Basics of Blockchain Technology
19 important questions on Basics of Blockchain Technology
What is a solution that does not require a trusted third party for verification of digital content?
2. Distribute the ledger so that everybody can verify the data for themselves
- the stamp on the envelope can serve as time-stamp
- wide distribution of the ledger is important because otherwise somebody can establish an alternative ledger by distributing the ledger more widely
What are problems of solutions without a trusted third party?
- People would have to be incentivised to keep and store the ledger
What is the basic idea of Haber/Stornetta of hash digital content and post it in newspaper?
- the outcome is a short, unique code
- information about time and date is added
- distributed ledger
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What does a hash function do?
What is the input to a hash function?
- Text
- Data
- Video, music, photographs
- Fingerprints, irises
- Etc.
Limit: 2.09 exabytes
- So large it would take 220 years just to read in
What is the output from a hash function?
- tells you nothing about the length of the input
- 16 possible characters in each space
- digits 0 through 9, letters a through f
- number of possible outputs = 16ˆ64 or approximately 1.16*10ˆ77
- cannot use patterns of characters in the output as a roadmap for recovering the input, even if you know the hash function that generated the output
- only trial-and-error decryption will work
What is the summary of how to time-stamp a digital document?
2. Unique hash
3. Time & Date
4. Unique hash of time-stamped content
5. Distribute ledger or publish in newspaper
What is electronic cash?
- Fungibility of cash
- one unit of digital cash is indistinguishable from any other unit of the same digital cash
- owner is whoever is in possession
- even if units of cash have a serial number, you do not have a claim to a specific unit of cash
- you cannot reclaim stolen cash from its current holder (but you are entitled to take legal action against whoever took it away from you)
Is money on your bank account electronic cash?
Why do we need electronic cash?
- real-world marketplace: transactions are regularly done peer-to-peer using cash
- online marketplace: transactions via an intermediary using (credit) accounts
- cash transactions are non-reversible
- no trusted third party needs to provide (costly) verification
- transfer of cash is immediate
What are problems with electronic cash?
- Decentralised peer-to-peer solutions need to address these questions:
- how can you own something digitally that is fungible? How can you verify that somebody is the owner of fungible electronic cash?
- how can you store and validate data in a decentralised fashion?
What can you credibly establish using the ledger, with the distributed ledger solution?
- The amount of electronic cash owned by that person
- A record date at which that person owned electronic cash
What are the technologies assembled by Nakamoto (2008) in Bitcoin?
2. The Blockchain: recording new data sequentially in a write-only, indelible ledger
3. Proof-of-work: validating new data by cryptographic 'consensus' proof, in recurring 10-minute open competitions, instead of relying on a trusted third party
How do digital (cryptographic) signatures work?
- only the private key can generate a correct signature
- however, the public ket is linked to the private key in a way such that you can check whether the corresponding private key was used to generate the signature
Who updates the blockchain? Has to solve double-spending problem?
- A trusted third party codes blocks
- The chain is public, becoming a distributed ledger that can be verified by anyone
- Network members compete to create new blocks
- the competition is called proof-of-work
- proof of work: solve a puzzle that solely requires computing power
- node which solves the puzzle first creates the block
- node earns a reward IF block is accepted as correct by the network
How does proof-of-work work?
- if a coin is spend more than once, the block will not be accepted by the network
- if accepted, the reward is newly created ('minted' or 'mined') Bitcoin and transaction fees
What is the incentive mechanism by proof-of-work?
- to play the game, you have to commit expensive resources to the network. To win the game, you have to be honest
- when does this mechanism fail?
- one party holds onto more than 51% of the nodes and can thus validate an incorrect block
What 4 innovations did Nakamoto integrate to create Bitcoin?
- ensures bitcoin can only be transacted by the person who own the bitcoin (gives controlled access to your wallet)
2. Distributed ledger
- replaces a trusted third party to guarantee that the data are correct
3. The Blockchain
- makes changing the ledger impossible because changing one entry of the ledger would require to change the entire blockchain, one would have to rewrite the entire blockchain
4. Proof-of-work
- validates transactions, prevents double spending
What makes the blockchain brilliant?
- The blockchain essentially is an easy-to-handle and fool-proof transaction recording technology
- It naturally offers a feature that is essential for the functioning of markets: trust
The question on the page originate from the summary of the following study material:
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