Technology

Blockchain, smart contract's, Proof-of-Importance. No Idea what these terms signify? Then you are in the right spot. Here you can find the information you need about the technology behind cryptocurrencies!

The limits of my language are the limits of my world
— Ludwig Wittgenstein
 
 

History

After the financial crisis in 2008, Satoshi Nakamoto (an unknown source) created a 9 page long whitepaper which is about to change the world from it's very foundation. It explains the original idea of a decentralized, peer-to-peer payment network - an alternative to our current centralized currencies. Its vision, a financial system that is trustless, distributed and based on a consensus, is about to become true. The blockchain technology, the main invention behind Satoshi's whitepaper, makes such a system possible and could revolutionize the world. It's use case is not limited to digital currencies. It can be implemented in all sorts of social systems, like "tokenizing" real world assets, allowing people to be in charge of and profit from their own information (Health and dental records, Social Media and online interactions (of which Google and Facebook make millions) Etc.)

Read the whitepaper here


 

A new paradigm: blockchain


Blockchain for Dummies

the Blockchain technology

The blockchain is a decentralized public ledger (PLD) that stores all kinds of information - from transactions to any kind of data - in a decentralized way. Millions of nodes (computers) around the world participate in the system and validate the ledger and the data in it through consensus. Any information that's put on the blockchain will stay there and is visible to anyone. So even if anyone tries to change the data, they can't because the whole community participating creates a collective consensus that outplays an individual change in the data history. Money can't be double spent anymore, data can't be manipulated, changed or censored anymore. Transactions, once made, are stored on the blockchain. This makes third parties superfluous. Imagine a world where, instead of trusting humans, we can now trust mathematical algorithms and the blockchain technology. Imagine that peer-to-peer trades are possible without middlemen involved and storing personal data in a secure decentralized way is a normal thing. This world can now become true, thanks to the blockchain technology.

 
 

distributed ledger and cryptographic hashfunctions

What cryptographic hash functions are 

Distributed Ledger and cryptographic hashfunctions

In order to fully understand the blockchain technology we need to understand what a distributed ledger and a hash is. A distributed ledger works in the way that every participant has an updated version of the ledger. Everyone can see this ledger but no one can manipulate it unless the majority of the people involved is convinced to change the ledger. A hashfunction is a unique fingerprint or mathematical equation where any input (transaction, personal data, etc) gives you a random unique hash - code (output), which is a random code of digits. If you change information in the input, the output will be completely different. To guess an output of a specific input is nearly impossible.

Any distributed ledger contains a certain hash. Whenever the information changes (new block in the blockchain), the hash changes completely. These hashes are stored on all the computers on the network and secure the blockchain with all the current information about all transactions.

 
 

mining explained in two minutes

 

PoW vs PoS

Mining

In order to secure the network from double spending money and to create a trust-less consensus, transactions need to be verified. To verify these transactions, so called miners have to solve mathematical problems. Whenever such a problem is solved and correct, they are added into a block and the miner gets rewarded. A fully verified block then gets added to the blockchain. The reward of solving these mathematical problems is a specific amount of newly created bitcoins or whatever currency is being mined. . This reward halves itself every 4 years. Thus the total amount of bitcoins is limited.


This process is called Proof-of-Work (PoW)

staking

Mining needs a lot of computing power in order to solve those mathematical problems, and thus a lot of electricity. Alternatively, there is the option of staking. To stake, a validator connects his wallet (node) with the cryptocurrencies being staked to the network and keeps them in order to verify and support the network. This node verifies new transactions on the blockchain. The amount of transactions verified through this node depends on the percentage of cryptocurrencies that are on this wallet. By chance, a verifier gets rewarded with "staked coins". This helps to ensure the network and make it attractive to keep your crypto in the wallet, thus stabilizing the currency.


This process is called Proof-of-Stake (PoS)

 

Proof-of-importance

NEM - is a cryptocurrency with yet a totally different blockchain as the ones mentioned above. It approaches the problem of having a distributed, trust-less consensus as follows. Instead of rewarding the people who have the most coins, NEM rewards the ones who participate in the network frequently. The amount of transactions and the people transacted with, give the user a so called "importance score". This calculates the reward.  

 
 

How does a transaction work?

If you create a transaction, your public key creates information that goes into a public so called memory pool. There, the transaction waits to be verified through miners and to be put on a new block. Once this new block is added to the blockchain, the transaction is verified and valid. But what information, you might ask?

When sending a transaction, you need to verify it's you. In order to do so, you need to create a digital signature to the transaction. By putting in your private key, an algorithm automatically creates a so called hash, a random, unique code. Your public key (wallet address) verifies that the hash actually was created by you. In other words: The hash verifies it is you, without you having to expose your private key. This hash can be verified by anyone on the blockchain.