The Era of Cryptocurrency (Part III)
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Continued
Third, comes the peer-to-peer network:
This technology first became popular with the various pirate schemes to share music without storing it in one central place where it could get confiscated. Instead, if you opened an account with one of the various peer-to-peer music sharing networks your computer became a “node” in a web of connected computers. All music stored on your computer was available to all other computers on the network and vice versa. The algorithms are complex and they need to deal with the fact that computers are not connected to the network the whole time, but this technology makes is possible for Bitcoin wallets to become “nodes” in a network, with the explicit purpose of validating each other’s transactions using the public key.
The fourth relevant piece of technology is “Proof of Work,” a lottery that involves hashing in pairs all 64-character transaction hashes of the past ten minutes and then hashing pairs of the resulting hashes until there’s only one hash left (called the Merkle root) and then repeatedly hashing the Merkle root with a specified length hash (the “nonce”) until a small enough hash can be generated. How small that hash is (think of it as rolling six dice until they add up to less than ten, for example) is the “difficulty” and the difficulty of the problem is continuously reset to keep the whole “proof of work” down to roughly ten minutes.
The four technologies were combined by the legendary Satoshi Nakamoto into the idea of the Blockchain:
Every ten minutes all nodes on the network ask their neighboring nodes and then the ones beyond (a bit like you’d go searching for a song on Gnutella) for as many time-stamped transactions (64 bit hashes) as they can get their hands on. Each node tries to piece together the full information on which wallet sent what Bitcoin to whom. Once you’ve checked (and endorsed) enough transactions you build them into a “block,” and can then start racing everybody to obtain “proof of work,” which involves heavy use of your CPU.
The first node to review a block of enough transactions and finish the requisite “proof of work” gets 25 Bitcoin (this it does by inserting an extra “coinbase” transaction whereby it is awarded 25 Bitcoin), publishes its results to the network for verification (incl. that it only awarded itself 25 Bitcoin) and the financial incentives are very strong to stop wasting time on unfinished blocks and try to build on top of the latest winner. Any transactions that weren’t included can hope to be included in the next block, but if they are not endorsed soon they get left out, presumably because they amount to double spending. (In the future, and to avoid inflation, the compensation in Bitcoin for calculating the next block will be halved to 25 and will keep being halved every 4 years).
This block is attached to the previous block and all previous ten-minute blocks to form the “blockchain.” All history is encapsulated in the header hash of the most recent block in the blockchain.
Recommended Books and Application to learn more about Cryptocurrency
1. The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology that Powers Them
2. The Blockchain and the New Architecture of Trust (Information Policy)
3. Blockchain Basics: A Non-Technical Introduction in 25 Steps
4. CryptoTrend mobile Application
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