Module 4: Concepts of Bitcoin

Text Book : Mastering Bitcoin - Andreas M. Antonopoulos (Chapters 4, 5 & 6)

Department of Computer Engineering, VESIT, Mumbai

 Agenda
Keys, Addresses Transactions
● Public Key Cryptography and ● Transaction Outputs and Inputs
Cryptocurrency ● Transaction Fees
● Segwit ● Transaction Scripts and Script Language
● Private and Public Keys ● Turing Incompleteness
● Bitcoin Addresses - ● Stateless Verification
○ Base58 ● Script Construction (Lock + Unlock)
○ Base58Check Encoding ● Pay-to-Public-Key-Hash (P2PKH)
Wallets ● Bitcoin Addresses, Balances, and Other
● Nondeterministic (Random) Wallets Abstractions
● Deterministic (Seeded) Wallets ● use https://bitcoin.org/en/
● HD Wallets (BIP-32/BIP-44)
● Wallet Best Practices
● Using a Bitcoin Wallet
Key & Addresses
Bitcoin uses elliptic curve multiplication as the basis for its cryptography.
- public key cryptography to create a key pair that controls access to bitcoin.
- The public key is used to receive funds, and
- the private key is used to sign trans‐ actions to spend the funds
A bitcoin wallet contains a collection of key pairs, each consisting of a private key
and a public key.
In most wallet implementations, the private and public keys are stored together
as a key pair for convenience. However, the public key can be calculated from
the private key, so storing only the private key is also possible.
Key & Addresses
The private key (k) is a number, usually picked at random.
- From the private key, we use elliptic curve multiplication, a one-way
cryptographic function, to generate a public key (K). K=k*g (k-Private key, g-
Generator constant Point)
- From the public key (K), we use a one-way cryptographic hash function to
generate a bitcoin address (A)
Key & Addresses
A bitcoin address is a string of digits and characters that can be shared with anyone
who wants to send you money.

- Addresses produced from public keys consist of a string of numbers and letters,
beginning with the digit “1.” eg.: 1J7mdg5rbQyUHENYdx39WVWK7fstLpEoXZy
- appears most commonly in a transaction as the “recipient” of the funds.
- The bitcoin address is derived from the public key through the use of one-way
cryptographic hashing.
- Algorithms used to make a BTC address from a public key are:
- Secure Hash Algorithm (SHA) specifically SHA256
- RACE Integrity Primitives Evaluation Message Digest (RIPEMD), specifically
RIPEMD160.
- A = RIPEMD160 (SHA256(K)), Where K – Public key and A – Resultant bitcoin
address.(160-bit (20 bytes) number.
Key & Addresses
Key & Addresses

- Bitcoin addresses are almost always encoded as

“Base58Check”
- uses 58 characters (a Base58 number system)
- checksum to help human readability, avoid ambiguity, and
protect against errors in address transcription and entry.
- Base58Check is also used in many other ways in bitcoin, whenever there is a
need for a user to read and correctly transcribe a number, such as a
bitcoin address, a private key, an encrypted key, or a script hash.
Key & Addresses
- to represent long numbers in a compact way, using fewer symbols, many
computer systems use mixed-alphanumeric representations with a base (or radix)
higher than 10.
Eg:
- Decimal system uses the 10 , numerals 0 through 9
- Hexadecimal system uses 16, with the letters A through F as the six additional
symbols.
- Base64 → uses 26 lowercase letters, 26 capital letters, 10 numerals, and 2 more
characters such as “+” and “/”
- to transmit binary data over text-based media such as email.
- to add binary attachments to email.
Key & Addresses
Base58 is a text-based binary-encoding format developed for use in bitcoin and
used in many other cryptocurrencies.

- It offers a balance between compact representation, readability, and error

detection and prevention.
- a subset of Base64, using upper- and lower‐case letters and numbers, but
omitting some characters that are frequently mistaken for one another and can
appear identical when displayed in certain fonts.
- Base58 is a set of lowercase and capital letters and numbers without the
four (0, O, l, I) just mentioned.
Key & Addresses
Base58Check

- Base58 encoding format, which has a built-in error-checking code.

- To add extra security against typos or transcription errors
- Checksum is an additional four bytes added to the end of the data that is being
encoded.
- It is derived from the hash of the encoded data
- used to detect and prevent transcription and typing errors.
- When presented with Base58Check code, the decoding software will calculate
the checksum of the data and compare it to the checksum included in the code.
- If NO match, Base58Check data is invalid.
- This prevents a mistyped bitcoin address from being accepted by the wallet
software as a valid destination, an error that would otherwise result in loss of
funds.
 Key & Addresses
To convert data (a number) into a
Base58Check format,

1 . add a prefix to the data, called the

“version byte,” which serves to easily
identify the type of data that is encoded.

- Eg: for bitcoin address the prefix is

zero (0x00 in hex)
- Whereas prefix used when
Encoding a private key is 128
(0x80 in hex).
SegWit
SegWit
Benefits of SegWit
Wallets

- refers to the data structure used to store and manage a user’s keys.
- are two primary types of wallets
- nondeterministic wallet,
- where each key is independently generated from a random number.
- The keys are not related to each other.
- This type of wallet is also known as a JBOK “Just a Bunch Of Keys.”
- deterministic wallet,
- where all the keys are derived from a single master key, known as the
seed.
- All the keys in this type of wallet are related to each other and can be
generated again if one has the original seed.
- The most commonly used derivation method uses a tree-like structure and
is known as a hierarchical deterministic or HD wallet.
Wallets - Nondeterministic (Random) Wallets
- The disadvantage of random keys is that if you generate many of them you
must keep copies of all of them, meaning that the wallet must be backed
up frequently.
- transaction. Address reuse reduces privacy by associating multiple
transactions and addresses with each other.
Wallets - Deterministic (Seeded) Wallets
- wallets that contain private keys that are all derived from a common
seed, through the use of a one-way hash function.
- The seed is a randomly generated number that is combined with other
data, such as an index number or “chain code” to derive the private keys.
- the seed is sufficient
- to recover all the derived keys, and therefore a single backup at
creation time is sufficient.
- wallet export or import, allowing for easy migration of all the user’s
keys between different wallet implementations.
Wallets - Deterministic (Seeded) Wallets
HD Wallets (BIP-32/BIP-44)
- The most advanced form of deterministic wallets is the HD wallet defined
by the BIP-32 standard.
- HD wallets contain keys derived in a tree structure, such that a parent key
can derive a sequence of children keys, each of which can derive a
sequence of grandchildren keys, and so on, to an infinite depth.
Wallets - Deterministic (Seeded) Wallets
- Bitcoin Improvement Proposal 39 wordlist (or
'BIP39' for short) is a standardized set of words
for the recovery and backup of a bitcoin or
cryptocurrency wallet.
- Each word in the list is unique within the first four
letters of each word, meaning no two words on
the list share the same first four letters.

Github : BIP 39
Wallets - Deterministic (Seeded) Wallets
HD Wallets two major advantages over random (nondeterministic) keys.
1. Tree structure can be used to express additional organizational
meaning,
Eg: Branches of keys can also be used in corporate settings, allocating
different branches to departments, subsidiaries, specific functions, or
accounting categories.
1. Users can create a sequence of public keys without having access
to the corresponding private keys.
a. Thus HD wallets to be used on an insecure server
b. The public keys do not need to be preloaded or derived in
advance,
Wallets
Wallet Best Practices
- certain common industry standards have emerged that make bitcoin
wallets broadly interoperable, easy to use, secure, and flexible.
- These common standards are:
• Mnemonic code words, based on BIP-39
• HD wallets, based on BIP-32
• Multipurpose HD wallet structure, based on BIP-43
• Multicurrency and multiaccount wallets, based on BIP-44
- Eg : software wallets : Breadwallet, Copay, Multibit HD, and
Mycelium.
- Eg : Hardware : Keepkey, Ledger, and Trezor.
Wallets
Using a Bitcoin Wallet
Eg:
1. the device generated a mnemonic and seed from a built-in hardware
random number generator. During this initialization phase, the wallet
displayed a numbered sequence of words, one by one, on the
screen
2. By writing down this mnemonic, we can created a backup that can
be used for recovery in the case of loss or damage to the Trezor
device.
3. This mnemonic can be used for recovery in a new Trezor or in any
one of the many compatible software or hardware wallets.
Note : sequence of words is important,
Transaction Outputs and Inputs
- The fundamental building block of a bitcoin transaction is a transaction
output.
- Transaction outputs are indivisible chunks of bitcoin currency, recorded on
the blockchain, and recognized as valid by the entire network.
- Bitcoin full nodes track all available and spendable outputs, known as unspent
transaction outputs, or UTXO.
- The collection of all UTXO is known as the UTXO set and currently numbers in
the millions of UTXO.
- The UTXO set grows as new UTXO is created and shrinks when UTXO is
consumed.
- Every transaction represents a change (state transition) in the UTXO set.
Transaction Outputs and Inputs

Every bitcoin transaction creates outputs, which are recorded on

the bitcoin ledger.
Transaction outputs consist of two parts:
1. An amount of bitcoin, denominated in satoshis, the smallest bitcoin
unit
2. A cryptographic puzzle that determines the conditions required to
spend the output
The cryptographic puzzle is also known as a locking script, a
witness script, or a scriptPubKey.
Transaction Outputs and Inputs
Transaction inputs identify (by reference) which UTXO will be consumed and
provide proof of ownership through an unlocking script.
The input contains four elements:
1. A transaction ID, referencing the transaction that contains the UTXO being
spent
2. An output index (vout), identifying which UTXO from that transaction is
referenced (first one is zero)
3. A scriptSig, which satisfies the conditions placed on the UTXO, unlocking it
for spending
4. A sequence number
Transaction Fees
- Most transactions include transaction fees, which compensate
the bitcoin miners for securing the network.
- Fees also serve as a security mechanism themselves, by making it
economically infeasible for attackers to flood the network
with transactions.
- incentive to include (mine) a transaction into the next block
and also as a disincentive against abuse of the system by
imposing a small coston every transaction.
- Transaction fees are collected by the miner who mines the
block that records the transaction on the blockchain.
Transaction Scripts and Script Language
- bitcoin transaction script language, called Script, is a Forth-like
reverse-polish notation stack-based execution language
- A stack-based scripting language embedded in Bitcoin
transactions
- locking script placed on a UTXO and the unlocking script are
written in this scripting language.
- Script is a very simple language
- limited in scope and
- executable on a range of hardware
- requires minimal processing
- use in validating programmable money, this is a deliberate
security feature.
Transaction Scripts and Script Language

- Bitcoin transaction validation is not based on a static pattern,

but instead is achieved through the execution of a scripting
language.
- This language allows for a nearly infinite variety of conditions to
be expressed.
- This is how bitcoin gets the power of “programmable money.”
Transaction Scripts and Script Language

Turing Incompleteness
- bitcoin transaction script language contains many operators
- there are no loops or complex flow control capabilities other
than conditional flow control.
- This ensures that the language is not Turing Complete,
- scripts have limited complexity and predictable execution times.
- Script is not a general-purpose language.
- These limitations ensure that the language cannot be used to
create an infinite loop or other form of “logic bomb” that could
be embedded in a transaction in a way that causes a denial-of-
service attack against the bitcoin network.
Transaction Scripts and Script Language
Turing Incompleteness
- Every transaction is validated by every full node on the bitcoin
network.
- A limited language prevents the transaction validation
mechanism from being used as a vulnerability.
Transaction Scripts and Script Language

Stateless Verification
- The bitcoin transaction script language is stateless, in that
there is no state prior to execution of the script, or state
saved after execution of the script.
- Therefore, all the information needed to execute a script is
contained within the script.
- A script will predictably execute the same way on any
system.
- A valid transaction is valid for everyone and everyone knows
this. This predictability of outcomes is an essential benefit
of the bitcoin system.
Transaction Scripts and Script Language

Script Construction (Lock + Unlock)

- Bitcoin’s transaction validation engine relies on two types of
scripts to validate trans‐ actions:
- a locking script and
- an unlocking script.
Transaction Scripts and Script Language

Script Construction (Lock + Unlock)

A locking script
- spending condition placed on an output:
- it specifies the conditions that must be met to spend the
output in the future.
- called a scriptPubKey, because it usually contained a public
key or bitcoin address (public key hash).
- referred to as a witness script / cryptographic puzzle.
Transaction Scripts and Script Language

Script Construction (Lock + Unlock)

An unlocking script
- A script that “solves,” or satisfies, the conditions placed
on an output by a locking script and allows the output to
be spent.
- part of every transaction input.
- they contain a digital signature produced by the user’s
wallet from his or her private key.
- called scriptSig, because as they contained a digital
signature
Transaction Scripts and Script Language
Script Construction (Lock + Unlock)
Transaction Scripts and Script Language

- When bitcoins are sent to a recipient,

- Script commands in an unlocking
script (scriptSig) validate the
available bitcoins (UTXOs)
- Script commands in a locking
script (scriptPubKey) set the
conditions for spending them.

Courtesy : PC Magazine
Transaction Scripts and Script Language

script execution stack

Transaction Scripts and Script Language
script execution stack
Pay-to-Public-Key-Hash (P2PKH)

- The vast majority of transactions processed on the bitcoin

network spend outputs locked with a Pay-to-Public-Key-Hash
or “P2PKH” script.
- These outputs contain a locking script that locks the
output to a public key hash, more commonly known as a
bitcoin address.
- An output locked by a P2PKH script can be unlocked
(spent) by presenting a public key and a digital signature
created by the corresponding private key
Pay-to-Public-Key-
Hash (P2PKH)
Pay-to-Public-Key-
Hash (P2PKH)
Agenda
11. Transactions and UTXOs
12. Where do transaction fees comes from?
13. How wallets work?
14. Signatures : Private & Public Keys
15. What is Segregated Witness ? (SegWit)
16. Public Key Vs Bitcoin Address
17. Hierarchically Deterministic (HD) Wallets
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai
Department of Computer Engineering, VESIT, Mumbai