Blockchain Technology
The Blockchain Reward
Lets talk about the blockchain reward, as nodes need to solve cryptographic puzzles on a P2P network through the use of bruteforce, and the number of possible combinations is about 1077, Satoshi Nakamoto decided to include an incentive in the Bitcoin system to make up for all these great efforts.
The first node to solve the puzzle will be awarded with a reward, which is known as the “block reward”. The first ever reward was set at 50 bitcoins. In reality, every time a new block is included in the blockchain, it generates a corresponding reward anew.
Nakamoto also figured out a way to control the creation of new bitcoins, by setting a limit of up to around 10 minutes between new blocks being included in the blockchain. Looking at it this way, you can say a cryptographic puzzle is solved every 10 or so minutes. That means 144 blocks per day or 52560 per year. As more nodes and more powerful computers join the network, puzzles will be solved much faster.
To avoid any inflationary trends, Nakamoto also included a parameter called ‘Difficulty’ in the protocol. This increases the number of leading zeros in the resulting hash when a node tries to solve the puzzle. In addition to this, the block reward is halved every 210,000 blocks (which is approximately every 4 years). The last reward will be awarded in the year 2140.
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Public and Private Keysvs. Public Address
To understand bitcoin and its intricate structure, you need to know
the difference between three terms whose definitions are often, easily
(and mistakenly), interchanged.
PRIVATE KEY: In their purest form, private keys are 256-bit numbers that are generated randomly and used to authorise the spending of bitcoins. ‘Bit’ is short for binary digit and always represented by one of the two binary figures: a 0 or a 1.
Since the number of possible 256-bit combinations is extremely large, a simpler system has been created to represent the private key. A 64-character hexadecimal system using letters a-f and numbers 1-9, like so:
ef235aacf90d9f4aadd8c92e4b2562e1d9eb97f0df9ba3b508258739cb013db2.
PUBLIC KEY: Derived from the mathematical theory of elliptic curve multiplication, public keys are created from private keys. They are used to confirm that the data sent in the blockchain is authentic; in other words that it comes from the owner of the specific
PRIVATE KEY: Thanks to the public key, the private key takes the shape of a digital signature, without ever being publicly revealed. The receiver, or any peer in the network, will only see the digital signature and public key. Example of a Public Key:
030589ee559348bd6a7325994f9c8eff12bd5d73cc683142bd0dd1a17abc99b0dc.
PUBLIC ADDRESS: Also known as the bitcoin address, the public address is also a major identifier for a transaction and it’s derived from the public key. In fact, this is the information that people need to input if they wish to send you bitcoin. Each bitcoin transaction carries with it a unique public address, generated by applying the public key into a cryptographic algorithm called Secure Hash Algorithm (SHA). Example of a Public Address: 1J7mdgA5rbQyUHE2NYd5x39WVBWK7AfsLpEo6XZy
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Transaction Fees
Is another new day to learn something about the blockchain and its technology, and today we will be looking into Transaction Fees.
It is no secret that miners invest in fast computing devices to be able to compute as many hashes as possible. A lot has also been said and written about the high electricity bills that individuals or pools of miners have to pay in order to run their computers.
The incentive, of course, is the block reward! As mentioned previously, this is a number of bitcoins starting from 50 and halving every four years until the last year of 2140, when all 21 million bitcoins will have been mined. But, if the block reward is low and doesn’t cover all of the expenses, what then? How will the bitcoin network operate and run without the incentive to reimburse the miners’ expenses fully? The answer is transaction fees. There is also incentive with transaction fees, which may see a substantial rise through time.
It is logically deduced that even though the bitcoin cash system attempted to remove the fees imposed by the financial institutions to the merchants (who consequently passed them on to the consumers), transaction fees in the bitcoin world will eventually increase to cover the mining expenses. Keeping in mind that the bitcoin reward is halved every four years, only the rise of bitcoin’s price will keep transaction fees low. Time will tell!
Lets take a break here, we will continue from the next publication. Stay tuned!!!
Cryptography
Is another new day to learn something about the blockchain and its technology, and today we will be looking into Cryptography.
Cryptography has a long history, dating back thousands of years. At its heart, the principle definition has remained the same even while technological advances have radically modernised cryptography.
It is the discipline or science of keeping data and messages secure (or secret) while communicating and/or transmitting them over an insecure route or through a vulnerable medium.
Historically speaking, the use of cryptography heavily influenced the course of action in both World War I and World War II. Since then, cryptography has made huge advances into the digital space. The Bitcoin network uses cryptography as its primary security measure.
While transacting bitcoin, cryptography comes into play when describing the role of the Secure Hash Algorithm (SHA). This is a cryptographic algorithm designed by the National Security Agency (NSA). In order for a user to obtain his or her public keys, the corresponding private key is fed into SHA-256. This generates the public key, which is then fed back into the SHA-256 to generate the public address. The SHA-256 algorithm takes a string of data of any length and transforms it into exactly 256 bits – that is, a series of 256 1s and 0s.
Another innovation of Satoshi Nakamoto is the digital signature, which is actually not only unique to every block but also contains links to the previous blocks that make its transactions irreversible. Digital signatures are another example of the kind of cryptography used in the Bitcoin network.
Lets take a break here, we will continue from the next publication. Stay tuned!!!
Digital Signature
Is another new day to learn something about the blockchain and today we will be looking into Digital Signature.
The digital signature is the result of a mathematical formula
(or, cryptographic hash algorithm), known as SHA-256. A file of data is accepted and scanned through this cryptographic algorithm, generating an output of 64 alphanumeric characters. This output is known as the
digital signature. Keep in mind that the length of this alphanumeric code will always be 64 characters, regardless of the length of the received data file, and that every digital signature always begins with 4 zeroes.
To make things even more secure, the system is designed so that if just one character is changed in the data, the SHA-256 algorithm will generate an entirely different signature. If a user was attempting to trick the system by changing the amount of bitcoins he received from the sender, the corresponding digital signature would change as well, including all the previous signatures since the beginning of time. This makes it impossible for users to trick the system, which creates another layer of security.
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History of Blockchain
The backbone technology behind cryptocurrencies is the blockchain. It allows every client in the network to reach consensus without ever having to trust each other.
The early days
The idea behind blockchain technology was described as early as 1991 when research scientists Stuart Haber and W. Scott Stornetta introduced a computationally practical solution for time-stamping digital documents so that they could not be backdated or tampered with.
The system used a cryptographically secured chain of blocks to store the time-stamped documents and in 1992 Merkle trees were incorporated to the design, making it more efficient by allowing several documents to be collected into one block. However, this technology went unused and the patent lapsed in 2004, four years before the inception of Bitcoin.
Reusable Proof Of Work
Computer scientist and cryptographic activist Hal Finney (Harold Thomas Finney II) introduced a system called RPoW in 2004,
Reusable Proof Of Work. The system worked by receiving a non-fungible Hashcash based proof of work token and in return created an RSA-signed token that could then be sent from one person to another.
RPoW solved the double spending problem by keeping the ownership of tokens registered on a trusted server that was designed to allow users throughout the universe to validate its correctness and integrity in real time.
RPoW can be considered as an early prototype and a significant early step in the history of cryptocurrencies.
Bitcoin networkIn late 2008 a white paper introducing a decentralized peer-to-peer electronic cash system called "Bitcoin" was posted to a cryptography mailing list by a person or group using the pseudonym Satoshi Nakamoto.
Based on the Hashcash proof of work algorithm, but rather than using a hardware trusted computing function like the RPoW, the double spending protection in Bitcoin was provided by a decentralized peer-to-peer protocol for tracking and verifying the transactions. In short, Bitcoins are “mined” for a reward using the proof-of-work mechanism by individual miners and then verified by the decentralized nodes in the network.
Bitcoin came into existence when the first bitcoin block was mined by Satoshi Nakamoto on the 3rd of January 2009,
which had a reward of 50 bitcoins. The first recipient of Bitcoin was Hal Finney, he received 10 bitcoins from Satoshi Nakamoto in the world's first bitcoin transaction on 12 January 2009.
Ethereum
In 2013, a programmer and a co-founder of the Bitcoin Magazine by name Vitalik Buterin
stated that Bitcoin needed a scripting language for building decentralized applications. Failing to gain agreement in the community, Vitalik started the development of a new blockchain-based distributed computing platform, Ethereum, that featured a scripting functionality, called smart contracts.
Smart contracts are programs or scripts that are deployed and executed on the Ethereum blockchain, they can be used for example to make a transaction if certain conditions are met. They are written in a specific programming languages and compiled into bytecode, which a decentralized Turing-complete virtual machine, called the Ethereum virtual machine (EVM) can then read and execute.
Developers are also able to create and publish applications that run inside Ethereum blockchain. These applications are usually referred to as DApps (decentralized applications) and there are already hundreds of DApps running in the Ethereum blockchain, including social media platforms, gambling applications, and financial exchanges.
The cryptocurrency of Ethereum is called Ether, it can be transferred between accounts and is used to pay the fees for the computational power used when executing smart contracts.
Today blockchain technology is gaining a lot of mainstream attention and is already used in a variety of applications, not limited to cryptocurrencies.
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Safety of The Blockchain
Blockchains are secured through a variety of mechanisms that include advanced cryptographic techniques. Blockchain technology is the underlying structure of most cryptocurrency systems and is what prevents this kind of digital money from being duplicated or destroyed. The use of blockchain technology is also being explored in other contexts where data immutability and security are highly valuable. A few examples include the act of recording and tracking charity donations, medical databases, supply chain management, etc.
However, blockchain security is far from being a simple subject. So it is important to know the basic concepts and mechanisms that grant robust protection to these innovative systems.
Immutability and Consensus
Although many features play into the security associated with blockchain, two of the most important are the concepts of consensus and immutability. Consensus refers to the ability of the nodes within a distributed blockchain network to agree on the true state of the network and on the validity of transactions. Typically, the process of achieving consensus is dependent on the so-called consensus algorithms.
Immutability, on the other hand, refers to the ability of blockchains to prevent alteration of transactions that have already been confirmed. Although these transactions are often relating to the transfer of cryptocurrencies, they may also refer to the record of other non-monetary forms of digital data.
Combined, consensus and immutability provide the framework for data security in blockchain networks. While consensus algorithms ensure that the rules of the system are being followed and that all parties involved agree on the current state of the network - immutability guarantees the integrity of data and transaction records after each new block of data is confirmed to be valid.
The role of cryptography in blockchain security
Blockchains rely heavily on cryptography to get their data security. In this context, the cryptographic hashing functions are of fundamental importance. Hashing is a process whereby an algorithm (hash function) receives an input of data of any size and returns an output (hash) that contains a predictable and fixed size (or length).
Regardless of the input size, the output will always present the same length. But if the input changes, the output will be completely different. However, if the input doesn’t change, the resulting hash will always be the same - no matter how many times you run the hash function.
Within blockchains, these output values, known as hashes, are used as unique identifiers for data blocks. The hash of each block is generated in relation to the hash of the previous block, and that is what creates a chain of linked blocks. The block hash is dependent on the data contained within that block, meaning that any change made to the data would require a change to the block hash. Therefore, the hash of each block is generated based on both the data contained within that block and the hash of the previous block. These hash identifiers play a major role in ensuring blockchain security and immutability.
Hashing is also leveraged in the consensus algorithms used to validate transactions. On the Bitcoin blockchain, for example, the Proof of Work (PoW) algorithm utilizes a hash function called SHA-256. As the name implies, SHA-256 takes data input and returns a hash that is 256 bits or 64 characters long.
In addition to providing protection for transaction records on ledgers, cryptography also plays a role in ensuring the security of the wallets used to store units of cryptocurrency. The paired public and private keys that respectively allow users to receive and send payments are created through the use of asymmetric or public-key cryptography. Private keys are used to generate digital signatures for transactions, making it possible to authenticate ownership of the coins that are being sent.
Though the specifics are beyond the scope of this article, the nature of asymmetric cryptography prevents anyone but the private key holder from accessing funds stored in a cryptocurrency wallet, thus keeping those funds safe until the owner decides to spend them (as long as the private key is not shared or compromised).
The Cryptoeconomics
In addition to cryptography, a relatively new concept known as cryptoeconomics also plays a role in maintaining the security of blockchain networks. It is related to a field of study known as game theory, which mathematically models decision-making by rational actors in situations with predefined rules and rewards. While traditional game theory can be broadly applied to a range of cases, cryptoeconomics specifically models and describes the behavior of nodes on distributed blockchain systems. In short, cryptoeconomics is the study of the economics within blockchain protocols and the possible outcomes that their design may present based on its participants’ behavior. Security through cryptoeconomics is based on the notion that blockchain systems provide greater incentives for nodes to act honestly than to adopt malicious or faulty behaviors. Once again, the Proof of Work consensus algorithm used in Bitcoin mining offers a good example of this incentive structure. When Satoshi Nakamoto created the framework for Bitcoin mining, it was intentionally designed to be a costly and resource-intensive process. Owing to its complexity and computational demands, PoW mining involves a considerable investment of money and time - regardless of where and who the mining node is. Therefore, such a structure provides a strong disincentive for malicious activity and significant incentives for honest mining activity. Dishonest or inefficient nodes will be quickly expelled from the blockchain network, while the honest and efficient miners have the potential of getting substantial block rewards. Similarly, this balance of risks and rewards also grants protection against potential attacks that could undermine consensus by placing the majority hash rate of a blockchain network into the hands of a single group or entity. Such attacks, known as 51 percent attacks, could be extremely damaging if successfully executed. Due to the competitiveness of Proof of Work mining and the magnitude of the Bitcoin network, the likelihood of a malicious actor gaining control of a majority of nodes is extremely minimal. Furthermore, the cost in computing power needed to attain 51 percent control of a huge blockchain network would be astronomical, providing an immediate disincentive to make such a large investment for a relatively small potential reward. This fact contributes to a characteristic of blockchains known as Byzantine Fault Tolerance (BFT), which is essentially the ability of a distributed system to continue to work normally even if some nodes become compromised or act maliciously.
As long as the cost of establishing a majority of malicious nodes remains prohibitive and better incentives exist for honest activity, the system will be able to thrive without significant disruption. It is worth noting, however, that small blockchain networks are certainly susceptible to majority attack because the total hash rate devoted to those systems is considerably lower than the one of Bitcoin.
As the uses of blockchain continue to evolve, their security systems will also change in order to meet the needs of different applications. The private blockchains now being developed for business enterprises, for example, rely much more on security through access control than on the game theory mechanisms (or cryptoeconomics) that are indispensable to the safety of most public blockchains.