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A Summary of

Bitcoin’s academic pedigree (2017)

by
Arvind Narayanan, Jeremy Clark
ACM
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The concept of cryptocurrencies is built from forgotten ideas in research literature.

The Ledger

  • 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: 
    • Immutable.
    • 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.
    • Hashcash
      • 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.

The Blockchain

  • 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 
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