The chain of beads that carry the ledger!

My final article on the technologies that govern bitcoin

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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. - Bitcoin: A Peer-to-Peer Electronic Cash System, Satoshi Nakamoto

We discussed the "double spending" problem with digital currency in past articles. We also looked at why a peer-to-peer network model was preferred over client-server network models. We recently discussed how a hash-based proof-of-work solution was proposed to secure bitcoin. How it can enable cryptocurrencies to function without a central authority. But there is more to bitcoin technology. This article will explore the final few technologies that complete the bitcoin puzzle.

But before we analyse further, it might be interesting for some of you to revisit our learnings about money. We explored, in brief, its origins and its evolution. More importantly, we discussed how ledgers have been around for millennia. Ledgers are a record of transactions. Physical ledgers that record credits and debits, pre-date money. Digital currency, too, requires ledgers to track transactions. But how to do it securely? How to ensure that the ledger cannot be manipulated?

Every transaction on the bitcoin network is verified using hash-based proof-of-work. Once all the other nodes in the network accept the proof-of-work, the transaction block is added to the previous transactions. As more verified transactions get added to this chain, it becomes increasingly difficult to undo past transactions. Why or how? Let's look at the below metaphor to understand it better.

Photo by Carter Yocham on Unsplash

Imagine a robust chain. This chain is made by a group of highly skilled craftsmen, all working together simultaneously. They have made it impenetrable because they are working together. They have made a chain that can only be used with trustworthy beads. The beads are created to protect a very precious piece of paper. This paper is a ledger. A ledger that records the transfer of a unique jewel between two parties. Before adding this bead to the chain, the team of skilled craftsmen had to do a tough challenge. The first one to pass the challenge shares the result with the others, and if a majority of them agree that he has completed the challenge, they will allow the bead to be added to the chain. For undertaking the challenge, the winner gets rewarded with a jewel of their own. They can use the jewel to transact with others for goods or services. And the cycle starts all over again. As the super-strong chain gets longer and more beads are added, it gains trust and value. After all, a lot of work has gone into building this chain with beads. So the craftsmen respect the chain and do not acknowledge any other chain.

In the above example, the jewel the craftsman is rewarded is a bitcoin (or several). The precious piece of paper is the transaction data. The trustworthy bead is the hash-based proof-of-work that verifies the transaction. The craftsmen are the nodes working on the challenge. The challenge is the algorithm that needs to be solved as proof-of-work.

Photo by Shubham Dhage on Unsplash

And most importantly, the chain is the bitcoin blockchain, a record of all transactions on the bitcoin network. The chain is secured by the majority decision making power of the nodes. To change any block in the chain, an attacker must redo the "hash" and all subsequent "hash's". This would require a tremendous amount of computing power. Henceetwork is secure. The longest chain will be the most trusted chain as it has invested the most proof-of-work effort.

Since majority decision-making power plays a critical role in securing the blockchain, it is essential to ensure that it's not easy to achieve a majority. The bitcoin white paper noted, "If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs." So instead, the paper proposes, "Proof-of-work is essentially one-CPU-one-vote."

To understand this logic better, let us look at a real-world example where voting plays an important role. Elections are supposed to work because citizens get just one vote - "one-CPU-one-vote". But what if the system could be rigged? What if a few influential people could cast as many votes as they liked? They would be able to quickly determine the outcome of the election. The same would happen if the majority decision was based on "one-IP-address-one-vote".

Photo by Markus Winkler on Unsplash

There is one more small piece to complete this puzzle. The difficulty of performing the proof-of-work will be determined by a moving average - targeting an average number of blocks per hour. If the computing power outpaced the transactions, the number of blocks added to the blockchain every hour would increase. To offset this, the proof-of-work would become more challenging to solve. The opposite would happen if the transactions increased. The current standard is 6 blocks an hour for Bitcoin or approximately 10 mins per block. To date, 731,926 blocks have been created, and in the process, 19,011,657 BTC have been minted.

This article was meant to round out the mini-series on the foundational technologies that govern bitcoin. I also hoped to highlight why these technologies were chosen and why they worked. This was a truly fascinating journey for me. I gained this knowledge thanks to this blog. The work I put in helped me distil this information into something easier to understand. I am sure that there are critical aspects that I have missed out on or not covered in sufficient detail. Whenever I feel that an existing article could do with some changes or revisions, I will try and update it.

I am a little lost on which direction to take next, so any suggestions would be helpful. Please leave a comment, and don't forget to like and share this article.