The super-simple economic image that economists love is that of ten people buying and selling different kinds of things using fiat currency. For example, Tam Mao sold his son Jack one of his shorts for 100,000 VND, Chi Pheo bought a pair of Ngoc Trinh’s water-tons missing for three liters… When everyone finished trading for the day, there was no problem. about where they stand financially: they just need to count their money.
Things are a bit more complicated if the market works on credit markets. Thi No borrowed Ba Kien 50 cents, Xuan Toc Do owed Mrs. Pho Doan 2 cents… but no fiat currency changed hands. In this scenario, any interested, sufficiently motivated party would note their transactions to keep track of what they owe and what others owe them. But unless all parties are fully conscientious and extremely careful, disagreements will arise. Because, in this life, we often remember what others owe us, but few people remember what we owe others.
To make sure everything is fair, the team needs a central ledger. That way, when there is a difference, the final arbiter will be there to settle it. But who controls the ledger? Will the group hold an election? An arm wrestling competition? How often rotate position ? Should two people share the responsibility? Perhaps the two ledgers should be kept concurrently, or that could cause more problems than it solves. Most importantly, how to keep the team accurate when people’s hearts are always changing.
Ideally, everyone would keep the ledger. In other words, each will have equal input and supervision when it comes to a central ledger, rather than keeping it separately. It was a tough technical challenge, but fortunately it was one of the distributed ledgers, also known as blockchains, that solved the problem.
Trust and proof of work
The distributed ledger solved a problem that had long vexed cryptographers: faith. In any of the above scenarios, everyone has to rely on each other’s decency. Personal, family, and community relationships may ease the temptation to defraud the frustrated and disinterested, but those forces will be disrupted on a larger scale by corruption not avoidable.
Distributed ledgers overcome the trust problem by allowing multiple people to verify the accuracy of the central ledger using their own copy. The consensus algorithm eliminates the belief that proof of work (POW).
The concept of proof of work predates bitcoin. This is meant to prevent malicious uses of computing power, such as email spam and denial of service (DDOS) attacks, by requiring a non-trivial but possible amount of work. manageable.
In 2004, Hal Finney applied this idea to money. His money proposal is still a white paper, but the marriage of money and proof of work has become an important foundation of bitcoin, and Satoshi Nakamoto introduced it five years later in the Bitcoin white paper.
If bitcoin’s ledger were as simple as a spreadsheet, it would be easy for someone with control to reorg as they wish, adjusting a transaction or two and making them a millionaire. Also, they can double spend, a significant problem with currencies that don’t exist in the real world.
Proof of work makes it difficult to add a new transaction, changing a recent transaction requires some seriousness, and changing a transaction from last year is impossible. Imagine placing a new block on top of the Pyramids of Giza, that’s not difficult, but to pull a brick from the center of the bottom layer of the structure is impossible, it requires inverting everything. the work that was done to build it. Then, to fool anyone into thinking that nothing has happened, you have to rebuild everything as is. Because if you don’t, the value you just reorg will return to 0, because no one believes in this system anymore.
Hashing and Mining
At some point, the metaphor fails to convey what is really happening in the distributed ledger. At its most basic, such a ledger is made up of sequentially arranged “blocks” called the block chain. Each block is a record of all transactions that have taken place (note that in reality, some are carried over) during a certain period of time. In the bitcoin blockchain, a new block is added every 10 minutes.
The “distributed” aspect of the ledger corresponds to the “nodes” of the network, the computers that run the related program and store a record of the entire blockchain as it stands. They do not necessarily correspond to “miners,” the computers that do the work to add new blocks to the blockchain, but in practice there is a lot of overlap.
Mining is where everything starts to get coins. Each block records the transactions that occurred in the time since the last block was mined. Each block also records any previous transactions, however, through a sequence of characters known as a “hash”. Hashes are generated by subjecting a set of data – in this case, transaction data – to cryptographic transformations. A given set of data will generate only one hash and altering even an iota of the original data, due to a phenomenon known as the “avalanche effect”, will cause it to produce an unambiguous hash is different. Hashes also can’t be used to get the original data, just to check if the dataset in front of you matches the data that generated the hash.
In addition to its own transaction data, each block incorporates the hash of the previous block. Then, trying to sneak a fraudulent transaction into a long-forgotten block would then discard any subsequent hashes and the other participants of the network would reject that version of the blockchain.
The only way to change the blockchain is to control the majority of the network’s computing power. Such a controlling entity could carry out a 51% attack, preventing transactions from being confirmed and canceling transactions that occurred while they were in control of the network; in other words, they can spend their crypto twice (double spending), which will depreciate its value quickly, as fast as the ex-lover turns his back.
However, even if a 51% attack occurs, the hacker probably won’t be able to reverse or alter past transactions. The reason is that the enormous amount of work that has been recorded in those transactions, requires an equally enormous amount of work to undo (as in the pyramid metaphor above). Generating a hash is trivial for a modern computer, however, the bitcoin network poses an artificial barrier, known as “mining difficulty,” or diff.
Making mining difficult involves establishing a maximum value for a valid hash: the lower the maximum, the more work is required. The hash of block #0 is
The string of 10 leading zeros indicates a very low value, but that comes easily compared to the 17 leading zeros in hash block #431233. For block #0, the difficulty is 1; for #431233.
The harder it is to find a valid hash, the more guesses are lost. Of course, a given set of data can only generate one hash, which is extremely unlikely to fall below the target. For more than one, miners add a “nonce,” an integer at the end of the transaction data that causes it to generate a completely different hash. There is no way to determine an exact nonce other than trial and error: the nonce of block #431223 is 410871698, suggesting that a successful miner must have taken more than a few cracks.
The network calibrates the difficulty so that on average, someone finds a valid nonce and mines a new block every ten minutes. Having more miners makes the network more powerful, but it also makes it more likely for someone to get a “yellow card”, so the network lowers the target and increases the difficulty.
Mining is a competitive process, but it is not a lottery race. Anyone can hit the lucky number. Mining companies together increase their chances of collective success, as mining a new block comes with transaction fees as well as a reward of newly created bitcoins (reward has been reduced from 50 BTC to 12, 5 at the time of writing and will eventually run out).
Mining pools have raised concerns of a 51% attack, but the only pool that has acquired most of the computing power of the bitcoin network – ghash.io in July 2014 – voluntarily reduce its scale to deflect suspicion.
Ironically, the bitcoin community still relies on trust from time to time.
Distributed Ledger Summary
It’s not the simplest solution for the ten people in the test, but it works pretty well. Each installs a bitcoin (or another cryptocurrency) application, sets up a quick and dirty mining rig, and goes to work to maintain a single public ledger over which each of them has control. control equally. After a few minutes of widget transactions, each of their computers starts running through the nonces to find a valid hash. When one of these — anyone’s guess — succeeds, it broadcasts the new hash to the network and everyone updates their blockchain. Making sure that no one interferes with previous transactions is as simple as making sure that two numbers match, a process that is of course automatic.
If the five unite, they have the ability to bring the network to a halt and cripple any new transactions, but they cannot go back and correct the history of the transaction. To do that, someone would need to basically control the computing power of the entire network; of course, that would leave them with a complex, private simulation, but of no value to anyone else. Like fiat, the value of cryptocurrencies evaporates with no trust left in those who issue it, and this is also ironic, given that distributed ledgers exist to eliminate trust. centralized organizations.
See also: Why people miss the most important invention of the past 500 years
Distributed Ledger Application
Bitcoin’s distributed ledger has proved resilient and even relatively popular, and the technology has begun to pique the interest of banks, governments, and others. Banks see a way to avoid fraud and eliminate unnecessary audits.
With the government, Honduras is working to commit to registering land on a blockchain.
There are a host of other potential uses, as any information – not just an exchange of value – can be committed to a blockchain. Emails, marriage certificates, votes, wills, you name it. “Smart Contracts” promise to automate large parts, if not all, of some businesses by encoding self-executing contracts into a blockchain.
See also: What is Proof of Work (POW)?
What is Blockchain?
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