The concept of cryptocurrencies is built from forgotten ideas in research literature.
- If you have a secure ledger, the process to leverage it into a digital payment system is straightforward.
- The starting point for understanding Bitcoin's ledger.
- A place to record all transactions in the system.
- Bitcoin converts this system for recording payments into a currency.
- Ledger properties for Bitcoin:
- Ability for participants to obtain a succinct cryptographic digest of the state of the ledger at any time.
- In each block's Merkle tree:
- Leaf nodes are transactions.
- Internal node essentially consists of two pointers.
- Fault-tolerant distributed computing has been studied with linked timestamping to resolve forks.
- Byzantine faults include both naturally occurring faults as well as maliciously crafted behaviors.
Proof of Work
- Virtually all fault-tolerant systems assume that a majority of nodes in the system are honest and reliable.
- A cryptographic construction called proof of work was created to mitigate attacks.
- A Proof-of-work instance should:
- Be specific to the recipient.
- Pose minimal computational burden on the recipient.
- There are other approaches to treating proof-of-work instances aside from the original approach.
- Uses only hash functions instead of digital signatures.
Putting in all together
- In Bitcoin, puzzle solutions don't constitute cash by themselves, they are used to secure the ledger.
- A miner who solves a puzzle
- Contributes the next batch/block of transactions to the ledger.
- Rewarded with newly minted units of the currency.
- If a miner contributes an invalid transaction or block, it will be rejected by the majority of other miners.
- The market will determine transaction fees and miners' rewards.
- Blockchain is a loose umbrella term used to refer to systems that bear varying levels of resemblance to Bitcoin and its ledger.
- Applications that benefit from blockchain:
- A database backend for transactions among a consortium of banks.
- An asset-management application.
- Skepticism surrounding blockchain:
- Many proposed applications of blockchains, especially in banking, use the ledger data structure and Byzantine agreement.
- Blockchains are presented as more secure than traditional registries — a misleading claim.
Sidebars to Consider
- Sybil-resistant networks
- Smart Contracts
- Permissioned blockchains