because it is a currency
    • Embraces Randomness:  Does away with the notion of a specific end -point
      • Probability of transaction being includes keeps going higher
      • Probabilistic guarentee