This series is based on Blockchain by Melanie Swan. Each article is a chapter summary whose purpose is to supplement your understanding of the material. To get a more in-depth understanding of the material, read the book and support Melanie. You can find the book here!
What is the relationship between blockchain, protocol, and currency?
What is the relationship between Bitcoin and the double-spend problem?
How do users use Bitcoin?
What are wallet services?
How is Bitcoin used in practical life?
Key Terms & Definitions
Protocol — a system of rules that explain the correct conduct and procedures to be followed in formal situations
Double-spend problem — an attack where the given set of coins is spent in more than one transaction
Byzantine Generals’ problem — a thought experiment meant to illustrate the pitfalls and design challenges of attempting to coordinate an action by communicating over an unreliable link
Public address — an identifier of alphanumeric characters that represents a possible destination for a digital currency payment
Private key —a secret number that allows digital currencies to be spent
eWallet — an online account with an external provider where bitcoins can be stored
Crypto-security — a component of communications security that deals with the creation and application of measures used to protect encryption systems and methods from enemy discovery, decryption, interception and tampering
Push technology — communication where the request for a given transaction is initiated by the publisher or central server
Pull technology — communication where the initial request for data originates from the client, and then is responded to by the server
Fiat —state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard
I. Technology Stack: Blockchain, Protocol, Currency
Bitcoin terminology can often be confusing since the word Bitcoin is used to refer to three things: the blockchain technology, the protocol on top of the blockchain, and the digital currency
Underlying blockchain technology (ledger database) - The decentralized public ledger that holds all transaction records on the network - Database that network nodes run and miners verify
Protocol (software) - The software that facilitates the transfer of money in the blockchain
Digital Currency (Bitcoin) - The currency system that is traded on exchanges and used in transactions
All cryptocurrencies are made up of these three parts: blockchain, protocol, and currency - Some currencies, however, share a blockchain with other currencies (ex. Counterparty or XCP runs on the Bitcoin blockchain)
II. The Double-Spend & Byzantine Generals’ Computing Problems
Double-spend problem - Prior to blockchain technology, digital currencies could be copied and the same coin could then be used over and over - It was impossible to tell what coins weren’t already spent without the help of a third party (thus the introduction of services such as PayPal) - Third parties had to intervene and keep a centralized ledger to prevent the same coin from being spent twice - For more information, visit http://blogs.cornell.edu/info4220/2013/03/29/bitcoin-and-the-double-spending-problem/
Bitcoin solves the double-spend problem and the Byzantine Generals’ problem - Bitcoin combines peer to peer data-sharing tech with public-key cryptography to solve the double-spend problem - The blockchain is trust-less (users do not need to trust one another and no third party is needed), thus solving the Byzantine Generals’ problem
New blocks holding the most recent transactions are created sequentially and linked to the last published block - All information on the blockchain is public and can be inspected on sites such as www.blockchain.info
How a Cryptocurrency Works
Overview - Bitcoin is a different form of money and can be used to buy and sell items over the Internet - Users need an address, a private key, and a wallet to use Bitcoin - Other people need your wallet to send Bitcoins to you - Your private key (cryptographic secret) allows you to send Bitcoin to others - Wallet services help you manage you Bitcoin - There is no centralized “account”, as long as you hold a private key, you hold Bitcoin
eWallet services and personal crypto-security - If you lose your private key, you lose all the Bitcoin associated with that key, there is no retrieval system - Consumers need to understand personal crypto-security to properly protect their digital assets and to prevent becoming victims of theft - Coin mixing — mixing your coins with other transactions to make your transactions more anonymous — is a good strategy and can be done with services such as Helix by Gram and Dark Wallet - Blockchain is a push technology meaning that users only push pertinent information concerning the transaction when needed thus preventing too much personal information from existing online - Pull technologies, on the contrary, require central storage of consumer information and can attract hacking attacks - The lack of a third party also significantly reduces transaction fees
Merchant acceptance of Bitcoin - BitPay, Coinbase, and Coinify are some of the major Bitcoin merchant processors - Services that combine existing vendor processing software with Bitcoin processing software will most likely emerge in the future - Mobile payment functionality is also a focus to increase merchant acceptance
Summary: Blockchain 1.0 in Practical Use
Overview - Blockchain has the potential to become the “Internet of Money” and connect finances - The introduction of alternative currencies reduce merchant payment fees drastically to below 1% - Users can send and receive funds immediately with the use of digital currencies - Blockchain 1.0 (currency) is starting to be extended into Blockchain 2.0 (contracts) to create programmable money
Relation to fiat currency - Currently, Bitcoin prices are volatile and has ranged considerably - Services such as Bitreserve have tried to stabilize Bitcoin prices by locking up deposits - The market cap of Bitcoin exceeds that of a small country’s GDP at 86 billion USD (as of 10/12/2017) - Money supply of Bitcoin is predetermined at 21 million - New coins are released every 10 minutes and will reach the 21 million unit cap by 2040 - Milli-bitcoins (mBTC) are 1/1000 of a Bitcoin and Satoshis are 1/10000000 of a Bitcoin
Regulatory status - Government regulation will influence whether or not the blockchain industry can grow into a mature service - Some countries have banned Bitcoin (Bolivia) but other have adopted it as an official currency (UK) - Countries are starting to realize that Bitcoin is different enough that it requires new legislation to regulate
Cryptocurrencies are made up of blockchain (public ledger), protocol (transaction software), and currency (coin)
Blockchain technology solves the double-spend problem and the Byzantine Generals’ problem
All transactions of the blockchain are public can be found online
To use Bitcoin, one needs an address (receive coins), a private key (send coins), and a wallet (manage coins)
Consumers must understand personal crypto-security to safely protect their digital assets
The elimination of a third party drastically reduces transaction fees, making it more attractive to merchants
Blockchain could one day become the “Internet of Money” and connect finances
Though volatile, the market cap of Bitcoin already far exceeds that of many countries
Government regulations play an important role in the acceptance of cryptocurrencies
Bitcoin will require new legislations to be properly regulated
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