CRYPTO(CURRENCIES/TOKEN/ASSET/GRAPHY) - PART 1

Cryptography = Greek(secret writing)


 There are so many cryptocurrencies, each working differently with different rules and mechanisms. For example, Bitcoin uses a mechanism called 'proof-of-work' to ensure that anyone can add blocks to the blockchain at a certain cadence without a central actor coordinating access or providing permission.

BITCOIN

Bitcoins are digital assets ('coins') whose ownership is recorded on an electronic ledger that is updated (almost) simultaneously on about 10,000 independently operated computers around the world that connect and gossip (is a protocol) with each other. This ledger is called Bitcoin's blockchain. 

Transactions that record transfer of ownership of those coins are created and validated according to a protocol, a list of rules that define how things work and which therefore govern updates to the ledger. The protocol is implements by software, an app that participants run on their computers. The machine running the apps are called nodes.

Node

An independent validator of all pending transactions wherever they arise, and updates its own record of the ledger with validated blocks of confirmed transactions. Specialists nodes, called miners, bundle together value transactions into blocks and distribute those blocks to nodes across the network.

Anyone can buy bitcoins, own them, and send them to other people. Every bitcoin transaction is recorded and shared publicly in plain text on Bitcoin's blockchain. It is not encrypted. By design, everyone sees all details of all transactions. Anyone can, in theory, create bitcoins for themselves too. This is part of the block creation process, called mining.

What is the point of Bitcoin?

As described by a pseudonymous Satoshi Nakamoto, published in October 2008. The abstract of the paper: 

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double spending. We propose a solution to the double spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing  chain of hash-based proof-of-work, forming a record that cannot be changed without redoing of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. as long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, accepting the longest proof-of-work chain as proof of what happened while they were gone.

The first sentence says it all. For the first time in history, we have a system that can send value from A to B, without the physical movement of items or using specific third-party intermediaries. 

BLOCKCHAIN OR BLOCK CHAIN

There is no mention of a blockchain at all in the original bitcoin paper, even though we are constantly reminded that blockchain is built on blockchain or that blockchain is the underlying technology of Bitcoin. A chain of blocks was not the purpose of Bitcoin, it is just the design that was developed to achieve the objective, the solution to the business problem.


How Does Bitcoin Work?

The Bitcoin blockchain is managed by software running on computers that communicate with each other forming a network.

The software should have the ability to do the following tasks,

  1. Connect with other participants in the Bitcoin network.
  2. Download the blockchain from other participants.
  3. Store the blockchain.
  4. Listen for new transactions.
  5. Validate those transactions.
  6. Store the transactions.
  7. Relay valid transactions to other nodes.
  8. Listen for new blocks.
  9. Validate for new blocks.
  10. Store those blocks as part of its blockchain.
  11. Relay valid blocks.
  12. Create new blocks.
  13. Mine new blocks.
  14. Manage addresses.
  15. Create and send transactions.
To understand how Bitcoin works, and why it works the way it does, it is important to keep in mind the objective: to create an electronic payment system that cannot be censored, and to allow anyone the ability to send payments 'directly from one party to another without going through a financial institution'.

Hmmm, let's start with a classic centralized model and then try to decentralize it.

Classic Centralized Model

Let's start with the ledger which keeps tracks of balances, managed by an administrator. You can think of it as a list with two columns: Account, Balances

                            Bookkeeper
----------------------------------------------------
    Account                |            Balance
----------------------------------------------------
    000001                 |           $100.00
    000002                 |           $200.00
    000003                 |           $300.00
-----------------------------------------------------

The administrator assigns account numbers to customers, and customers make payments by instructing the administrator. There is an authentication process where the customer proves that they are the account holders before the admin will carry out the payment instruction. So each customer is named and, for security, has a password linked to their account.

The admin maintains the central record of balances and makes all payments. They are responsible for ensuring that no one spends money they don't have or spend the same money more than once, the 'double spend'.

If we want resistance to control and censorship, and to allow anyone to be able to transact with anyone else, we need to remove the admin.

First, let's remove the admin from the account opening process, so that anyone can open an account without needing permission from the admin.

Problem: Accounts Need Permission

Someone has to set up an account and assign it to you. It is the admin's job to assign an unassigned account number then set you up with a username and password, so that when you ask to make a payment, admin knows it is really you making the request. In setting up the account, admin has granted permission for you to open the account, and may, equally, choose to refuse that permission.

Is there a way you can open an account without having to ask permission? Well, cryptography provides a solution.

Solution: Use Public Keys as Account Numbers

Instead of names or account numbers and passwords, why not use public keys as the account number, and digital signatures instead of passwords?

By using public keys as account numbers, anyone can. create their own accounts with their own computer without having to ask an admin. Remember a public is derived from a private key (ECDSA), which is a number picket at random. 

In Bitcoin and most other cryptocurrencies, account numbers are mathematically derived from public keys(not public keys themselves), and are called addresses. 


                                    Bookkeeper

-----------------------------------------------------------------------

Address(derived from public key)                     | Balance

-----------------------------------------------------------------------

1mkk1Qr....                                                        | $100

-----------------------------------------------------------------------

1Lna1Hna....                                                      | $10

-----------------------------------------------------------------------

1PFZiJCY....                                                      | $250

-----------------------------------------------------------------------



Bitcoin address allow people to pay to it. No one can spend anything from it unless they have the private key, which only you have. Addresses can be many, wallet software will manage all of them for you.

Could someone else already be using an address that you randomly picked? Possible, but unlikely. 

Public/Private key pairs also solve the authentication problem. You don't have to log in to prove that you are the account holder. When sending a payment instruction you digitally sign the transaction with your private key, and the signature proves to the admin that the instruction is indeed coming from you, the account holder.

 PART 2: Eliminating Role of Bookkeeper (Coming Soon)







 


 

 



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