Bitcoin
Whitepaper Summary
It is impossible to explain blockchain without introducing Bitcoin. This post is designed as an introduction to Satoshi’s whitepaper which, in 2009, introduced Bitcoin to the world. Anyone attempting to understand blockchain applications in a meaningful way should be familiar with this publication, which is why we are featuring it in the first in a series of posts highlighting some of our favorite and most influential blockchain resources. Please note that we are attempting to summarize the Satoshi whitepaper, a technical document, in plain English that the common person can understand.
Until recently, banks have played the role of brokering trust between participants of financial transactions who do not know or trust each other. Naturally, as a result, the financial system developed a critical dependence on banks. Bitcoin, as introduced by Satoshi Nakamoto in 2009, is a new version of electronic cash where no central third party (i.e., a bank) is needed to create trust in the system. The trust is in the distributed network and handled through cryptographic proof, rather than by a bank or a middleman. A peer-to-peer network and digital signatures are the key instruments in solving the “double spend” problem that, until now, banks have been in place to solve.
How does the network operate? It’s remarkably simple. In fact, the genius of Satoshi’s design is this “unstructured simplicity” which adds to the security and robustness. It works as follows:
- New transactions are distributed to the network of nodes.
- Nodes collect transactions in a block.
- Each node works on solving an energy-intensive Proof of Work (PoW) problem.
- The winning node broadcasts the solution to nodes.
- Nodes accept solution if all transactions are valid and coin is not already spent.
- Nodes express acceptance by working on next block using hash of previous block.
All the transactions in a block are shared amongst all the network nodes through the PoW consensus algorithm. This method of hashing and publicly announcing all transactions in a block gives the Bitcoin blockchain its transparency. No one can argue that a transaction did not happen as long as it has been recorded on the growing, shared, and transparent blockchain.
The nodes on the network are rewarded for competing because they receive new Bitcoin when they solve a block, winning a competition every 10 minutes. These “miners” are mining new bitcoin through the effort and energy they expend solving the PoW problem. The energy output required for PoW consensus is a key feature because it makes the blockchain less vulnerable to attack. The system is protected against fraud because transactions in the system are too computationally expensive to reverse. Hacking the system is not practical, because it would require too much energy to take control of the network.
Hashed Commentary:
The Bitcoin blockchain is an open protocol (the GitHub repository can be found here). Any developer in the world can review and use the code as they wish. In the real world, Bitcoin is a program that provides a user with a wallet, allowing the user to send and receive bitcoins.
The system is now being used by people and businesses around the world. It’s no longer a “fringe” phenomenon. As of July 11 2017, one Bitcoin equals $2284.53 and the Bitcoin market cap is $37.3B. 16M Bitcoin are in circulation with more Bitcoin being mined every day (until the 21M cap is reached). The number of blocks now exceeds 475,000. More money flows through the Bitcoin blockchain than through Western Union. Bitcoin will never stop so long as miners continue to operate. No government or central bank can shut it off.
You may have heard about Bitcoin hacks in the past. In reality, the Bitcoin blockchain has never been hacked. It is by far the most battle-tested of all the blockchain protocols. Successful hacks have been at the “wallet” level, affecting software that 3rd parties have written on top of Bitcoin
Ethereum
Whitepaper Summary
Whereas Satoshi Nakamoto’s Bitcoin Whitepaper is often credited as a catalyst to the current blockchain revolution, the Ethereum Whitepaper was a dramatic breakthrough in unlocking the power of decentralized technologies. This guide is designed to introduce you to Ethereum, which was introduced to the world in 2013 by Vitalik Buterin. Ethereum is the second largest blockchain protocol in the world, behind only Bitcoin. Any person attempting to understand how future applications will sit atop of blockchain protocols should start with understanding Ethereum. To make that easier, we have created this guide to help you understand the Ethereum whitepaper.
Throughout history, banks and third-party institutions have existed to provide trust between multiple parties of a transaction. Bitcoin radically changed this construct, allowing transactions to take place within a protocol, without the need to depend on third-party entities (to read more about Satoshi’s Whitepaper on Bitcoin, click here). By moving trust from the intermediary to the protocol, Bitcoin changed the way money flows and set the stage for the Internet of Value. All the Blockchain initiatives we talk about today, including Ethereum, are a result of Bitcoin.
As world-changing as Bitcoin is, it does not allow for easy repurposing of the Bitcoin protocol for alternative blockchain applications. Developers were faced with a tough choice – go through the labor intensive process of creating a completely new blockchain, or attempt to expand past the limitations of the current protocol.
Whereas Bitcoin was specifically constructed to administer a specific use of blockchain technology, Ethereum was created to provide a framework to run all decentralized applications. Ethereum includes a Turing-complete programming language for users to create “smart contracts”, or arbitrary rules that dictate the execution of actions. The breakthrough lies in the inclusion of a complete programming language, empowering complete freedom for developers to build any application they wish.
Below is a brief outline explaining how the Ethereum blockchain works:
1. New transactions are sent to the nodes within the network
2. Nodes compile and store these transactions within a block
3. Each nodes works to solve an energy and computing intensive Proof-of-Work (PoW)
4. The node that first finds a solution broadcasts it to the rest of the network
5. Nodes accept the solution if it is valid
6. Nodes show acceptance by beginning to work on the following block
The process is extremely similar to Bitcoin. Algorithms regulate the difficulty of the PoW puzzles to maintain a constant frequency of block creation (about every 12-15 seconds). The winning miner is rewarded with 5 ether. This process has two main functions – it allows new Ether to be circulated without a central authority and it validates transactions in a decentralized manner. The mining process makes hacking nearly impossible, due to the sheer computing power that would be required to reverse prior transactions. However, we must note that Ethereum is planning to begin the transition an alternative mining process, Proof-of-stake. To learn more about Proof of Stake, here are a few good resources:
Blockgeeks has an easy overview here.
To read more about Casper, click here.
Great Medium post by Vitalik Buterin here.
Hashed Commentary:
Most people know about Ethereum because of the Ether (ETH) token. ETH has cemented itself as the second most valuable cryptocurrency, trailing only Bitcoin (BTC) in value. Although Bitcoin may be more well known, Bitcoin exists primarily as digital gold. Meanwhile Ethereum has become a platform for distributed computing, distributed applications, and digital tokens. In Vitalik’s words, Ethereum is “a fundamentally new class of cryptoeconomic organisms — decentralized, jurisdiction-less entities that exist entirely in cyberspace, maintained by a combination of cryptography, economics and social consensus.” In other words, it represents a whole new way thinking about and building systems. Ethereum has largely been responsible for the proliferation of Initial Coin Offerings (ICOs) in the past year. Just in the past two months, these ICOs have surpassed early stage venture funding in dollars raised by startups. Whether or not the explosion in ICOs has created a bubble is up for debate, but the revolutionary effect of Ethereum as a catalyst for new blockchain applications is not. To date, over 850 currencies representing $44B in digital assets have been created since Ethereum set the stage. Many believe the ICO tokens are Ethereum’s ‘killer app.’ Now, any innovative development team can create and program their own unique cryptographically secure financial system with unique economic principles for incentivising behavior. To make things even more interesting, the tokens used can be fractionalized to support any level of micro-payment needed. The container of the current banking system can’t dream of doing that. It’s not just that you can build a new economic system, it’s that you can design it to out-perform any existing system on the planet. And, as a result, before our very eyes, we are watching as entrepreneurs change the way currency flows.