Introduction to Bitcoin

A 2008 whitepaper written by the pseudonymous Satoshi Nakamoto introduced the concept of bitcoin,
and the design principle behind bitcoin is:

“A purely peer-to-peer version of electronic cash [which] would allow online payments to
be sent directly from one party to another without going through a financial institution”

So, there is the concept of electronic cash: cash being a bearer asset, like the cash in pocket which one can
spend at will without asking permission from a third party.Before Bitcoin there was never electronic cash;
we had numbers being stored in the database of a financial institution like a bank , whose rules we had to
comply with in order to open an account and use, and whose permission we had to seek before being able
to move the money.

What makes it different from normal currencies?

Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, rupees, or
yen, which are also traded digitally.

However, bitcoin’s most important characteristic, and the thing that makes it different to conventional
money, is that it is decentralized. No single institution controls the bitcoin network. This puts some
people at ease, because it means that a large bank can’t control their money.

Who prints it?

This currency isn’t physically printed in the shadows by a central bank, unaccountable to the population,
and making its own rules. Those banks can simply produce more money to cover the national debt, thus
devaluing their currency.

Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’,
using computing power in a distributed network.This network also processes transactions made with the
virtual currency, effectively making bitcoin its own payment network.

Characteristics of Bitcoin

Bitcoin has several important features that set it apart from government-backed currencies.

1. It is decentralized: The bitcoin network isn’t controlled by one central authority. Every machine
that mines bitcoin and processes transactions makes up a part of the network, and the machines
work together. That means that, in theory, one central authority can’t tinker with monetary policy
and cause a meltdown.And if some part of the network goes offline for some reason, the money
keeps on flowing.

2. It is easy to set up: Conventional banks make you jump through hoops simply to open a bank
account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy.
However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.
 3. It is anonymous: Users can hold multiple bitcoin addresses, and they aren’t linked to names,
addresses, or other personally identifying information.

4. It is completely transparent: Bitcoin stores details of every single transaction that ever happened in
the network in a huge version of a general ledger, called the blockchain.If you have a publicly used
bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know
that it’s yours.
There are measures that people can take to make their activities more opaque on the bitcoin network,
though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin
to a single address.

5. Transaction fees are miniscule: Bitcoin charges very less or no fees for transaction

6. It is fast: One can send money anywhere and it will arrive minutes later, as soon as the bitcoin
network processes the payment.

7. It is non-repudiable: When your bitcoins are sent, there’s no getting them back, unless the recipient
returns them to you. They’re gone forever.

Why use Bitcoins?

1. It’s fast and cheap: Bitcoin transactions are usually faster and cheap

2. Central governments can’t take it away: Because the currency is decentralized, you own it. No
central authority has control, and so a bank can’t take it away from you.

3. There are no chargebacks: Once bitcoins have been sent, they’re gone. A person who has sent
bitcoins cannot try to retrieve them without the recipient’s consent. This makes it difficult to
commit the kind of fraud that we often see with credit cards, in which people make a purchase
and then contact the credit card company to make a chargeback, effectively reversing the
transaction.

4. People can’t steal your payment information from merchant: This is a big one. Most online
purchases today are made via credit cards, but in the 1920s and ’30s, when the first precursors to
credit cards appeared, the Internet hadn’t yet been conceived. Credit cards were never supposed
to be used online and are insecure. Online forms require one to enter all secret information (the
credit card number, expiry date, and CSV number) into a web form. It’s hard to think of a less
secure way to do online business. This is why credit card numbers keep being stolen.

5. Bitcoin transactions, however, don’t require to give up any secret information. Instead, they use
two keys: a public key, and a private one. Anyone can see the public key (which is actually your
bitcoin address), but the private key is secret. When one sends a bitcoin, one ‘signs’ the
transaction by combining the public and private keys together, and applying a mathematical
function to them. This creates a certificate that proves the transaction came from that person. As
long as one doesn’t publish the private key for everyone to see, a person is safe.
6. It isn’t inflationary: The problem with regular fiat currency is that governments can print as much
of it as they like, and they frequently .Inflation can be difficult to control, and can decrease
people’s buying power. Bitcoin was designed to have a maximum number of coins. Only 21
million will ever be created under the original specification. This means that after that, the
number of bitcoins won’t grow, so inflation won’t be a problem.

7. It’s as private as you want it to be: Sometimes, we don’t want people knowing what we have
purchased. Bitcoin is a relatively private currency. On the one hand, it is transparent due to the
blockchain, everyone knows how much a particular bitcoin address holds in transactions. They
know where those transactions came from, and where they’re sent. On the other hand, unlike
conventional bank accounts, no one knows who holds a particular bitcoin address. Everyone can
look inside it, but no one knows whose it is. However, it’s worth pointing out that people who use
bitcoin unwisely (such as always using the same bitcoin address, or combining coins from
multiple addresses into a single address) risk making it easier to identify them online.

8. No trust needed: In a conventional banking system, one has to trust people to handle yr money
properly along the way. One has to trust the bank, or trust a third-party payment processor. These
organizations demand important, sensitive pieces of information. Because bitcoin is entirely
decentralized one need not trust anyone when using it. When a transaction is sent , it is digitally
signed, and secure. An unknown miner will verify it, and then the transaction is completed.

9. You own it: There is no other electronic cash system in which our account isn't owned by
someone else. Take PayPal, for example: if the company decides for some reason that an account
account has been misused, it has the power to freeze all of the assets held in the account, without
any consultation. It is then up to us to jump through whatever hoops are necessary to get it
cleared, in order to access our funds. With bitcoin, we own the private key and the corresponding
public key that makes up a bitcoin address. No one can take that away from us (unless we lose it
ourselves, or host it with a web-based wallet service).

10. Creating one’s own money: One can certainly buy bitcoins on the open market, and also mine
one’s own if one has enough computing power. After covering the initial investment in
equipment and electricity, mining bitcoins is simply a case of leaving the machine switched on,
and the software running.
 Getting started with Bitcoins
A Bitcoin wallet is first required to get started with using bitcoins. A wallet can be created easily through
different online applications. The wallet can be downloaded on computer through a software wallet, on
your mobile, and also on the web.

The next step after installing a wallet is to obtain bitcoins. Obtaining bitcoins is a relatively easy process.
The three common ways are:
 Selling and buying via bitcoins
 Purchase and sell bitcoins through Bitcoin exchanges (this is the most common way. Exchanges are
typically found online.)
 Trading bitcoins for traditional currencies of countries

Bitcoin works off addresses. There are two components to a Bitcoin address: a public address, and a
private address. Each Bitcoin address has its own Bitcoin balance. Every time a transaction is made, the
public address of each user is made public to the entire network. Therefore, it is recommended that the
sender creates a new address for each transaction. An example of a bitcoin address:
1MKe24pNsLmFYk9mJd1dXHkKj9h5YhoEey. For a wallet to provide accurate information, it needs to
be online or connected to a Bitcoin Blockchain file, which it uses as its source of information. The wallet
will read the Bitcoin Blockchain file and calculate the balances in each address. Bitcoin wallets helps to
create bitcoin addresses to receive incoming transactions and make outgoing payments.

Figure: Bitcoin wallet showing public and private key

Making payments with bitcoins is an easy process. It is given below:

 Enter the recipient's address.
 Enter the amount of bitcoins to be sent.
 Press send.
The recipient will then simply receive the request for bitcoins in exchange for what he is offering (goods,
services, or perhaps a currency).

Figure: Data from Bitcoin blockchain

 Blockchain Technology
In his original Bitcoin white paper, Satoshi Nakamoto defined an electronic coin – the Bitcoin – as “a
chain of digital signatures” known as the ‘blockchain’.The blockchain enables each coin owner to transfer
an amount of currency directly to any other party connected to the same network without the need for a
financial institution to mediate the exchange. We can illustrate how a blockchain works by using Bitcoin
as an example, as shown in figure below. Bitcoin, like other blockchains, uses cryptography to validate
transactions, which is why digital currencies are often referred to as ‘cryptocurrencies’. Bitcoin users gain
access to their balance through a password known as a private key. Transactions are validated by a
network of users called ‘miners’, who donate their computer power in exchange for the chance to gain
additional bitcoins using a shared database and distributed processing.

Figure: Bitcoin transaction

A blockchain is essentially a type of database for recording transactions – one that is copied to all of the
computers in a participating network.It is thus sometimes referred to as a ‘distributed ledger’. Blockchain
technology creates a decentralised digital public record of transactions that is secure, anonymous, tamper
proof & unchangeable. Instead of a bank or other intermediary maintaining a private database of records,
blockchain technology makes all records public.Data in a blockchain is stored in fixed structures called
‘blocks’. The important parts of a block are:

• its header, which includes metadata, such as a unique block reference number, the time the block was
created and a link back to the previous block

• its content, usually a validated list of digital assets and instruction statements, such as transactions made,
their amounts and the addresses of the parties to those transactions.

Given the latest block, it is possible to access all previous blocks linked together in the chain, so a
blockchain database retains the complete history of all assets and instructions executed since the very first
one – making its data verifiable and independently auditable. As the number of participants grows, it
becomes harder for malicious actors to overcome the verification activities of the majority. Therefore the
network becomes increasingly robust and secure.

The elimination of intermediaries brings with it a number of benefits, many of which cannot yet be fully
comprehended. Banks & governments for example, often impede the free flow of business because of the
time it takes to process transactions and regulatory requirements. The blockchain could enable people and
businesses to trade much more frequently and efficiently. This would significantly boost local and
international trade. Blockchain technology would also eliminate expensive intermediary fees that have
become a large burden on individuals and businesses. There are also security benefits. Hacking attacks
and fraudulent activities that commonly impact large central intermediaries would not be possible with
blockchain technology. These are just some of the potential benefits blockchain technology could deliver.
The technology could profoundly disrupt hundreds of industries that rely on intermediaries.
 Implementing Blockchain Technology in Bitcoin transaction
There are three principal technologies that combine to create a blockchain. These technologies are: 1)
private key cryptography, 2) a distributed network with a shared ledger and 3) an incentive to service the
network’s transactions, record-keeping and security.

The following is an explanation of how these technologies work together to secure digital relationships.

Cryptographic keys

Two people wish to transact over the internet.

Each of them holds a private key and a public key.

The main purpose of this component of blockchain technology is to create a secure digital identity
reference. Identity is based on possession of a combination of private and public cryptographic keys.
In turn, this digital signature provides strong control of ownership.
A Distributed Network

Every single person on the network has a copy of the ledger. There is no single centralized original copy. Ledger
here means the copy of all the transactions that ever happened.

Blockchain is a distributed database that stores all the Bitcoin transactions that have ever happened in the
history of Bitcoin. The distribution of data works on a peer-to-peer basis, rather than client-server. One
benefit of peer-to-peer (p2p) over client-server is that with p2p, the network doesn’t rely on one central
point of control which can fail.

Figure:Bitcoin Blockchain files

Figure: Bank ledger vs bitcoin ledger

When cryptographic keys are combined with this network, a super useful form of digital interactions
emerges. The process begins with A taking their private key, making an announcement of some sort — in
the case of bitcoin, that you are sending a sum of the cryptocurrency — and attach it to B’s public key.
Protocol

A block – containing a digital signature, timestamp and relevant information – is then broadcast to all
nodes in the network.

Figure: Transaction block

Everything stored on the Blockchain is encrypted. This way, everyone is able to see all the transactions
but at the same time no one will know which of those accounts belongs to a particular person.

Proof of Work is a concept invented in Bitcoin Blockchain where in the miners (special users of Bitcoin)
will validate transactions by solving a complex mathematical puzzle called Proof of Work. Technically,
there is a hash target value designated to every block before time.

Miners club together a set of unverified Bitcoin transactions (around 250) into one block, compute its
hash and then begin a race to find a specific set of characters called Nonce.

The total hash obtained from the hash of the previous block, transaction data and the nonce has to match
the final pre-assigned target hash value. It is this Nonce which is computationally extensive. Only people
with huge computational computing power and electricity are able to solve it in 10 minutes on average.

Figure: solving Proof of Work

With blockchains, by offering your computer processing power to service the network, there is a reward
available for one of the computers. A person’s self-interest is being used to help service the public need.

With bitcoin, the goal of the protocol is to eliminate the possibility that the same bitcoin is used in
separate transactions at the same time, in such a way that this would be difficult to detect.

This is how bitcoin seeks to act as gold, as property. Bitcoins and their base units (satoshis) must be
unique to be owned and have value. To achieve this, the nodes serving the network create and maintain a
history of transactions for each bitcoin by working to solve proof-of-work mathematical problems.

They basically vote with their CPU power, expressing their agreement about new blocks or rejecting
invalid blocks. When a majority of the miners arrive at the same solution, they add a new block to the
chain. This block is timestamped, and can also contain data or messages.

The most interesting part of Bitcoin is Bitcoin Mining. It is the concept in which certain users do a piece
of work and are rewarded 12.5 BTC per block. Each block takes on average about 10 minutes to mine.
 Blockchaining India’s digital future
Blockchain technology allows for instant recognition of the exact size of the block by all transacting
parties in the chain since the block is simultaneously updated on all their databases, and has unique
security features that do not allow tampering with the definition of the block.
 In addition, each block’s movements across the chain have the ability to be verified by all parties in
the chain since the block carries with it the digital imprint, or ‘signature’, of wherever it has been.
 Therefore, it creates instant trust without having to rely on a series of trustworthy banks to clear
cheques. Here, various parties transacting regard their reputation as being more important than
reneging on it. Unlike traditional banking system, cash transactions here are undertaken immediately.

Benefits of blockchain technology:

 As a public ledger system, blockchain records and validate each and every transaction made, which
makes it secure and reliable.
 All the transactions made are authorized by miners, which makes the transactions immutable and
prevent it from the threat of hacking.
 Blockchain technology discards the need of any third-party or central authority for peer-to-peer
transactions.
 It allows decentralization of the technology.

Status of blockchain technology in India

• In India Financial players are the first movers to capitalise on this technology.
• It is witnessing a lot of traction within India, in sectors such as banking and insurance.
• In most of these industries, players are coming together to form a consortium to realise the
benefits of blockchain at an industry level.
• The Institute for Development and Research in Banking Technology (IDRBT), an arm of the
Reserve Bank of India (RBI), is developing a model platform for this technology.
• Reliance Jio Infocomm is drawing up plans to create its own cryptocurrency, Jio Coin.

How blockchain can be used in public administration?

Blockchain has the potential to optimize the delivery of public services, further India’s fight against
corruption, and create considerable value for its citizens.

 By maintaining an immutable and chronologically ordered record of all actions and files (“blocks”)
linked together (“chain”) in a distributed and decentralized database, Blockchain creates an efficient
and cost-effective database that is virtually tamper-proof. By doing so, blockchain promises to create
more transparent, accountable, and efficient governments.
 In addition to creating a more efficient government, blockchain can also help create a more honest
government. A public blockchain, like the one Bitcoin uses, records all information and transactions
 on the decentralized database permanently, publicly, and most importantly, securely. By allowing
governments to track the movement of government funds, blockchain can hold state and local actors
accountable for any misappropriations.
 Blockchain not only deters corruption through accountability, but it can also do so by bypassing the
middleman entirely. Earlier this year, the World Food Programme began testing blockchain-based
food and cash transactions in Pakistan’s Sindh province. Refugees in Jordan’s Azraq camp are now
using the same technology, in conjunction with biometric registration data for authentication, to pay
for food.
 In 2016,ICICI Bank executed India’s first banking transactions on blockchain in partnership with
Emirates NBD.
 With Aadhaar cards becoming nearly ubiquitous in India, adopting blockchain could be the next
logical step in India’s pursuit of becoming a digital economy. Blockchain can play an important role
in storing individuals’ data, helping conduct secure transactions, maintaining a permanent and private
identity record, and turning India into a digital society.

Concerns with Blockchain

Blockchain is still a (relatively) new technology and is not without its problems. For a start, there are
ongoing concerns about privacy in the settlement and storage of securities – blockchain providers are
working hard to address.
Banks are also at threat with blockchain, since more and more firms (using their IT service providers from
India and elsewhere) will build systems that can create and exchange ‘blocks’ with one another
completely legally, without ever having to use the banks as a financial intermediary.
 Conclusion
Blockchain, however, is not a panacea. While it can help enhance the delivery of government services, it
cannot replace an inefficient system. Although it can deter corruption by making governments more
accountable and transparent, it cannot prevent the entering of false information into the network. Yet, it
presents the government with a powerful opportunity. By embracing blockchain, it can create a
bureaucracy that focuses on innovation and experimentation, a government that seeks to maximize
efficiency and governance, and an economy sustained on the promise of technology. Blockchain’s
applications in the public sphere, however, have yet to catch the eye of the Indian government. This is
baffling; the technology is not only promising, but has even begun to be utilized by governments globally.
 SEMINAR REPORT
ON

Bitcoin and Blockchain Technology

Submitted By:
Papori Borgohain,APTS
Proby. DSP(C)