THE CRYPTOGRAPHY BEHIND BITCOIN:
How does it work?
The purpose of this paper seeks to
discuss the relevancy and the technical details that involves the now popular
crypto-currencies, to give special attention to the cryptography process that
is for most of the digital currency out there, this study is made to see the process for these block-chains to create an structure that is capable to
achieve such high standard of security capabilities, in order to give a clear explanation to this
subject I choose as study object the most popular asset in this category the
Bitcoin, as its mentioned nowadays the Bitcoin functions as a wide scheme that
can enhance and improve the way that we make transfer operations between several
persons, this process doesn’t have much time before it began to gain
popularity. Although the idea was brought in 2009, over the last years the
value of the crypto currencies have been increased exponentially to understand,
I’m going to show the whole structure of the
design that was used to create the Bitcoin services and also, to represent a
technical overview for the special characteristics that make so popular this
digital currency, giving the chance to present a whole analysis to the
structure and how this system uses a special cryptography services to provide
the security standards that make this whole thing a new way to move your money
without the regulations that are placed commonly by bank entities, governments,
and financial institutions.
The Bitcoin structure functions as a
payment structure that it makes easier and secure the transactions between
several parties, unlike any other system these transactions are not determined
or value by an organism that creates a standard of value and security, for that
reason the Bitcoin has its own metric value, to be specific enough a Bitcoin is
no more than electronic token that doesn’t need the protocols that are created
by some commodities. Also, to specific the value of this token you can measure
the value in an intrinsic way, owning a huge amount of Bitcoins it means that
you have the ability to move the token over the transactions environment, for
that reason I can state that, a Bitcoin value is derived mainly from its use
for making payments in the Bitcoin system 1.
Now to give a better explanation of the
Bitcoin environment that I mentioned before, I have to describe the
distributions and how the users are organized to receive and sent the payments
to the Bitcoin environment.
The transactions are handled by a public
ledger, called block-chain, the unlike the traditional methods that function as
an intermediary, there is not a standard process or entities that serves as a
bridge to these transactions every user that possess a copy of this block-chain
can serve a bridge to guarantee the transactions for that reason the operations
using Bitcoin are known to be anonymous cause the process of transactions are
handled by many people at the same time that makes difficult to detect where
the transactions are heading or who made it on the first place. All this
process and these mechanisms function at a crucial point of this report cause
without it the well-defined process for transactions cannot be determined by
the several users that use the system. The verification and encryption type of
the security is handled by a special type of cryptography that gives special
insurance to every user that has a little percentage of the crypto currency.
The Cryptography of Bitcoin:
The cryptography process handled by the
Bitcoin token is hard to determine because the algorithms that are used to the
secure the process are constantly changed is difficult for a normal person to
determine the type of algorithms that the system is using without determining
the main source for Bitcoin system itself.
First algorithm I’m going to
explain is the SHA function, now this is the backbone of the Bitcoin network a
high-level explanation of the SHA function is, that you take a message and in
this case it’s a transaction details, this can be of an arbitrary size.
This is fed into the hash function and
then it digests to spit out the other end, the digest is fixed in length, so in
the case of sha-256 it’s 256 bits in length a hash function needs to be
deterministic, so what that means is that regardless of how many times you feed
the message through the hash function.
The digest that comes out on the other end
is always the same, it’s also irreversible or at least extremely difficulty of
to reverse it and this is what helps keep the message secure, so for a shell
function to be efficient to be valid, it needs to be computationally efficient,
so it shouldn’t take too much computing time to compute, it also needs to be
So let’s say you had two messages message
want a message to that are different and that they’re fed, into the same hash
function they shouldn’t be put out the same digest, now this is not necessary
and probably, this will never happen with a good hash function, will try to make
sure that it’s not probable that it ever does happen a good hash function will
also hide the information about the input and the digest should look as random
These algorithms sustain the security
aspect of the blockchain that I mentioned before. Now to understand the way
these algorithms enhance the security we must know that a hash algorithms
functions taking data in an arbitrary way and transforms the data gathered in a
string that can contain over (64-bit or 128bit) of information.
That size operations depend mostly on
the type of hash functions that we required. 1 This transformation process is
what the Bitcoin users call a Hash; Hash is the product of a cryptographic
approach to our algorithm.
This hash use a determined algorithm
called SHA-256, that was developed by the NSA (National Security Agency) of
United States, the block-chain are added using this complex algorithm to solve
complex math problems, that add the blocks of encrypted information to the
common block-chain, it functions like a lottery process.
Although that SHA-256 is heavily used
by Bitcoin process there is another step, these algorithms required
organizations so there located into something called Merkle Tree, This hashed
are located in groups of two, and then there are hashed again.
This makes the whole concept of
transactions very conservative about what kinds of encryption system are we
handling because the whole process is divided and multiple transactions,
keeping the whole thing secure. The Bitcoin
protocol set the aim of this hashed to set a block- destination that must match
the segment of the Block-header, so basically, the productions hashed is
determined by the number of transactions that we are hashed into, this process
is constantly updated by the Bitcoin protocols to maintain the transactions going
This process work under Boolean
operations to handle 32-bit algorithms that creates block on information to
turn that information into binary code then add another algorithm to assign
those converted values into set of bits to be secure the hashing process.
Working with ASIC(American Standard code for information Interchange), the
correct balance between the relation of the SHA
Algorithm, guarantee the process of
block generate by the user so the set of transfer increased depending on
the data that is sent.
Another interesting that I can discuss
about is the miner aspect the machines that are specialized to calculate and
hash and a specific chain of numbers, Bitcoin miner is a specialized computing system that’s made to hash the
sha-256algorithm with incredible efficiency.
This is what the miners start to do, so a Bitcoin
miner will take all the loose transactions that are in the Bitcoin network and
they’ll line a month and then it’ll hatch the sha-256 algorithm to create
digests and then take those to create more digests and then it’ll all come down
to one final digest.
This is equivalent to that block that I
mentioned before, the block is then encoded with all the previous blocks,
attached to it and then, the miners get to work trying to do what they call a
proof-of-work algorithm, to secure the block as being the block to use from there
This is how a proof-of-work algorithm
works, it’s going to take the encoding of the whole blockchain and it’s going
to feed it through the SHA algorithm ,with some random numbers and it wants to
return a value with X amount of leading zeros the more leading zeros that it
wants to return the harder the algorithm is.
For that reason the computing power of a
whole network can determine a large amount of data encrypted in several minutes
cause is a whole mixed computer power merges into one operation, even if there
are millions of hashing processes.
process of encrypted communication:
Despite the symmetric method that is
used for key encryption functions, the process for the encryption of data can
be seen from different perspectives of your computer or in some server, the
communications process requires different standards, because the same approach
is used for both processes, the encryption and the decryption process are
handle through the same standard.
The only reason to create a different
channel to improve the communication on a channel is to think that your channel
isn’t secure, so to give special
security to that communication process, it exist a special key called
Diffie-Hellman that functions like a key, specially created to improve the
security over exchange process.
This method allows the user to establish
a communication using a unsecure channel giving each user a shared secret key,
to prevent any leak, in a summary way it functions like a personal key exchange
for people, this approach is often used for the Bitcoin system as well, to
change the scheme of transactions, cause it gets changed time after time to
keep the transactions and communication between users safe. 3
Another aspect that I need to discuss to
cover the aspect of use for Bitcoin cryptography exchanges, is the Public-key
Cryptography, this is a shared methodology for communications, allowing the
users to possess two keys one public and a private key, the public key
functions as a showing bridge for the communication. Each user possess the
encryption type using the public key, and decryption segment using a particular
private key, that shut the way for any attackers that can download the public
from a determined server, but is necessary the correct key to access the data
exchange of the users. Cryptographic signatures that keep the transactions secure so when we’re
talking about the digital signatures that are associated with each transaction possess
a signing key that is introduced using the mentioned algorithms like thesha-256
algorithm and then it’s pushed through another hash algorithm. But these
algorithms are used to recreate and to cooperate with different approaches to
guarantee the high sustainability of the system.
For every key that exist inside the
Bitcoin platform, exist a 1 on 1 exchange using the public keys, also is necessary
to mention that these are handled using the Elliptical Curve Digital Signature
Algorithm (ECDSA,) this algorithm transform the keys that are generated to be
one-sided encryption type, so they are protected to reverse-engineering process.
The keys are 256-bit numbers that are
presented in several ways 5. The ECDSA functions as a mathematical equation.
This algorithm use integer mathematics and those numbers are bonded to the
number of bits that are used to the digital signature of the key, along this
EDCSA work with SHA cryptographic process that we mention before that work
under mathematical parameters too to sing the file that you are hashing.
The principles of ECDSA algorithm used
for the public keys assignation process on the Bitcoin system work under the
= (X^3 + a * x + b) mod p 4
Cause I’m talking about an equation that
works with integers values, the square signature value and the elliptic curve
of the values.
In that way you can add point changing
the result over 2 possible solution, but applying this concept to a integers
the whole scheme changes, giving the possibility to create multiple values,
adding even a slight point to the equation so it will be difficult to represent
the whole initial mathematical process even if you know the sequence. 5
The whole process is based on the
concept, that even after some operations or trying to break through the values
of the curve, you can’t really find the multiplicand on the mathematical
problem, so you will be stuck trying to find the solution giving runes for
This process is the main key of security
that enhances the cryptography using ECDSA algorithm and this is called
trapdoor function. Applying this to the public keys transfer process we are
having the basic parameters like a,b,p, N and “G” which is the most important
parameter for ECDSA
Because it serves like a reference
point. So when the process initiates first you will have the private key that
is a 20bytes number a random number and the public is a point of the curve,
that we generate adding values to the parameters mention before multiplied by
G, this is the whole process used by ECDSA algorithm. 4
In order to summarize all the Bitcoin advantages using a cryptographic
scheme to protect the transactions integrity we need to mention a few other
benefits that can bring to improve the way we handle transactions nowadays.
In order to do that I need to compare it with the time speed that it would
take to conventional methods of payment if we put in perspective to give an
example the several seconds a credit card transaction takes, waiting this long for
confirmations of the decryption for a chain it
may seem burdensome so Bitcoin is
actually much faster for a business perspective. The block solution time would
get very small.
Bitcoin protect itself by requiring difficult math problems to be solved
with each block, would-be attackers are pitted against the entire rest to the
network in a computational race they’re unlikely to win.
Bitcoin promises many interesting ideas, such as insulation from government
meddling, anonymity, and potentially lower transaction fees. It also has many challenges,
as it is currently very difficult to exchange Bitcoins for other currencies,
and has been cited as a haven for illegal activity and tax evasion, so
governments might try to ban it.
Knowing the aspect of hard encryption
and cryptography approaches to the Bitcoin platform we can only assume that
this tendency will increase the common use of these practices to create a way
out, to the current interconnection and privacy violation that people suffer
These concepts can be applied for many
applications, Bitcoin is just one example of the things we can offer
implementing a great and complex mathematical system, sharing purposes of
privacy techniques. The cryptography exposed discussing the SHA options were
only merging from a mechanism created by the government, now used to distract
or serve as a tunnel for a new moderate way for interconnections.
This particular focus to the currency
transaction by Bitcoin. Only using mathematical principles and basic
codification this new cryptocurrency are coming to take a big market, that’s a
reality nowadays and many expert agree with the idea of a new way to keep our
money safe using these approaches.
I exposed on the report Cryptography is the key art between the
computers and reality, cryptography transforms huge amounts of information for
easy understating process, this process gives the connection between the
computer world to the user, breaks that very large line of insane amounts of
data to be digested easily by the user, Bitcoin as our subject for this report
uses this method everywhere in every section to provide guarantees on their
experience and to bring security to their address process and their user
interface, although there many methods and opinions about it, the cryptography
involved to sustain the Bitcoin platform.
helps and serves as way to break things for better understanding or even to
create system that can go beyond the always mechanic process of true or false
created by the machines, using cryptography the Bitcoin experience can be
sustained with a good enough perspective being effective as it was perfect.