Chapter 6 : Data Convergence — Blockchain — Introduction to to Bitcoin and CryptoCurrency
Bitcoin : What is it?
How Does it Work?
Bitcoin Mining
Value of Blockchains
Bitcoin is for everyone
Cryptocurrency:
Public key encryption:
Private key encryption:
Key agreement exchange:
Digital signatures:
Hash functions:
Elliptic curve Encryption:
There is tremendous interest in the cryptocurrency space right now and equal parts confusion, uncertainty and doubt. Bitcoin, cryptocurrencies, blockchain, ICOs. What do these even mean? The natural response to these foreign concepts is usually skepticism and rejection, but beneath the jargon lies a powerful new technology revamping our financial system.
Bitcoin started as an experiment in the depths of the global Financial Crisis of 2008 aiming to build a better financial system. Early on, cryptocurrencies developed a seedy undertone as they were mainly associated with black market trades: drug deals, ransomware payments, money laundering and tax evasion. Cryptocurrency has been described as the most disruptive technology since the internet as well as a fraud or a massive Ponzi scheme.
The pundits say it is a speculative bubble, but that’s simply an easy out for those who have failed to find the proper explanations. They have the merits to ask the right questions, but ultimately fail to identify the main reasons behind the fast-growing appetite for cryptocurrency. Bitcoin and other cryptoassets are an emerging new asset class experiencing rapid growth as a fundamentally innovative new technology.
We live in a digital era where the new generation prefers to trust the “abstract,” question traditional norms and find a better way forward through technology. Bitcoin brings a multifunctional financial utility to the world by creating an open financial system and allowing us to store and transact value in ways that we never thought imaginable before.
Bitcoin : What is it?
Bitcoin is digital money that is not issued or controlled by anyone. It is used to securely store and transfer any amount of value anywhere in the world. It is used to buy goods and services, store wealth, or send value to anyone without the permission of a third party. Often regarded as “Digital Gold,” bitcoin that is stored properly cannot be hacked, stolen or seized by a government. Thus giving people full proprietorship much like having a Swiss bank account in their pocket. Unlike physical gold, Bitcoin is cheaper, faster and more efficient to store or send anywhere in the world. Bitcoin is divisible to the eighth decimal place and is completely digital, allowing the transfer of any monetary value. Opposed to government “Fiat” currencies, which can be manipulated and devalued, there is a finite supply of 21 million bitcoins making it a scarce and valuable asset. Bitcoin is the internet of money and will do for finance what the internet did for communication.
How Does it Work?
The Bitcoin network is a peer-to-peer network that runs on a decentralized distributed self-clearing ledger called the blockchain. Units of currency that run on the Bitcoin network are called bitcoins, which are used to store and transmit value among network participants. Unlike most currencies issued by central banks, which can be devalued and manipulated, bitcoins are issued according to a fixed set of rules to create sound money that can’t be manipulated by a central authority or malicious actor. Users can buy or sell goods and services, send money to people or organizations, or even extend credit in a fast, secure and borderless manner. The only prerequisite for access to these coins is an internet connection and a private key that forms a pair with public-facing keys to provide access to the coins stored on the Bitcoin network. Unauthorized access to someone’s private key is analogous to stealing gold from their vault.
Decentralized: There is no central entity or one person with control.
Distributed: Instead of one central server owned and operated by a singular entity, Bitcoin’s ledger is distributed across the globe making it impossible to shut down as there is no central point of failure. There is no Bitcoin HQ address for someone to raid; there is no central server to hack.
Bitcoin Mining
The database is maintained by miners: people or businesses who have set up specialized computers to process transactions by contributing their electricity and computer processing power to the network. In exchange, they receive transaction fees and/or new bitcoins that are released into the network by the protocol when a new block is added to the chain. Miners provide a public service by securing the network and the network rewards them for their work.
For this to work, users broadcast transactions to the network and miners record them with specialized compute power by racing to complete complex mathematical puzzles, which prove that they are working for the Bitcoin network. Each new block is added to the blockchain and those transactions are confirmed and recorded every 10 minutes. Then the miners’ race for the next block begins. This is all dictated by the rules of the Bitcoin algorithm/protocol and its underlying NSA cryptographic hashing algorithm (SHA-256) as outlined in the original Bitcoin white paper.
Value of Blockchains
Before blockchains it wasn’t possible to actually own a digital asset. If I send you an mp3 file you only have a copy, while the original remains with me — there are two copies. When it comes to money, if I send you
10 and it’s now yours. With blockchain technology, we now have a way to prove and enforce the concept of digital scarcity and track the ownership of digital assets in a decentralized way.
The idea that we can have money living on the internet is a breakthrough. We now have the same open access architecture we saw on the internet for communication but for finance.
The first set of internet protocols enabled global permission-free exchange of information which has completely changed the world. This new set of blockchain based protocols or “cryptoassets” enable global permission less exchange of value. The ability to exchange value on the internet is a game changer. We will see vastly improved ways of organizing capital, new markets, or even decentralized autonomous organizations as blockchains will be making decisions, and allocating resources and capital in ways that no human can match.*
“In its purest form, currency is confidence. It’s a network effect around an agreed-upon medium of exchange that has some promise of scarcity. Bitcoin enforces its scarcity through a combination of cryptography and economic incentives (“cryptoeconomics”). A lot of people find that more comforting than relying on the good faith of a government. In math we trust.”
- David Sacks Founder of Paypal
Bitcoin is for everyone
No person, company, or organization is in control of Bitcoin: it’s a decentralized digital currency that’s powered by a huge, distributed network of computers.
As such, when you own Bitcoin, only you have access to your funds. You’ll typically send, receive, and store it using a secure digital wallet app which you can download for free.
It’s really important to remember that, since no bank or other financial intermediary ever has access to your wallet app, you’re in charge of keeping it secure.
Cryptocurrency:
Cryptography is the process of communicating securely in an insecure environment — i.e. where other people can listen in and control the communication channel.
The message you wish to send is converted to a cipher text that appears to be gibberish unless you know the secret to unlocking it.
If you have used Bitcoin at all, you have probably heard of a private key. Private keys are vital to the Bitcoin system. They are the mechanism for proving ownership of bitcoin. This is what allows a user to authorize a transaction on the network. Private keys exist in many forms outside of Bitcoin for many purposes, and most people who are familiar with them from a previous experience would know them as a way to send encrypted messages.
For every private key that exists in Bitcoin, there is a 1:1 relationship with something called a public key. As you can imagine, a private key is intended to remain private and shared with no one, under any circumstance. A public key, in contrast, can be shared with anyone — there is no danger in me placing my public key on my website, for example, or to e-mail it to a client to receive payment for some activity. In this sense, you can think of public and private keys like a username and password — one allows you to identify yourself, while the other allows you to prove you are that person. However, unlike a password, a private key can never be reset or recovered if lost. Thus, a private key is an extremely important piece of data and should be protected perhaps to the point of paranoia.
Due to the 1:1 guarantee, public and private keys share a cryptographic relationship that links them together. In Bitcoin, private keys produce a public key via an Elliptical Curve Digital Signature Algorithm, or ECDSA. A private key that is an input for that algorithm will always produce its corresponding public key. However, the public key can never be reverse-engineered to produce its corresponding private key due to the one-sided nature of this algorithm.
A Bitcoin private key is usually a 256-bit number, which can be represented a number of ways. Public and private key pair cryptography is what powers the address system in Bitcoin — the cryptocurrency equivalent to a checking account. A new address can simply be generated programatically. Whenever a new one is required, you can use interface of your choice (perhaps a Bitcoin wallet) and make one.
Let’s see some concepts, what they are and what they do.
Public key encryption:
A code generated by public key encryption attached to an electronically transmitted document to create a shared encryption key that they can in order to verify the contents of the document.
Private key encryption:
A private key is an alphanumeric string of data that corresponds to a single specific wallet or “public address”. Private keys can be thought of as a password that enables an individual to access their crypto wallet/account. Never reveal your private key to anyone, as whoever controls the private key controls the account funds. If you lose your private key, then you lose access to your wallet.
Key agreement exchange:
Key agreement protocols enable two or more parties to create a shared encryption key that they can use to encrypt or sign data. The data can then be confidentially shared with the corresponding parties without other parties obtaining the information.
Digital signatures:
A digital signature is a method of approving a transaction. In order to send a transaction, a digital, private key must be used to verify true ownership of the wallet or ethereum address. For example, if Alice tries to send Bob ether, she needs to be able to verify that she is sending ether from her specific wallet. She does this by using her private key which acts as a digital signature that approves the transactions, thereby sending the ether to Bob.
Hash functions:
A function that takes an input, and then outputs an alphanumeric string known as the “hash value” or “digital fingerprint.” Each block in the blockchain contains the hash value that validated the transaction before it followed by its own hash value. Hashes confirm transactions on the blockchain.
Elliptic curve Encryption:
Elliptic curve encryption (ECC) is an advanced mathematical category that is based on arithmetic operations on an elliptic curve. In ECC, multiplication modulo a prime is simple but the division is practically impossible, which is referred to as the discrete logarithm problem. This is useful in cryptography because it enables modern computer systems and cryptocurrencies to use private keys and digital signatures.
SOURCE : Hackernoon, pluralsight, Consensys
