Bitcoin protocol

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A diagram of a bitcoin transfer Bitcoin Transaction Visual.svg
A diagram of a bitcoin transfer

The Bitcoin protocol is the set of rules that govern the functioning of Bitcoin. Its key components and principles are: a peer-to-peer decentralized network with no central oversight; the blockchain technology, a public ledger that records all Bitcoin transactions; mining and proof of work, the process to create new bitcoins and verify transactions; and cryptographic security.

Contents

Users broadcast cryptographically signed messages to the network using Bitcoin cryptocurrency wallet software. These messages are proposed transactions, changes to be made in the ledger. Each node has a copy of the ledger's entire transaction history. If a transaction violates the rules of the Bitcoin protocol, it is ignored, as transactions only occur when the entire network reaches a consensus that they should take place. This "full network consensus" is achieved when each node on the network verifies the results of a proof-of-work operation called mining. Mining packages groups of transactions into blocks, and produces a hash code that follows the rules of the Bitcoin protocol. Creating this hash requires expensive energy, but a network node can verify the hash is valid using very little energy. If a miner proposes a block to the network, and its hash is valid, the block and its ledger changes are added to the blockchain, and the network moves on to yet unprocessed transactions. In case there is a dispute, then the longest chain is considered to be correct. A new block is created every 10 minutes, on average.

Changes to the Bitcoin protocol require consensus among the network participants. The Bitcoin protocol has inspired the creation of numerous other digital currencies and blockchain-based technologies, making it a foundational technology in the field of cryptocurrencies.

Blockchain

Blockchain technology is a decentralized and secure digital ledger that records transactions across a network of computers. It ensures transparency, immutability, and tamper resistance, making data manipulation difficult. Blockchain is the underlying technology for cryptocurrencies like Bitcoin and has applications beyond finance, such as supply chain management and smart contracts. [1]

Transactions

The best chain .mw-parser-output .legend{page-break-inside:avoid;break-inside:avoid-column}.mw-parser-output .legend-color{display:inline-block;min-width:1.25em;height:1.25em;line-height:1.25;margin:1px 0;text-align:center;border:1px solid black;background-color:transparent;color:black}.mw-parser-output .legend-text{} consists of the longest series of transaction records from the genesis block to the current block or record. Orphaned records exist outside of the best chain. Blockchain.svg
The best chain   consists of the longest series of transaction records from the genesis block   to the current block or record. Orphaned records   exist outside of the best chain.

The network requires minimal structure to share transactions. An ad hoc decentralized network of volunteers is sufficient. Messages are broadcast on a best-effort basis, and nodes can leave and rejoin the network at will. Upon reconnection, a node downloads and verifies new blocks from other nodes to complete its local copy of the blockchain. [2] [3]

Mining

GPU-based mining rig, 2012 AustrianBitCoinMiningRig.jpg
GPU-based mining rig, 2012
A Bitcoin mining farm, 2018 Hut 8 Medicine Hat box 1.jpg
A Bitcoin mining farm, 2018

Bitcoin uses a proof-of-work system to form a distributed timestamp server as a peer-to-peer network. [3] This work is often called bitcoin mining.

During mining, practically all of the computing power of the Bitcoin network is used to solve cryptographic tasks, which is proof of work. Their purpose is to ensure that the generation of valid blocks involves a certain amount of effort so that subsequent modification of the blockchain, such as in the 51% attack scenario, can be practically ruled out. Because of the difficulty, miners form "mining pools" to get payouts despite these high power requirements, costly hardware deployments, and hardware under control. As a result of the Chinese ban on Bitcoin mining in 2021, the United States currently holds the largest share of Bitcoin mining pools. [4] [5]

Requiring a proof of work to accept a new block to the blockchain was Satoshi Nakamoto's key innovation. The mining process involves identifying a block that, when hashed twice with SHA-256, yields a number smaller than the given difficulty target. While the average work required increases in inverse proportion to the difficulty target, a hash can always be verified by executing a single round of double SHA-256.

For the bitcoin timestamp network, a valid proof of work is found by incrementing a nonce until a value is found that gives the block's hash the required number of leading zero bits. Once the hashing has produced a valid result, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the block would include redoing the work for each subsequent block. If there is a deviation in consensus then a blockchain fork can occur.

Majority consensus in bitcoin is represented by the longest chain, which required the greatest amount of effort to produce. If a majority of computing power is controlled by honest nodes, the honest chain will grow fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the proof-of-work of that block and all blocks after it and then surpass the work of the honest nodes. The probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added. [3]

Mining difficulty has increased significantly. Bitcoin difficulty.svg
Mining difficulty has increased significantly.

To compensate for increasing hardware speed and varying interest in running nodes over time, the difficulty of finding a valid hash is adjusted roughly every two weeks. If blocks are generated too quickly, the difficulty increases and more hashes are required to make a block and to generate new bitcoins. [3]

Difficulty and mining pools

Minage de crypto-monnaie (2).jpg
Early bitcoin miners used GPUs for mining, as they were better suited to the proof-of-work algorithm than CPUs. [6]
USB Erupter.jpg
Later amateurs mined bitcoins with specialized FPGA and ASIC chips. The chips pictured have become obsolete due to increasing difficulty.
Cryptocurrency Mining Farm.jpg
Today, bitcoin mining companies dedicate facilities to housing and operating large amounts of high-performance mining hardware. [7]
The largest Bitcoin mining pools as of April 2020 by nation in which the pools are based Bitcoin mining pools by location (country) - Mining pool distributions of Bitcoin blockchain.webp
The largest Bitcoin mining pools as of April 2020 by nation in which the pools are based

Bitcoin mining is a competitive endeavor. An "arms race" has been observed through the various hashing technologies that have been used to mine bitcoins: basic central processing units (CPUs), high-end graphics processing units (GPUs), field-programmable gate arrays (FPGAs) and application-specific integrated circuits (ASICs) all have been used, each reducing the profitability of the less-specialized technology. Bitcoin-specific ASICs are now the primary method of mining bitcoin and have surpassed GPU speed by as much as 300-fold. The difficulty of the mining process is periodically adjusted to the mining power active on the network. As bitcoins have become more difficult to mine, computer hardware manufacturing companies have seen an increase in sales of high-end ASIC products. [8]

Computing power is often bundled together or "pooled" to reduce variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block. This payment depends on the amount of work an individual miner contributed to help find that block, and the payment system used by the pool. [9]

Environmental effects

This section is an excerpt from Environmental effects of bitcoin.[ edit ]
Bitcoin mining facility in Quebec, Canada Argo Blockchain Mirabel Facility.jpg
Bitcoin mining facility in Quebec, Canada
The environmental effects of bitcoin are significant. Bitcoin mining, the process by which bitcoins are created and transactions are finalized, is energy-consuming and results in carbon emissions as about half of the electricity used is generated through fossil fuels. [10] Moreover, bitcoins are mined on specialized computer hardware with a short lifespan, resulting in electronic waste. [11] The amount of e-waste generated by bitcoin mining is comparable to the one of the Netherlands. [11] Scholars argue that Bitcoin mining could support renewable energy development by utilizing surplus electricity from wind and solar. [12] Bitcoin's environmental impact has attracted the attention of regulators, leading to incentives or restrictions in various jurisdictions. [13]
Avalon ASIC-based mining machine Avalon-An ASIC base bitcoin machine.jpg
Avalon ASIC-based mining machine

Mined bitcoins

Diagram showing how bitcoin transactions are verified Bitcoinpaymentverification.png
Diagram showing how bitcoin transactions are verified

By convention, the first transaction in a block is a special transaction that produces new bitcoins owned by the creator of the block. This is the incentive for nodes to support the network. [2] It provides a way to move new bitcoins into circulation. The reward for mining halves every 210,000 blocks. It started at 50 bitcoin, dropped to 25 in late 2012, and to 6.25 bitcoin in 2020. The most recent halving, which occurred on 20 April 2024 at 12:09am UTC (with block number 740,000), reduced the block reward to 3.125 bitcoins. [14] [15] The next halving is expected to occur in 2028, when the block reward will fall to 1.625 bitcoins. [16] . [17] This halving process is programmed to continue a maximum of 64 times before new coin creation ceases. [18]

Payment verification

Each miner can choose which transactions are included in or exempted from a block. [19] A greater number of transactions in a block does not equate to greater computational power required to solve that block. [19]

As noted in Nakamoto's whitepaper, it is possible to verify bitcoin payments without running a full network node (simplified payment verification, SPV). A user only needs a copy of the block headers of the longest chain, which are available by querying network nodes until it is apparent that the longest chain has been obtained; then, get the Merkle tree branch linking the transaction to its block. Linking the transaction to a place in the chain demonstrates that a network node has accepted it, and blocks added after it further establish the confirmation. [2]

Protocol features

Security

Various potential attacks on the bitcoin network and its use as a payment system, real or theoretical, have been considered. The bitcoin protocol includes several features that protect it against some of those attacks, such as unauthorized spending, double spending, forging bitcoins, and tampering with the blockchain. Other attacks, such as theft of private keys, require due care by users. [20] [21]

Unauthorized spending

Unauthorized spending is mitigated by bitcoin's implementation of public-private key cryptography. For example, when Alice sends a bitcoin to Bob, Bob becomes the new owner of the bitcoin. Eve, observing the transaction, might want to spend the bitcoin Bob just received, but she cannot sign the transaction without the knowledge of Bob's private key. [21]

Double spending

A specific problem that an internet payment system must solve is double-spending, whereby a user pays the same coin to two or more different recipients. An example of such a problem would be if Eve sent a bitcoin to Alice and later sent the same bitcoin to Bob. The bitcoin network guards against double-spending by recording all bitcoin transfers in a ledger (the blockchain) that is visible to all users, and ensuring for all transferred bitcoins that they have not been previously spent. [21] : 4 

Race attack

If Eve offers to pay Alice a bitcoin in exchange for goods and signs a corresponding transaction, it is still possible that she also creates a different transaction at the same time sending the same bitcoin to Bob. By the rules, the network accepts only one of the transactions. This is called a race attack, since there is a race between the recipients to accept the transaction first. Alice can reduce the risk of race attack stipulating that she will not deliver the goods until Eve's payment to Alice appears in the blockchain. [22]

A variant race attack (which has been called a Finney attack by reference to Hal Finney) requires the participation of a miner. Instead of sending both payment requests (to pay Bob and Alice with the same coins) to the network, Eve issues only Alice's payment request to the network, while the accomplice tries to mine a block that includes the payment to Bob instead of Alice. There is a positive probability that the rogue miner will succeed before the network, in which case the payment to Alice will be rejected. As with the plain race attack, Alice can reduce the risk of a Finney attack by waiting for the payment to be included in the blockchain. [23]

History modification

Each block that is added to the blockchain, starting with the block containing a given transaction, is called a confirmation of that transaction. Ideally, merchants and services that receive payment in bitcoin should wait for at least a few confirmations to be distributed over the network before assuming that the payment was done. The more confirmations that the merchant waits for, the more difficult it is for an attacker to successfully reverse the transaction—unless the attacker controls more than half the total network power, in which case it is called a 51% attack, or a majority attack. [24] Although more difficult for attackers of a smaller size, there may be financial incentives that make history modification attacks profitable. [25]

Scalability

This section is an excerpt from Bitcoin scalability problem.[ edit ]
Number of transactions per month, on a logarithmic scale Bitcoin transactions per month.svg
Number of transactions per month, on a logarithmic scale

The Bitcoin scalability problem refers to the limited capability of the Bitcoin network to handle large amounts of transaction data on its platform in a short span of time. [26] It is related to the fact that records (known as blocks) in the Bitcoin blockchain are limited in size and frequency. [27]

Bitcoin's blocks contain the transactions on the bitcoin network. [28] : ch. 2  The on-chain transaction processing capacity of the bitcoin network is limited by the average block creation time of 10 minutes and the original block size limit of 1 megabyte. These jointly constrain the network's throughput. The transaction processing capacity maximum estimated using an average or median transaction size is between 3.3 and 7 transactions per second. [27] There are various proposed and activated solutions to address this issue.

Privacy

Deanonymisation of clients

Deanonymisation is a strategy in data mining in which anonymous data is cross-referenced with other sources of data to re-identify the anonymous data source. Along with transaction graph analysis, which may reveal connections between bitcoin addresses (pseudonyms), [20] [29] there is a possible attack [30] which links a user's pseudonym to its IP address. If the peer is using Tor, the attack includes a method to separate the peer from the Tor network, forcing them to use their real IP address for any further transactions. The cost of the attack on the full bitcoin network was estimated to be under €1500 per month, as of 2014. [30]

Consensus mechanism and upgrades

Impact and influence

See also

Related Research Articles

Proof of work (PoW) is a form of cryptographic proof in which one party proves to others that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expenditure with minimal effort on their part. The concept was invented by Moni Naor and Cynthia Dwork in 1993 as a way to deter denial-of-service attacks and other service abuses such as spam on a network by requiring some work from a service requester, usually meaning processing time by a computer. The term "proof of work" was first coined and formalized in a 1999 paper by Markus Jakobsson and Ari Juels. The concept was adapted to digital tokens by Hal Finney in 2004 through the idea of "reusable proof of work" using the 160-bit secure hash algorithm 1 (SHA-1).

Double-spending is a fundamental flaw in a digital cash protocol in which the same single digital token can be spent more than once. Due to the nature of information space, in comparison to physical space, a digital token is inherently almost infinitely duplicable or falsifiable, leading to ownership of said token itself being undefinable unless declared so by a chosen authority. As with counterfeit money, such double-spending leads to inflation by creating a new amount of copied currency that did not previously exist. Like all increasingly abundant resources, this devalues the currency relative to other monetary units or goods and diminishes user trust as well as the circulation and retention of the currency.

<span class="mw-page-title-main">Bitcoin</span> Decentralized digital currency

Bitcoin is the first decentralized cryptocurrency. Nodes in the peer-to-peer bitcoin network verify transactions through cryptography and record them in a public distributed ledger, called a blockchain, without central oversight. Consensus between nodes is achieved using a computationally intensive process based on proof of work, called mining, that requires increasing quantities of electricity and guarantees the security of the bitcoin blockchain.

<span class="mw-page-title-main">Cryptocurrency</span> Digital currency not reliant on a central authority

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

Zerocoin is a privacy protocol proposed in 2013 by Johns Hopkins University professor Matthew D. Green and his graduate students, Ian Miers and Christina Garman. It was designed as an extension to the Bitcoin protocol that would improve Bitcoin transactions' anonymity by having coin-mixing capabilities natively built into the protocol. Zerocoin is not currently compatible with Bitcoin.

Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of proof-of-work (POW) schemes. The first functioning use of PoS for cryptocurrency was Peercoin in 2012, although the scheme, on the surface, still resembled a POW.

In the context of cryptocurrency mining, a mining pool is the pooling of resources by miners, who share their processing power over a network, to split the reward equally, according to the amount of work they contributed to the probability of finding a block. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work. Mining in pools began when the difficulty for mining increased to the point where it could take centuries for slower miners to generate a block. The solution to this problem was for miners to pool their resources so they could generate blocks more quickly and therefore receive a portion of the block reward on a consistent basis, rather than randomly once every few years.

A blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Since each block contains information about the previous block, they effectively form a chain, with each additional block linking to the ones before it. Consequently, blockchain transactions are irreversible in that, once they are recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.

Monero is a cryptocurrency which uses a blockchain with privacy-enhancing technologies to obfuscate transactions to achieve anonymity and fungibility. Observers cannot decipher addresses trading Monero, transaction amounts, address balances, or transaction histories.

A decentralised application is an application that can operate autonomously, typically through the use of smart contracts, that run on a decentralized computing, blockchain or other distributed ledger system. Like traditional applications, DApps provide some function or utility to its users. However, unlike traditional applications, DApps operate without human intervention and are not owned by any one entity, rather DApps distribute tokens that represent ownership. These tokens are distributed according to a programmed algorithm to the users of the system, diluting ownership and control of the DApp. Without any one entity controlling the system, the application is therefore decentralised.

A distributed ledger is the consensus of replicated, shared, and synchronized digital data that is geographically spread (distributed) across many sites, countries, or institutions. In contrast to a centralized database, a distributed ledger does not require a central administrator, and consequently does not have a single (central) point-of-failure.

<span class="mw-page-title-main">Ethereum Classic</span> Blockchain computing platform

Ethereum Classic is a blockchain-based distributed computing platform that offers smart contract (scripting) functionality. It is open source and supports a modified version of Nakamoto consensus via transaction-based state transitions executed on a public Ethereum Virtual Machine (EVM).

<span class="mw-page-title-main">Firo (cryptocurrency)</span> Cryptocurrency

Firo, formerly known as Zcoin, is a cryptocurrency aimed at using cryptography to provide better privacy for its users compared to other cryptocurrencies such as Bitcoin.

<span class="mw-page-title-main">Lightning Network</span> Payment protocol for Bitcoin

The Lightning Network (LN) is a "layer 2" payment protocol built on the Bitcoin blockchain and those of other cryptocurrencies. It is intended to enable fast transactions among participating nodes and has been proposed as a solution to the bitcoin scalability problem. It is a peer-to-peer system for making micropayments of cryptocurrency through a network of bidirectional payment channels, without delegating custody of funds.

<span class="mw-page-title-main">Bitcoin scalability problem</span> Scaling problem in bitcoin processing

The Bitcoin scalability problem refers to the limited capability of the Bitcoin network to handle large amounts of transaction data on its platform in a short span of time. It is related to the fact that records in the Bitcoin blockchain are limited in size and frequency.

Segregated Witness, or SegWit, is the name used for an implemented soft fork change in the transaction format of Bitcoin.

A cryptocurrency wallet is a device, physical medium, program or an online service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet more often offers the functionality of encrypting and/or signing information. Signing can for example result in executing a smart contract, a cryptocurrency transaction, identification, or legally signing a 'document'.

In cryptocurrencies, an unspent transaction output (UTXO) is a distinctive element in a subset of digital currency models. A UTXO represents a certain amount of cryptocurrency that has been authorized by a sender and is available to be spent by a recipient. The utilization of UTXOs in transaction processes is a key feature of many cryptocurrencies, but it primarily characterizes those implementing the UTXO model.

A blockchain is a shared database that records transactions between two parties in an immutable ledger. Blockchain documents and confirms pseudonymous ownership of all transactions in a verifiable and sustainable way. After a transaction is validated and cryptographically verified by other participants or nodes in the network, it is made into a "block" on the blockchain. A block contains information about the time the transaction occurred, previous transactions, and details about the transaction. Once recorded as a block, transactions are ordered chronologically and cannot be altered. This technology rose to popularity after the creation of Bitcoin, the first application of blockchain technology, which has since catalyzed other cryptocurrencies and applications.

Nervos Network is a proof-of-work blockchain platform which consists of multiple blockchain layers that are designed for different functions. The native cryptocurrency of this layer is called CKB. Smart contracts and decentralized applications can be deployed on the Nervos blockchain. The Nervos Network was founded in 2018.

References

  1. ↑ Hut, Moody. "What is Blockchain Technology and How Does it Work".
  2. 1 2 3 Nakamoto, Satoshi (24 May 2009). "Bitcoin: A Peer-to-Peer Electronic Cash System" (PDF). Archived from the original (PDF) on 4 July 2010. Retrieved 20 December 2012.
  3. 1 2 3 4 Barber, Simon; Boyen, Xavier; Shi, Elaine & Uzun, Ersin (2012). "Bitter to Better – how to make Bitcoin a better currency" (PDF). Financial Cryptography and Data Security. Lecture Notes in Computer Science. 7397. Springer Publishing: 399–414. doi:10.1007/978-3-642-32946-3_29. ISBN   978-3-642-32945-6.
  4. ↑ Sigalos, MacKenzie (15 June 2021). "China is kicking out more than half the world's bitcoin miners – and a whole lot of them could be headed to Texas". CNBC. Retrieved 5 December 2023.
  5. ↑ "Cambridge Bitcoin Electricity Consumption Index (CBECI)". ccaf.io. Retrieved 5 December 2023.
  6. ↑ "Bitcoin mania is hurting PC gamers by pushing up GPU prices". 30 January 2018. Archived from the original on 2 February 2018. Retrieved 2 February 2018.
  7. ↑ "Cryptocurrency mining operation launched by Iron Bridge Resources". World Oil. 26 January 2018. Archived from the original on 30 January 2018.
  8. ↑ "Bitcoin boom benefiting TSMC: report". Taipei Times. 4 January 2014.
  9. ↑ Rosenfeld, Meni (17 November 2011). Analysis of Bitcoin Pooled Mining Reward Systems. arXiv: 1112.4980 . Bibcode:2011arXiv1112.4980R.
  10. ↑ Huang, Jon; O'Neill, Claire; Tabuchi, Hiroko (3 September 2021). "Bitcoin Uses More Electricity Than Many Countries. How Is That Possible?". The New York Times . ISSN   0362-4331. Archived from the original on 17 February 2023. Retrieved 1 February 2022.
  11. 1 2 de Vries, Alex; Stoll, Christian (December 2021). "Bitcoin's growing e-waste problem". Resources, Conservation and Recycling. 175: 105901. doi:10.1016/j.resconrec.2021.105901. ISSN   0921-3449. S2CID   240585651. Archived from the original on 23 November 2021. Retrieved 6 October 2022.
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  14. ↑ Macheel, Tanaya (20 April 2024). "The Bitcoin network completes the fourth-ever 'halving' of rewards to miners". CNBC. Retrieved 20 April 2024.
  15. ↑ "So, Bitcoin Halving Is Done. What Happened and What's Next?". Investopedia. Retrieved 20 April 2024.
  16. ↑ https://coinpedia.org/beginners-guide/what-is-bitcoin-halving/
  17. ↑ https://markets.businessinsider.com/news/currencies/bitcoin-halving-event-cryptocurrency-new-all-time-high-halvening-explained-2024-3
  18. ↑ Antonopoulos, Andreas M (1 July 2017). Mastering bitcoin: programming the open blockchain (2nd ed.). Sebastopol, California, USA: O'Reilly Media. p. 239. ISBN   978-1-4919-5438-6. OCLC   953432201.
  19. 1 2 Houy, N. (2016). "The Bitcoin Mining Game". Ledger. 1: 53–68. doi: 10.5195/ledger.2016.13 . Retrieved 14 January 2017.
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  23. ↑ Karame, Ghassan O.; Androulaki, Elli; Capkun, Srdjan (2012). "Two Bitcoins at the Price of One? Double-Spending Attacks on Fast Payments in Bitcoin" (PDF). iacr.org. International Association for Cryptologic Research. Retrieved 22 October 2014.
  24. ↑ Michael J. Casey; Paul Vigna (16 June 2014). "Short-Term Fixes To Avert "51% Attack"". Money Beat. Wall Street Journal. Retrieved 30 June 2014.
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  27. 1 2 Croman, Kyle; Eyal, Ittay (2016). "On Scaling Decentralized Blockchains" (PDF). Financial Cryptography and Data Security. Lecture Notes in Computer Science. Vol. 9604. pp. 106–125. doi:10.1007/978-3-662-53357-4_8. ISBN   978-3-662-53356-7 . Retrieved 10 December 2017. The maximum throughput is the maximum rate at which the blockchain can confirm transactions. Today, bitcoin's maximum throughput is 3.3–7 transactions/sec [1]. This number is constrained by the maximum block size and the inter-block time.
  28. ↑ Antonopoulos, Andreas M. (April 2014). Mastering Bitcoin. Unlocking Digital Crypto-Currencies. O'Reilly Media. ISBN   978-1-4493-7404-4.
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Works cited

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