2. Money
The need for money arose when humans started living in larger
settlements and started exchanging goods with strangers.
First money had intrinsic value – barley, salt, hide, clothes.
Then came money without intrinsic value – gold, silver, cowry shells.
Kings started issuing coins with their mark to guarantee weight and
authenticity of money. Fiat currency.
Governments started issuing currency without backing of gold.
3. Bitcoin
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 the proof-of-work.
The longest chain not only serves as proof 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,
and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain
as proof of what happened while they were gone.
4. Bitcoin
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 the proof-of-
work.
The longest chain not only serves as proof 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,
and nodes can leave and rejoin the network at will, accepting the longest proof-of-work
chain as proof of what happened while they were gone.
5. The promise of Bitcoin
Peer-to-peer electronic cash
No middlemen
Proof-of-work as solution to double spending
Longest chain wins
Attacking the chain requires majority CPU power
6. Problem of double spending
When you spend money, the money is gone from you. You can not spend
real life money multiple times.
Digital money is easily copiable so you can spend same money multiple
times.
Trusted third parties like banks are required to make sure people don’t
spend the same money multiple times.
When you pay someone from your bank account, bank reduces your
balance.
7. Problem of double spending
Cryptocurrency wants to do away with middlemen like banks, so they use a
Proof-of-work ledger to avoid double spending.
Transactions are recorded as a series of blocks, each block connected to
the previous block, thus creating a chain of transactions.
Adding a block to the chain, takes efforts. A node, needs to do lot of
processing in order to get the right of adding next transaction to the chain.
When a node shows this proof of work done, they get to add the next
block to blockchain.
8. Magic of proof-of-work
Single node cannot just add blocks to the chain at will. Even if it does,
other nodes will reject it and follow the longest chain.
Thus, hacking the blockchain requires that attackers control at least 51% of
the chain’s processing power.
This makes the blockchain secure.
9. A blockchain
Must be public – anyone should be able to join as a node.
Must be permissionless – anyone should be able to add a block to the
chain as long as they show proof-of-work.
Must be trustless – nodes do not trust each-other. They trust the longest
chain because it represents most work done.
Must be decentralized – not controlled by a single entity. That is the
whole point of blockchain. Decentralization.
10. Decentralization
Decentralization is the fundamental concept of the whole cryptocurrency
and blockchain movement.
The goal of cryptocurrency is to remove middlemen who provide trust.
A decentralized blockchain relies on CPU intensive proof-of-work to
provide trust.
11. Inefficiency – feature, not a bug
Proof-of-work means adding new blocks of transactions takes a lot of CPU
processing and electricity.
Nodes who do this work – miners – are rewarded with new cryptocurrency
as a reward for their work (CPU power and electricity).
As network grows, more processing is required to add blocks.
Difficulty of the work increases to keep the blockchain attack-proof.
Attacker must always require 51% of CPU power to attack the chain.
Blockchain is inefficient by design. It’s a security feature, not a bug.
12. Problem with blockchain
With increasing difficulty, over time, the rewards for mining are not
enough to compensate for electricity and hardware spent doing the work.
To incentivize the miners to continue to mine and add new blocks to the
chain, transaction fees must be introduced. People who want their
transactions to go on chain must pay miners to pick their transaction and
put on block.
It leads to bidding war. Those who offer higher transaction fees, their
transactions will be picked up and processed first.
13. Proof-of-work alternatives
Can we use proof-of-stake instead of proof-of-work?
No.
https://antsstyle.medium.com/explanation-of-blockchain-consensus-
algorithms-pow-pos-etc-735fa50d93c8
14. Private blockchain
A private, permissioned, trustful blockchain that does not use the
expensive proof-of-work is pointless.
Private blockchain is private, not public.
Private blockchain is permissoned. It only allows certain users to add
blocks without showing any proof-of-work.
Private blokchain is trusted. Users already know and trust each other,
making overheads of the blockchain redundant.
Private blockchain by its very nature is not decentralized. It is controlled by
one or a few authorities.
Private blockchain is everything, a blockchain is not supposed to be.
15. Conclusion
Public, permissionless, trustless, decentralized blockchain is inefficient by
design and unsuitable for any real-world use cases.
Private, permissioned, trusted, centralized blockchain is pointless because
it doesn’t offer anything new over already existing databases which are
much more efficient, fast and cost effective.
Blockchain is a solution for nothing.