Bitcoin Storage and Addresses

How to Store and Use Bitcoins

• Storing bitcoins revolves around the storage and management of Bitcoin secret keys.
• Various key management approaches offer different trade-offs among availability, security, and convenience.
• Storing secret keys on a file on a local device provides the simplest key management method.
• Simple local storage is convenient, but has poor availability and security.
• It is not advised to store life savings on a local device as it can get lost or stolen.

Addresses

• Wallet software manages keys and provides a convenient user interface to keep track of coins.
• Bitcoin addresses are encoded as text strings or QR codes for communication between receiver and spender.
• Encoding an address as a text string involves converting key bits from a binary number to a base58 number.

Vanity Address

• Addresses are outputs of a hash function, yielding random-looking data.
• Addresses can start with human-meaningful text.
• Generating an address with a specific k-character string requires generating 58^k addresses on average.

Hot and Cold Storage

• Hot storage involves storing bitcoins on a computer, and is like carrying money in a wallet.
• Cold storage involves storing bitcoins offline without internet connection and is archival, without easy access.
• It is expected that coins should move between hot and cold storage.
• Cold storage does not require an online connection to receive coins.
• Managing cold storage addresses means each coin exists at a separate address with different secret keys, requiring a way for the hot side to access these addresses.

Cold Storage Addresses

• The cold side can generate and send a large batch of addresses to the hot side for use, but this comes with periodical reconnects.
• Hierarchical wallets allow the cold side to use a virtually unlimited number of addresses using cryptographic methods.
• Instead of generating individual addresses, address generation info and private key generation info is created.
• Address generation info does not reveal information about the private keys.

ECDSA

• ECDSA supports hierarchical key generation.
• The cold side generates keys, the hot side generates corresponding addresses.

Cold Information Storage

• Store critical information on a secure device in a safe.
• Brain wallets use a secret passphrase and algorithm to derive public/private keys.
• Brain wallets are vulnerable to password cracking.
• Countermeasure; use key stretching and memorable passphrases to derive private keys.
• Coins are lost if a brain wallet passphrase is lost or forgotten.
• Printing key material and storing it securely
• Using Tamper-resistant devices that sign statements with the key, using a button press and password

Splitting and Sharing Keys

• Secret Sharing divides a secret key into N pieces; K pieces can reconstruct the whole.
• Threshold signatures are a cryptographic approach splitting a single key into shares, storing them separately, and signing transactions without key reconstruction.
• Multi-signatures enable control of an address by multiple independent keys.

Online Wallets

• Online wallets involve the site storing keys and delivering code to the browser or app.
• Online wallets have security risks due to the need to trust the provider is not compromised.

Wallets

• Hot Wallets include:
  • Web wallets like Blockchain.com, Coinbase, and Binance
  • Mobile wallets like Trust Wallet, Electrum, and Mycelium
  • Desktop Wallets like Exodus, Electrum, and Bitcoin Core
  • Cold Wallets include:
  • Hardware storage like Ledger Nano S/X, Trezor, and Coldcard
  • Paper wallets
  • Multisignature Wallets include Casa and BitGo

Bitcoin Exchanges

• Bitcoin exchanges accept bitcoin deposits like a bank.
• Exchanges facilitate the transfer of fiat currency into cryptocurrency.
• Centralized exchanges are popular due to ease of use.
• Decentralized exchanges and P2P platforms offer higher privacy and control.
• https://cex.io is an example of a bitcoin exchange

Bitcoin Payment Services

• Payment services help customers pay with bitcoins
• There are various possible risks, these include: using new technology; handling bitcoins and exchange rate risk.
• Payment services facilitate transactions between customers and merchants.
• https://bitpay.com is where payment services are provided

Transaction Fees

• No fee is required if a transaction is less than 1000 bytes, outputs are at least 0.01 BTC, and priority is high enough.
• Transaction priority is calculated as the sum of input age times input value divided by transaction size.
• Bitcoin Core removed priority-based free transactions in version 0.12.0 (2016) due to reduced miner incentives.
• Transaction Fee = Transaction Size (bytes) × Fee Rate (satoshis/byte)
• A basic transaction (~226 bytes) costs less.
• The fee rate increases if the network is busy (e.g., 50-100+ sat/byte).
• Lower fees (e.g., 10-20 sat/byte) may still be confirmed if the network is quiet.

How to Reduce Bitcoin Transaction Fees

• Combine multiple payments into one transaction
• Transact when the network is less busy.
• Tools like mempool.space recommend optimal fees.
• SegWit Addresses reduce transaction size, increase speed, and improve security.
• Using the Lightning Network speeds up transactions and lowers fees by transacting off-chain, only settling when necessary.

Bitcoin Mining

• Miners validate transactions and compete for block rewards
• Miners create a Merkle tree to find a nonce that produces a valid hash.
• If the nonce is not sufficient, miners modify the "coinbase nonce" in the transaction, which requires recalculating the Merkle tree.
• In March 2015, the mining difficulty was about 1 in 2^67 attempts for a valid block.
• The difficulty adjustment mechanism ensures consistent block discovery, but challenges are faced because of economic instability.
• The next difficulty can be calculated; next_difficulty = (previous_difficulty * 2016 * 10 minutes) / (time to mine last 2016 blocks)
• Bitcoin mining uses the SHA-256 cryptographic hash function, which is computationally intensive.
• Miners must perform SHA-256 twice per block.

Mining Hardware

• Early miners in 2009-2010 used CPUs, and computed ~20 million hashes, but this soon becane unprofitable
• By 2010-2011 miners shifted to to GPUs, which had higher parallelism, at ~200 MH/s.
• By 2011-2012 Field-Programmable Gate Arrays (FPGAs) were used due to better performance (~ or 1 GH/s) and cooling efficiency.
• From 2013 onwards, Application-Specific Integrated Circuits (ASICs) became dominant

ASIC

• ASIC chips provide optimized performance and energy efficiency for Bitcoin mining.
• Mining shifted from individuals to professional mining facilities.
• Professional mining facilities gain bulk discounts and optimal locations.
• Mining pools allow individuals to increase their chances of earning rewards.
• Mining pools increased accessibility but have led to centralization concerns.

Mining Pools

• Smaller miners face high variance in earnings due to randomness of block discovery.
• Risks can be reduced via the use of mining pools
• A pool manager collects block rewards, distributed according to eachs miner's work
• Miners prove their work using shares that are close to valid blocks.

Mining Strategies

• Miners strategically choose which transactions to include, the blocks to mine on, when to announce new blocks, and how to handle forks.
• Mining relies on complex strategic decisions; deviations from default behavior can also be profitable under specific conditions.