Writer’s Block(chain): A Byte-Sized Summary Of Bitcoin
Bitcoin aims to provide a decentralized peer-to-peer network to facilitate transfers of value online.
The Bitcoin whitepaper is relatively short and to the point, coming in at only nine pages. However, these nine pages created an entirely new way to deal with decentralization in the digital world: blockchain.
Bitcoin serves to create an alternative to the traditional financial system that isn’t run by a centralized entity. The decentralized nature of bitcoin cuts out the middle man, providing a platform where there is no need to trust in a central intermediary party to facilitate transactions.
Bitcoin aims to decrease transaction costs of sending and receiving value through this lack of a central intermediary party. Due to the strength of blockchain, millions of dollars worth of bitcoin can be sent across the world in mere minutes, with a transaction cost of only a few dollars.
There are three primary elements that were the “primordial soup” from which bitcoin — and thus blockchain — formed: cryptography, game theory, and peer-to-peer networking.
The basics. Bitcoin is a digital asset with a supply limited to 21 million. It acts just as fiat currency would, and can be exchanged for goods or services. However, Bitcoin is set up in a way that there is no centralized intermediary party through which your funds must pass before reaching the intended recipient. Instead, the bitcoin passes to the recipient directly, but only after the transaction is logged on the current “block”. Each of these blocks is cryptographically linked to the one before it in a way that ensures that the blockchain “ledger” of transactions cannot be tampered with. Further, game-theoretic principles make it completely impractical to ever modify this ledger of transactions. Once a transaction has been confirmed on the Bitcoin blockchain it is considered immutable and cannot be “rolled back” due to a combination of game-theoretic and mathematical certainties. This means that refunds or reversions of a transaction are not possible once they have been completed.
The power of cryptography. Bitcoin relies heavily on cryptographic principles, hence it is called a “cryptocurrency”. Primarily, Bitcoin uses something called a hash to encrypt data. A hash is a useful cryptographic tool for many reasons. First of all, the SHA-256 hash used by bitcoin is considered to be extremely secure, and could only be compromised if one were to try every possible combination of the 256 bits— to the tune of 2²⁵⁶ possibilities [hint: this number is unfathomably large, coming in at 78 digits long]. Second of all, any amount of data can be processed through this hash (as input) and be encrypted into an output that has exactly 256 bits (AKA it is a binary string that is 256 characters in length). Third, No matter the length of the input data that is processed through the hashing function, the output is always the same length as any other output of the hash. Finally, this hash is a one-way function. It is not possible to determine the input that was used to create any given output (and even very similar inputs can create drastically different 256-bit outputs!).
Bitcoin users use a wallet to store, send, and receive coins. These wallets contain a public address and a private address. The public address is where bitcoin is sent to. The private address is kept secret and known only to those in control of the wallet. The public and private keys are digital encryption keys that perform an inverse function. This means that if a transaction is signed with a private key, only the person’s public key can be used to decrypt it (and vice versa). This ensures that users maintain control of their wallets and that their bitcoin cannot be stolen. In order to remain secure, users must not share their private keys.
The “block” in the blockchain. In essence, each block is a segmented ledger of transactions that is distributed across the Bitcoin network of nodes. It is a “block” of data that is then permanently linked to the previous block of data in a manner that ensures that the ledger of transactions cannot be modified. These blocks are linked together via the block header, with each block referencing the block before it — and thus each block referencing all prior blocks in the chain.
The “chain” in the blockchain. Each of the blocks above is linked to the ones before it via the block header. The block header is composed of three parts: the “root” hash of the current block, the hash of the previous block, and the nonce (that, in essence, serves as a receipt for the proof of work). Since each block header is concatenated with the block header before itself being hashed, trust in each block gets stronger as more blocks are generated (as those newer blocks act to further verify the ones before them). In other words, each block contains what could be likened to a “Russian nesting doll” of transaction proofs for all of the blocks that came before it and thus all of the bitcoin transactions that have ever occurred. It follows that the further back a block gets in this chain, the more times other blocks have verified it down the line, and thus verified all of the transactions that the block in question contained.
Nodes, or the peer-to-peer transfer of bitcoin transaction logs. Bitcoin nodes are people that run software that logs all bitcoin transactions on their computers. Each node is connected to the other nodes (either directly or indirectly, like a web) and pass each transaction on to each other. Once this ledger of transactions becomes “full” it constitutes a proposed block, and must then be verified. However, not just any node can verify a block and add it to the chain. This is where bitcoin mining comes in.
Bitcoin mining, decentralized work, and decentralized reward. Miners run software on their computers that very resources intensive to run, as it is solving complex mathematical “proof of work” problems. However, if a miner successfully solves this proof of work problem they are allowed to propose a block for addition to the existing chain of blocks. If this block is accepted by the network (matching transactions that the network passed along, then the miner receives bitcoin. This is how bitcoin is “made” — entirely new bitcoins are created when each block is verified (however, this doesn’t last forever, bitcoin miner rewards decrease over time). These miners running nodes are in essence the keepers of the blockchain — without them, the system doesn’t work. Because of how important they are, users of bitcoin can attach what equates to a tip to their transactions, which is paid to the miner if they win that particular block verification.
Proof of work, game theory, and making trust an overwhelming mathematical probability. Proof of work is the way that miners become eligible to propose a block and receive the rewards associated with it. In essence, proof of work is a computer randomly generating numbers to plug into the block header in a way that when it is hashed it will equate an output that starts with a certain number of zeroes. Its called proof of work because there is no easy way out. Miners must run a program on their hardware that randomly plugs in numbers over and over and over until it stumbles upon an answer. Hence, the only way to win the block is to essentially win a mini-lottery by having the computer plugin and try as many numbers as it can until it stumbles upon a solution. This is resource-intensive by design — it makes it prohibitively costly for miners to attempt to be dishonest.
The game theory behind proof of work. Proof of work for each block serves an incredibly important process for bitcoin — without it, there would be no way to ensure that miners wouldn’t simply try to propose a faked transaction log that sends a lot of bitcoin to their own wallet or otherwise compromises the integrity of the transactions. The proof of work system prohibits this by making the probability of you solving a block directly proportional to the computer power at your disposal. This creates a game-theoretical gambit to ensure honesty. In order for anyone to reliably propose a block each time, they would have to control greater than 51% of all of the computational power of all of the miners combined. The sheer power of all of the computational power of all of the miners combined make this extremely improbable and exceedingly cost-prohibitive.
Blockchain, not block tree. Occasionally, some miners may solve the block around the same time. In this case, whichever miners block is used in the longest chain wins. This means that whatever block was sent to the most nodes and then used by the next miner to solve and so on will win. Thus, a 51% attack as described above would need to be sustained long enough to create a longer chain than any other competing, legitimate, blocks. Essentially, the idea is that the cost of launching some sort of attack to change a bitcoin block in this manner would cost much more than any gain you would receive from it. The trust in the bitcoin ledger is founded on the fact that any attempt to attack bitcoin would require more computing power than the rest of the network of miners combined for a sustained period of time.
Immutable? The bitcoin blockchain itself is considered by many to be immutable. This is the case, for the most part. However, the game-theoretic principles used to protect bitcoin do face some problems today. Through the rise of ASICs (dedicated and specialized mining hardware that are much more efficient as proof of work problems than a regular computer) and mining pools, bitcoin’s proof of work gambit might not be as strong as it was initially envisioned. ASICs and mining pools give some entities a much larger slice of the proof of work pie. Some mining pools control double-digit percentages of the total mining power at any given time. Additionally, proof of work blockchain verification methods such as that used by bitcoin are relatively energy-intensive. Finally, proof of work takes a lot of time. This means that bitcoin transactions are subject to a huge bottleneck — the bitcoin network can only handle a few transactions per second.
For these reasons, some blockchain technologies are looking to change the way of finding consensus through a proof of stake algorithm or other consensus methods that don’t rely so heavily on raw computational power. The game theory behind blockchain technology is starting to evolve beyond this foundation laid by bitcoin’s creator, Satoshi Nakamoto.
More on that later…
Disclaimer: The views expressed by the author above do not necessarily represent the views of the Ethereum Foundation.
