Technical

Some technical considerations:

• The current average block time on Bitcoin is calibrated to be around ten minutes. Depending on the use cases in mind for the T-chain, we can very simply lower the average block time by reducing the difficulty of the proof-of-work task, possibly down to fifteen seconds, which was the block time on Ethereum when it used proof-of-work.

• The current block size on Bitcoin is constrained to 4 MB. Similar to Bitcoin Cash, we can simply increase the block size of the T-chain to handle many more transactions.

• The maximum supply of Bitcoin is capped at 21 million, which lends it credibility and enduring value. The T-coin is not meant to replace the dollar, hence its maximum supply should probably be capped like Bitcoin rather than subject to USG monetary policy. However, depending on the use cases, we can simply modify the maximum supply of the T-chain to be variable, allowing it to exceed 21 million, similar to the maximum supply of Dogecoin, which is uncapped.

• A valid criticism of proof-of-work is its environmental impact: as of 2024 the annual electricity consumption of Bitcoin mining is comparable to that of Poland. Similar to Ethereum during The Merge, the T-chain can consider a future migration from proof-of-work to proof-of-stake. If this migration is likely, from day one we can also launch a proof-of-work test chain similar to Ethereum’s Beacon Chain to ensure the sound and sustainable maintenance of proof-of-stake consensus, before switching the T-chain to use proof-of-stake.

• The main threat to a proof-of-work blockchain (including Bitcoin) is the 51% attack, where at least 51% of the mining power of the blockchain colludes to create and validate fraudulent blocks to the chain. Given the prominence of the T-chain from day one as sponsored by the USG, nation-state adversaries might possibly have incentives to launch 51% attacks against it. To prevent these threat vectors, the T-chain should prepare, before its launch, a significant reserve of mining power which is guaranteed to not partake in any such attacks, and which is large enough to maintain at least 51% of the mining power of the blockchain even in the face of such attacks.

Technical Details Behind Bitcoin

Bitcoin, introduced in 2009 by an anonymous entity using the pseudonym Satoshi Nakamoto, represents the first successful implementation of a decentralized digital currency. Its innovative architecture combines cryptography, distributed systems, and economic incentives to enable peer-to-peer transactions without relying on intermediaries such as banks. Below, we explore the intricate technical mechanisms that make Bitcoin resilient, secure, and efficient.

1. Blockchain Technology

The blockchain is the foundational data structure behind Bitcoin. It functions as a distributed, immutable ledger where all Bitcoin transactions are recorded. Each node in the Bitcoin network maintains a complete copy of this ledger, ensuring redundancy and resilience against tampering. Let’s break down its components:

• Blocks: A block is a data container that includes a header and a list of transactions. Each block is capped in size (currently 4 MB with Segregated Witness) to ensure scalability and prevent excessive network congestion.

• Block Header: The block header contains several pieces of critical metadata:

  • Previous Block Hash: A cryptographic hash referencing the preceding block, linking blocks in a chronological chain.
  • Merkle Root: A hash that represents all transactions in the block, organized in a Merkle tree structure. This compact data representation ensures efficient verification of individual transactions.
  • Timestamp: The time the block was created, recorded in Unix epoch time.
  • Nonce: A variable that miners adjust to meet the Proof of Work requirements.
  • Target Difficulty: Defines the computational challenge for mining the block.

• Immutability: Each block’s hash depends on its content and the hash of the previous block. Altering any data in a block would invalidate its hash and all subsequent blocks, making tampering infeasible without enormous computational power.

2. Proof of Work (PoW)

Proof of Work is the consensus mechanism that secures the Bitcoin network and validates transactions. It introduces a computational puzzle that miners must solve to propose a new block. The puzzle involves finding a hash of the block header that is less than a specified target value. This target adjusts every 2016 blocks (~two weeks) to ensure a stable block creation time of 10 minutes.

How Proof of Work Operates:

1. Hashing Function: Bitcoin uses the SHA-256 cryptographic hashing algorithm. It takes an input and produces a fixed-length output that appears random. Small changes to the input generate entirely different outputs.
2. Nonce Variation: Miners repeatedly modify the nonce and recompute the block’s hash until they find a valid solution.
3. Validation: Once a miner finds a valid hash, it broadcasts the block to the network. Other nodes verify the block’s validity by checking its hash and the included transactions.
4. Economic Incentive: Miners receive a block reward (currently 6.25 BTC as of 2024) and transaction fees for their effort.

PoW serves as a defense against Sybil attacks, where an attacker floods the network with fake identities to gain control. The high computational cost of PoW ensures that attackers must expend significant resources to influence the network.

3. Cryptography in Bitcoin

Bitcoin relies heavily on cryptographic techniques to secure transactions and maintain user anonymity. The two key cryptographic systems used are:

Public Key Cryptography:

• Private Key: A 256-bit number kept secret by the user. It serves as the basis for generating a digital signature.
• Public Key: Derived from the private key using the secp256k1 elliptic curve algorithm. The public key is mathematically linked to the private key but cannot reveal it.
• Bitcoin Address: A hashed version of the public key, providing an additional layer of security.

When initiating a transaction, the sender signs the transaction input with their private key. The network validates this signature against the sender’s public key, ensuring authenticity without exposing the private key.

Hash Functions:

Bitcoin uses SHA-256 and RIPEMD-160 hash functions extensively: - SHA-256: Produces a 256-bit hash and is used for block headers and Proof of Work. - RIPEMD-160: Used in generating Bitcoin addresses from public keys.

Hash functions in Bitcoin ensure data integrity, pseudo-anonymity, and security.

4. Transactions and the UTXO Model

Bitcoin’s transaction system operates on the Unspent Transaction Output (UTXO) model, where each transaction consumes one or more UTXOs and generates new ones. This system offers simplicity, scalability, and efficient validation.

Transaction Structure:

1. Inputs:
   • Reference previous UTXOs by including their transaction ID and output index.
   • Contain a digital signature to prove ownership of the referenced UTXOs.
2. Outputs:
   • Define the recipient’s address and the amount of Bitcoin being transferred.
   • Any remaining balance (change) is sent to a new UTXO controlled by the sender.

Double-Spending Prevention:

The blockchain ensures that each UTXO can only be spent once. Nodes validate transactions by checking the ledger for the availability of referenced UTXOs, rejecting any attempts to double-spend.

5. Mining and Difficulty Adjustment

Mining is the process by which new blocks are added to the blockchain. It involves solving the Proof of Work puzzle, which becomes more challenging as network hash power increases. The difficulty adjustment mechanism ensures a consistent block creation time of approximately 10 minutes.

Difficulty Adjustment Algorithm:

1. The network evaluates the average block time over the last 2016 blocks.
2. If blocks were mined faster than the 10-minute target, the difficulty increases; if slower, it decreases.
3. Adjustments are proportional to the deviation from the target and ensure the network’s stability.

This dynamic adjustment prevents disruptions from sudden changes in mining power and maintains Bitcoin’s predictable issuance schedule.

6. Decentralization and Nodes

Bitcoin’s decentralized architecture is a cornerstone of its security and censorship resistance. The network consists of various types of nodes:

1. Full Nodes:
   • Store a complete copy of the blockchain.
   • Validate transactions and blocks independently.
   • Relay valid transactions and blocks to other nodes.
2. Lightweight Nodes (SPV Nodes):
   • Rely on full nodes for transaction verification.
   • Only download block headers, not full blocks.
3. Mining Nodes:
   • Compete to solve the Proof of Work puzzle.
   • Validate transactions as part of the block creation process.

Decentralization ensures that no single entity controls the network. Nodes independently verify transactions and blocks, creating a trustless system where consensus emerges organically.

7. Supply Cap and Halving

Bitcoin’s monetary policy is built on a fixed supply cap of 21 million coins. This scarcity is enforced by the protocol’s rules and the halving mechanism, which reduces the block reward by 50% approximately every four years.

Block Reward Schedule:

• Genesis Block (2009): Initial block reward was 50 BTC.
• First Halving (2012): Reduced to 25 BTC.
• Second Halving (2016): Reduced to 12.5 BTC.
• Third Halving (2020): Reduced to 6.25 BTC.

This predictable reduction in issuance creates a deflationary environment, often compared to gold, which has driven Bitcoin’s perception as “digital gold.”

8. Scalability Challenges and Solutions

Bitcoin’s design prioritizes security and decentralization, but this comes at the expense of scalability. The network’s transaction throughput is limited to approximately 7 transactions per second. Several solutions have been proposed and implemented to address this:

Segregated Witness (SegWit):

• Introduced in 2017, SegWit separates transaction signatures from the transaction data.
• Increases block efficiency, allowing more transactions per block.
• Fixes transaction malleability, a bug that could alter transaction IDs.

Lightning Network:

• A Layer 2 solution enabling off-chain transactions.
• Participants open payment channels and conduct multiple transactions off-chain, settling the net result on-chain.
• Reduces on-chain congestion and facilitates microtransactions.

9. Security and Consensus

Bitcoin’s security derives from its decentralized architecture, PoW mechanism, and economic incentives. The network’s consensus rules ensure that all participants agree on the state of the blockchain without requiring trust.

51% Attack:

An attacker controlling more than 50% of the network’s mining power could potentially: - Reverse their own transactions (double-spending). - Prevent new transactions from being confirmed.

Such an attack is prohibitively expensive and becomes increasingly unlikely as the network grows.

Forks:

• Soft Forks: Backward-compatible changes to the protocol.
• Hard Forks: Non-backward-compatible changes that require all participants to upgrade.

Notable examples include the Bitcoin Cash hard fork in 2017, which resulted from disagreements over scalability.

Conclusion

Bitcoin is a groundbreaking technology that combines cryptography, game theory, and distributed computing to create a secure and decentralized digital currency. Its intricate design, from the blockchain and Proof of Work to its supply cap and cryptographic foundations, ensures its resilience against censorship and tampering. While scalability and energy consumption remain challenges, ongoing innovations like the Lightning Network and SegWit continue to enhance its functionality. As the pioneer of the cryptocurrency world, Bitcoin’s technical foundation remains a benchmark for subsequent innovations in the blockchain ecosystem.