Blockchain, a chain of interests

Since if you are reading this I think it is close to impossible you are not aware of what this is, even a vague awareness of its value, my article goal is to explain this technology from the perspective of three different types of individuals, The Creator, The User, and The Miner.

Chain image or a symbolic representation of the three basic types of parties directly involved in the functioning of a blockchain cryptocurrency.

The Creator is the person who used the technology of blockchain to create a cryptocurrency with their own particular style choices, The User is the person who decided to invest their money in the cryptocurrency with their own agenda, and The Miner, the person who does the hard work of consistently minting new coins by creating blocks, constrained by the choices of the creator following their own particular set of interests.

Through the article, I will build the case for how the ecosystem of a cryptocurrency build using blockchain functions, its constraints, and its benefits.

The format to read this article is,

First, you will find a why there you will find the promises that blockchain enables that allow it to make a cryptocurrency, the interests of all the players directly involved in this, or the motivation behind the player action.

Second, a how here I will explain the key components which are parts of what makes this possible hence making the promises possible.

Third, what is happening with what constraints.

The Creator

Netflix thanks for the image, this image was taken from Monthy Python and the Holy Grail.

Why Blockchain? In its most simple definition, it allows the creation of a decentralized network that validates itself through a peer-to-peer system, everyone has a copy of the complete blockchain, and each new block created is broadcasted to everyone that participates on the network, the validity of the update is dependant on having more than 50% of the entire network computational power seeking to keep it safe, while that is true it is impossible to tamper with it since the way it validates which next block added to the chain is right, is based on which next block added keeps on getting more blocks added to it, you always trust whichever chain keeps on getting updated. This makes the promise of a decentralized currency be possible since the network keeps itself functioning and the challenge it poses to own more than 50% of the entire network computational power is quite unfeasible.

How does it do it? There is a set of different algorithms at multiple parts of the entire system that makes the tampering extremely hard and provides the safety that permits this to be trusted without the need of a central figure or institution validating it.

This a list of the different technologies that are chosen by The Creator which Users and Miners must comply with, there are many variants of this, different cryptocurrencies show different versions of this concept given the particular vision of the creator, I’m using the algorithms used in bitcoin has an example:

• Digital Signatures — This is the approach to validating transactions since only signed transactions are valid, it is a security method that validates every transaction that happens, it is a Private Key and Public Key that everyone participating gets, the signature changes depending on the message and requires the Private Key aka Secret Key, while the message is the same the signature will be the same using the same Secret Key, but if the message changes, the signature changes. The signature is 256 bits long and can be verified using another function that requires knowing only the message, signature, and Public Key, this function tells you whether the message associated with the signature is true or false.
• SHA256 Cryptographic Hash Function — For any input, all the transactions registered within the block, it creates a 256 bits string, if any change on the input happens, it completely changes which carries a 256 to the power of 256 to figure it out since the way it reconfigures itself lacks a pattern while you can brute force try to guess this, and you could get lucky, the amount of computational power to keep a tampered version of the chain valid, requires having at your disposal over 50% of the entire network working for you validating this tampered version, if that is not happening then its impossible since eventually your tampered version will be smaller than the version that over 50% of the network is working on, and the network trusts whichever chain is the longest.
• Proof of work — This is a decentralized consensus mechanism that requires members of a network to extent effort solving arbitrary mathematical puzzles, this mechanism slows down the creation of new blocks, in bitcoin, this slows down the creation of blocks to ~10 min before a new block can be added to the chain.

What is next? Since these mechanisms make blockchains secure methods of keeping information, hence transactions can happen in a secure way without the need of a financial institution to keep things right, you don’t need governments or banks as intermediaries, and all exchanges of electronic cash within the blockchain network are safe. There are more pieces needed to completely understand all that is happening, and those explanations will be done in the other individuals, this is meant to explain what this is from the creator of a cryptocurrency using blockchain technology perspective, the vantage point I use is the bitcoin cryptocurrency and I hope that if you are seeking to compare the benefits of other methods to create a functioning cryptocurrency you can just replace the components with the other version components and still make sense of what a cryptocurrency must achieve to be a decentralized network that doesn’t need an institution to function.

The Miner

A miner from Minecraft.

Why is there a miner involved in this? The word mining got adopted because it is a laborious work minting new coins, think about it hitting a rock with a pickage hoping to find a precious mineral is for sure a challenge, the work that happens within a cryptocurrency that is called mining comes from the Proof of work, it’s worth noting there are other alternatives to this, it is a mathematical puzzle that in the case of Bitcoin takes approximately 10 minutes to complete, in which whoever miner manages to solve it first gets to create a new block in the chain, but why is anyone bothering doing this you might wonder, it is because whoever manages to create the next block gets a reward called block reward, hence the precious mineral found, in the form of a determined amount of cryptocurrency, your reward for the laborious work that involves solving the puzzle before every other miner working on the network does.

How does this make sense? Every coin from any cryptocurrency was at some point mined, it didn’t sporadically materialize, someone took the effort to solve the mathematical puzzle and whoever solved it first, created the next block, and this new block came with this incentive to the miner for their hard work. You might be wondering so there is an infinite amount of coins? Not really each Creator made a strategy particular for whatever their vision was, in the case of Bitcoin, The Creator of it Satoshi Nakamoto decided to only make it possible to be in total 21,000,000 bitcoins, then you must be thinking so there are currently 21,000,000 in circulation, not at all, all coins to be must be mined first, this makes the peer-to-peer network function because it creates an incentive for multiple parties in many parts of the world to mine, hence anyone owning over 50% of the entire network is not easy, so what Satoshi Nakamoto relied on was simple arithmetics, if every ~10 minutes a new block can be made, and the goal is to have a controlled supply hence avoiding inflation, and you want a clear total of coins ever to exist, he decided to start the reward being 50 bitcoins per block found, and made it so every 210,000 blocks the rewards get cut in half, which is about every 4 years, with the last coin rewards happening somewhere around the year 2140.

So what is actually happening? Approximately every 10 minutes a bitcoin miner discovers a new block, they discover this by working on a cryptographic puzzle, each block comprises a set of transactions that were previously waiting on the bitcoin memory pool, the transactions that usually get chosen first are the ones with the greatest transaction fee, it's worth noting that in any transaction you can leave behind a tip for the miner to earn plus the block reward.

The User

The Creation of Adam, there is no central institution, it is everyone participating on the network that makes the network work.

Why would this be useful? Transferring money between two parties in continents, countries, etc, depending on the circumstances can impose many challenges, while there are plenty of alternatives and companies that provide services for this, it is still not simple since it requires institutions validating the transaction, with blockchain since it is a peer-to-peer network this challenge vanishes, you only need to broadcast the transaction, it must be written on a block, which acts as a ledger keeping track of a number of transactions, then the block gets added to the chain and its done, tampering is extremely hard and you only need your Private Key to sign the transaction associated with your wallet where you keep your cryptocurrency, if its an amount you own, then you can sign it, with your Public Key it can be validated and the transaction is valid.

How is this happening? For any transaction to happen it first must be broadcasted to the bitcoin memory pool, in which if you are tipping any amount of cryptocurrency to the miner, you might get prioritized since for each block in bitcoin the number of maximum transactions possible is around ~2,759 transactions per block, meaning every ~10 minutes can at maximum be ~2,759 transactions.

What this implies? While this limitation is troublesome since it hinders some of the promises that bitcoin offered in the end there are plenty of other coins that actually offer improvements to this problem and for great amounts of money it seems to be feasible for this to still be functional.

What is happening with the Cryptocurrencies currently available and how all these individuals at the end give life to this possibility that is revolutionizing banking?

Once the cryptocurrency is placed into existence the limited amount of coins available to be created and their ability to get fractionalized easily make a great market for people to add any currency to the ledger since the supply is limited the more money that in total gets added makes the value of the currency has a whole to be more valuable, but it also makes the prices to be very volatile since if anyone takes a huge sum of money out of the network the value of the network as whole decreases then the value of each coin decreases too but the reverse is also true if anyone adds a massive amount of any currency the value can easily increase.

Hope that you got some value from this article and I would like to thank these resources for been helpful in the creation of this article:

• 3Blue1Brown Channel: Blockchain video.
• DeCrypt webpage: What will happen to bitcoin after all 21 million are mined.
• Towards Data Science: Blockchain scalability problem.