BLOCKCHAIN: THE SIMPLEST EXPLANATION.

The blockchain technology invented with Bitcoin optimizes an empirical module that is used to make transactions, and exchanges as well as applications and implementations of security.

put simply, every single transaction is broadcast to the user network and propagated according to peer-to-peer technology. Participants in the system generate addresses from their public keys for transactions between them. The private key corresponding to each public key used to generate the address is needed to dispose of the bitcoins on the addresses. Competitive block validators collect transactions to add into a block to be added to the blockchain

In Bitcoin, the block size imposes limits on the number of transactions to be included. Each new block is pointing to a hash of the previous block. A hash function generates a noninvertible fixed-length output from an input. Hence, the blocks are chained together in a blockchain. A consequence of this is that if a validator wants to include transactions not consistent with the previous blocks in a new block, the validator would then need to alter the whole chain, back to a block consistent with the fraud, possibly the genesis block, to get hashes consistent with the present block of transactions.

This could, in theory, be a simple task, but the Bitcoin blockchain is designed such that this would be very costly. Don’t worry though, I’m getting right into that.

To be allowed to add a candidate block to the blockchain, the validator must be the first to solve a computationally costly puzzle. This puzzle consist of assembling the hash of the previous block, a hash of the transactions13 in the candidate block, some other inputs, and a freely chosen nonce unto a hash-function, such that the resulting hash falls below a certain threshold. Hence, the validator must find a nonce that produces a valid hash consistent with the blockchain that the subsequent blocks will point back However, as so-called network analysis can be used to infer identities from limited real-world information, several cryptocurrencies seek to improve anonymity by variants of mixing to hide the sender and receiver of transactions

This shares parallels with repeated prisoner’s dilemma games, which are often utilized to analyze the stability of cartels. Most software implements a rule that only valid transactions are propagated further to the network. However, this is no hard rule, but is dependent on users following the protocol.

The block-size is 1MB. A transaction contains on average 495 bytes, which renders the average number of transactions per block slightly below 2000. To be precise, the header of the previous block. In the same manner as a public key is generated from a private key. Organized as a so-called Merkle tree, to make the search for specific transactions efficient.

To solve this puzzle, the candidate block validator must perform many trials, as the hash function is not invertible and each trial contains minimal information about the solution. The lower the threshold is, the harder it is to find a solution. To maintain the difficulty as the technological computational capacity increases, reductions in thresholds are implemented in the protocol. The difficulty is set such that a new block is found on average every 10 minutes. The first finder of a valid nonce gets the privilege of adding its candidate block to the blockchain. After the nonce is found, its validity is easy to verify, which facilitates the detection of dishonest behavior.

The incentive to be a block-validator is that the validator can include a fixed amount of newly minted bitcoins to a chosen address (normally of the validator itself or a mining pool in which the block validator participates) and transaction fees set at the discretion of the senders.

According to the Bitcoin-protocol, the reward of newly minted coins is halved at intervals of about four years.This renders the total supply of bitcoins to converge from below at approximately 21 million. Since the block-validator is rewarded newly minted coins, the block-validators are commonly referred to as a miners. If a new block is found, it is not guaranteed to be a part of the blockchain.

This depends on future block miners building their block on this particular block — that is, as to whether it becomes part of the consensus chain. The newly minted coin reward and the transaction fees are lost if the block does not become part of the consensus chain. Assuming that future block validators are honest and only build upon honest blocks, a miner has strong incentives to be honest and follow the protocol. Attempts to violate the protocol rules will render the block abandoned and the potential reward lost. This incentive scheme, based on the miners’ use of computing-resources to validate blocks to receive a reward, is referred to as proof-of-work (PoW). Various alternatives to PoW exist that may be used in combination with PoW. One commonly applied scheme is proof-of-stake (PoS). PoS means, simplified, that the block-validator is determined probabilistically according to the stake in the actual currency.

A high stake provides incentives to maintain the value of the currency. As long as the stakes in the currency are not too concentrated, a dishonest block-validator will face a risk, as the block is not likely to be included in the chain by the next block-validator.

More sophisticated validation schemes also take into account the age of the coins held. This prevents, inter alia, a “hostile takeover” in the form of purchased dominance. Other variables, such as contribution This can be described as solving an equation where a valid hash is the solution and the nonce is the unknown.

Let bt = (h(bt−1),m(T),n,..)

represent the header of the candidate block; h, a hash function; m, the hash of a Merkle tree of the transactions, T, to be included in this candidate block; and n, the nonce. To be allowed to add a candidate block to the blockchain, the validator must be the first to solve the computationally costly puzzle

h(bt) < C

where the nonce, n, is the unknown and C (positive) is the threshold. In other words, the hash algorithm is made such that one calculation gives as little information as possible regarding the solution to the puzzle.

Although the main rule so far has been that the difficulty increases, it is also possible that the difficulty level reduces if the average time taken to find a new block increases.

The 21, 000, 000 finite value

The reward started at 50 bitcoins per block and halves every 210,000 blocks, which happens approximately every 4 years. Using a geometric series as an approximation, the upper limit is given by:

210000 x 50 x ∞ ∑ k=0 1 2 k = 210000 x 50 x 2 = 21m.

Because bitcoins are not infinitely indivisible, the maximum is slightly below 21 million. The justification for this specific scheme is not provided by the pseudonym Nakamoto.

I hope you enjoyed the read….I’ll be explaining the variance from one crypto to another based on the roles of core-developers. Who are core-developers? Don’t you worry, it’s in my next article.