How to Make Bitcoin a Better Currency

Bitter to Better — How to Make Bitcoin a Better Currency
Simon Barber 1
, Xavier Boyen 1
, Elaine Shi 2?
, and Ersin Uzun 1
1
Palo Alto Research Center
2
University of California, Berkeley
Abstract. Bitcoin is a distributed digital currency which has attracted a substan-
tial number of users. We perform an in-depth investigation to understand what
made Bitcoin so successful, while decades of research on cryptographic e-cash
has not lead to a large-scale deployment. We ask also how Bitcoin could become
a good candidate for a long-lived stable currency. In doing so, we identify several
issues and attacks of Bitcoin, and propose suitable techniques to address them.
1 Introduction
Bitcoin is a decentralized electronic cash system initially designed and developed by
Satoshi Nakamoto (whose name is conjectured to be fake by some, and who has not
been heard from since April 2011). The design of Bitcoin was first described in a self-
published paper by Nakamoto [14] in October 2008, after which an open-source project
was registered on sourceforge. The genesis block was established on January 3rd 2009,
and the project was announced on the Cryptography mailing list on January 11th 2009.
Since its invention, Bitcoin has gained amazing popularity and much attention from
the press. At the time of the writing, approximately 7M Bitcoins are in circulation;
approximately USD $2M to $5M worth of transactions take place each day in Bitcoin;
and about eighteen Bitcoin exchanges exist offering exchange services with many real
world currencies, (e.g., EUR, USD, CAD, GBP, PLN, JPY, HKD, SEK, AUD, CHF,
and so on). Bitcoin’s exchange rate has varied widely, reaching as high as USD $30 per
Bitcoin although at the time of writing is around USD $5 per Bitcoin.
Despite some pessimists’ critiques and disbelief, Bitcoin has admittedly witnessed
enormous success since its invention. To the security and cryptographic community,
the idea of digital currency or electronic cash is by no means new. As early as 1982,
Chaum has outlined his blueprint of an anonymous e-cash scheme in his pioneering pa-
per [10]. Ever since then, hundreds of academic papers have been published to improve
the efficiency and security of e-cash constructions — to name a few, see [15, 8, 9].
Naturally, an interesting question arises: Despite three decades’ research on e-cash,
why have e-cash schemes not taken off, while Bitcoin — a system designed and initially
implemented possibly single-handedly by someone previously unknown, a system that
uses no fancy cryptography, and is by no means perfect — has enjoyed a swift rise to
success? Looking forward, one also wonders: Does Bitcoin have what it takes to become
a serious candidate for a long-lived stable currency, or is it yet another transient fad?
Intrigued by these questions, we investigated Bitcoin’s design and history, and came
to many interesting realizations. We therefore present this paper to the (financial) cryp-
tography research community, with the following goals and expectations:
?
Work done while author was affiliated with PARC.
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1. To investigate the Bitcoin phenomenon, and achieve a deeper understanding of the
crucial factors underlying its success, especially compared to other e-cash schemes.
2. To scrutinize the design of Bitcoin and analyze its strengths and weakness, in order
to expose and anticipate potential attacks, and focus investigation on key issues;
3. To suggest redesigns, improvements, or extensions, such as, e.g., our fail-safe mixer
protocol that requires no third-party and no system modification (Section 7).
4. To pose open research problems stemming from our broad reflections on Bitcoin;
5. Last but not least, to bring Bitcoin to the attention of the cryptography research
community, to encourage it to reflect on its success, and draw lessons therein.
2 The Intriguing Success of Bitcoin: A Comparative Study
As mentioned earlier, despite three decades’ research on e-cash by the cryptographic
community [10, 15, 8, 9], all these efforts seem to have been dwindled by the swift suc-
cess of Bitcoin. Has Nakamoto, a single individual whose name previously unheard of,
outsmarted the ingenuity of all the cryptographers combined? Bitcoin is by no means
perfect and some well-known problems are discussed later on. So what is it in Bitcoin
that has ensured its success?
After an in-depth investigation of Bitcoin, we found that although Bitcoin uses no
fancy cryptography, its design actually reflects a suprising amount of ingenuity and so-
phistication. Most importantly, it addresses the incentive problems most expeditiously.
No central point of trust. Bitcoin has a completely distributed architecture, without
any single trusted entity. Bitcoin assumes that the majority of nodes in its network are
honest, and resorts to a majority vote mechanism for double spending avoidance, and
dispute resolution. In contrast, most e-cash schemes require a centralized bank who is
trusted for purposes of e-cash issuance, and double-spending detection. This greatly ap-
peals to individuals who wish for a freely-traded currency not in control by any govern-
ments, banks, or authorities — from libertarians to drug-dealers and other underground
economy proponents (note that apart from the aforementioned illegal usages, there are
numerous legitimate uses as well, which will be mentioned later). In a spirit similar
to the original motivation for a distributed Internet, such a purely decentralized system
guarantees that no single entity, no matter how initially benevolent, can succumb to the
temptation or be coerced by a government into subverting it for its own benefit.
Incentives and economic system. Bitcoin’s eco-system is ingeniously designed, and
ensures that users have economic incentives to participate. First, the generation of new
bitcoins happens in a distributed fashion at a predictable rate: “bitcoin miners” solve
computational puzzles to generate new bitcoins, and this process is closely coupled with
the verification of previous transactions. At the same time, miners also get to collect
optional transaction fees for their effort of vetting said transactions. This gives users
clear economic incentives to invest spare computing cycles in the verification of Bitcoin
transactions and the generation of new Bitcoins. At the time of writing the investment
of a GPU to accelerate Bitcoin puzzle solution can pay for itself in ∼6 months.
Predictable money supply. Bitcoin makes sure that new coins will be minted at a fixed
rate, that is, the larger the Bitcoin community and the total computational resource
devoted to coin generation, the more difficult the computational puzzle becomes. This

provides strong incentives for early adopters — the earlier in the game, the cheaper
the coins minted. (In a later section we discuss negative consequences that the adopted
money supply schedule will have, in the long term, on value, incentives, and security.)
Divisibility and fungibility. One practical appeal of Bitcoin is the ease with which
coins can be both divided and recombined to create essentially any denomination possi-
ble. This is an Achilles’ heel of (strongly anonymous) e-cash systems, because denom-
inations had to be standardized to be unlinkable, which incidentally makes the compu-
tational cost of e-cash transactions linear in the amount. In Bitcoin, linkage is inherent,
as it is what prevents double spending; but it is the identities that are “anonymous”.
Versatility, openness, and vibrancy. Bitcoin is remarkably flexible partly due to its
completely distributed design. The open-source nature of the project entices the cre-
ation of new applications and spurs new businesses. Because of its flexibility and open-
ness, a rich extended ecosystem surrounding Bitcoin is flourishing. For example, mixer
services have spawned to cater to users who need better anonymity guarantees (see Sec-
tion 7 for details). There are payment processor services that offer gadgets venders can
embed in their webpages to receive Bitcoin payments alongside regular currency.
Scripting. Another salient and very innovative feature is allowing users (payers and
payees) to embed scripts in their Bitcoin transactions. Although today’s reference im-
plementations have not fully utilized the power of this feature, in theory, one can realize
rich transactional semantics and contracts through scripts [2], such as deposits, escrow
and dispute mediation, assurance contracts, including the use of external states, and so
on. It is conceivable that in the future, richer forms of financial contracts and mecha-
nisms are going to be built around Bitcoin using this feature.
Transaction irreversibility. Bitcoin transactions quickly become irreversible. This at-
tracts a niche market where vendors are concerned about credit-card fraud and charge-
backs. Through personal communication with a vendor selling specialty magazines, he
mentioned that before, he could not conduct business with customers in certain coun-
tries where credit-card fraud prevails. With Bitcoin, he is able to extend his business to
these countries due to the protection he obtains from the irreversibility of transactions.
Low fees and friction. The Bitcoin verifiers’ market currently bears very low transac-
tion fees (which are optional and chosen by the payer); this can be attractive in micro-
payments where fees can dominate. Bitcoin is also appealing for its lack of additional
costs traditionally tacked upon international money transfers, due to disintermediation.
Readily available implementations. Last but not the least, in comparison with other e-
cash schemes, Bitcoin has provided readily available implementations, not only for the
desktop computer, but also for mobile phones. The open-source project is maintained
by a vibrant community, and has had healthy developments.
3 Under the Hood of the Bitcoin System
Bitcoin is based on a peer-to-peer network layer that broadcasts data to all nodes on
the network. There are two types of object that are broadcast: transactions and blocks.
Both object types are addressed by a hash of the object data, and are broadcast through
the network to all nodes. Transactions are the operations whereby money is combined,
divided, and remitted. Blocks record the transactions vetted as valid.

Spending. Suppose that Alice wishes to remit 1 bitcoin to Bob and 2 to Carol. Alice’s
coins “reside” in prior transactions that designate her public key as beneficiary. To spend
coins, Alice creates a new transaction that endorses any such coins she has not spent
yet, e.g., she can endorse, using a digital signature, 4 coins each received from Diane
and Edgar as the inputs of her new transaction. As outputs she specifies 1 coin for Bob,
2 for Carol, and 4.99 of “change” back to herself. In this example, Alice chose to leave
a residual of 0.01 coin, which can be claimed as a fee by whoever vets it first.
Vetting. In order for a transaction to be confirmed, its various components must be
validated and checked against double spending. Once verified, transactions are incor-
porated in frequently issued official records called blocks. Anyone is allowed to create
such blocks, and indeed two sorts of incentives are offered to attract verifiers to compete
for block creation: (1) the collection of fees; and (2) the minting of new coins.
Minting. The bitcoin money supply expands as each block created may contain a spe-
cial generation transaction (with no explicit input) that pays the block creator a time-
dependent amount for the effort (50 coins today, rapidly decreasing). The rate of block,
hence money, creation is limited by a proof of work of adaptive difficulty, that strives to
maintain a creation rate of one block every 10 minutes across the whole network. Bit-
coin transaction verification is thus a lucrative race open to all, but a computationally
expensive one. Note: “bad” blocks will be rejected by peers, invalidating their rewards.
3.1 Transactions and Scripting: the Tools for Spending
One of the main powers of the Bitcoin system is that the input and output of transactions
need not have a fixed format, but rather are constructed using a Forth-like stack-based
flexible scripting language. We remark that transaction principals are not named users
but anonymous public keys, which users may freely create in any number they wish.
Transactions. Transaction encapsulate the movement of bitcoins by transfering the
value received from its inputs to its outputs (exception: generation transactions have
no explicit input at all). An input identifies a previous transaction output (as the hash
of the earlier transaction and an index to an output within it), and claims its full value.
An output specifies an amount; the outputs’ total must not exceed the inputs’. Both also
contain fragments of executable script, on the input side for redeeming inflows, and on
the output side for designating payees.
Script fragments. The scripting language is a Forth-like stack-based language. Oper-
ators include cryptographic operations like SHA1 (which replaces the top item on the
stack with its hash), and CHECKSIG (which pops an ECDSA public key and signature
from the stack, verifies the signature for a “message” implicitly defined from the trans-
action data, and leaves the result as a true or false on the stack). For a transaction to be
valid, its outputs must not exceed its inputs, and its issuer must show title to each input
claimed. Title is tested by evaluating the input script fragment concatenated with the
script fragment from the output (of an earlier transaction) that the input references.
Standard transfer. To illustrate how the stack-based scripting language can be used,
among other things, to designate and enforce the recipient of a transfer, we study the ex-
ample of the standard Bitcoin transaction used for transfer. To send coins to an address
stated as the hash of a public key, the payer, Alice, creates a transaction output with

the following associated script fragment (recall that since the amount is specified in a
special record associated with the output; the script only needs to enforce the recipient):
DUP HASH160 <recipient-address> EQUALVERIFY CHECKSIG (?)
The recipient, Bob, will notice the remittance (since it is broadcast to all), and mark it
for spending. Later on, to spend those received coins, he creates a transaction with an
input that redeems them, and an output that spends them. The redeeming input script is:
<signature> <public-key> (??)
Bob will have managed to spend coins received from Alice if his redemption is valid.
This is checked by executing the concatenated script (?, ??): the input fragment (?)
pushes a signature and a key on the stack; the output fragment (??) checks that the key
hash matches the recipient, and checks the signature against transaction and key.
3.2 Blocks and Coin Creation: the Process of Verifying
Transactions become effective after they have been referenced in a block, which serve as
the official record of executed transactions. Transactions may only be listed in a block
if they satisfy such conditions as valid timestamping and absence of double spending.
Blocks. A block consists of one “coinbase” minting transaction, zero or more regular
spending transactions, a computational proof of work, and a reference to the chronologi-
cally prior block. Thus the blocks form a singly linked blockchain, rooted in Nakamoto’s
genesis block whose hash is hardcoded in the software. The regular creation of new
blocks serves the dual purpose of ensuring the timely vetting of new transactions, and
the creation of new coins, all in a decentralized process driven by economic incentives
(the minting of new coins and the collection of fees) balanced by computational costs.
The difficulty of the required proof of work is adjusted by a feedback mechanism that
ensures an average block creation interval of 10 minutes across the entire network.
Coinbase. Currently, each new block may contain a coinbase transaction with an im-
plicit input value of 50 coins, with about 7M already minted as of this writing. The
minting rate is slated to decrease shortly, eventually to reach zero when the total supply
reaches about 21M bitcoins. The coinbase transaction also serves to claim all the fees in
the transactions collected in the block. Both minting and fees motivate people to create
blocks and hence keep the system alive.
3.3 Forking and Conflict Resolution
If two blocks are published nearly simultaneously, a fork in the chain can occur. Nodes
are programmed to follow the blockchain whose total proof-of-work difficulty is the
largest and discard blocks from other forks. Transactions on the discarded branch will
eventually be collected into blocks on the prevailing branch. This mechanism ensures
that one single ordering of transactions becomes apparent and accepted by all (although
it may take a few blocks’ time to become clear), and hence this solves the double-
spending problem.
4 Structural Problems and Potential Solutions
Whether by accident or by design, the Bitcoin system as presently parameterized defines
a currency with extreme deflationary characteristics built into it. Currently coins are

minted by verifiers (i.e., block creators, or “miners”) as an incentive to keep the Bitcoin
ecosystem running, but minting is poised to expire gradually, and rather soon, resulting
in a hard cap on the coins total. Moreover, coins whose private key has been forgotten or
destroyed — let us call them zombie coins — can never be replaced, resulting in further
shrinkage of the money base. For perspective, of the 21M coins maximum, 7M have
already been minted; and of those, tens of thousands have reportedly become zombies.
Aside from economic considerations that have been discussed at length [4], The
potential deflationary spiral in a decentralized system like Bitcoin has security implica-
tions that should not be neglected.
4.1 Deflationary Spiral
In capped supply, bitcoins have no alternative but to appreciate tremendously should the
system ever gain more than marginal acceptance. Even in a “mature market” scenario
with, say, a stable 1% of the US GDP transacted in BitCoins and 99% in dollars, the real
purchasing power of coins would still increase over time, as each coin would capture
a correspondingly constant fraction of the country’s growing wealth. Put in another
way, while the Federal Reserve can increase the number of dollars in circulation to
accommodate economic growth, in a Bitcoin economy the only outlet for growth would
be appreciation of the currency. While it has been observed that the money supply cap
could lead to a severe deflationary spiral [4], it is quite a paradox that the intrinsic
strength of the Bitcoin currency could be its greatest weakness, causing an even more
catastrophic unraveling than through “mere” deflation.
Hoarding: a moral hazard? Bitcoins much more than any other currency in existence
derive their value from the presence of a live, dynamic infrastructure loosely constituted
by the network of verifiers participating in block creation. Because of their appreciation
potential, bitcoins will tend to be saved rather than spent. As hoarded bitcoins vanish
from circulation, transaction volume will dwindle and block creation will become less
profitable (fewer fees to collect). If circulation drops too much, it can precipitate a loss
of interest in the system, resulting in “bit rot” and verifier dearth, until such point that
the system has become too weak to heal and defend itself. Of particular concern is an
unavoidable large-scale fraud that we describe in the next section, and whose aftermath
includes sudden loss of confidence, collapse of value, and repudiation.
Towards decentralized organic inflation. An antidote to the preceding predicament
could take the form of a Bitcoin-like electronic currency with a decentralized inflation-
ary feedback built-in, that could control the global minting rate based, e.g., on transac-
tion volume statistics. While we leave the devising of monetary parameters for such an
“organically inflationary” currency as an open problem, we show next how deflationary
expectations negatively impact the long-term structural security of the Bitcoin system.
4.2 Doomsday, or the “History-Revision” Attack
In the Bitcoin world, transactions are irrevocably valid once they are incorporated into
the ever growing Block Chain, insofar as they do not end up in the discarded branch
of a fork. As previously described, short-lived forks may arise, but tend to be quickly
resolved per the rule that the chain whose “total difficulty” is the greatest, prevails.

Most forks are benign, causing the few transactions on the wrong side of the fork to be
delayed — merely a temporary rejection, unless double spending was attempted.
This approach works well, under the crucial assumption that no attacker should ever
be able to muster so much computational power that it is able to fake and publish an
“alternative history”, created ex post facto, that has greater total difficulty and hence
is more authoritative than the actual history. In such event, the forking rules would
cause the actual history to be discarded in favor of the alternative history, from the
forking point onwards. We designate this as the history-revision attack. In the extreme
case where the fork is made near time zero, a history-revision attacker would cause the
entire coin base ever created to be replaced with a figment of its forgery.
One may take solace in the ludicrous amount of computing power that, one might
hope, such a history-revision attack would require. Alas, the threat is very real — owing
both to technical and monetary characteristics of Bitcoin.
Technical vulnerability. The attack’s feasibility stems from Moore’s law, which empir-
ically posits that computation power per unit cost is doubling every year or so. Assum-
ing a stable population of verifiers, the block difficulty parameter (set by the system to
maintain a block creation mean interval of 10 minutes) is thus an exponential function
of time, f(t) = α et/τ
. The total difficulty of the block chain at any point in time is thus
approximated by the integral F(t) =
R t
t0
f(t0
)dt0
∝ f(t). It follows that, regardless of
the block chain’s length, an attacker that can muster a small multiple (say 2×) of the
computation power of the legitimate verifiers together, and starting an attack at time
t = t1, will be able to create an entire alternative history forked at the origin time t0,
whose total difficulty F0
(t) overtakes F(t) at some future time t = t2, where the attack
length ∆t = t2 − t1 is bounded by a constant (about 1–2 years for a 2× multiple). 3
Economic motivation. The strong deflationary characteristic of Bitcoin further com-
pounds the problem. On the one hand, Bitcoins are a currency poised to explode in
value, ceteris paribus, as already discussed; and hence so will the incentive for theft.
On the other hand, the way deflation comes into play, driven by a hard cap on the money
supply, will all but eliminate the money-minting incentive that currently draws in the
many verifiers that by their competition contribute to make block creation a difficult
problem. With this incentive dwindling, laws of economics dictate that the competi-
tive effort devoted to verifying transactions and creating blocks will diminish. In other
words, while block difficulty may continue to increase for some time into the future, it
will eventually start to decrease relatively to the power of the day’s typical PC. History
revision attacks will thence become easier not harder.
4.3 Countering “Revisionism” by Checkpointing the Past
We outline a distributed strategy to tackle the history-revision attack threat in a sim-
ple and elegant way. Its principle is rooted in the commonsense notion that one ought
to be suspicious of tales that conflict with one’s own first-hand recollection of events.
3
To underscore the seriousness of the threat, we note that it is common nowadays for miners
to pool their resources and, by some estimates, one such mining pool, deepbit, contributes
40% of the total computation power devoted to mining in the entire system. Merely doubling
its “market share” would make it able to revise the entire Bitcoin history in a year’s time,
owing to Moore’s law. Botnets and governments may be there already.

Translated in the Bitcoin world, we propose that a Verifier that has been running with-
out interruption for a long time, should be “highly skeptical” of any long-range fork
resolution that would drastically change its own private view of the transaction history
acquired from first-hand data collection and block creation.
Private checkpointing. Verifiers should thus timestamp published transactions as they
see them, and privately take regular snapshots of their own view of the transaction his-
tory (such snapshots should be made tamper-proof, e.g., with a cryptographic forward-
secure signature). If in the future a drastic fork is put forth that is inconsistent with
many of the various snapshots taken, the verifier should demand an increasingly high
burden of proof before accepting the “new” branch as correct. E.g., the verifier should
not merely accept an alternative branch whose total difficulty exceeds that of the pri-
vately checkpointed history, but demand an increasingly high margin of excess, the
longer and the more improbable the alternative branch is deemed w.r.t. the verifier’s
private knowledge.
Implicit voting and phase transition. Verifiers ought to make such determination inde-
pendently, based on their own remembered history. That is to say that “young” verifiers
that recently came online, and acquired their history by downloading the transaction
log ex post facto, would have little first-hand checkpointing to rely upon, and would
thus behave as in the current system (merely favoring the most difficult branch in a
fork). “Seasoned” verifiers that have seen and checkpointed ancient transactions first-
hand, would on the contrary oppose a resisting force of skepticism against what they
perceive could be an attempt to revise history. As a result, the network would partition
into two camps, but only briefly, as certain verifiers that are on the fence “flip” one way
or the other based on observing their peers’ endorsement of either branch of the fork.
Eventually, as more and more verifiers endorse one position over the other, and the cor-
responding branch of the fork grows faster, the whole network will “phase-transition”
back to a single unified view.
Comparative behavior. Our strategy is a strict improvement over the current Bitcoin
handling of history-revision attacks, for in all cases where a history-revision attack
would fail in the current system, our system would behave identically (and exhibit
no partition, and no subsequent phase transition). It is only in cases where a history-
revision attack would have succeeded in the current system, that a partition could occur
in the new system. A partition could remain meta-stable for a certain time, but eventu-
ally ought to resolve itself by taking the bulk of the network to one side or the other.
Checkpointing today. We remark that the current protocol already does what we would
call “fiat checkpointing”, where authoritative checkpoints (in the form of hardcoded
hashes of certain blocks) are pushed out with software updates [12]. Alas, there is no
reason to trust a download of the software any more than one of the transaction history
itself. This is unlke our private checkpointing proposal which emphatically prescribes
first-hand checkpoints, independently made by each verifier in a privately tamper-proof
decentralized way.
We leave as an open problem the formal design and analysis of “anti-revisionism
profiles” that offer marked security against vastly powerful history-revision attacks,
while guaranteeing that partitions caused by accidental forks get quickly resolved.

5 Theft or Loss of Bitcoins
As all bitcoins are public knowledge (in the form of unredeemed transaction outputs),
what enables a user to spend a coin is possession of the associated private key. Theft or
loss of private keys, or signature forgeries, thus equate to loss of money in this world.
5.1 Malware Attacks
Reported malware attacks on Bitcoin are on the rise [16, 1], resulting in the theft of pri-
vate keys. The online wallet service mybitcoin.com recently lost $1.3 million worth
of users’ coins due to malware [1]. Several solutions can be envisaged; we mention:
Threshold cryptography. A natural countermeasure to malware is to split private keys
into random shares, using standard threshold cryptography techniques [11, 13], and dis-
tribute them onto multiple locations, e.g., a user’s desktop computer, her smart phone,
and an online service provider. In this way, only when a threshold number of these de-
vices collaborate, can a user spend her coins. Of course, doing so can harm the usability
of the system, since coins can no longer be spent without operating multiple devices
(even though not all the devices but only a chosen number of them are needed at once).
Super-wallets. To address the usability concern, we propose the simple idea of super-
wallet, i.e., a user’s “personal bank” where most of her coins are stored. The super-
wallet is split across multiple computing devices, using threshold techniques as above.
In addition, the user carries a small sub-wallet with her on her smartphone. Pre-approved
transactions are setup so that the user can withdraw money from her super-wallet onto
her sub-wallet, periodically in small amounts (similar to how real banks let people with-
draw cash from ATMs today). The user now only needs her smartphone to spend money
in her wallet, and in case her smartphone is captured by an adversary, the user only loses
the small amount of money that she has in her wallet, but not that in her personal bank.
Large amounts can always be spent from the super-wallet using a threshold of devices.
Both approaches can be implemented as backward-compatible and incrementally
deployable wrappers, requiring changes in the signature generation but not verification.
5.2 Accidental Loss of Bitcoins
Apart from malware, system failures or human errors can cause the accidental loss of the
wallet file (which stores the private keys needed to spend coins), which in turn leads to
the loss of coins (turning them into zombies). For example, bitomat, the third largest
bitcoin exchange, recently lost about $200K worth of bitcoins (at the exchange rate at
the time) due to the loss of its private wallet file — the cause was later identified to be
human error, as the developer hosted the wallet on non-persistent cloud storage [3].
Backups. Naturally, the universal answer against accidental loss or adversarial destruc-
tion of data, is to follow best-practice backup procedures. For backup purposes, the
wallet file should be treated like any other private cryptographic asset — meaning that
backups are a non-trivial proposition, not because of volume, but because of secrecy.
With Bitcoin, things are complicated by the incessant creation of keys.
Pseudo-random keys. To avoid having to back up a constantly growing wallet file,
a trivial solution is to generate all of one’s private keys not at random, but pseudo-
randomly from a master secret that never changes, using a standard PRG. The problem
then reduces to that of backing up the short and static PRG seed, e.g., in a bank vault.

Encryption. A natural idea is to encrypt the wallet using a password sufficiently strong
that the resulting ciphertext can be widely replicated without fear of cryptanalysis. This
approach is especially useful in conjunction with pseudo-random keys, as then coins
can be spent and received without requiring the ciphertext to be updated. The main
problem, of course, is that strong passwords are prone to memory loss and palimpsest.
Offline (single-)password-based encryption. One solution relies on the “optimal”
password-based encryption system of [7], which offers optimal trade-offs between pass-
word strength (how tough it is to guess) and “snappiness” (how quickly it can be used,
which is also kept a secret). Users can even set multiple passwords with varying trade-
offs for a common security goal: e.g., an everyday password, complex but snappy; and
a backup password, simple but just as secure by virtue of being made “sluggish”. A
pseudo-random wallet seed, encrypted à la [7], would combine static portability with
usable protection against both loss and theft, and is probably the best approach for an
isolated user who trusts his mental possessions more than his physical ones.
Online (multi-)password-based encryption. Another approach is to combine the power
of several memorable secrets into a single high-security “vault”, using the protocols of
[5]. Each member in some circle of friends holds a short totally private and long-term
memorable phrase. One member is a distinguished leader. Without revealing their se-
crets, the members can perform private operations such as signing or decrypting a mes-
sage on behalf of the leader. With this protocol, a group of users can cooperate to let
the leader spend the coins from his wallet (kept as a public, static, accessible, encrypted
file), by issuing signatures on messages created by the leader. This approach provides
strong safety against loss, plus security against compromise of a subset of the group.
Trusted paths. Any of the above approaches can be combined with trusted-path de-
vices, which are dedicated hardware devices that let humans input and read out (tiny
amounts of) cryptographic data out of the reach of any malware. European banks use
the DigiPass, for example. Alas, while trusted-path protocols are well known and very
safe when it can be assumed that the remote server is uncorrupted (e.g., when talking
to a bank), in the Bitcoin case the server is the user’s own PC, possibly infected. It is an
interesting open problem to devise trusted-path protocols that are secure in this model,
when the trusted-path data is too tiny to provide cryptographic strength by itself.
6 Scalability
Bitcoin suffers from several scalability issues, among which we note the following.
6.1 Data Retention and Communication Failures
The smooth operation of Bitcoin relies on the timely broadcast of transactions and
blocks. A preprint [6] suggests that verifiers competing for the same reward have an
incentive to withhold the information needed to do so. However, since transactors have
an incentive to disseminate their data as quickly and widely as possible, not only is re-
tention futile, but economic forces will counter it by fostering circumvention services.
6.2 Linear Transaction History
As discussed, the Bitcoin wallet software fetches the entire Bitcoin blockchain at in-
stallation, and all new transactions and blocks are (supposedly) broadcast to all nodes.

The Bitcoin nodes cryptographically verify the authenticity of all blocks and trans-
actions as they receive them. Clearly, this approach introduces a scalability issue in the
longer term, in terms of both network bandwidth, and computational overhead associ-
ated with cryptographic transaction verification. The scalability issue can be worrying
for smart phones with limited bandwidth, computational power, and battery supply.
The scalability issue can be addressed with a subscription-based filtering service.
Recall that Bitcoin nodes can be divided into broadly two classes, verifiers and clients.
Verifiers create new blocks and hence mint new coins. Verifiers are mostly nodes with
ample computational and bandwidth resources, typically desktop computers. By con-
trast, clients are Bitcoin nodes that are not actively minting new coins, such as smart
phones. While verifiers have incentives to receive all transactions (to earn transaction
fees), clients may not care. In particular, all that is needed for clients to spend their
coins is that they receive transactions payable to their public key(s).
Bitcoin filtering service. Our filtering service is a third-party cloud service provider
which filters Bitcoin transactions, and sends only relevant transactions to nodes that
have registered for the service. A Bitcoin client (e.g., a user’s smartphone) can send
a cryptographic capability to the filtering service, which allows the filtering service to
determine whether a transaction is payable to one or more of its public keys.
We identify the following desirable security and usability requirements.
– Unlinkability without the capability. While a user may allow the filtering service
to determine which transactions are payable to itself, no other party should be able
to link a user’s multiple public keys better than they can today (i.e., without the
filtering service).
– Forward security. The filtering service should be able to update its capability peri-
odically, such that in the case of compromise or a subpoena, the revealed capability
can allow one to identify new transactions targeted to a specific user, but cannot be
used to link the users’ transactions in the past.
– Reasonable false positives and low false negatives. A false positive is when the
filtering service mistakenly sends a user a non-relevant transaction. False positives
wastes a user’s bandwidth and computational power, but a user can locally detect
such false positives after receiving the transactions. A false negative is when the
filtering service fails to send a user a relevant transaction. The false negative rate
should ideally be 0.
Constructing a filtering service. We now propose a potential approach to build such
a filtering service, in a way that is backward compatible with today’s Bitcoin. Assume
that the user and the filtering service are weakly time synchronized. A user can generate
a random Message Authentication Code (MAC) key K and share it with the filtering
service. This MAC key K will be used as the initial MAC key. For forward security,
in every time epoch (e.g., every day), both the user and the filtering service will update
their MAC key by applying a Pseudo-Random Generator (PRG): K ← PRG(K). The
MAC key K will then be used as below. When the user needs to pick a public key to
receive money, it will pick a public key PK whose hash H(PK) satisfies the following
condition: MACK(H(PK)) mod 2`
= 0. In particular, when ` is not too large, the
user can find such a public key by randomly generating public-private key pairs until
a public-key satisfying the above condition is found. ` is a parameter used to engineer

the tradeoff between the false positive rate and the computation cost needed to generate
public keys. Since a transaction payable to user A includes user A’s public key hashes in
one or more outputs, the filtering service can now identify transactions possibly targeted
for user A by checking the above condition.
6.3 Delayed Transaction Confirmation
Another related scalability issue is delayed transaction confirmation. In the current im-
plementation, a new block is generated about every 10 minutes, so it takes at least 10
minutes or so to get a transaction confirmed. This can be problematic in certain applica-
tion scenarios, e.g., on-demand video playback Worse still, after a single confirmation
it is still possible the transaction is a double spend, and the blockchain has forked.
One approach, already seen in the Bitcoin ecosystem, uses intermediate “semi-
trusted” third parties acting as short-term banks, issuing the Bitcoin equivalents to
cashiers’ checks (essentially, a transaction signed by the bank’s key). Banks would have
no incentive to double-spend, as their fraud would immediately become apparent to all.
Another approach is to fundamentally reduce the transaction confirmation delay by
re-parameterizing the computational puzzles to reduce the average block creation inter-
val from 10 minutes to 10 seconds. However, this would increase the forking propensity
on slow communication networks, which could become a concern.
6.4 Dynamically Growing Private Key Storage
To achieve better anonymity, users are urged to use a different public key for each trans-
action. However, this means that the user has to store the corresponding private keys for
all previously generated public keys — a private key should only be deleted if one is
certain that no payment to its public key will ever be made (lest zombie coins result).
Aside from size, the dynamic nature of the private key storage is another difficulty.
Pseudo-random generation of private keys. An easy answer to both concerns, already
mentioned, is to generate all of one’s private keys pseudo-randomly from a static secret.
Explicit expiration of public keys. Another way to address this problem is to introduce
explicit expiration dates for public keys, and ensure that no money can be sent to expired
keys, or that such money can be reclaimed somehow. In any case, it is good practice
that keys be made to expire, and this should be encouraged. In view of this, it seems
desirable to give the scripting language facilities for reading and comparing timestamps.
7 Improving Anonymity with Reduced Trust
Bitcoin partially addresses the anonymity and unlinkability issue, by allowing users
to use different addresses and public keys in every transaction. However, Bitcoin still
exposes their users to a weak form of linkability. Specifically, multiple public keys of
the same user can potentially be linked when the user pays change to herself, in which
case two or more of a single user’s public keys will appear in the same transaction [17].
To improve users’ anonymity, third-party services called mixers have emerged, that
take multiple users’ coins, mix them, and issue back coins in equal denominations. To-
day, the mixers are trusted entities, in the sense that users send money to the mixer,
trusting that it will issue back the money later. As a malicious mixer can cheat and

in out
Alice A 𝑉 𝜎𝐵 ∧
𝑉 𝜎𝐴
∨
H(a+b)
A
𝜎𝐵
𝜎𝐴
Bob B 𝑉 𝜎𝐴 ∧
H(b)
∨
𝑉 𝜎𝐵 B
𝜎𝐴
𝜎𝐵
a+b
𝜎𝐵
B
𝜎𝐴
b A
TxCommA
TxRefundA
TxClaimA
TxClaimB
TxCommB
TxRefundB
Fig. 1: A fair exchange protocol: mixing Bitcoins with an untrusted mixer.
not pay the money back, a cautious user could send the money to the mixer in small
amounts, and only continue sending when the mixer has paid back. However, this ap-
proach is unscalable, especially as each transaction can take 10 minutes to confirm.
An alternative and better approach is to implement a fair exchange protocol. One
contribution of this paper is to demonstrate how to implement such a fair exchange
protocol in Bitcoin in a backward compatible manner.
7.1 A Fair Exchange Protocol
A fair exchange protocol consists of three types of transactions:
– A commitment transaction, denoted TxCommA or TxCommB, commits a party to
the money exchange;
– A refund transaction, denoted TxRefundA or TxRefundB, refunds a party’s com-
mitted money at a future date, in case the exchange protocol aborts.
– A claim transaction denoted TxClaimA or TxClaimB, allows a party to claim the
other party’s committed money. To ensure fairness one party conducts the first
claim transaction in which it must publish a secret which enables the second claim.
Secrets setup phase. As depicted in Figure 2, Alice and Bob perform key generation,
and exchange public keys. The reasons for each party to generate two key pairs is to
later use different keys for different transactions to ensure unlinkability. Alice and Bob
then engage in a cut-and-choose protocol. At the end of the protocol, the remaining set
indexed by I := [n]I will later be used in the fair exchange. Specifically, the hash
values {H(ai + bi) : ∀i ∈ I} will later be included in the output script of TxCommA,
and the hash values {H(bi) : ∀i ∈ I} will be later included in the output script of
TxCommB. For Bob to claim Alice’s committed money TxCommA, it has to reveal all
of the correct {ai + bi : i ∈ I}, such that their hash values match those in TxCommA.
For Alice to later claim Bob’s committed money TxCommB, it only has to reveal one bi
for some i ∈ I, such that it matches one hash value in TxCommB. The key to ensuring
fairness is that when Bob claims TxCommA, it has to reveal the secrets {ai+bi : i ∈ I},
allowing Alice to learn the values of {bi : i ∈ I}, enabling Alice to claim TxCommB.
A cheating Bob can potentially supply Alice with the wrong H(bi) values, in an
attempt to prevent Alice from claiming TxCommB, while retaining its own ability to

1. A: Select random key pairs (PKA1, SKA1) and (PKA2, SKA2)
B: Select random key pairs (PKB1, SKB1) and (PKB2, SKB2)
A ⇔ B : Exchange public keys
2. A: Select random secrets ΩA = {a1, a2, . . . , an}
B: Select random secrets ΩB = {b1, b2, . . . , bn}
A → B : ΩA
B → A : {H(ai + bi), H(bi) : ∀i ∈ [n]}
3. A → B : random index set I ⊆ [n], s.t. |I| = n − k
B → A : {bi|i ∈ I}
A: ∀i ∈ I: verify correctness of previously received H(ai + bi), H(bi)
Fig. 2: Secrets setup phase. A and B exchange keys then engage in cut-and-choose. At the end of
the protocol, the remaining set of size k indexed by [n]I will later be used in the fair exchange.
<PK A2> CHECKSIGVERIFY
IF // refund case
<PK B2> CHECKSIG
ELSE // claim case
HASH
DUP <H(b1)> EQUAL SWAP
DUP <H(b2)> EQUAL SWAP
<H(b3)> EQUAL
BOOLOR BOOLOR
ENDIF
<PK B1> CHECKSIGVERIFY
IF // refund case
<PK A1> CHECKSIG
ELSE // claim case
HASH <H(a1 + b1)> EQUALVERIFY
HASH <H(a2 + b2)> EQUALVERIFY
HASH <H(a3 + b3)> EQUAL
ENDIF
Fig. 3: On left: Output script of TxCommB. On right: Output script of TxCommA.
claim TxCommA. Suppose that I has size k. Through elementary probability anal-
ysis, we can show that a cheating B can succeed only with very small probability:
Pr[B succeeds in cheating] = 1/ n
k

' 1/nk
.
Transaction setup phase — Bob. Bob generates TxCommB, using an output script
that will allow 2 forms of redemption. The redemption can either be the refund transac-
tion (dated in the future), with an input script signed by SKA2 and SKB2, or the claim
transaction with an input script signed by SKA2 and supplying any one of Bob’s secrets
from the set {bi : i ∈ I}. Figure 3 shows an example of TxCommB’s output script for
set I of size k = 3.
Bob then generates a partial TxRefundB releasing his money, with the locktime
set to t+3 (timing in units of ’certain transaction confirmation time’, an agreed number
of block times, plus a buffer), with this incomplete input script: sig B2 1. Bob
sends the partial TxRefundB to party A, who verifies the locktime, and adds his signa-
ture to the input script sig B2 1 sig A2, and returns the completed refund
transaction to Bob. Bob verifies the signed TxRefundB and publishes TxCommB and
TxRefundB, and is now committed to the exchange.
Transaction setup phase — Alice. Alice waits until TxCommB confirms, verifies
TxRefundB and checks the value. Alice generates TxCommA, again using an output
script that allows 2 forms of redemption. The first form enables the refund transaction,
requiring signature by SKB1and SKA1. The second form allows the claim transaction
requiring signature by SKB1 and all of {ai + bi : i ∈ I}. Figure 3 shows an example
output script of TxCommA, for a set I of size k = 3.
Then, Alice generates TxRefundA, with the locktime set to t+1, with the incomplete
input script sig A1 1 and with a standard output addressed to PKA1 (returning
the money to herself). Alice sends this incomplete TxRefundA to Bob. Bob verifies the
locktime and adds his signature to the input script: sig A1 1 sig B1, and
returns the now complete transaction to Alice. Alice verifies the returned TxRefundA

is unmodified and correctly signed. Alice now broadcasts TxCommA and TxRefundA,
and is now committed to the exchange.
Money claim phase. Bob waits for TxCommA to confirm, and checks the amount is
sufficient. Bob also needs to ensure he has enough time for his claim of Alice’s money
to confirm before TxRefundA’s time lock (hence the requirements on time locks). Now
Bob claims Alice’s money; he does this by taking TxRefundA and modifying the time
lock to “now” and the output to PKB1. He also updates the input script to become (mod-
ified to include {ai + bi : i ∈ I}), a3+b3 a2+b2 a1+b1 0 sig B1,
thus creating TxClaimB. Bob now publishes TxClaimB. This claims Alice’s money,
while also revealing Alice’s bis for i ∈ I. Now Alice can claim Bob’s money by taking
TxRefundB, removing the locktime, changing the output to PKA2, and updating the in-
put script to this form (modified to include one bi from I): b 0 sig A2. Alice
earlier made sure that the locktime on TxRefundB would give her sufficient time for
this claim to confirm before the Bob’s refund.
8 Conclusion
We have provided a preliminary but broad study of the crypto-monetary phenomenon
Bitcoin, whose popularity has far overtaken the e-cash systems based on decades of
research. Bitcoin’s appeal lies in its simplicity, flexibility, and decentralization, making
it easy to grasp but hard to subvert. We studied this curious contraption with a critical
eye, trying to gauge its strengths and expose its flaws, suggesting solutions and research
directions. Our conclusion is nuanced: while the instantiation is impaired by its poor
parameters, the core design could support a robust decentralized currency if done right.
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