In the last post, I tried to establish that "Web 1/Web 2/Web 3" are nebulously defined terms for basic iterations of the internet. Specifically "web 2" refers to current day where the web is centralized under bigTech. "web 3" refers to the idea of a decentralized web supported by specialized peer-to-peer networks.
What exists today are early-stage peer-to-peer protocols that are testing utility specific blockchains as a way to establish sustainable decentralized networks. These networks (Bitcoin / Ethereum / etc) are testing different methods, models, and use cases to secure and scale. More to come on chain-specific use cases later in the series!
What is the Blockchain & The Distributed Ledger?
-The blockchain is a set of data transaction containers called blocks that are inherently tied together through cryptographic metadata and broadcast to a ledger on a distributed network. Block interconnection is achieved through complex cryptographic hash algorithms whereby each block produces a uniqueID called a block hash. The block hash contains metadata from each transaction in the block as well as metadata from the preceding block hash (See more in-depth anatomy of a block). If malicious operators tried to manipulate a new block, they would be unable to record it to the blockchain because the non-malicious validators on the network would not recognize the rogue block hash when matched against the expected outputs from the longest chain. The longest chain is the official version of the distributed ledger that each validator nodes accepts as the valid chain history. The popularized sentiment that data is more secure on a blockchain is primarily derived from this concept. There are however, specific limitations on this type of 'security purity' in the blockchain: malicious blocks can be added by operators that control a majority of network capacity to create new blocks (AKA hashrate). These majority controllers would also have the potential to manipulate old blocks by way of re-routing the longest chain. This concept is commonly referred to as a 51% Attack.
Side-Note: Susceptibility to a 51% attack also indicates that decentralized networks can be centralized in their infancy or become centralized over time. This is an important dynamic to keep in mind when evaluating the current state and future potential of specific protocols. Well-designed protocols should include deterrents and clear strategies to mitigate and/or migrate away from centralized control associated with 51% vulnerabilities.
How does Bitcoin fit in?
-Without falling too far down the Bitcoin hole from an economic perspective, it is important to understand that Bitcoin was the first real-world use-case for modern blockchain technology, and the first introduction to scarce commodities in a digital market. Most 'web3' concepts would not exist in the current reality without the ideas posed by the pseudonymous Satoshi Nakamoto in the Bitcoin whitepaper. Aptly titled "Bitcoin: A Peer-to-Peer Electronic Cash System", Bitcoin introduces the idea of removing "trusted third parties" (financial institutions) as the intermediaries in cash transactions. Satoshi argued that the only justifiable use of financial intermediaries in digital banking is to solve the double spend problem, which can be mitigated instead by a P2P protocol. To accomplish this, Satoshi proposed that data would be added to blocks and hashed onto the blockchain through proof-of-work based cryptography. Bitcoin was introduced to accomplish a set of specific financial & economic goals and was not overtly intended to illicit the broad changes to the web that are actively taking shape. Bitcoin was the precursor to blockchain proliferation and paved the way for pioneers like Valterik Butterin , Emin Gün Sirer , and others to innovate and create.
Proof Of Work Cryptography & Mining
- Proof of work is a method of computational cryptography where a party submits proof to validators that a certain amount of "computer work" has been done to solve a 'puzzle'. This work comes in the form of computing (CPU/GPU) power. Proof of work first came around in the early 1990's and there are various models for implementation and use cases. These models differ in how the proof of work is executed, but they all require significant computing power to function. PoW networks are considered environmentally unfriendly because of the computing power required to facilitate them. Macro environmental complications develop as PoW networks scale and consume higher amounts of electrical energy. PoW is designed at its core to require an immense amount of resources to be expended as a deterrent for malicious actors, and is wholly tethered to the concept of energy consumption as a means to provide "proof of work"
- Mining refers to a complex reusable style proof-of-work concept that Satoshi Nakamoto introduced in the Bitcoin white paper. Since bitcoin, several other proof of work style blockchains have come to life, deploying various versions of cryptographic hash algorithms. Bitcoin utilizes a double-SHA-256 bit cryptographic hash algorithm for its mining operations.
- Simplified Summary of BTC Mining:
-Block "miners" compile transactions into blocks from lists called 'mem pools' and expend computer resources to compete with each other to add those blocks to the chain. The competition is in the form of puzzles, where a miner's computer resources are used to randomly guess hash combinations thousands of times over in rapid succession until finding the correct match. The first miner to crack the code creates (mines) the block and broadcasts it to the nodes on the network for verification. Nodes verify the miners result by matching it against the longest chain. The miner that successfully mined the block receives what is known as a block reward. A block reward is newly minted bitcoin. New bitcoin can only be minted from successful block mining. Bitcoin is deflationary with a cap of 21 million Bitcoins. For miners, each successfully mined block leads to a smaller block reward and more complex puzzle each step forward. As Bitcoin grows, so too does the difficulty of mining a block, and minders counter this difficulty by adding more and more computing power to compete for the ever-shrinking block rewards. This mechanism is at the heart of bitcoin's environmental complexities, because it encourages a computer arms race that relies on exponential levels of energy consumption.
- Refer to community style mining 'groups' where individuals and/or organizations pool resources together to accumulate higher level hashing power which leads to a higher probability of block reward. The reward is then fractionalized proportionality amongst pool participants. The emergence of mining pools created an opportunity for more centralized control of the Bitcoin network through control of the majority hash rate. The presence of miners controlling large portions of hash rates also contribute heavily to the market price of BTC because issues affecting large mining pools lower the collective hash rate, slowing down transactions and congesting the network. This is again a subset of symptoms of the 51% attack family.
Next time we will dive into another blockchain proofing mechanism known as Proof of Stake, which is believed to be a more environmentally sustainable method of blockchain facilitation.
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Blockchain = transaction data containers that are inherently interconnected through cryptographic hashes produced from metadata.
Distributed Ledger = a database or record system that is distributed and synced across a network that achieves consensus on the 'valid history'
Bitcoin = first real-world use-case for modern blockchain technology. Introduced the first scarce commodity in a digital market. Precursor to blockchain proliferation
Proof of work = computational cryptography method that requires expending significant physical computing resources and energy
Mining = complex reusable style of computational proof of work first introduced by Bitcoin. Bitcoin uses a Double SHA-256 cryptographic has algorithm for its mining processes