1.
Demystifying
Bitcoin and Blockchain
Ganesh Kondal

2.
Intent
Intent is to understand bitcoin and take a deeper look at blockchain – the technology that is
enabling bitcoin
What I cannot cover
• Bitcoin – is more than technology; it is economics
• Leaving few basics, cannot cover details on bitcoin adoption
• Leaving few basics on cryptography, will not be able to cover the internals

3.
Agenda
Segment 1 : Currency
• Currency Economics
• Money Creation
Segment 2 : Bitcoin
• Bitcoin – buy BTC, how to transact with BTC //
wallets
• Digital Signing – Wallet
• Cryptography Basics
• Transaction Ordering
Segment 3 : Blockchain
• Some basics
• Hash function, partial hash inversion,
• Proof of work systems
• Blockchain Internals
• Block Difficulty & Mining
• Blockchain Threats
• Dispute Resolution
• Double Spend Attack [Security Hole /
Threat]
Segment 4 : Common Questions
• Common Questions we get
Segment 5 : Blockchain Usage
• Block chain usage across industries

4.
Segment 1 : Currency Economics

5.
Trading & Currency
• Medium of exchange started with grains to the $$ notes we have now
• $$ / INR notes we have is physical money; Bitcoins are the converse – is non-physical digital money
• Physical money is governed by central entities – like our RBI in India; Treasury Department in USA
• Money in flow ≠ Country’s gold deposits [ Nixon took this out in 1971 post Vietnam war]
• Physical money < Money in circulation
• Financial institution that holds the central ledger for
its customers & Enable transfer of money
• Trusted by the customers
• Provides loans and there by creating more money
• Money spent outside of the banks (cash) are
untraceable to a large extent
• Transaction honoring is based on the time a check is
presented to the bank
Banks
100
100
John
1000 – 100 =
900 (balance)
Joe
100 + 100 =
200 (balance)
BANK
Central body owning the ledger and the transactions

6.
Currency Economics – Money Creation
• Money creation is two ways –
• Fractional Reserve banking that relies on
Credit Reserve Ratio
• Treasury/RBI/Central Bank created money
• FRR- Fractional Reserve Banking
• Customers deposit money
• Banks can loan to 90% at the max (ie. CRR –
is 10%)
• Banks loan and make money out of what
they get
T = A*(1 – R)1 + A*(1 – R)2 + A*(1 – R)3 +
…
A = 1000
R = 10% (reserve ratio)
T = Total amount
1000
INR 100 INR
900
INR
900
INR
810
INR
90 INR
810
INR
729 INR 810 INR
10,000 INR in
circulation
Bank Liability Kept Loaned Total Assets
Bank 1 1000 100 900 900
Bank 2 900 90 810 810
Bank 3 810 81 729 729
.. ..
Bank N 0 0 0 0
Total 10000 1000 9000 10000

7.
Treasury created Money
Treasury
Bonds
Creates/sells
Government
Buys
Money [already exists] used to buy these bonds /
treasury bills
Federal Reserve (US)
RBI (in India)
Buys Bonds
Buys
Bonds
Large banks – like
Chinese central bank
Prints
Rupee
Prints $$
Money creation is based on pure debt. We are running on a debt based system

8.
Currency Economics – Key Takeaways
• Money is created via debt instruments ; two ways money is created
• Via banks giving out loans – there by extending the original money
• By RBI / US Fed, who create money (from nothing) for a bond /t-bill issued by the Govt
• So bitcoin created by “miners” is not something that is radically different than what happens in our economy today
• PAPER MONEY HAS NO INTRINSIC VALUE – so called FIAT money; depends on expectation & social convention
• Few key points to note:
• Country's money flow is not equated to GOLD deposits anymore
• Ex: USD $$ was equated to a portion of GOLD till Nixon in 1971 (post Vietnam war) nullified it
• Now US Fed creates $$ for bonds (debt) issued by the US Treasury
• Because of the above reason, US debt (post 1971) has skyrocketed to 21 trillion (and above) now !!!
http://www.usdebtclock.org/current-rates.html

9.
Segment 2: Bitcoin

10.
Bitcoin
• Bitcoin is a digital asset (currency) – invented by Satoshi Nakamoto*
• Launched in January 2009; https://bitcoin.org/bitcoin.pdf – white paper that originated bitcoin
• Peer to peer payment system (like torrent)
• Transactions are verified by the nodes in the bitcoin network (not by a bank)
• Instead of a bank – the entire transactions are held across nodes; a public ledger called blockchain
• Bitcoin is nothing more than a digital file that holds the accounts; transaction happen by updating this file
Account
Holder
Balance
John 10
Bob 5
Alice 6
Dave 3
… …
-5
+5
Bitcoin
network –
each node
having a copy
of the ledger

11.
11
Bitcoin – Transactions
• Users are identified by large strings (address)
• Private key is with the user
• In below example – Alice signs the transaction she
creates (of sending 10 BTC to Bob) with her private key
• Nodes in the network verify that with her public key; on
validation they confirm it
• Confirmed transactions are distributed across the nodes
• Bob can share his address
• Via email Or Messaging
• Or via pairing of phones
Digitally signed Trx
Bitcoin Node
Bitcoin Node
Bitcoin NodeTransaction digitally signed
by Alice with her private key
Alice
Bob
Simplified Bitcoin network
Wallets
• Software that helps manage the funds (BTCs)
• Hold the private keys (user can hold many)
• Helps you sign a transaction
• Install wallet - https://blockchain.info/wallet
• Online wallet services :
• www.circle.com | www.coinbase.com …
Bitcoin Add / Private key Bitcoin Balance
asdfas23524taasdasfWEFSDs
df..
12.31000
4454575kjhdhghfdsgSDFSDF
q989..
0.23
Sadfa243525243q34d… 1.99
Total Wallet Balance 14.53

12.
Cryptography – Basics
Symmetric key cryptography
• One key is used to encrypt the message
• Same key is used to decrypt the message, as it is received
Public key – Private key cryptography
• Public key is used to lock the message
• Private key is used to unlock the message // private key alone needs to be
safe
• Public and Private key pairs are mathematically linked
Digital Signatures
• Intent is similar to handwritten signature; ensure the message was generated
by the signer
Elliptic Curve Cryptography
• Elliptic Curve Cryptography is used to generate the public / private key pair
in bitcoin
• It ensures – finding a public key with a private key is easier; and the converse
is near impossible
Bitcoin address
• Bitcoin addresses are hash of public key generated by the wallet

13.
Bitcoin – Transactions cont.
• Ordering of payment is critical – in every mode of
transaction
• New transactions created are put in a pending pool
• Participating bitcoin nodes – will help in confirming** the
transaction
• As transaction gets confirmed, it gets added to the
transaction chain
Bitcoin Mining
• Nodes that help confirm the transaction, by contributing their
computational power – are granted with few bitcoins; this is the
act of MINING (creating) new Bitcoins
• Such mining grant will end by 2140; post which only transaction
fee can be paid as mining fee
Account Balance
• All unspent transactions of a user is summed up to determine
the account balance of a user
• Balance is calculated to approve a spending
(like Alice sending 5 BTC to Bob)
SALT
Bitcoin Wallet
Alice  Bob
Fred  Alice
John  Alice
Output: 3.0 BTC
Output: 3.0 BTC
refers
refers5.0 BTC
Txn # 323
Txn # 412
Txn # 412
Txn # 323
Inputs

14.
Bitcoin cont.
• Purchasing using bitcoins
• http://spendbitcoins.com/ - lists all places where you can use bitcoins and buy items
• http://www.overstock.com/bitcoin - sells 2.3 Billion $ per year
• Bitcoin transaction cost – is by far the most cheapest than any other mode (Paypal, Master/Visa card –
transaction fees)
• Unlike the current money creation, the inflation in case of bitcoin will be well contained
• Bitcoins clients are available across – desktop, mobile.,
Bitcoin clients
• Multibit – Desktop
• Electrum – Desktop
• Blockchain.info – Browser
• Bitcoin wallet – mobile client
• …

15.
Alternates
• There are many variations of bitcoins out there in the market. Some of them are
• Litecoin
• Introduced in 2011
• has 5% marketshare of bitcoin; does transactions faster; relies on memory intensive computation
• Peercoin
• Introduced in 2012
• Namecoin
• Auroracoin
• Primecoin
• Dogecoin
• Bitcoin source can be forked to create a modified coin
• Marketcap of various coins as of Q2 2014
• Litcoin – 325 million
• Peercoin – 52 million
• Namecoin – 20 million
• …
• Bitcoins present market cap – 7 billion (as of Apr 2016)

16.
Segment 3 : Blockchain

17.
Some basics – before the ‘Blockchain’
• Cryptographic Hash function
• Takes an arbitrary length of input and outputs a fixed length output
• Even a small variation in input (like a space added to the input) drastically changes the output
• One way-ness : computationally infeasible to find the input value from the hash value
• Strong collision resistance : Given an input, it is almost computationally infeasible** to find another input that will create the
same hash value
• Uses SHA 256^2 – using SHA256 hashing twice
** - means that there is no known algorithm
that can figure out the input supplied. Only
option in such a case is the brute force of
guessing; in case of SHA 256, such a guess
takes an exponential (impractical) amount of
time.
How are you
How are you?
9c7d5b046878838da72e40c
eb3179580958df544b24086
9b80d0275cc07209cc
df287dfc1406ed2b692e1c2
c783bb5cec97eac53151ee1
d9810397aa0afa0d89
SHA256
hashing
Note: Output hash value is significantly different for a single character addition (?) in the input string
INPUT TEXT HASH OUTPUT

18.
Blockchain
Key Facets
• Most important innovation by bitcoin
• Missing link that makes the whole peer to peer digital currency
feasible
• Holds all bitcoin transactions starting Jan 3, 2009 [ distributed
transaction database ]
What is it?
• Transactions are grouped into blocks – called the block chain
• Transactions are grouped based on time;
• Each block points to the previous block
• Keeps the entire transactions secure
• Each block contains *new* confirmed transactions
• Each block has a link to the previous block
(single parent)
• Old transactions / Old Blocks are never removed; block chain
keeps growing
• Blocks – can be created by anyone
• Bitcoin generation algorithm is immutable
Hash of prev block
Trx 1
Trx 2
Trx 3
Nonce
BLOCK
Nonce helps
solve the partial
hash inversion
problem
Block #1 Block # 2 Block # 310 min 10 min
Parent Block
of Block # 3Genesis Block
First ever block
Created on Jan 3,2009
BLOCK HEIGHT
Last Block
Blockchain head

19.
Blockchain cont. – Proof of Work System
Proof of Work
• Blockchain is a proof-of-work system [PoW]
• Captcha is a simplistic PoW system, where it is making the end user do work before it authenticates
f( prev block reference + entire block text + random guess ) < target
Partial hash inversion – proof of work
Block Creation
• Each node in the bitcoin network takes a list of PENDING transactions & will try creating a block
• Ordering of blocks happens via solving a puzzle
• Puzzle is to find the ‘random_guess’ (number) which when supplied to the hashing function gets a hash that is less than the target set for
that block
• Random guess ensures no two nodes cannot compute (identify) a subsequent block at the same time
• 10 minutes to solve the problem with so many computers guessing it
• Hacker has to outpace entire list of participating nodes to ensure he/she wins, which is improbable
[wiki]

20.
Blockchain - Details
• Block Difficulty
• 271,076 block mined on Nov 23, 2013 had 61 zero bits
• Such a target is coded into every bitcoin client. This is to ensure, it takes the computational power to compute / solve the
puzzle in 10 minutes or so
• Block target is set at a global level
• With every 2016 block mined, the block difficulty gets incremented
• This is to ensure, it takes a higher computational power (considering tons of nodes in the network) to solve the puzzle and
add a block to the chain
• Persons who are contributing their computation power – are called MINERS
Hash of prev block
Coinbase
Nonce
BLOCK
Trx In
Trx In
Trx Out
Trx N
Trx In
Trx In
Trx Out
Trx N-1
Trx In
Trx In
Trx Out
• Coinbase
• First transaction in a block is called coinbase
• Coinbase transactions have no input but all outputs
• All outputs combined denotes the block reward
• Mining Reward
• 50 bitcoins per block
• Every 210k blocks (or every 4 years) block reward is halved
• Now its 25 bitcoins for every block (partial hash inversion) being solved

21.
Blockchain – Dispute Resolution
• Fork
• When two miners mine a block at the same time, we will
get a fork
• Orphan
• Only one can be in the chain – the other is called Orphan
• Orphan gets back to the pending pool
• Fork / Dispute Resolution
• Protocol automatically selects the longest running branch
that has the highest difficulty
Blockchain head New block
New block
Unconfirmed
transaction pool
Moved to transaction
pool
Block # 6
Block # 5
Block # 7 Block # 7
Block # 8
BlockHeight
Timeprogression
Orphaned
transactions that
has already got into
any confirmed
blocks are
discarded
AMERICA EU - RUSSIA APAC / AUS
T1
T2
T3
T3
T4
# 5
# 6
# 7
# 7
# 8

22.
• End of chain insecurity – opens up the possibility of Alice the hacker to spend her BTC twice – once to the real
seller and one back to her (refund)
Last confirmed
block
Trx to you
the seller
Alice new
fork
Alice
second
block
Contains the transaction paying her back
Step Description Result
1 Alice pays Bob to buy a book
Orange block above gets created with that transaction
Bob’s system ships the item
2 Alice with her computing power creates another block
at the same time; in that she refunds the money (used
to pay Bob)
Alice gets back the money
3 Alice creates another block on top of her block; Orange block with Bobs transaction is
cancelled and that transaction gets back to
the pending pool
Double Spend Attack

23.
Double Spend Attack cont.
• For Alice to create two blocks before anyone else needs CPU power more than most of the nodes in the network
• Even if she has the CPU power of more than half the nodes – it just gives her 0.5 probability
Last confirmed
block
Trx to you the seller
Alice  Bob
Alice created block
[to create the fork]
Alice  Alice
Alice created block
[to create the fork]
Some transactions
PENDING POOL
Trx to you the seller
Alice  Bob
When a block miner tries to create a
block with this transaction, it will not go
through
Alice created block
[to create the fork]
Some transactions

24.
Miners’ – tries
f( #23A, trx1, trx2, .. Random # 1) = x > target
f( #23A, trx1, trx2, .. Random # 2) = x > target
f( #23A, trx1, trx2, .. Random # 3) = x > target
f( #23A, trx1, trx2, .. Random # 4) = x < target
Double Spend Attack – Defense
• Finding the nonce (random guess) is CPU intensive;
brute force; cannot be done faster
Replacement of an older block is impossible
• Blocks hash value is the fingerprint of that block
• There is no way to change the block (insert or replace
a block at a later time)
Hash value of this block. Even a small change
in the blocks’ content will result in a
completely different value
348EF348EF
5436UI
ROGUE
BLOCK
5436UI

25.
25
Common Questions

26.
1) How a 10 minute transaction confirmation be accepted
• Sampling a set of miners and accepting a transaction is what the bitcoin industry is moving towards; which are in seconds
compared to the 10 minutes of block creation
• Credit card systems has a 90 day reversal possibility; whereas it is just an hour for bitcoin
• Propagation vs. confirmation time
• In ~10 seconds the transaction reaches 99% miners; if the transaction used is(are) double spent, you will get a
rejection. If you have not, accept the transaction
• Multi-Sig-transaction is another solution, where you pay a thirdparty, where you (as the buyer) and the seller have a
relationship with (similar to visa/mastercard model but with a very less transaction fee)
2) What are the advantages of using bitcoin
• Freedom – from bank holidays to bureaucracy
• Secure than any other form of payment
• Transparent – once it is in blockchain; there is no worry of data loss
3) What are the disadvantages of using bitcoin
• Acceptance
• Volatility – from 1 BTC worth 1 USD to 1200 USD to 420 USD (now)
• Still under development 
• 1MB limit & possibility of confirmation time getting higher (some reported 43 minutes once)
Common Questions
Please refer https://bitcoin.org/en/faq

27.
27
Usage

28.
Blockchain Usage
• Healthcare
• Electronic health records in blockchain
• Digitally secure
• Encrypted and stored
• Payers sending personal medical suggestions to members, which they can (only) open with their private keys
• Bitcoin payments
• Direct use-case
• Anti counterfiet
• Each drug gets a unique key which is then verified at the time of distribution by comparing it against the key stored
in blockchain, which cannot be tampered
• Other Arenas
• Private / Public equities/ Bonds / Derivatives
• Mortgage / Trading / Transaction Records
• Public records - passports, vehicle information, license information, birth/death certs, voter IDs, patents
• Voter information
• Contracts and escrows across
• Ownership records – of painting, music, escrows to antiques that can be verified

29.
29
Thank You !!!
Feel free to send me questions; will try to respond to the best of my knowledge
ganesh.kondal@cognizant.com

30.
30
Appendix

31.
31
Reference
• Currency
• https://www.rbi.org.in/currency/FAqs.html
• https://www.youtube.com/watch?v=KuIFz7Qzryg
• Books
• Understanding bitcoin - http://goo.gl/rUp4BY
• Wiki
• https://en.wikipedia.org/wiki/Indian_rupee
• https://en.wikipedia.org/wiki/Money_creation
• Money Creation
• https://www.youtube.com/watch?v=qIxhsF6JLEA
• http://positivemoney.org/how-money-works/how-banks-create-money/
• http://blog.karthiksankar.com/moneycreation/
• Bitcoin videos
• https://www.youtube.com/watch?v=ArMq6sXp0ek
• https://www.youtube.com/watch?v=Lx9zgZCMqXE
• RBI / T-bills
• http://articles.economictimes.indiatimes.com/2016-02-04/news/70343823_1_open-market-operation-omo-government-bonds
• http://www.gktoday.in/blog/key-facts-about-treasury-bills-in-india/
• http://articles.economictimes.indiatimes.com/2016-03-18/news/71630794_1_lakh-crore-borrowing-calendar-market-borrowing
• Preimage Resistant
• http://www.denimgroup.com/know_artic_secure_hash_functions.html
• http://hashcash.org/

32.
32
Reference cont.
• Blockchain – Dispute Resolution
• http://orm-chimera-prod.s3.amazonaws.com/1234000001802/images/msbt_0806.png
• Bitcoin difficulty
• https://en.bitcoin.it/wiki/Difficulty
• Bitcoin wiki
• https://en.bitcoin.it/wiki/Main_Page
• Blockchain & Cognizant
• http://investors.cognizant.com/2016-02-16-Mizuho-Financial-Group-Partners-with-Cognizant-to-Develop-a-
Blockchain-Solution-for-Secure-Record-Keeping-and-Improved-Customer-Experience
• Blockcypher – 10min – barrier
• https://blog.blockcypher.com/we-broke-the-10-minute-bitcoin-confirmation-barrier-a9d53a505b05#.8iax89a6i