DECENTRALIZED E-Money (BITCOIN)

What is decentralized e-money ?

Decentralized e-money is store and flows through a peer-to-peer computer network that
directly link users, much like a chat room. No single user controls the network.
There is no centralized issuer of such products or a trusted third party that manages them.
This means that they are independent of central banks,financial institutions and internet
platforms. Decentralized e-money is not backed by any particular good or service, and is not
re deemable into national currencies.
Bitcoin is an example of a decentralized e-money innovation. Bitcoin was launched in 2009,
and since then, many other similar digital currencies have been created,including
Litecoin,Peercoin, Ripple and Nxt.
Decentralized e-money such as Bitcoin arose because cryptography and technology have
solved two problems,counterfeiting and double spending, that would have made a
decentralized digital currency impossible. The use of crytography is one of the reasons why
the various types of decentralized e-money are typically called « cryptocurrencies »
Authenticity
As with today’s polymer bank notes, to ensure the value of a currency, you need to check
that it is authentic. The same is tru of cryptocurrencies. To confirm the authenticity of a
cryptocurrency, you need to verify the electronic record that supports it. There are now
well-established information technologies to help you do that.
Double spending
You also want to make sure that the crytocurrency you receive has not already been spent-
that the person sending it to you has not previously sent the same unit of the crytocurrency
to someone else.
Preventing this problem is particularly chanllenging in decentralized e-money,because there
is no centralized platform pr institution to verify the transaction and take steps against
double spending
Now, thanks to cryptographic tools, network users can trust the validity of the crytocurrency
despite the absence of a trusted third party.
ARE CRYTOCURRENCIES « money » ?
The commonly held definition of money includes three criteria :
(i) Money should be generally accepted as a medium of exchange
(ii) Money should be a unit of account so that we can compare the costs of goods
and services over time and between merchants.
(iii) Money should be a store of value that stays stable over time
Using those criteria for Bitcoin and other cryptocurrencies,we see that they fall short of
today’s definition of « money»

AS A STORE OF VALUE
Cryptocurrencies such as Bitcoin are hightly volatile. For Example, the value of Bitcoin is 40
times more variable than the value of the U.S.dollar. People are unlikely to want to save or
invest money in a cryptocurrency whose value could swing wildly over a short period of
time. The same is true for merchants,who are unlikely to accept a « medium of exchange»
that is so volatile in value.
POTENTIAL RISKS OF USING CRYTOCURRENCIES
Bitcoin users need to beaware of the potential financial risks to which they might be
exposed, in light of the volatility of Bitcoin prices and risk of faillure of Bitcoin exchanges,
such as Mt. Gox. As well, given that cryptocurrencies such as Bitcoin are not regulated and
do not have a centralized issuer,users bear all of the risks themselves and have no legal
recourse should they wish to reverse a bitcoin transaction.
What makes it different from normal currencies

 Bitcoin can be used to buy things electronically. In that sense,it’s like conventional
dollars, euros, or yen, which are also traded digitally.
 However, Bitcoin’s most important characteristic, and the thing that make 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 bank can ‘t
control their money.

What is Bitcoin

 Bitcoin is a new currency that was created in 2009 by an unknown person using the
alias Satoshi Nakamoto. Transactions are made with no middle men-meaning, no
banks !
Bitcoin can be used to book hotels on expedia, shop for furniture on Overstock and
buy Xbox games. But much of the hype is about getting rich by trading it. The price of
bitcoin skyrocketed into the thousands in 2017.

When did Bitcoin Start ?

 Bitcoin was invented by Satoshi Nakamoto, [note 6] who publiblished his invention
on 31 October 2008 in a research paper called ‘’Bitcoin : A Peer-to-Peer Electronic
Cash system ‘’. It was implemented as open source code and released in January
2009.
 Bitcoin

 A type of digital currency in which encryption techniques are used to regulate the
generation of units of currency and verify the transfer of funds, operating
independently of a central bank : bitcoin has become a hot commodity among
speculators if you want to buy something using bitcoin you need to make sure the
seller accepts the crytocurrency.
Why Bitcoins ?

 Bitcoin can be used to buy merchandise anonymously. In addition, international

payments are easy and cheap because bitcoins :
 Are not tied to nay country or subject to regulation.
 Small businesses may like them because :
 There are no credit card fees.
 Some people just buy bitcoins as an investment, hoping that they’ll go up in
value.
What is the bitcoin algorithm ?

 Bitcoin makes heavy use of the cryptographic hash function SHA256, which stands
for Secure Hash Algorithm 256-bit. Incidentally, the SHA algorithms were originally
developed by the NSA. You might wonder how we can trust something that came
from the NSA.Sep 3, 2013.
How do you verify a Bitcoin ?
A bitcoin address is generated raandomly, and is simply a sequence of letters and
numbers…. She then sends them from her bitcoin wallet out to the wider bitcoin
network. From there, bitcoin miners verify the transaction, putting it into a transactio
block and eventually solving it.
What is Bitcoin encryption ?

 Instead of using a single key for both encryption and decryption, separate keys are
used for both. A user generates a pair of keys that are mathematically linked to each
other. One key (the public key) is used for encryption and the other (the private key)
is used for decryption.
What is the Bitcoin protocol ?

 The bitcoin network is peer-to-peer payment network that operates on a

cryptographic protocol . Users send and receive bitcoins, the units of currency, by
broadcasting digitally signed messages to the network using bitcoin crytocurrency
wallet software.
Where are bit coins stored ?

 Stored in your wallet file is the list of accounts that you control and the secret key
needed to spend coins sent to those accounts.Stored in the public blockchain (held
 on every computer running the Bitcoin client) is the record of every transaction ever
made, including any transactions that sent you coins

Is Bitcoin Scrypt ?
Just like bitcoin, litecoin is a cryptocurrency that is generated by mining … Litecoin,
however, uses the scrypt algorithm – originally named as s-crypt, but pronounced as
‘scrypt ‘. This algorithm incorporates the SHA-256 algorithm, but its calculations are
much more serialised than those of SHA-2256 in bitcoin. Apr 2, 2014.

Anonymity
Though each bitcoin transaction is recorded in a public log, name of buyers and
sellers are never revealed – only their wallet IDs. While that keeps bitcoin users’
transactions private, it also lets them buy or sell anything without easily tracing it
back to them. That’s why it has become the currency of choice for people online
buying drugs or other illicit activities.

Future in question
 No one knows what will become of bitcoin. It is mostly unregulated, but some
countries like Japan, China and Australia have begun weighing regulations.
Governments are concerned about taxation and their lack of control over the
currency.

What is a digital signature encryption ?

 Digital signatures are the public-key primitives of message authentication. In the
physical world, it is common to use handwritten signatures on handwritten or typed
messages. They are used to bid signatory to the message. Similarly, a digital
signature is a technique that binds a person/entity to the digital data.
What is a digital signature encryption ?

 Digital signatures are the public-key primitives of message authentication. In the

physical world, it is common to use handwritten signatures on handwritten or typed
messages. They are used to bind signatory to the message. Similarly, a digital
signature is a technique that binds a person/entity to the digital data.

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 secue
digital identity reference. Identity is based on possesion of a combination of private
and public cryptographic keys.

Privated key – an alphanumeric string kept secrte by the user, and designed to sign a
digital communication when hashed with a puplic key. In the case of Bitcoin, this
string is a public key (which can be publicly distributed). The public – private key pair
form of cryptography is standard and accepted security pratice. A third party can
 verify that a digital signature was issued by a private key by comparing the digital
signature with the public key, all without having to know th actual private key.

MODULAR ARITHMETIC AND CRYPTOGRAPHY

Construction of a crytosystem generally requires the system to be relatively easy to

solve in one direction but difficult to solve in the reverse. For example, modular
multiplication is easy but modular division can be difficult. To assist in modular
aritmetic, factoring methods such as Pollard’s p – 1 factoring algorithm can be used.
An overview for the types of encryption methods are given to introduce a basic
cryptosystem and a new elliptic curve cryptosystem.

MODULAR ARITHMETIC

1. (Reflexivity)
𝒂 ≡ 𝒂 𝒎𝒐𝒅 𝒏

2. (Symmetry)
𝒂 ≡ 𝒃 𝒎𝒐𝒅 𝒏 𝒂𝒏𝒅 𝒃 ≡ 𝒄 𝒎𝒐𝒅 𝒏, 𝒕𝒉𝒆𝒏 𝒂 ≡ 𝒄 𝒎𝒐𝒅 𝒏

3. (Transitivity)
𝒊𝒇 𝒂 ≡ 𝒃 𝒎𝒐𝒅 𝒏 𝒂𝒏𝒅 𝒄 ≡ 𝒅 𝒎𝒐𝒅 𝒏, 𝒕𝒉𝒆𝒏
And 𝒊𝒇 𝒂 ≡ 𝒃 𝒎𝒐𝒅 𝒏 𝒂𝒏𝒅 𝒄 ≡ 𝒅 𝒎𝒐𝒅 , 𝒕𝒉𝒆𝒏
1. 𝒂 ± 𝒄 ≡ 𝒃 ± 𝒅 𝒎𝒐𝒅 𝒏, And
2. 𝒂𝒄 ≡ 𝒃𝒅 𝒎𝒐𝒅 𝒏.
To make decryption difficult many crytosystems use division.
R S A ENCRYPTION AND DECRYPTION
1. Chose two large primes, p and q with product n. Let 𝜑 denote Euler’s phi function so
that

𝜑(𝑛) = 𝜑(𝑝𝑞) = 𝜑(𝑝)𝜑(𝑞) = (𝑝 − 1)(𝑞 − 1)

2. Select any unit modulo 𝜑(𝑛) ,call it 𝑒.
3. Find the inverse of 𝑒 modulo 𝑛 , call it 𝑑
4. The pair (𝑛 , 𝑒) is transmitted as public data
5. Break the message into blocks of size 𝑦 < 𝑛 , to encrypt block m

𝒚 ≡ 𝒏𝒆 𝒎𝒐𝒅 𝒏
To Decrypt a message :

𝒚𝒅 = (𝒏𝒆 )𝒅 ≡ 𝒏𝒆𝒅 𝒎𝒐𝒅 𝒏

Which allows
 𝒌
𝒏𝒆𝒅 ≡ 𝒎(𝟏+𝜑(𝑛)𝑘) ≡ 𝒎 𝒎𝜑(𝑛)𝑘 ≡ 𝒎 (𝒎𝜑(𝑛) ) ≡ 𝒎 𝟏𝒌 ≡ 𝒎 𝒏

FACTORING

Naive factoring , check any positive integer from 1 − [ √𝑛 ].

Pollard ‘s 𝑝 − 1 factoring algorithm : find a non-trival factor of composite integer n.
1. Choose a small integer 1 < 𝑎 < 𝑛
2. Find gcd (a,n).

 If gcd (a, n) ≠ 1, then gcd (a,n) | 𝑛

 If gcd (a,n) = n , the algorithm terminates.
 If gcd (a,n) = 1 , so recursively calculate the following :

𝒂𝟏 ≡ 𝒂 𝒎𝒐𝒅 𝒏
𝒂𝟐 ≡ 𝒂𝟐𝟏 𝒎𝒐𝒅 𝒏
.
.
𝒂𝒊 ≡ 𝒂𝒊𝒊−𝟏 𝒎𝒐𝒅 𝒏
 Find gcd (𝑎𝑖 − 1, 𝑛) for each i until gcd (𝑎𝑖 − 1, 𝑛) ≠ 1 or n for some 𝑖 > 0.

3. If is a prime factor of n and B is positive integer for which (𝑝 − 1) | 𝐵! , the

algorithm terminates in at most B steps. When the gcd (a,n) = n , choose a
new 𝑎 value and repeat.
ELLIPTIC CURVES
An elliptic curve is a curve defined by
𝑦 2 = 𝑥 3 + 𝑎𝑥 2 + 𝑏𝑥 + 𝑐
Elements of E are all points (x , y) satisfying the equation , and the additional element ‘’∞’’
,the additive identity.
Using the line through two points a third point can always be found. The sum of the two
points is defined as the additive inverse of the third point of intersection.

Addition on an Elliptic Curve

Case 1 : 𝒙𝑷 ≠ 𝒙𝑸 Case 2 : 𝑷 = −𝑷 , but 𝑃 ≠ 𝑄

 NEW CRYPTOSYSTEM
Similar to an RSA cryptosystem , the new cryptosystem relies on two secret primes 𝑝 𝑎𝑛𝑑 𝑞
,assume 𝑝 < 𝑞.
1. Select a secret basepoint 𝐺 ∈ 𝐸(𝑥) whith order 𝑞. Pick a random point in
𝐸(𝑥)/∞ and multiply by q ,so that 𝐺𝑞 = ∞. We’ve obtained a prime 𝑥 for
which 𝑁 = 𝑝𝑞 divides E(x).
2. Choose a positive integer 𝑏 < 𝑞 where b is distinct by taking 𝑛 = 𝑞, and use
it to define a decryption list ,
 𝑆 = {𝐺 , 2𝐺, 3𝐺, … , (𝑏 − 1)𝐺, 𝑏𝐺}
3. Publish the triple (K, E’(x), b) on the public channel, where the point K on
𝐸(𝑥) is

𝐾 ≡ 𝑝𝐺 𝑚𝑜𝑑 𝑥
Encryption
1. Break the message into blocks of size at most b
2. To encrypt a block m, compute the below and sent Y ∈ 𝐸(𝑥) across the public
channel.
𝑌 ≡ 𝑚𝐾 𝑚𝑜𝑑 𝑥
Decryption
1. Find the multiplicative inverse ℓ 𝑜𝑓 𝑝 𝑚𝑜𝑑𝑢𝑙𝑜 𝑥
2. Mutiply the encrypted message 𝑌 𝑏𝑦 ℓ , obtaining the point
ℓ𝑌 ≡ ℓ(𝑚𝐾) ≡ (ℓ𝑚)(𝑝𝐺) ≡ (ℓ𝑝)(𝑚𝐺) ≡ 𝑚 𝑚𝑜𝑑 𝑥
3. Find 𝑚𝐺 anong the decryption list and its index in the list.

As a medium of exchange
Only a few retailers accept Bitcoin as payment for goods and services. In Canada, in early
2014, there may be only about 200 retailers that accept Bitcoin. While this number is likely
growing, at present , Bitcoin is not generally accepted as a medium of exchange.
As a unit of account
Even retailers that accept Bitcoin tend to display their prices in state currencies such as the
Canadian dollar and only translate them into Bitcoin at the point of sale. This suggests that
Bitcoin is not a unit of measurement that could be used to compare the value of a good or
service offered over time or by differnt merchants.
As a store of value
Cryptocurrencies such as Bitcoin are highly volatile. For example, the value of Bitcoin is 40
times more variable than the value of the U.S. dollar. People are unlikely to want to save or
invest money in a cryptocurrency whose value could swing wildly over a short period of
time. The same is true for merchants,who are unlikely to accept a medium of exchange that
is so volatile in value.

Potential risks of using cryptocurrencies

Bitcoin users need to be aware of the potential financial risks to which they might be
exposed, in light of the volatility of Bitcoin prices and the risk of failure of bitcoin exchanges,
such as Mt Gox. As well , given that cryptocurrencies such as Bitcoin are not regulated and
do not have a centralized issuer , users bear all of the risks themselves and have nolegal
recourse should they wish to reverse a Bitcoin transaction.

Decentralized e-money such as Bitcoin arose because cryptography and technology have
solved two problems, counter feiting and double spending , that would have made a
decentralized digital currency impossible. The use of cryptography is one of the reasons why
the various types of decentralized e-money are typically called ‘’cryptocurrencies.’’

Taxonomy of virtual currencies

Economic Perspectives
At present , VCs do not completely fulfill the three economic roles associated with money :

 High price volatility of VCs limits their ability to ser as a reliable store of value. VCs
are not liabilities of a state and most VCs are not liabilities of private entities either.
Their prices have been highly unstable (see figure 2) with volatility that is typically
much higher than for national currency pairs. Both prices and volatility appear to be
unrelated to economic or financial factors, making them hard to hedge or forecast
(Yermack,2013).
 The current small size and limited acceptance network of VCs significantly restricts
their use as a medim of exchange : without legal tender status a VC is acce^ted only
when two parties agree to use it. Despite the very rapid growth of VC- based
payments, the number and volume of transaction in VCs remain small. Indeed, the
current total market value of VC sis about US$7 billion. By contrast, U.S. currency in
circulation is US $1.4 trillion, while U.S. money supply (M2) is about US$12 trillon.
 As of now, there is little evidence that VCs are used as an independent unit of
account. In other words, rather than being used to measure the value of goods and
services directly, they instead represent the value in fiat currency based on the VC
exchange rate. Retailers who accept payment in VCs will quote prices in fiat currency
with the price in VC based on the exchange rate at a particular point in time.