Mathematical and Economic Foundations of Bitcoin

45 Pages Posted: 14 Apr 2020

See all articles by Lauri Ahlberg

Lauri Ahlberg

Aalto University - School of Science

Jorge Soria

University of Helsinki - Helsinki Graduate School of Economics

Date Written: February 25, 2020

Abstract

Blockchain technology has a significant impact in multiple fields. Bitcoin was the first of its applications to rise to widespread attention. Due to its source code being publicly available (open source), it was followed quickly by a number of other cryptocurrencies as developers caught on to the opportunities it presented. The chief innovation introduced by Bitcoin was the ability to pay in a moderately secure fashion without third parties, such as banks.

In this work we examine the mathematical and economic foundations upon which cryptocurrencies are built. We include a discussion of some cryptographic tools used in cryptocurrencies, such as hash functions that enable hiding information and committing to specific values; and the elliptic curve digital signature algorithm (ECDSA) used to implement Bitcoin's digital signature scheme.

After covering the mathematical background we move on to the cryptocurrencies themselves. Bitcoin offers an immutable bookkeeping system based on blockchain technology, implemented using hash functions. To add transactions to the blockchain, miners calculate suitable hashes by trial and error. In order to change a transaction after it has been written onto the blockchain would require a practically infeasible amount of computation. Bitcoin transactions rely on ECDSA for authorisation. Having discussed the technical implementation of Bitcoin to some level of detail, we move on to describe two other cryptocurrencies, Zcash and Monero. These were developed to address some limitations in Bitcoin, especially when it comes to privacy considerations. We finish with a comparison of the cryptocurrencies introduced previously and a discussion of the relationship between cryptocurrencies and the society at large.

Keywords: Blockchain, Cryptocurrencies, Bitcoin, ECDSA, SHA-256

JEL Classification: D43, E42, G29

Suggested Citation

Ahlberg, Lauri and Soria, Jorge, Mathematical and Economic Foundations of Bitcoin (February 25, 2020). Available at SSRN: https://ssrn.com/abstract=3544047 or http://dx.doi.org/10.2139/ssrn.3544047

Lauri Ahlberg

Aalto University - School of Science ( email )

Espoo
Finland

Jorge Soria (Contact Author)

University of Helsinki - Helsinki Graduate School of Economics ( email )

P.O. Box 17 (Arkadiankatu 7)
Helsinki, FI00014
Finland

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