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How The Blockchain Works

CRYTOCURRENCIES.

Cryptocurrencies are recent. They have been made possible by the Internet and blockchain technology.

It was in 2009, when Sathosi Nakamoto published his "White paper" for the development and implementation of a cryptographic "currency" that could be used for exchanges on the Internet under a series of premises that differentiate it from fiat money:

  • Issuance limited to 21,000,000 units.  Objective: to avoid depreciation due to an increase in current units.
  • Decentralized management. Neither Banks nor Governments.
  • Strong cryptographic security criteria, to avoid manipulation and errors in transactions. To date, no one has managed to "hack" the blockchain.
  • Transparent system. All blockchain activity is available to the public

It should be noted that blockchain technology, already present before Sathosi Nakamoto's proposal, has been evolving.

Currently there are public blockchains, such as Bitcoin and others  - which we will talk about later - and private blockchains.

Naturally, private blockchains are not accessible to the public.

 

In the basic scheme of the Bitcoin blockchain, blocks were defined with a number of characteristics:

- Each block was published on the network every 10 minutes. Each block houses some 2,400 transactions. Its size is about 1 MB. This means a maximum of 4 transactions per second.

- For the system to work, a computer network is needed, where the so-called validator nodes are located. The set of validator nodes form a kind of "Big Ledger" where transactions and balances of all users are stored.

In each validator node there is therefore a copy of the blockchain database.

These validator nodes are also known as miners. As we will see later, there is a strong incentive for these miners to serve the network.

What Are The Main Challenges For This Technology?

  • 1.- How to protect the order of the blocks?
  • 2.- How to protect the integrity of the blocks?
  • 3.- How to avoid writing collisions?
  • 4.- How to incentive to miners?

1.- How do they protect the order of the blocks?

Tis task is done by the miners, following un common protocol.

They build a headline. They take the headline of the previous block.

They build a hash (unique digital signature). SHA 256. It gives me a 256 bit string. This respects the order of the blocks.

2.- How do they protect the integrity of the blocks?

Any change in the information of the transactions, would change the digital signature, that is, the hash.

This would make the miners not accept the block validation.

After the header comes the information of the transactions and finally, very important, the last paragraph has to contain an answer to an unknown.

The so-called hash function must be satisfied, with a certain level of difficulty.

No mathematical function has been found to solve the hash function, so it has to be solved by trial and error.

In practice, computing power is needed to solve hash functions.

 

The result is always a 256-bit string, where the difficulty is set to the number of initial bits that must be equal to 0.

A low number, say 4 zeros, is relatively easy. A high number, say 20 zeros, is quite difficult.

The difficulty of the hash function is continuously adjusted, so that the time between blocks is 10 minutes.

3.- How do they avoid writing collisions?

How do they prevent 2 blocks from being “written at the same time”?

When a miner finds the solution to the hash function and  publish it, this block is verified by other miners and if it is correct, the block is accepted and the block is considered validated. After that,  the clock is reset and all miners go to the listen to the next block.

A new block is coming each 10 minutes.

This works so nicely because the probability that 2 o more miners find the solution at the same time is so very low that it approachs zero.

So far, this has nerver happened.

4.- How do they incentive the miners?

As of February 2021, the incentive is 6.25 Bitcoin per resolved block (> $ 300,000 as of today).

A total of $ 47,500,000 is "raffled" each day among Bitcoin miners.

Bitcoin mining has become an industry, led by China, that benefits from low electricity prices.

Trying to mine bitcoin from home with a computer or a small group of computers is like playing the lottery.

And mining bitcoin entails expenses, especially electricity, not counting the investment of buying special machines to mine, which are expensive.

Special computer for the minery of cryptocurrencies. High power computing.

Hundreds of megahashes per second minimum, thst is: hundreds of millions of possible   solutions per second.

 

 

 

What have we achieved with the Blockchain + Sathosi Nakamoto's project + Cryptography + Bitcoin?

 

A great innovation, by creating

a totally decentralized financial  system, where there is a single version of the truth -until now it has not been corrupted –where we can determine with total security the balances of the users, with a cryptographic firm.

 

Where all nodes are necessary, but none is essential. Where no one can exercise censorship or control over the rest of the nodes.

Among them, and due to the probability of finding a solution to the problem, they organize themselves automatically and have sufficient incentives to give full coverage to the network.

 

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