CHAPTER 8
BLOCKCHAIN AND BITCOIN SECURITY

K. Murugeswari,1 B. Balamurugan2 and G. Ganesan3

1 Kalasalingam University, Kalasalingam Academy of Research and Education, Srivilliputhur, Tamil Nadu, India

2 Galgotias University, School of Computer Science and Engineering, Greater Noida, Delhi, India

3 Thiagarajar College of Engineering, Madurai, Tamil Nadu, India

Abstract
Bitcoin is the world’s first virtual currency, which was introduced in 2008. After only 10 years, that is in January 2018, its value reached 18k. This slow progress is owing to security violations like hacking and theft, which happened in the past 10 years. This chapter aims to show the strength of Bitcoin value, despite its many security threats. With the help of a case study, the major contributing security breach which caused a drop in the value of Bitcoin is identified. Also, there is a focus on the prediction of future value of Bitcoin.

Keywords: Bitcoin, security, blockchain

8.1 Introduction

Bitcoin was introduced in 2008 by Satoshi Nakamoto [1]. Bitcoin was an enhanced version of cryptocurrency, which was introduced in 1999 by Wei Dai. It is a currency system without any central control. Bitcoin was launched after the financial crisis of 2007-2008, which was a motivating factor for its creation. Bitcoin transactions can be done internationally without any fees or low fees. It also needs no personal information and it is transparent to each user. Each party who participates has a copy of the ledger called blockchain, which is secured by a cryptographic algorithm. The two major challenges of Bitcoin are volatility and degree of acceptance.

Ciaian et al. made an attempt to make Bitcoin a global currency by analyzing its characteristics [2]. Kleineberg and Helbing showcased how it can sustain digital diversity [3]. Chambers and Helbing insisted on the need for a robust currency by identifying the security and technology needed for manufacturing it [4]. Sompolinsky et al. introduced a faster cryptocurrency protocol which confirms the transactions in seconds instead of minutes [5]. After India’s demonetization move in November 2016, people started to move towards digital currency such as bitcoin, which doesn’t have any control over centralized decisions (see Figure 8.1).1

Schematic diagram depicting a Bitcoin transaction.

Figure 8.1 Understanding a Bitcoin transaction.

8.2 Security Threats to Bitcoin

For a better understanding of the security threats to Bitcoin, the working idea of bitcoin needs to be understood first. Hence, it has been the focus of researchers in recent years and the subject of in-depth studies [6]. Other nontechnical factors affecting the value of Bitcoin are; government legislation and the strength of traditional currencies. This chapter will aim at identifying which factors mentioned here will cause major fluctuations in the Bitcoin currency value.

8.3 Working Idea of Bitcoin

Bitcoin was based on the peer-to-peer transactions principle; the owner only knows the complex public address and a private key. It means that the transaction takes place between peer-to-peer without the intervention of a third party financial institution by utilizing the network for hashing the timestamp of transactions. Then all hashes are added and form a chain of hashes called Blockchain. It now acts as a permanent record/ledger of transactions witnessed on the network, which is the backbone of bitcoin network. It uses SHA-256 algorithm to generate cryptographic data. Each transaction is signed by the private key of the owner of that particular bitcoin. Hence, third party tampering is prevented.

For doing Bitcoin transactions, two items are mandatory:

  1. Bitcoin address and
  2. Private key known only to the owner.

These two items form an asymmetric key pair. The bitcoin address is a random sequence of numbers and letters which act as a public key. If user A wants to send bitcoins to user B, first the input (source of transaction and amount) is signed with the private key of A and the output is the public key of user B, then it is sent as a private message to user B. Finally, the bicoins are sent to user B’s wallet. It requires a number of independent confirmations, which takes approximately 10 minutes. These confirmations will be provided by the Bitcoin miners. Mining is the process of providing confirmation to the bitcoin transactions by the shared consensus system on the network. Miners are the core of bitcoin system and they are responsible for confirming the validity of all transactions on the bitcoin network.

For each generation of new bicoins, a block is added to the blockchain by using hash function.

Bitcoin is the first cryptocurrency beyond any centralized control such as monetary power. However, this decentralized nature leads to the following limitations:

  • Public ledger maintained by every user
  • No central authority to validate distributed transactions
  • Anonymity of bitcoin creation
  • Dynamic nature of bitcoin exchange values

Decentralization is felt by the users by having the transparency of validation of code used for services.

8.4 Case Study for Analyzing the Reason for Fall in Bitcoin Value

In 2017, Fraser and Bouridane listed the possible security threats to Bitcoin and they analyzed the causes for the fall in Bitcoin value [7]. They are as follows:

8.4.1 Security Threats to Bitcoin Protocol

Since Bitcoin is purely an online product, risks are always around. Bradbury identified a security flaw and named it the “51% attack,” in which an individual or group of users can have control over more than half of the bitcoin network [8]. They also double spend bitcoins. This problem is mentioned by Bonneau et al. [9]. He also elaborated that this kind of problem is impossible with the current size of bitcoin network (millions of nodes). However, threat to bitcoin is minimal, it cannot be fully discounted. Bitcoin values are also affected by public concern.

8.4.2 Security Threats to Bitcoin Services

As the use of Bitcoin was popularized, the services utilizing it were also being increased. Bohme et al. surveyed Bitcoin digital wallet services and currency exchanges in the two public sectors which hold and trade the bitcoins respectively [10]. They define digital wallet as an electronic version of accounts, transactions and private keys which are necessary to transfer or spend the bitcoin values.

Bohme also states individuals can obtain bitcoin through Bitcoin exchange without going through the complex mining process. Moore and Christin further investigated and reported that many bitcoin users lost money due to hacking of Bitcoin exchanges [11].

Compared to Bitcoin protocol, the above-mentioned Bitcoin services are more vulnerable to all kinds of cyberattacks.

8.4.3 Security Threats by Other Factors

In addition to security breaches, financial decisions and government legislation are other factors which affect the value of Bitcoin. Basically, Bitcoin is a kind of currency; hence, whatever problems occur with traditional currencies will also be applicable to bitcoin.

8.5 Analyzed Report

In this section, seven cases of Bitcoin values dropping against the U.S. dollar were analyzed. The U.S. dollar is the commonly accepted standard currency around the world. Data investigated for these seven cases are from 2008 only. The standard drop value taken here is $150. The investigated results are mapped out for any one of these three categories:

  • Security threats to Bitcoin protocol
  • Security threats to Bitcoin services
  • Security threats by other factors

From 2013 to 2017, at different intervals, the highest and the lowest bitcoin values and their differences are recorded in Table 8.1.2

Table 8.1 Bitcoin value changes against the U.S. dollar and their reasons.

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For each record, the reason for the fall in the value is identified and fit into one of the three categories of reasons. Finally, average percentage of reduction in value is calculated for each category. The reason having the highest percentage is concluded to be the most influential factor which affects the value of bitcoin.

From Figure 8.2 we concluded that security threats to bitcoin protocol were the most influential factor. We also claimed that their methodology was deemed to be the best way for identifying the most significant factor affecting the value of bitcoin.

Bar graph depicting the average percentage of the Bitcoin value drop, with vertical bars for security threats to Bitcoin protocol, security threats to Bitcoin services, and security threats by other factors (left–right).

Figure 8.2 Average percentage of the Bitcoin value drop.

8.6 Rise of Bitcoin Value

Even though there are frequent fluctuations in Bitcoin value, it still retains the number one position. The year 2019 was a great one for Bitcoin, with more people starting to believe in the technology and starting to invest. By mid-2019 its value started to reach $20,000. Around the world there are only 21 million bitcoins ready for circulation. Among those, only 17 million are already mined and the remaining 4 million are yet to be mined, which will hike the bitcoin value more. Countries like the U.S, Japan and South Korea have shown interest in using bitcoin and other cryptocurrencies.

From the Nasdaq report shown in Figure 8.3, it can be seen that Bitcoin value was expected to reach up to $23,499 by the end of the year 2019 [14, 27-28]. Hence, 2019 was a bullish year for Bitcoin.

Image described by caption and surrounding text.

Figure 8.3 Bitcoin price prediction.

8.7 Conclusion

The purpose of this chapter was to show the strength of bitcoin value. From the case study, it is observed that security threats in the Bitcoin services mostly affect the value of bitcoin. Bitcoin’s pros have outweighed its cons. Hence, Bitcoin has gained popularity around the world and its technology has attracted the major countries. A Nasdaq report also revealed that by the end of the year 2019, its predicted value will have reached $23,499. It’s a good beginning for Bitcoin. A careful elimination of security breaches and flaws in bitcoin services and protocol will result in a reduction in the volatility of Bitcoin value.

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Notes

  1. Corresponding authors: [email protected]; [email protected]; [email protected]
  2. 1 https://twitter.com/diioannid/status/989417621400453120
  3. 2 https://www.statista.com/statistics/326707/bitcoin-price-index/
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