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Cryptocurrency for Dummies: Bitcoin and Beyond

Bitcoin created a draw of buzz on the Internet. It was ridiculed, it was attacked, and finally it was accepted and became a part of our lives. however, Bitcoin is not entirely. At this moment, there are over 700 AltCoin implementations, which use similar principles and assorted cryptocurrency algorithm .
Cryptocurrency for dummies cover illustration
therefore, what do you need to create something like Bitcoin ?
Without trying to understand your personal motivation for creating a decentralized, anonymous arrangement for exchanging money/information ( but calm hoping that it is in setting of moral and legal activities ), let ’ s first break down the basic requirements for our new payment system :

  1. All transactions should be made over the Internet
  2. We do not want to have a central authority that will process transactions
  3. Users should be anonymous and identified only by their virtual identity
  4. A single user can have as many virtual identities as he or she likes
  5. Value supply (new virtual bills) must be added in a controlled way

Decentralized Information Sharing Over Internet

Fulfilling the first two requirements from our list, removing a central authority for information central over the Internet, is already possible. What you need is a peer-to-peer (P2P) net .
data sharing in P2P networks is similar to information sharing among friends and family. If you contribution information with at least one extremity of the network, finally this information will reach every other extremity of the network. The only deviation is that in digital networks this information will not be altered in any way .
Cryptocurrency algorithms and Toptal
You have credibly heard of BitTorrent, one of the most popular P2P file sharing ( content manner of speaking ) systems. Another popular application for P2P partake is Skype, a well as other chat systems .
Bottom line is that you can implement or use one of the existing open-source P2P protocols to support your newfangled cryptocurrency, which we ’ ll call Topcoin .

Hashing Algorithm

To understand digital identities, we need to understand how cryptographic hashing works. Hashing is the action of mapping digital data of any arbitrary size to data of a sterilize size. In bare words, hash is a action of taking some data that is clear and making something that makes no sense at all .

You can compare hashing to getting answers from politicians. information you provide to them is clear and apprehensible, while the output they provide looks like random stream of words .

P2P Protocols
There are a few requirements that a commodity hash algorithm needs :

  1. Output length of hashing algorithm must be fixed (a good value is 256 bytes)
  2. Even the smallest change in input data must produce significant difference in output
  3. Same input will always produce same output
  4. There must be no way to reverse the output value to calculate the input
  5. Calculating the HASH value should not be compute intensive and should be fast

If you take a look at the simpleton statistics, we will have a limited ( but huge ) numeral of possible HASH values, plainly because our HASH distance is limited. however, our hashing algorithm ( let ’ s mention it Politician256 ) should be reliable enough that it alone produces duplicate hashish values for unlike inputs about arsenic frequently as a putter in a menagerie manages to correctly type Hamlet on a typewriter !
If you think Hamlet is just a name or a word, please stop understand now, or read about the Infinite Monkey Theorem .

Digital Signature

When signing a paper, all you need to do is append your signature to the text of a document. A digital touch is similar : you good need to append your personal data to the text file you are signing .
If you understand that the hashing algorithm adheres to the principle where even the smallest change in input data must produce significant difference in output, then it is obvious that the HASH prize created for the master document will be unlike from the HASH rate created for the text file with the append signature .
A combination of the master document and the HASH value produced for the document with your personal data appended is a digitally signed document .
And this is how we get to your virtual identity, which is defined as the data you appended to the document before you created that HASH rate .
following, you need to make certain that your signature can not be copied, and no one can execute any transaction on your behalf. The best way to make surely that your signature is secured, is to keep it yourself, and provide a different method acting for person else to validate the gestural document. Again, we can fall back on engineering and algorithm that are promptly available. What we need to use is public-key cryptography besides known as asymmetric cryptography .
To make this work, you need to create a private key and a public key. These two keys will be in some kind of numerical correlation and will depend on each other. The algorithm that you will use to make these keys will assure that each private key will have a different public key. As their names suggest, a private key is information that you will keep just for yourself, while a public key is information that you will contribution .
If you use your individual key ( your identity ) and original document as stimulation values for the signing algorithm to create a HASH value, assuming you kept your identify secret, you can be certain that no one else can produce the same HASH value for that document .
How Bitcoin and Cryptocurrency works
If anyone needs to validate your signature, he or she will use the original document, the HASH value you produced, and your public identify as inputs for the signature verifying algorithm to verify that these values match .
Signature verifying algorithm

How to send Bitcoin/Money

Assuming that you have implemented P2P communication, mechanisms for creating digital identities ( private and public keys ), and provided ways for users to sign documents using their private keys, you are ready to start sending data to your peers .
Since we do not have a central agency that will validate how much money you have, the system will have to ask you about it every time, and then check if you lied or not. then, your transaction record might contain the follow information :

  1. I have 100 Topcoins
  2. I want to send 10 coins to my pharmacist for the medication (you would include your pharmacists public key here)
  3. I want to give one coin as transaction fee to the system (we will come back to this later)
  4. I want to keep the remaining 89 coins

The lone thing left to do is digitally sign the transaction read with your private cardinal and transmit the transaction record to your peers in the network. At that point, everyone will receive the information that person ( your virtual identity ) is sending money to person else ( your pharmacist ’ s virtual identity ) .
Your job is done. however, your medicine will not be paid for until the solid network agrees that you truly did have 100 coins, and therefore could execute this transaction. merely after your transaction is validated will your pharmacist get the funds and send you the medication .

Cryptocurrency Miners: A New Breed of Agent

Miners are known to be very hard working people who are, in my public opinion, heavily underpay. In the digital universe of cryptocurrency, miners play a very alike function, except in this case, they do the computationally-intensive work alternatively of digging piles of dirt. Unlike veridical miners, some cryptocurrency miners earned a small luck over the by five years, but many others lost a fortune on this bad endeavor .
Miners are the core component of the system and their chief function is to confirm the cogency of each and every transaction requested by users .
In order to confirm the validity of your transaction ( or a combination of several transactions requested by a few early users ), miners will do two things .
first base, they will rely on the fact that “ everyone knows everything, ” intend that every transaction executed in the system is copied and available to any peer in the network. They will look into the history of your transactions to verify that you actually had 100 coins to begin with. once your account remainder is confirmed, they will generate a specific HASH value. This hash value must have a specific format; it must start with certain number of zeros .
There are two inputs for calculating this HASH prize :

  1. Transaction record data
  2. Miner’s proof-of-work

Considering that even the smallest change in remark data must produce a significant difference in output HASH value, miners have a very unmanageable tax. They need to find a specific prize for a proof-of-work variable star that will produce a HASH beginning with zeros. If your system requires a minimum of 40 zeros in each validate transaction, the miner will need to calculate approximately 2^40 different HASH values in order to find the right proof-of-work .
once a miner finds the proper value for proof-of-work, he or she is entitled to a transaction fee ( the single mint you were uncoerced to pay ), which can be added as function of the validate transaction. Every validated transaction is transmitted to peers in the network and stored in a specific database format known as the Blockchain .
But what happens if the number of miners goes up, and their hardware becomes much more efficient ? Bitcoin used to be mined on CPUs, then GPUs and FPGAs, but ultimately miners started designing their own ASIC chips, which were vastly more herculean than these early on solutions. As the hashish rate goes up, indeed does the mine difficulty, therefore ensuring equilibrium. When more hash baron is introduced into the network, the trouble goes astir and vice versa ; if many miners decide to pull the chew because their operation is no longer profitable, trouble is readjusted to match the new hash rate .

Blockchain for Dummies: The Global Cryptocurrency Ledger

The blockchain contains the history of all transactions performed in the system. every validate transaction, or batch of transactions, becomes another resound in the chain. Every unmarried blockchain development ship’s company relies on this populace daybook .
sol, the Bitcoin blockchain is, basically, a public ledger where transactions are listed in a chronological decree .

The beginning band in the Bitcoin blockchain is called the Genesis Block

To read more about how the blockchain works, I suggest reading Blockchain Technology Explained : Powering Bitcoin, by Nermin Hajdarbegovic .
There is no limit to how many miners may be active in your arrangement. This means that it is potential for two or more miners to validate the same transaction. If this happens, the system will check the full campaign each miner invested in validating the transaction by just counting zero. The miner that invested more effort ( found more lead zero ) will prevail and his or her obstruct will be accepted .

Controlling The Money Supply

The first rule of the Bitcoin system is that there can be a utmost of 21,000,000 Bitcoins generated. This number has still not been achieved, and according to current trends, it is thought that this issue will be reached by the class 2140 .
This may cause you to question the utility of such a system, because 21 million units doesn ’ triiodothyronine sound like much. however, Bitcoin arrangement supports fractional values down to the eight decimal ( 0.00000001 ). This smallest unit of a bitcoin is called a Satoshi, in honor of Satoshi Nakamoto, the anonymous developer behind the Bitcoin protocol .
New coins are created as a advantage to miners for validating transactions. This reward is not the transaction fee that you specified when you created a transaction record, but it is defined by the system. The reward amount decreases over time and finally will be set to zero once the total number of coins issued ( 21m ) has been reached. When this happens, transaction fees will play a much more authoritative function since miners might choose to prioritize more valuable transactions for validation .
apart from setting the upper limit in maximal act of coins, the Bitcoin system besides uses an interest way to limit day by day production of new coins. By calibrating the minimum issue of leading zero required for a proof-of-work calculation, the time required to validate the transaction, and get a reward of new coins, is constantly set to approximately 10 minutes. If the fourth dimension between adding newfangled blocks to the blockchain decreases, the system might require that proof-of-work generates 45 or 50 moderate zero .
so, by limiting how fast and how many new coins can be generated, the Bitcoin arrangement is efficaciously controlling the money supply .

Start “Printing” Your Own Currency

As you can see, making your own translation of Bitcoin is not that difficult. By utilizing existing technology, implemented in an advanced direction, you have everything you need for a cryptocurrency .

  1. All transaction are made over the Internet using P2P communication, thus removing the need for a central authority
  2. Users can perform anonymous transactions by utilizing asynchronous cryptography and they are identified only by their private key/public key combination
  3. You have implemented a validated global ledger of all transactions that has been safely copied to every peer in the network
  4. You have a secured, automated, and controlled money supply, which assures the stability of your currency without the need of central authority

One survive thing worth mention is that, in its kernel, cryptocurrency is a way to transfer anonymous value/information from one user to another in a distributed peer-to-peer network .
Consider replacing coins in your transaction record with random data that might even be encrypted using asynchronous cryptanalysis so lone the transmitter and liquidator can decipher it. nowadays think about applying that to something like the Internet Of Things !

A cryptocurrency arrangement might be an interest way to enable communication between our stave and toaster .
A number of technical school heavyweights are already exploring the consumption of blockchain engineering in IoT platforms, but that ’ s not the merely potential application of this relatively newly technology .
If you see no argue to create an alternative currency of your own ( other than a virtual antic ), you could try to use the lapp or similar border on for something else, such as distribute authentication, creation of virtual currencies used in games, social networks, and other applications, or you could proceed to create a newly commitment program for your e-commerce occupation, which would reward regular customers with virtual tokens that could be redeemed late on .

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Category : Economy

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