Below is a draft of a book that i have started writing. It will be the first book released from the Macrohard hub and will begin the process of enhancing the curriculum of 'legitimate illiteracy', the basis of an entire school that i have created, that everyone can school in.
By means of this book, i will incorporate 'legitimate illiteracy' with 'cryptocurrency', introducing is mix among participants of the Macrohard hub. Where copies of the books are sold, it will intimate the world about 'cryptocurrency' in a legitimate illiteracy way and proceeds from sales will go towards the evolution and sustenance of the Macohard hub. The Macrohard hub is currently located in the Philippines.
The video below, was recorded at the Macrohard hub and on it, i started the inception of this book:
I am trying to recover a bit from the passing of my dad. I didn't play my role as son enough and it haunts me. This book will be dedicated to my parents. By its means, may i make them proud a bit and heal in turn.
Your boy Terry
The Blockchain
'A chain of blocks'.
Let us take a quick look at the relationship between blocks and chain. A block is a collection of data pertaining to transactions.
A transaction can take different forms. For example, the Bitcoin blockchain was built primarily to cater to the industry of ‘financial services’. Hence, the 'blocks' that make up the Bitcoin blockchain store data pertaining to 'financial transactions' e.g date, time, transaction-amount, sender, recipient etc.
On the other hand, the Hive blockchain (i.e 'https://hive.io') was built primarily to cater to the industry of ‘social media’. As such, the ‘blocks’ that make up the Hive blockchain store data pertaining to ‘social transactions’ such as likes, replies, dislikes etc.
While the Bitcoin blockchain may be a perfect fit for ‘E-bay’ (an e-commerce platform), it may fail to perform well, if used for ‘Instagram’ (a social media platform). The Hive blockchain on the other hand, may be a good fit for both E-bay and Instagram because though it was built primarily to support ‘social transactions’, a financial transaction has a social element.
A chain in this context refers to a system of documenting ‘blocks’ in a chain-like manner i.e a new block is always appended to the end of the latest block.
Blocks also have timestamps, giving each block its unique age and position on the chain.
Each block has information that distinguishes it from other blocks, a unique identifier called a 'hash'. Yet, this hash is used to link one block to the next, strengthening the chain.
Why ‘blocks’ and why ‘chain’?
Let us reiterate that a block stores pieces of data associated with transactions. For instance, a block sized at '1 Megabyte', may contain data associated with thousands of transactions.
Within the scope of this segment, we will focus on ‘financial transactions’. Typical 'data' associated with financial transactions are 'date, time, sender, recipient etc'.
On a blockchain, transactions aren't recorded directly. Transactions are inserted into a block instead. Once validated, this block is appended to the latest block on the chain, maintaining a blockchain.
e.g Block 653553 > Block 653554 > Block 653555
As such, besides data pertaining to ‘transactions’, a block also stores information about the block preceding it, in the form of a 'hash'; i.e the hash of the block preceding it!
A ‘hash’ (typically represented by a string of alpha-numeric characters) is a 'unique identifier' used to distinguish one block from the next. Alas, a hash is also used to connect one block on the chain, to the next block.
But there is more...
Did we mention that 'transactions' on a blockchain are identified by their own hashes too?
Well, each transaction has its own hash. Each transaction contained inside a block is represented by its respective hash.
Now containing many transactions (each transaction represented by its own hash), a block can derive its own unique hash (also called a root hash); a hash that sufficiently represents it.
A block’s root hash is derived from a ‘mathematical semi-permutation’ (encryption) of all the hashes associated with the various transactions that constitute it.
What are we hinting at?
On a blockchain, for a block to prove itself as ‘valid’, enough to be inserted into the chain, it needs to submit its root hash to the blockchain network.
For now, let us describe a ‘root hash’ as ‘that password that each block needs to submit to the blockchain network to validate its insertion onto the chain’.
Un-technically, we can also describe a ‘root hash’ as ‘that password that the blockchain needs to decrypt data associated with the transactions contained in a block’.
To understand these scenarios better, kindly visit ‘https://www.blockchain.com/explorer'. This URL will lead you to an interface containing the ‘Bitcoin blockchain explorer’. Next, paste the hash ‘000000000000000000089c84e1528034d960366dec7a7b65425e53749ff89f6e’ into the search-box, located at the top-right segment of the page.
What are you shown? ‘A page containing data associated with all the transactions contained in ‘Block 653554’ of the Bitcoin blockchain’.
In impractical terms, you geniusly provided the Bitcoin blockchain with ‘the very password’ (hash) that it will need to decrypt or access the data associated with the Bitcoin transactions contained in ‘Block 653554’ of the Bitcoin blockchain.
It is obvious that a blockchain prefers to record 'hashes'.
On the one hand, recording ‘hashes’ instead of ‘transactions’ constitutes its ‘encryption/security’ mechanism.
On the other hand, recording ‘hashes’ instead of bulky ‘transactions’ keeps a blockchain 'light-weight', allowing it to scale as we will see later!
A blockchain was innovated to be tamper-proof, publicly-accessible, decentralized and un-delete-able. A transaction that successfully executes via a blockchain is also irreversible.
So far, we have been looking at the model behind the ‘Bitcoin blockchain’, a blockchain innovated to cater to the sector of ‘financial services’. As we discussed in chapter 2, the sector of ‘financial services’ is a delicate sector, requiring ‘trust’.
As ‘1 BTC’ today ranges around '13,000$' in price, any tamper to the Bitcoin blockchain translates into huge financial losses.
Do you better-understand why the ‘BTC’ cryptocurrency incorporates a blockchain or ‘a chain of blocks’?
“The 'current block' (i.e Block 653554) keeps a record of the hash of the 'previous block' (i.e Block 653553) and delivers its hash to the 'next block' (i.e Block 653555), strengthening the chain”.
This cryptographic-chain method of storing data is the general basis for a blockchain's unique security-mechanism.
However, there is another salient reason why the BTC cryptocurrency makes use of 'blockchain technology'. Since financial transactions on the Bitcoin network happen in a peer-to-peer fashion, a financial transaction between two parties should succeed without authorization from a third-party. This is made possible by ‘blockchain technology’.
In the later part of this chapter, we will discuss the role of 'blockchain technology' in ensuring that transactions can settle 'peer-to-peer'.
For now, let us develop a playful scenario below, to help you understand how difficult it is to hack or tamper a blockchain...
A blockchain is extremely hard to tamper or hack. Being a chain, made up of interconnected blocks, to tamper data associated with a particular transaction for instance, a hacker will need to hack 'the particular block that contains the targeted data' first, which in itself is hard. How so?
Upon entering this block, in search of this ‘target data’, he is met with ‘an encrypted hash’ (i.e the block’s hash) instead, which he will need to decrypt/reverse/de-permutate to arrive at the particular hash associated with the 'transaction' that he wants to tamper; a hash that he needs to decrypt too!
Note: He has to accomplish these hacks without alerting the blockchain network.
Recall that a blockchain transaction is irreversible? Well, the thing is, if the hacker eventually manages to tamper/change the data associated with his ‘target transaction’, contained in ‘Block 653554’ (which was recorded a month ago), his action will tamper the original hash of 'Block 653554' as well, giving it a new hash.
To complete his hack, the hacker practically breaks the chain, alerting the blockchain network of a hack, because he will have had to tamper the hash of every other block making up the chain.
Computationally, to tamper each block on the chain, he will need all the computers in existence.
Note also that, all along, the hacker has mostly attacked one copy of the blockchain.
There are other copies!
In all eventuality, the hacker's attempt fails because there are copies of the blockchain, each in its original state, stored on various ‘nodes’ (i.e servers) that are distributed across random locations.
It is timely to conclude that typical 'blockchain records' are irreversible or permanent, meaning that each transaction documented on a blockchain can't be deleted.
As more blocks are added to the chain, the blockchain grows taller and older, improving its security.
Yes, a blockchain has a height and an age, which only extends. Each ‘new state’ of the chain is instantaneously communicated and registered to every node that holds a copy of the blockchain, maintaining each copy 'up-to-date'.
As such, a blockchain remains public and decentralized.
Ideally, a blockchain doesn't remain ‘a blockchain’, if it fails to maintain up-to-date copies of itself on 'random servers' (i.e nodes) distributed across various locations. As such, these distributed nodes making up the blockchain network should be capable of communicating among one another as part of the process for ‘validating transactions’.
We are arriving at another important element of a blockchain; a ‘consensus’ mechanism.
Different blockchains make use of different ‘blockchain protocols’! Thus, each blockchain has its own ‘consensus’ mechanism as we will explain later.
For a transaction to settle, distributed nodes that up the blockchain network, need to agree that a certain ‘transaction is valid’ (i.e insertable into a block).
For instance, if you were to send me a payment of ‘500 BTC’, a parameter that will be checked by the nodes of the Bitcoin network in the process of validating your transaction, is whether you have up to ‘500 BTC’ in your wallet. Basically, the nodes verify according to their copy of the blockchain, whether your balance is greater than ‘500 BTC’, communicating their establishments with the other nodes and once it is established across the network that your transaction is valid, your transaction obtains the right to be inserted into a block, preparing it for its insertion into the blockchain.
An invalid transaction is rejected.
It is becoming obvious so far that ‘blockchain technologies’ constitute ‘softwares with computing capabilities’!
The terminology ‘blockchain’ may refer to an ‘immutable ledger of data’. Contextually however, the terminology ‘blockchain’ covers ‘the technologies, models, concepts, algorithms, software’ involved in generating and maintaining an ‘immutable ledger of data’.
Having broadened the scope for the terminology ‘blockchain’, it is now easier to understand how a transaction can occur between two parties via a blockchain, in a peer-to-peer fashion, without the permission or authorization of ‘third-parties’, like banks, government or legal-systems.
In a financial system based on virtual ‘cryptocurrency’, where transactions happen in a peer-to-peer fashion, data needs to be held on a ledger that is tamper-free, immutable and decentralized.
Now, let us take a quick general look at how a transaction executes on a blockchain. This will give you further insight into the value of 'blockchain technology' in the scheme of things.
On a blockchain, a typical financial transaction occurs between two parties, in a peer-to-peer fashion. If a sender wants to send a payment to a recipient, all he needs is the recipient's wallet-address. Not much else is needed for a transaction to complete.
On the Bitcoin blockchain (i.e ‘https://bitcoin.org’) for instance, a new ‘BTC wallet address’ is generated anytime a user initiates the ‘creation of a Bitcoin wallet’.
A BTC wallet address is an ‘alpha-numeric string of characters’ that look like this: 'bc1qa0e24rdvnc2aszdm5dnt4nfj3zs2u0se5j2sa9'.
This ‘unique identifier’ (similar to a ‘username’), is used to distinguish one ‘bitcoin wallet’ from another.
A user is also provided with a ‘private key’ (i.e a randomly generated password) in the process of creating their Bitcoin wallet.
Alas, a BTC wallet address (e.g ‘bc1qa0e24rdvnc2aszdm5dnt4nfj3zs2u0se5j2sa9’) also constitutes an ‘entire Bitcoin wallet’, accessible by a respective ‘private key’.
To initiate a ‘transfer’ operation, the owner of a Bitcoin wallet must log into his wallet using his ‘private key’, proving to the network that he owns his wallet. Inside his wallet, he can begin the process of transferring his ‘BTC’ to another wallet address, in a transaction that is irreversible.
His transaction will require a minimum of ‘10 mins’ to settle. Each BTC transaction has an associated fee!
On the other hand, to receive ‘BTC’, he needs to provide his public wallet-address to the sender.
This means that this BTC wallet address 'bc1qa0e24rdvnc2aszdm5dnt4nfj3zs2u0se5j2sa9', used in our example earlier, is a ‘recipient/deposit’ address associated with a ‘bitcoin wallet’ and it can transfer or store 'BTC'.
Being a public address, a BTC-holder may transfer BTC to 'bc1qa0e24rdvnc2aszdm5dnt4nfj3zs2u0se5j2sa9' even inadvertently, with success. Alas, a Bitcoin transaction is irreversible!
At this stage, let us establish that the general model behind a variety of ‘blockchain technologies’ is similar.
Let us take a quick look at another blockchain called ‘Hive’ (i.e ‘https://hive.io’)
On the ‘Hive blockchain’, it being a blockchain built for the sector of ‘social-media’, wallets are identified by ‘conventional usernames’ e.g ‘surpassinggoogle’.
To send ‘5,000,000 HIVE’ to ‘@surpassinggoogle’, simply log in to your ‘Hive blockchain wallet’ (i.e 'https://wallet.hive.blog'), using your 'private-key', initiate a transfer and approve it.
A financial transaction on the Hive blockchain settles in ‘3 seconds’ and costs ‘zero fees’. This transaction is irreversible.
Have you noticed that on both ‘blockchains’ i.e ‘Hive and Bitcoin’, transactions can complete without extra permission from a third-party?
‘Blockchain’ improves the way contracts are administered, allowing for transactions between two parties to settle without the need for a third-party.
Now, let us compare our earlier scenario with that of ‘a traditional/centralized financial system’.
In a traditional financial system, say you simply wanted to send someone a micro-payment of ‘0.2$’; there will be several third-parties involved.
Does this matter?
Let us use PayPal in our scenario. Let us assume that ‘PayPal’ (a third-party) is the payment-processor for your transaction, involving a payment of ‘0.2$’ to a certain PayPal user of the username ‘comsilbronze4@gmail.com’.
PayPal decides that it will take a small fee of ‘0.02$’ for processing your transaction but you have exactly ‘0.2$’ in your PayPal wallet; can you complete your payment?
Now, what if this recipient was located in ‘USA’', where the currency is ‘USD’ and you are located in ‘the Philippines’, where the currency is ‘PHP’ and there is additional ‘foreign-exchange fee’, involving other ‘third-parties’ e.g banks; doesn’t your transaction further-fail?
This entire process of ‘sending a payment’ was initiated when you created your PayPal wallet, a wallet that you must have funded with '0.2$'.
In the process of setting up a fully-functional PayPal wallet, you must have gone through a ‘know your customer’ procedure, which involved parting with some personal information. This procedure applies, even though your transaction involves just '0.2$'.
In some cases, PayPal may require additional verification to decide whether you are eligible for a PayPal wallet, a wallet that is supposed to hold your money. Who knows, they may need a copy of your passport at this stage.
Against all odds, you completed your payment; does it mean that the transaction has settled? Not entirely!
Further assuming, let us say that this recipient has successfully registered a PayPal account, to receive a payment of '0.2$', having surmounted similar odds as you; he now sees the said amount in his wallet but he is ‘unbanked'. Has the transaction settled yet?
The bank (another third-party) has deemed him ‘ineligible for opening a bank account’, even after he has parted with his entire identity.
Assuming he eventually got ‘banked’, what if PayPal decides to take withdrawal fees?
You have ‘an unsettled transaction and many third-parties involved’!
Amidst all the hassle, what if the government (another third-party) comes in and decides to tax this '0.2$'?
You have 'more third-parties; a bit more fees’!
Yes, for '0.2$' both parties may have compromised their privacy and perhaps sold their identities to third-parties.
Also, “you have just gone public”; your entire ledger distributed freely among these 'third-parties'.
They can hold you accountable, they can influence you!
PayPal for instance can upsell you. You can't upsell them in turn as ‘their ledger’ is private.
Now, there are advantages to ‘centralized financial systems’ but there are ‘alternatives’ too, referring to ‘financial systems that are decentralized in nature’ and knowledge of these alternatives is empowering at least.
As seen with our PayPal example, ‘transactions’ within a ‘centralized financial system’ can turn out slow. Each third-party involved in the transaction maintains a ledger but each one's ledger is private or centralized.
PayPal, in certain cases, can't allow your transaction to settle, without being able to verify via the ‘bank’s ledger’ that ‘you are banked’, nor do they have access to ‘your ID’ (your ledger), to ascertain who you are.
While ‘identifying you’ is a tangible security-mechanism; for better-business sake, it favors PayPal and any other third-party involved to know ‘who you are’, that they can targetedly upsell you.
Speaking of security, in our PayPal scenario, being that there are several third-parties involved, there is a network of ‘known paths’ from which to intercept funds during a transaction; favorable to hackers.
Being centralized, it isn't out of the question either that PayPal can be hacked and ‘your funds transferred’ or shut-down and ‘your funds lost’. Who says a bank can't declare bankruptcy and ‘your funds lost’?
Now, someone with your PayPal details, may automatically have your bank details and your entire identity too.
A tangible question thus is, ‘is it entirely necessary that humans compromise their privacy to transact financially’? Should humans be able exercise a right to interact financially, without interference? Why has society become so predictive of ‘humans’ as ‘potential crimesters’? Are ‘centralized financial systems’ free of crime? Has there been a financial system in the past that was ‘peer-to-peer’? Has there been a financial system in the past that was ‘trust-less’?
Today, ‘blockchain’ (and the financial system it provides) is considered ‘unconventional’ but is it really?
If it is ‘unconventional’, is it a tangible alternative? Can it evolve into an ideal financial system? Can centralized financial systems incorporate a layer of decentralization?
As we have seen so far, having looked at two different blockchains i.e ‘Hive and Bitcoin’, blockchain provides its users a certain level of anonymity or privacy. Does this hamper a user's ability to financially or socially transact on it reputably? The answer is not far-fetched!
Users of these blockchains only need their digital signatures to transact or interact. Once they have successfully accessed their wallets using their private key, they prove ownership of their wallet. This they can accomplish whether they are ‘private or public figures’ and without extra permission or authorization from a third-party.
Within their wallets, they can fully-access their funds too!
When a user initiates and authorizes a transaction, the blockchain technology comes into play, to validate and record the transaction. It validates and documents this transaction by means of a decentralized ‘consensus’ mechanism, leaving us a publicly-accessible ledger, that anyone can audit.
The blockchain is always accessible because there are copies of it stored on various ‘nodes’ (i.e servers) hosted on individual servers distributed across different geographical locations. Even if one server is offline, there are other servers online.
Once an offline node regains its internet connection, it restores communication with other nodes of the blockchain network, updating its redundant copy of the blockchain to the latest one.
What have we established?
On a blockchain, on a decentralized 'financial system', a user can choose to be public or anonymous, without any effect on his/her ability to transact or interact.
On the Hive blockchain for instance, a user can decide to affiliate his username with his social identity but this is optional. Similarly, someone may decide to share a post-update on his public Twitter, containing his ‘BTC wallet-address’, automatically associating a once anonymous BTC wallet-address to his identity.
Now, are there ‘reputable people’ on a blockchain network? Very much so!
This is underlyingly obtainable by virtue of a blockchain's public and permanent nature. Users of blockchain adopt a measure of accountability and responsibility in their blockchain interactions, knowing that any data associated with their person, recorded on the blockchain, is public and permanent.
For instance, if a public figure like Mark Zuckerberg was to transact whether socially or financially on a blockchain-based application like ‘Hive’ (i.e ‘https://hive.blog’), he would be wearier of his behavior than on ‘Facebook’, which database he controls.
Too, many blockchains are modeled with a ‘reward-distribution mechanism’ usually powered by a ‘cryptocurrency’, to incentivize and reward 'reputability'.
Starting with the ‘nodes’, which hold copies of the blockchain, there has to be an element of ‘reputability’. How so?
‘Nodes’ (typically 'server infrastructure'), are backed by ‘humans’.
Whether it is a ‘Bitcoin node’ or a ‘Hive witness’ (i.e a ‘Hive node’), there are humans in charge of maintaining blockchain ‘nodes’ and these humans are expected to be reputable.
Being ‘custodians’ of the blockchain which secure transactions involving many users, ‘node-operators’ are expected to be trustworthy.
As much as we have established that a blockchain can't be hacked, it can be hacked internally. If its custodians are not reputable, they can collude to take control of the blockchain and tamper its state.
Typically, the larger the blockchain ‘network’ (referring to 'the number of consensus nodes'), the more ‘distributed the network’ (referring to 'the geographical-distribution span of consensus nodes'), the harder it becomes to reach a consensus that is detrimental to the blockchain network.
Do you better understand why ‘blockchains’ make use of decentralized ‘consensus’ mechanism(s) to validate ‘transactions’ and document ‘blocks’?
Most blockchains are modeled to maintain a decentralized ‘consensus’ mechanism, in a bid to discourage a centralized ‘consensus’ mechanism. To accomplish this, many blockchains implement a ‘reward distribution’ mechanism, powered by a native 'cryptocurrency'; birthing a secondary utility for ‘cryptocurrencies’ called ‘rewards’.
By means of this cryptocurrency, an economy erupts that steers ‘governance’, another profound ‘utility’ for ‘cryptocurrencies’..
By virtue of ‘cryptocurrency’, users of the blockchain are incentivized to participate more in the governance of the blockchain, directly or indirectly, altogether strengthening the blockchain network; while ‘node-operators’ are rewarded for ensuring that the blockchain stays alive and that it behaves like a blockchain.
‘Node-operators’ and 'the average user' alike are incentivized to maintain 'reputability'.
Being that a blockchain is decentralized in nature, anyone can participate in the governance of the blockchain directly or indirectly. Typically each blockchain maintains a ‘reward distribution’ mechanism that rewards eligible participation. As such, most blockchains have a native cryptocurrency and their respective protocols for what constitutes ‘governance’.
On the Bitcoin blockchain for instance, each transaction has a corresponding fee (priced in 'BTC'). Whenever a ‘miner’ (referring to a powerful computational microchip designed for Bitcoin) succeeds in ‘producing a block’, he is paid out the ‘accumulative fee’ (i.e ‘miner-fee’) associated with all the transactions contained in that block.
Along with ‘miner-fees’, there is an associated ‘mining-reward’ paid to the miner, currently 6.2 BTC.
‘100% of the BTC’ minted by the Bitcoin network per day, is paid out to ‘miners’ as miner-rewards and miner-fee.
The above is ‘Bitcoin’s ‘reward distribution’ mechanism’.
On the Hive blockchain, instead of ‘miners’ there are ‘witnesses’. Similar to the Bitcoin blockchain, ‘witnesses’ are rewarded in 'HIVE' (i.e the native cryptocurrency of the Hive blockchain) as an incentive for ‘producing blocks’. Let us call these rewards ‘block-rewards’.
Unlike the Bitcoin blockchain however, ‘transactions’ on the Hive blockchain are ‘free’. As such, ‘witnesses’ (i.e ‘block-producers’) do not earn ‘block-fee’.
Paying out only ‘10%’ of its daily ‘rewards’ allocation to ‘witnesses’ (i.e ‘block-producers’), the Hive blockchain extends its ‘reward distribution’ mechanism beyond just ‘block-producers’ in favor of rewarding its average user, allowing members of its ecosystem to earn HIVE rewards without having to set up a ‘node’ (i.e ‘witness’) as we will see later.
Generally speaking, with a giant and ever-growing blockchain network, it eventually becomes unprofitable for ‘block-producers or nodes’ maintaining the blockchain to be ‘disreputable’. While such a competitive economy seems to encourage ‘collusion’, the ever-decentralizing nature of these cryptocurrency-economies discourages 'collusion'.
How so?
Assuming you are able to compete in this crypto-sphere as a ‘node-operator’ (i.e ‘custodians of the blockchain’) and you are able to climb the ‘ranks’ (referring to ‘your influence on the consensus that governs a blockchain’), in a bid to collude with other high-rankers (i.e other ‘consensus-eligible’ nodes) on a mission of disreputability, the network which has continued to grow, continues to grow and alas, ‘a random person’ (‘likely reputable’) who wants to compete as a ‘node-operator’ in a ‘consensus’ capacity enters the mix.
Let us explain this further!
Recall that ‘a blockchain’, being ‘decentralized in nature’ and modeled to incentivized participation via a ‘reward-distribution mechanism’ that pays out cryptocurrency ‘rewards’, anyone can desire to participate in the governance of a blockchain network and its economy?
This resaid, to continue to participate profitably in the governance of a blockchain, whether you like it or not, your reputability manages to grow, even obliviously.
For instance, on the Bitcoin blockchain, as the network grows, to stay relevant ‘earning ‘BTC’ rewards as a miner’, you will need to continue upgrading your infrastructure to meet the demands of the network. If you can't maintain that ‘reputation’ others can because unlike ‘centralized systems’, where one’s tentacles can be chopped off at will, anyone can participate on a blockchain.
“Blockchain is a more potent tool when used as a ‘mentality-adjuster’, than when used as a ‘reward-distributor’.” @surpassinggoogle
All along, we have been hinting on a subject that we haven’t explained, a very important element in the formulation of ‘blockchain technologies and cryptocurrencies’ and essential to their survival. It is called the ‘consensus mechanism’.
To prepare you for understanding it better, we began a discussion on the ‘reward-distribution mechanism’. We also touched on the terminology ‘blockchain governance’.
Let us proceed by touching on two popular ‘consensus’ mechanisms used by various ‘blockchain technologies’ i.e 'Proof Of Work' (used by the Bitcoin blockchain) and 'Proof of Stake' (used by the Hive blockchain).
Understanding these ‘consensus’ models' now, will be relevant in chapters 4 & 5, where we will begin discussions on how you can formulate and create your own ‘blockchain and cryptocurrency’. To a broader context, this knowledge will help you understand the relationship between the ‘real world’ and the ‘cryptocurrency world’, leaving you with more insight into the ‘true state of the world’; which in turn will enable you to better differentiate between the ‘real world’ and the ‘painted world’.
Proof Of Work (POW)
‘Proof of work’ is the ‘consensus’ mechanism used by the Bitcoin blockchain to validate transactions and inserting corresponding ‘blocks’ into the blockchain. The Bitcoin blockchain quite introduced this consensus ‘validation’ model and its technology, which has been adopted by other blockchain(s), such as ‘Ethereum’ (https://ethereum.org).
When you hear 'proof of work', it is indicative of 'physical computing infrastructure'. Well, it is also indicative of 'work' in the form of mining.
Since ‘consensus’ constitutes ‘decision-making’, what is being decided upon and who participates in this decision-making?
In answering the above questions, we will use the Bitcoin blockchain, which makes use of the POW in our scenario.
On the Bitcoin blockchain, there are many transactions, many of which are ‘financial transactions’. At an estimated ‘10 mins’ interval, a new block is added to the Bitcoin blockchain. This new block will contain data associated with hundreds or thousands of validated transactions. A basic example of a transaction on the Bitcoin blockchain is a ‘transfer BTC’ action.
Who plays the role of preparing the next block? On the Bitcoin blockchain, these ones are called ‘Miners’. Backed by human operators, ‘miners’ typically refer to ‘special infrastructure possessing ‘powerful computing capabilities’ necessary in performing complex hashing operations’. (For better understanding, let us describe ‘miners’ as ‘supercomputers’ modeled specially for ‘Bitcoin’).
Yes, across the Bitcoin blockchain network, ‘miners’ play the role of ‘producing blocks’.
In preparation for ‘producing the next block’, ‘miners’ begin looking for valid transactions to fit into their block. A typical Bitcoin block has a maximum size of ‘1 Megabyte’.
Each ‘miner’ decides on the best approach or most efficient approach for selecting ‘valid transactions’ and organizing them into their block. For instance, a ‘miner’ may decide to target ‘transactions’ that are associated with higher fees to fill his block with, desiring higher ‘miner-fees’.
Irrespective of their approach, they must fill their block with ‘valid transactions’, which is a computational task in itself.
In the process of organizing their block, a miner practically has to solves a complex mathematical puzzle, in a process referred to as ‘hashing’, on a mission to obtain a singular ‘hash’ that uniquely identifies it; one that sufficiently represents it and ‘all the transactions it contains’.
Subsequently, it submits its resulting hash to the ‘Bitcoin network’ (referring to the ‘Bitcoin nodes’), which plays the role of ‘consensus’ validators in deciding which miner ‘proved the most work’, in terms of ‘efficiency, accuracy and speed’.
The entire network of distributed nodes running the Bitcoin software should be in synchronization as to the winning ‘miner’. This ‘miner’ attains the eligibility of having ‘produced the block’ and the associated ‘BTC rewards’ paid out to the miner as ‘miner-fees and miner-rewards’.
At this stage, the ‘produced block’ is allowed insertion into the blockchain, ‘lengthening the blockchain’ and each node making up the Bitcoin network is communicated about the ‘new state of the blockchain’, that they can attain synchronization per the current state of the chain.
The entire scenario covered above occurs in minutes. The shortest interval between one Bitcoin block and the next is ‘10 minutes’.
Now, in proving this work, there isn't a social element involved. Simply having tangible infrastructure, whoever you are, irrespective of your location and you can operate a Bitcoin miner. Depending on how sophisticated your miner is, in comparison to other Bitcoin miners, your miner can begin to produce blocks, earning BTC rewards whenever it successfully mines a block.
These days, it costs thousands of dollars to run a profitable Bitcoin miner.
As we have hinted just earlier, 'nodes' hold copies of the Bitcoin blockchain and run a version of the Bitcoin software, enabling them to participate in the consensus process that validates transactions and insert blocks into the blockchain.
When a transaction is initiated, say you wanted to transfer 'BTC' from your wallet to another, capable nodes of the Bitcoin network begin the process of validating your transaction through a consensus. Basically, your transaction has to match the definition of a ‘valid transaction’ according to a protocol agreed to by all the nodes of the Bitcoin network, on the basis of the version of the Bitcoin software that they run.
In turn, they broadcast the existence of a pending ‘valid transaction’ to the entire Bitcoin network.
The ‘miners’ come in to ‘prove their work’ by competing to produce the next block.
Next, all the nodes in the Bitcoin network have to consent to the ‘winning miner’ and validate the corresponding block to ensure that it is valid, before it is inserted into the blockchain.
The ‘new state of the blockchain’ is then communicated across the Bitcoin network to ensure that each node stores the latest or true copy of the Bitcoin blockchain.
Being a chain, the ‘truest copy of the blockchain’ is usually the ‘lengthiest copy’.
As the size of the Bitcoin blockchain grows (referring to the number of financial transactions on the Bitcoin blockchain), it grows difficult to 'mine blocks'.
‘Miners’ that upgrade their infrastructure with the more efficient/faster supercomputers, have a better chance at mining blocks than others.
These days considering the size of the Bitcoin network, companies with large budgets are better positioned to 'produce blocks'.
Being that Bitcoin is decentralized, anyone can set up a mining rig. However, your infrastructural setup will have to be solid, to be successful at mining Bitcoin profitably.
As a-said, besides ‘mining-rewards’, miners are compensated with ‘miner-fees’. Each transaction on the Bitcoin network has an associated cost, paid by the user. This fee is priced in 'BTC'.
Most Bitcoin wallets are optimized to designate a default 'fee' to 'transactions', fees which can fluctuate depending on the congestion of the network. A user may customize how much they pay in fees, in a bid to speed up the completion of their transactions.
Even so, a Bitcoin transaction can't complete instantly. This is because the Bitcoin protocol is designed with 'block-intervals’ of ‘10 minutes' to avoid congestion and double-spending.
The 'consensus' for validating Bitcoin transactions requires participation from the entire network of Bitcoin nodes. Each node running the Bitcoin software contains the consensus protocol that defines 'a valid transaction'.
Radical changes to the Bitcoin blockchain (e.g adjustments to consensus protocol that validates transactions, changes to reward-distribution, software-iterations etc) require a form of 'consensus' too; a different type of consensus from that used in ‘producing blocks’ but the logic is relatively similar.
The Bitcoin source-code being public and open-source, anyone can audit it and its iterations. (You can find the Bitcoin source-code on ‘https://github.com/bitcoin/bitcoin’)
As such, anyone can propose changes to the Bitcoin blockchain through a proposal system.
Where your proposal is accepted by the Bitcoin community at large, your proposed change is implemented into the code by Bitcoin's core-programmers and a new version of the Bitcoin software becomes available.
Nevertheless, additional consensus must be reached by the entire Bitcoin network, referring to 'all the nodes running the Bitcoin software'.
For the now 'new version of Bitcoin' to become established and widely-accepted even by the average user, the nodes that make up the Bitcoin network have to update their Bitcoin software to the new version.
Radical changes that have been accepted into the Blockchain source-code are incorporated into a blockchain network through a process known as a ‘fork’.
Depending on the extent of the ‘proposed change’, there are generally two types of ‘forks’; a soft fork and a hard fork.
A ‘soft fork’ is ‘soft’, meaning that nodes running the ‘updated version of the blockchain software’ (i.e ‘the version now containing the proposed changes’) remain compatible with nodes running ‘the older version of the blockchain software’.
In the case of the Bitcoin blockchain, ‘consensus’ is needed from ‘95% of the nodes making up the Bitcoin network’ for a soft fork to take effect across the network. Where such consensus is attained the ‘updated version of the Bitcoin software’ becomes ‘the latest version of Bitcoin’.
Alternatively, ‘hard forks’ are ‘hard’. Used to implement more radical changes to the Blockchain network than those implementable by means of a ‘soft fork’, changes that may alter the dynamics of the blockchain at large, a ‘hard fork’ requires a more distributed consensus than a ‘soft fork’.
If the ‘consensus’ required for a ‘hard fork’ to be implemented into the blockchain isn’t attained, the blockchain splits, forming another chain.
‘Nodes’ maintaining the older version of the blockchain software, can no longer validate blocks from the ‘new chain’ (which now runs a different version of the blockchain software) and vice versa.
In the case of Bitcoin, a hard fork requires consensus from the entire network, meaning that if one node refuses to adopt the newly proposed version of the Bitcoin software, the chain splits in two, creating another blockchain and the ‘new chain’ births ‘a new cryptocurrency’.
One blockchain, that resulted from the aforementioned scenario is ‘Bitcoin Cash’; a blockchain that resulted from a split of the Bitcoin blockchain, when a proposed hard fork of the Bitcoin blockchain wasn’t accepted by the entire Bitcoin network.
In the aftermath of ‘a typical blockchain split’, the result is ‘two different blockchains’ i.e the original blockchain and a new blockchain
Let us refer to the ‘original blockchain’ as ‘the parent’ and the ‘new blockchain’ resulting from the split as ‘the child’.
Do you still recall the primary essence of a ‘hard fork’? ‘To institute a new version of the blockchain software, one that implements profound changes to a blockchain’s technology’ as the latest version..
Being that ‘a blockchain’ is ‘decentralized in nature’, the decision to implement such drastic changes into a blockchain should be widely-accepted ‘across the network’, in accordance with a blockchain’s ‘consensus’ protocol.
Typically, for a node to participate in the consensus that validates a ‘hard fork’, a ‘node’ has to run ‘the newly proposed version of the blockchain software’.
Ofcourse, different blockchains have their unique ‘consensus’ protocol with respect to a ‘hard fork’.
For instance, a blockchain’s ‘consensus’ protocol may require consensus from the ‘entire blockchain network’ for a proposed ‘hard fork’ to attain completion. If such is the case, at the time designated to the execution of the ‘hard fork’, if ‘every node of the blockchain’s network is running the newly proposed version of the Blockchain software’, the ‘hard fork’ completes and this new version becomes established and accepted as the ‘latest version of the blockchain software’.
Otherwise, there is a split and a new blockchain is formed. How so?
Let us assume that 50 ‘nodes’ dissented the aforementioned ‘hard fork’ and they maintained the original version of the blockchain software. They remain nodes with the original blockchain. The other 50 ‘nodes’ that supported the newly proposed version, had begun running the new software, setting into motion ‘a new blockchain’, one that inherits the transactional history of the original blockchain but now possessing its own standards, identity and cryptocurrency.
We now left with two quite similar blockchains that are incompatible. After the split, either blockchain begins to maintain its own transactional history, independent of the other.
Let us use an imperfect analogy to break this down a bit further.
Assuming the latest ‘Iphone’ is ‘Iphone 5’ and its latest operating system is ‘IOS v5’.
You currently make use of an ‘Iphone 5’ which allows you to enjoy your favorite cryptocurrency application but it is not compatible with ‘Netflix’, which you wish it had.
‘Apple Inc.’ announces that on a particular date, it will release a ‘new IOS version’ called ‘IOS v6’, which is a supposed upgrade to ‘IOS v5’.
According to Apple Inc., v6 is posed to improve v5 by preventing the ‘installation of any cryptocurrency application’. As part of the upgrade however, users will now be able to install their favorite ‘Netflix app’.
Typically, Apple inc being a centralized incorporation doesn’t need your consent to implement ‘IOS v6’.
After assessing either IOS version, you may prefer to stick with ‘v5’ to maintain access to your preferred cryptocurrency application since ‘v6’ isn’t compatible with ‘cryptocurrency applications’ or you may decide to upgrade your IOS device to ‘v6’ in favor of ‘Netflix’, which isn’t compatible with ‘v5’.
In eventuality, ‘Apple Inc.’ may ascertain that ‘v6’ has been widely-adopted and they may begin to relegate their support for ‘v5’ till it becomes redundant.
At times, the intent of a ‘hard fork’ is to ‘split the chain and create a new one’! This may happen if the community behind a blockchain becomes divided in their ideals pertaining to the standards guarding the blockchain.
Once again, being that blockchains are ‘decentralized in nature’, a hard fork is implemented, that the community can decide in public. Alas, they can choose either or both versions too!
Didn’t we mention that in the event of a split, the child blockchain inherits the transactional history of its parent blockchain?
In an ideal situation this is the case! Typically, when the new blockchain is created, a new ‘asset’ (i.e ‘cryptocurrency’) is created too. ‘Account holders’ on the parent blockchain’ maintain their accounts and inherit a ‘replica account on the child blockchain’.
Their ‘replica account on the child blockchain’ can be accessed with the ‘same login-credentials used to access ‘their accounts on the parent blockchain’.
If they possess the native cryptocurrency of the parent chain, they will receive an equal amount to their holdings ‘in the native cryptocurrency of the new chain’, which they can access too.
After the split that resulted in the ‘Bitcoin Cash’ blockchain, a corresponding ‘Bitcoin Cash’ blockchain account was designated to each user of the Bitcoin blockchain. A new cryptocurrency was formed too called ‘BCH’, native to the ‘Bitcoin Cash’ blockchain.
Upon the inception of the ‘Bitcoin Cash’ blockchain, each holder of ‘Bitcoin (BTC)’ prior to the split, was deposited a synonymous amount to their holdings, in 'BCH'.
Alas, that was how I got my first piece of the ‘BCH’ cryptocurrency. I didn't purchase it!
At the time, I had decided to purchase ‘0.2 BTC’, based on news of an ‘impending Bitcoin split’. In turn, I inherited ‘0.2 BCH’, leaving me with ‘0.2 BTC’ and ‘0.2 BCH’.
I earned this ‘0.2 BCH’ without purchasing it and ‘BCH’ became popular, attaining an all-time-high of '$3,717'.
It is easy to see why blockchains in general are ‘decentralized in nature’ and the impact of decentralization in their formation and success.
Too, you can begin to understand how cryptocurrencies (e.g ‘BTC’) attain intrinsic value.
Modeled around a ‘proof of work’ consensus (& reward-distribution) mechanism, the ‘BTC’ cryptocurrency is backed by ‘expensive infrastructure’.
Today, copies of the Bitcoin blockchain are hosted on some ‘100,000 nodes’, each node participating in the process of validating ‘BTC’ transactions.
There are some ‘1,000,000’ individual Bitcoin miners too, sharing in the responsibility of ‘producing Bitcoin blocks’.
‘Nodes and miners’ alike are maintained by humans, who invest in maintaining and upgrading these infrastructure.
By virtue of 'proof of work', the Bitcoin blockchain can sustain and scale its 'decentralized nature; 'decentralization' being its uniquest value-proposition. Subject to this very unique ‘proof of work’ consensus model, it can continue to provide a cryptocurrency in the form of ‘BTC’ that infers trust and privacy.
Along with curing the inflationary-limitation that ‘traditional money’ possesses, by maintaining ‘a maximum supply of 21,000,000 BTC’ and a defined ‘inflationary rate' (consisting of ‘6.25 BTC per block’, at an estimated ‘144 blocks per day’), it is no coincidence that ‘BTC’ is gaining popularity as a tangible ‘store of value’, currently valued at some ‘13,000$ each’.
Did we not hint at ‘proof of work’ being an underlying ‘reward-distribution’ mechanism?
‘Proof of work’ sets the rules that define how ‘rewards’ (referring to ‘BTC’) are distributed and these defined ‘set of rules’ (i.e a ‘reward-distribution’ mechanism) is ‘public’.
For instance, it is public knowledge that the Bitcoin blockchain currently distributes ‘BTC’ at a rate of ‘6.25 BTC per block’, has distributed some ‘18,527,131 BTC’ of its maximum ‘21,000,000 BTC’ and that there is an average of 144 blocks mined each day. It is also public knowledge that ‘100% of the new BTC created’ is allocated to ‘block producers’ (i.e ‘miners’).
Knowledge of this ‘reward-distribution model’ (put into effect by Bitcoin’s ‘proof of work’), further invites participation from users into a ‘decentralized economy’ based on BTC, which in turn incentivizes the maintenance of a decentralized Bitcoin blockchain.
How so?
Miners are sure that they will receive rewards and holders of BTC can better predict the value of BTC as a financial asset..
Participation continues to grow across the Bitcoin network and the Bitcoin blockchain stays decentralized.
Yes, ‘BTC’ isn't just another currency valued entirely on the basis of its financial strength. It has an underlying blockchain technology that is revolutionary; formulated to continuously decentralize.
Next, let us talk about ‘Proof of stake’.
I will soon resume fuller activity. I was able to bury my dad some 22 days ago, after 17 days past since he passed.
Join my Telegram: https://t.me/joinchat/GtfUvhoqQkW5U9EGboRGMw
Kind support the evolution of the Macrohard hub by purchasing a 15$ T-shirt.
Proceeds will go towards sustaining the hub: https://teespring.com/stores/surpassinggoogle