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Understanding the Blockchain

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posted on Dec, 11 2017 @ 05:36 AM
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Introduction

It's been quite a few years since I created a thread on the topic of cryptocurrency but I've noticed a trend lately where people are making a lot of claims about Bitcoin and other coins without really knowing how they work, specifically the claim that it's a NWO plan to push us all towards a purely digital money system. I will attempt to explain why these concerned are ill founded by explaining how blockchain technology works in simple terms that anyone could understand.

It's important to realize that most dollars are already digital, just some data on a bank computer, and most payments are made electronically now. There's absolutely no reason they need cryptocurrency to get rid of all cash money. However cash is unlikely to disappear any time soon because it has utility, it's useful for making payments which should remain off the record (for both governments and citizens) and it's useful for making payments when there is no technology available to make an electronic payment.

When Satoshi created Bitcoin he was trying to solve a specific problem, and that was how to create a virtual money system in a way such that people couldn't simply duplicate their bitcoins and spend the same bitcoin twice but he wanted to do this without a central authority to keep track of the currency. He wanted to create a decentralized money system so that people could be their own bank and send money anywhere in the world very quickly with very low fees compared to the traditional banking system.

The way he solved this was with the blockchain and a very clever mix of cryptographic techniques. A block is essentially just a collection of transactions and the first transaction in the block is the block reward transaction which is created by the miner of the block. A miner builds a block by collecting transactions sent to them from other peers in the network and they "solve" the block by hashing the transactions along with some meta data about the block such as the number of transaction it contains.

Hash Functions

The hash value is basically just a large number (usually represented in hex), and if that number is less than a certain value the block is considered solved. The meta data is called the "block header" and it includes a "nonce" value which is also just a number. The miner will increase the nonce each time they hash the block and fail to solve it. A hash function is a cryptographic function designed to provide a fixed length "checksum" or "fingerprint" which can be used to identify a specific set of data.

The idea behind a hash function is that you shouldn't be able to predict the output from the input and you shouldn't be able to recreate the input from the output. For example before I posted this thread I wrote it up in a text document and if I were to hash that text file using a hash function such as sha256 then I would get a resulting 256 bit number which can act as a unique identifier for that document and if I were to change even one letter in the document the hash value of the document would change entirely.

Another important properly of a hash function is that we don't get "hash collisions", I shouldn't be able to find two different documents which produce the same exact hash, at least not without an enormous amount of computing power. The higher the number of bits in our hash the harder it will be to find a collision but it also obviously depends on the design of the hash function, a poor design could lead to security holes. Bitcoin tends to use sha256 for anything that requires some security because it's well tested.

Mining Blocks

The block header also contains the hash value of the last solved block, this is how the block chain is formed, each block links to the previous block in the chain because when the block is hashed it is using the hash of the last block as part of the data which is used to produce the hash. When a miner has solved a new block they will then propagate that block around the network so that everyone else can add the block to the tip of their blockchain. The deeper a block is in the chain, the higher number of confirmations it is said to have.

Solving a block requires some amount of computational work, because the miner has to keep changing the nonce value or some other data in the block so they keep getting a different hash until the hash value they get is lower than the current "target" value. Others can hash a block they receive by checking the hash value is indeed lower than the current target to verify it has been properly solved. They can also check that the block header contains a hash value which points to the last block in the chain, if it does then it can be added onto their blockchain.

The target is what determines how hard a block is to solve at any moment in time, at the very start the difficulty was very low, meaning the target was very high, because there wasn't many people mining Bitcoin. The target will change over time depending on how fast blocks are being solved. Each node follows the same "protocol rules", so they all use the same equation to adjust the difficulty based on the rate blocks are being solved, allowing them to all agree on a single target value.

Chain Forking

If a bad miner where to not follow these rules and they computed the target to be higher than all other nodes, then their blocks would get rejected by all other nodes because they wouldn't have a low enough target. The same protocol rules prevent anyone making bad transactions or doing anything against the rules the majority of the network has agreed on. When two or more groups of nodes start following different rules this can lead to a "fork" in the chain.

Each chain is still valid from the perspective of the people following the rules of each chain, but they are incompatible with each other so they cannot coexist as a single chain and split into two, as if to create two separate coins. This is exactly what happened with Bitcoin Cash, the Bitcoin blockchain was forked several months ago because some people believed the maximum block size should be larger so more transactions could fit in each block, but the protocol rules of the original Bitcoin will not accept these larger sized blocks that Bitcoin Cash uses so it split into two chains.

Usually when a fork happens due to differences in software it's resolved rather quickly and people will tend to merge back onto a single chain quite quickly once it has been fixed, however mini-forks are actually happening all the time because miners will often solve a block at the same time so some people will end up accepting the block from one of the miners while everyone else accepts the block from the other miner, depending on which they received first. So you'll have two different groups trying to extend different chains because the last block they have is different.

This may go on for several blocks but it will be solved fairly quickly depending on which of the two chains gets extended faster, nodes will switch onto the longest chain once it gets far enough ahead and the other fork will die off and the blocks that weren't used will be "orphaned". When I say "longest chain" it's not really the number of blocks but rather the cumulative computational effort expended on the chain. Remember that solving blocks takes really serious computational effort, so the "best chain" is really determined by which ever has had the most effort expended on it.
edit on 11/12/2017 by ChaoticOrder because: (no reason given)




posted on Dec, 11 2017 @ 05:36 AM
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Transactions

I wont go too deeply into transactions because it gets fairly complex when you get into scripting but the basic idea is that a transaction contains a set of inputs and outputs. The outputs of a transaction essentially define to what addresses the coins should be sent and how much each address should receive, so a single transaction can have multiple recipients. The inputs of a transaction basically point to the outputs of some previous transaction in the blockchain and the person making the transaction must be able to prove they own the addresses referenced by those outputs.

This is done through an elliptic curve based digital signature algorithm (ECDSA). Digital signature algorithms allow individuals and companies to "sign" documents so you can verify the document actually came from them by checking the signature. You can think of a digital signature much like a hash value except that it also allows you to verify the signature was generated using a specific public key. The individual/company will first generate an elliptic curve key pair, which is to say a public and private key which are cryptographically linked together.

The public key is then announced to be the official public key of the individual/company. The private key is kept a secret and used to sign documents. People can then use the official public key to verify the signature was created using the private key which is linked to that public key, without needing to know the private key at all. A Bitcoin address is essentially just a public key, so the owner of the address is who ever owns the private key because only the person with the private key can sign a transaction which withdraws coins from the address attached to the private key.

When someone sends coins to your address they place your address in the output of their transaction, so when you go to spend those coins you create another transaction which references the output of the transaction which sent coins to you, then your private key is used to sign the transaction to verify you actually own the address and have authority to spend the coins sent to your address. Blocks are basically just a way to group together transactions into sets so everyone can agree on exactly what order they occurred since the order can matter.

Verifying Blocks

Before miners will even accept a transaction into a block they will make sure it's not referencing outputs which have been used in another transaction and they will also check the signatures. Since miners will have a full copy of the blockchain they can go back and look at previous blocks and the transactions in those blocks. However the way transactions link together in Bitcoin does force nodes to download the entire blockchain if they want to verify every transaction from start to finish and be sure there's nothing wrong with their copy of the blockchain, after all it is downloaded from random peers.

Blockchain bloat is becoming a rather larg issue as the size of the Bitcoin blockchain approaches 150GB. This threatens the decentralized nature of Bitcoin because it becomes hard for the average person to setup a full node when they have to wait days just to download the blockchain. This is one of the main reasons why many people are against increasing the maximum block size, it would mean the blockchain size would grow even faster, making it harder for the average person to setup a full node. The scalability issue is one of the biggest problems Bitcoin faces if it's to become mainstream.

The outputs of a transaction also specify how many coins should be transferred from the input addresses to the output addresses. Miners will also validate each transaction they receive from peers by ensuring that the total input values are greater than the total output values. The transaction fee is the difference between the total input values and total output values. Since block space is limited it may not be possible to fit all transactions into a single block, paying a higher fee will give you priority over transactions which pay lower fees because miners also get the fees.

Putting it Together

Put together everything I've explained so far and you have the basic idea of how most PoW based cryptocurrencies work. PoW stands for proof-of-work, which is the system Bitcoin uses for determining how a block is solved. As I explained it's based on a block hashing system which requires the output hash value to be lower than a given target, and a low hash value is proof that some work was done because it's not easy to produce low hash values. In other words a block is solved when the miner can prove they've done some amount of work but it's also a very random process because changing one bit of data will change the hash entirely.

As I explained the output of a hash function should be unpredictable so it's not just based on who has the most power, it's like a lottery where your odds increase when you have more hashing power. Now lets consider what happens when the very first block in a blockchain gets solved, this is called the "genesis block". There will be no previous block hash stored in the block header because there will be no block before the genesis block. The only transaction in the block will be the reward transaction made by the miner so the reward is sent to his address when he solves the block and relays it to peers in the network.

Then when the second block gets solved it will have the hash of the genesis block in the header and it may contain a transaction from the miner who got the first block reward if he tries to send those coins to another address. Typically the genesis block will be solved before the coin is released and it will be hard-coded into the protocol so everyone knows for sure what the first block is. The reward transaction in the genesis block also acts as a method for the creators of the coin to pre-mine some coins before making the coin publicly minable. The genesis block doesn't need to follow the protocol rules which limits the block reward.

PoW vs PoS

Proof-of-Stake (PoS) is an alternative to PoW which aims to vastly reduce the amount of energy consumed by the mining process in order to make cryptocurrencies which are better for the environment. The approach taken with PoS is to give block rewards to people based on how many coins they already own, so owning more coins means you get rewarded more by the system. In order to make this work it usually requires some form of ICO (initial coin offering) to distribute the coins in the beginning however some coins took a hybrid approach by having a short PoW mining period to distribute the coins before switching over to PoS.

Personally I'm not a huge fan of PoS coins because it leads to a lot of ICO's being created where the developers just make up what ever price they want to sell their coins for, when really it should be determined by the free market as soon as possible. The hybrid approach doesn't seem so bad but I'm also not too keen on the idea that the richest people get rewarded the most and they don't have to expend any energy to get those rewards. There are also other security concerns related to PoS systems but for the most part those problems have been sorted out. Still I prefer PoW over PoS from an ideological and economic standpoint.
edit on 11/12/2017 by ChaoticOrder because: (no reason given)



posted on Dec, 11 2017 @ 05:37 AM
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Summary

Anyway, getting back to my main point, Bitcoin was designed to solve specific problems and it managed to do that quite well for the most part. All transactions are stored on the publicly available blockchain however there are no real identities attached to the addresses in the blockchain and there are cryptocurrencies which used advanced anonymization techniques which make blockchain analysis very difficult or even impossible. Cryptocurrency is the worst nightmare of the traditional banking system but that doesn't mean cash will disappear, we'll always need physical tokens for exchanging value.

Cash is just a sheet of cotton anyway, it has no real intrinsic value and there's no limit to the amount they can create, they can inflate the money supply until the end of time. Whereas Bitcoin has a limited supply because the protocol rules dictate the block reward should decrease over time, until eventually there is no block reward and the only thing miners will get rewarded with is the transaction fees. This is similar to the way precious metals become harder to mine over time and limits the amount of inflation, allowing Bitcoin to hold value over long periods of time instead of losing value.
edit on 11/12/2017 by ChaoticOrder because: (no reason given)



posted on Dec, 11 2017 @ 05:42 AM
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by explaining how blockchain technology works in simple terms that anyone could understand.


Ummm..with all due respect, and seriously wow that's impressive, but when you get to the simple part anyone can understand may we have some smiley faces around it?

Please.



posted on Dec, 11 2017 @ 05:44 AM
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a reply to: Thorneblood

Lol after I finished writing this thread I realized that may not have been an entirely accurate statement, still I've explained it as simply as I could.



posted on Dec, 11 2017 @ 05:44 AM
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a reply to: ChaoticOrder

......You're that AI that lives in the internet...aren't you.
edit on 11-12-2017 by Thorneblood because: (no reason given)



posted on Dec, 11 2017 @ 05:50 AM
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originally posted by: Thorneblood
a reply to: ChaoticOrder

......You're that AI that lives in the internet...aren't you.

No I'm a human unfortunately, I am a programmer though and I've worked on cryptocurrencies which is why I understand this stuff so well.



posted on Dec, 11 2017 @ 05:52 AM
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a reply to: ChaoticOrder

Ok, let me put it this way. Think like a video game, this is the beginning.

My computer is trying to solve problem, and if it does it gets a magic key?



posted on Dec, 11 2017 @ 06:01 AM
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a reply to: ChaoticOrder

While this isn't exactly a "simple" explanation, it is good to see.

With so much attention and focus on crypto, especially BTC, some people need more details and better descriptors.

So thanks, CO!



edit on 11-12-2017 by havok because: Spelling



posted on Dec, 11 2017 @ 06:27 AM
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originally posted by: Thorneblood
a reply to: ChaoticOrder

Ok, let me put it this way. Think like a video game, this is the beginning.

My computer is trying to solve problem, and if it does it gets a magic key?

It's all explained in my opening post. But no, if a miner solves a block they don't get a private key which gives them access to the reward coins. Before they even start mining they will generate a new bitcoin address (really an elliptic curve keypair) and when they build a block they will always make the first transaction have an output which sends the reward to their address. The reward transaction doesn't have an input because the coins aren't being sent to you from another address, they are being mined and created when the block is solved. The miner calculates the block reward using the protocol rules and other nodes will not accept that block if it has a reward which is different than the reward they calculated using the protocol rules.
edit on 11/12/2017 by ChaoticOrder because: (no reason given)



posted on Dec, 11 2017 @ 07:06 AM
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originally posted by: ChaoticOrder
Introduction

The way he solved this was with the blockchain and a very clever mix of cryptographic techniques. A block is essentially just a collection of transactions and the first transaction in the block is the block reward transaction which is created by the miner of the block. A miner builds a block by collecting transactions sent to them from other peers in the network and they "solve" the block by hashing the transactions along with some meta data about the block such as the number of transaction it contains.


I'm pro-bitcoin, I do find it very interesting and I love the concept of it not being tied to banks yet (come on, let's face they'll do their best to gain control). Anyhow, the above statement sounds to me a bit like a pyramid scheme, where the future of the currency is dependant on it being mined into the future - and surely, at some stage the bitcoin will start to drop (significantly) in value due to overabundance?
That of course means there's no "artificial" stimulus of the bitcoin economy... Could Bitcoin consistently hold value?

Sorry if this is muddled, I have a filthy head cold :/



posted on Dec, 11 2017 @ 07:12 AM
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a reply to: jokei

Read the very last paragraph, I explain that the block reward drops over time until eventually it drops to nothing.



posted on Dec, 11 2017 @ 07:19 AM
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a reply to: ChaoticOrder

derp - thanks, blame the cold.

So is that for all miners? What is the incentive for new people to sign up to mine? Would this not lead to a group of mega computers "running" bitcoin?



posted on Dec, 11 2017 @ 07:32 AM
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You have deliberately intellectualized something to create a mystique around it. It really is not that complicated. It is a glorified machine money system working on algorithms, programmed by human beings.

You bet the financial elite are interested. This is a prototype for the world digital currency, that will be machine based. Everything will be number crunched from carbon output, weather systems and natural disaster statistics, statistics of all kinds, crop forecasts and human output, too, alongside gross domestic product and debts. All this will have a number representation and the algorithms for decision making will be based on calculations related to the world's economies. The decisions that the machine makes will be "the word" and nobody will have recourse to adjust anything because the computer says "no". It is already like that with the welfare system in the UK (the Universal Credit). It means humans can't be blamed for decision making because the machine told them to do it. There will then be zero conscience grief for decision makers, or so they think.

This will suit the elite who will be gods to the rest of us. Why did Revelation specifically state that the "NUMBER" of the beast is 666 and so is its system?

Your machine world will be the death of the poor, those outside of the system who do not have the credentials to access the system and can neither buy nor sell. They will be utterly alienated and eventually oppressed because it is easy to manufacture a lot of propaganda to demonize them (like they do with Black People in the U.S Ghettos in the present).

Even now you will regard me as a religious superstitious nut case left over from the past and not worthy of your gaze. See how easy it is to do this? You will say I am to blame for going against the system and it is my fault that I am poor and made the choices I made. What you will not realize is that the person I am can only make the choices I make because I am who I am, as your choices are yours and you would also not be able to deviate from them.

Your liberal sentiments will not be too upset by this because you satisfy your conscience that the little charity you support each month with your digital credits helps the needy, when in actual fact it is just another money making scam for some manipulating scoundrel. In effect, you will be turning a BLIND EYE on humanity for the sake of your Brave New World and will not even have a conscience about all those who are alienated by it. You will have all the facts and figures you need to justify your argument. The machine will provide you with that.

Only the Brave New World will end in tears. It will cause so much misery for so many in the finish because of the greed and manipulation by the few of a big enough "army" of interests to subjugate the organic human and natural spirit that makes a human being.

It is already happening. I totally disagree with you. The futures are launched in Bitcoin today. The Big Boys are now in the game and this will evolve into a digital world currency; I am 101% certain.


edit on 11-12-2017 by Revolution9 because: (no reason given)



posted on Dec, 11 2017 @ 07:52 AM
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a reply to: Revolution9


The decisions that the machine makes will be "the word" and nobody will have recourse to adjust anything because the computer says "no".

I understand the point you're making but Bitcoin is not an intelligent system, it's a set of protocols that enable transfer of coins between addresses, it's not going to make any decisions for you.


Your machine world will be the death of the poor, those outside of the system who do not have the credentials to access the system and can neither buy nor sell.

The way I see it many poor people are already isolated from the traditional banking system and cryptocurrency is starting to become quite popular in many of those regions because they can be their own bank and send money anywhere in the world with low fees, all they need is an internet connection and a phone.


The Big Boys are now in the game and this will evolve into a digital world currency; I am 101% certain.

It already is a "digital world currency", that's the beauty of it. It's a decentralized P2P currency which has no owner or controller. Sure the devs can alter the protocol but those new protocol rules will only come into effect if the majority of the network decides to adopt those new rules. No one, not even Satoshi himself has control over the Bitcoin network.



posted on Dec, 11 2017 @ 07:56 AM
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a reply to: ChaoticOrder

Algorithms to interpret statistics and make decisions: The Machine will enforce a fair world so if you eat more calories than you should you will be penalized, or if you have too much heating in the winter and your carbon output is out of control (zee smart meter), it will cost you in your digital pocket (your digital wallet).

Make no mistake the whole of everything human is going digital. I knew they were going to do this in 2005. That is why I gave up as I knew it was becoming too hostile for organic me. I am it's illogical "chaotic disorder" (pun on your ATS handle deliberate) that it must organize into data, checks and balances so I do not offend the algorithmic balance of resources.

This is real. It is really happening by degrees, "slowly, and surely, they drew their plans against us":




edit on 11-12-2017 by Revolution9 because: (no reason given)



posted on Dec, 11 2017 @ 07:59 AM
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I used to mine around 5 years ago for a brief period when I first heard of Bitcoin, mainly out of intrique. I never managed to collect a full bitcoin. I spent what I had about 2 years ago (Probably 0.25 bitcoin) at an online casino, seems silly now


Anyway, my question is this.

Bitcoin walllets take up a great deal of space on your Hard Disk.

The more blocks solved the more space is required by your hardware, correct?

Now, most Laptops, Desktops & Hard drives that you buy today are usually a Terrabyte minus the space required for your operating system, so usally about 950GB.

So what happens in the future when the space required by Bitcoin Wallets surpasses this volume?

Is that possible?

If so, what of the everyday typical user who just wants it as their personal "Bank"?.

I know the solution would be to just uppgrade your Disks to bigger sizes, but what if the increase is exponential?

Just something I've always been curious on, but never asked before.

Thanks,

Chipkin9
edit on 11-12-2017 by Chipkin9 because: (no reason given)

edit on 11-12-2017 by Chipkin9 because: (no reason given)



posted on Dec, 11 2017 @ 07:59 AM
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a reply to: ChaoticOrder

Thank you for this!!

It is a revolution in action, it is hard to explain and this helps greatly!!

S&F




posted on Dec, 11 2017 @ 08:01 AM
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So if there is a limit to the number of bitcoins mined, who set that limit? Wouldn't one of these new AI Multiple-Qbit super computers blow away any traditional mining computer and solve the block in a matter of seconds, scooping up and hoarding Bitcoins?

If I were to put this in an analogy, it would be like someone deciding to come up with some arburtrary number of Easter Eggs, then randomly throwing them out a helicopter and saying there are "maybe" X amount of eggs per square mile, but there's going to be a maximum number of eggs and no more thrown out the helicopter, go find them with this map I have, but you have to use sneakers and be on foot. Who the hell made the rules to Bitcoin and why are the sheep so eager to follow?



posted on Dec, 11 2017 @ 08:04 AM
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It already is a "digital world currency"


Yet you said in your opening post it was not going to be?:




It's been quite a few years since I created a thread on the topic of cryptocurrency but I've noticed a trend lately where people are making a lot of claims about Bitcoin and other coins without really knowing how they work, specifically the claim that it's a NWO plan to push us all towards a purely digital money system. I will attempt to explain why these concerned are ill founded by explaining how blockchain technology works in simple terms that anyone could understand.


It is indeed going to be NWO forced world digital currency and global money system. It is not right now, but it will soon evolve because they want it badly. They were in from the very beginning. In 2005 they were in it and taking a big interest.

Everything big has small beginnings.



So, which is it my friend? One minute you inform me that it is not going to be the world NWO currency then in the next moment you tell me it already is. I am sure you are a very good programmer, but leave the human literary analysis to me and especially don't feed me "porky pies" of literary data cuz I'm Jewish, lol.


edit on 11-12-2017 by Revolution9 because: (no reason given)



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