Week 4: Blockchain pt.2 and Proof of Work vs. Proof of Stake

Bitcoin was created by the pseudonym Satoshi Makomoto in 2008. The technology behind Bitcoin is Blockchain. Many cryptocurrencies work on a peer to peer network, so it is a decentralized system. As with a centralized network, digital currencies need to have the security of data and its users need to have trust in the legitimacy of the currency. Security can be achieved with asymmetric cryptography. More information about that can be found here. Trust can be established with a ledger, ensuring that transactions of Bitcoin are properly tracked. This ledger is sent to every computer (node) within this decentralized system. However, this causes an issue: since every node has the ledger, any node can tamper with it. This is where Blockchain comes in.

In Bitcoin, many transactions get grouped into one block. Then hashing is used to ensure the transaction data can’t be changed. Hashing uses algorithms on a specific input to generate a hash key. For example, if my input is “My name is Ishani”, my output would be a hash key. There is no limit to how big my input can be: it can be a single letter or an entire database. However, the size of my key would be dependent on the algorithm I’m using. If I was using SHA-512 as my hashing algorithm, my hash key would contain 512 letters and numbers. If I was using SHA-256, my hash key would contain 256 characters. If I change my input even a little bit, like to, “My name’s Ishani”, my hash key will become completely different.

In Blockchain, the first block will have its data, the second block will have its data and the hash of the first block, and the third block will have its data and the hash of the second block, and so on.

This ensures the safety of transaction data because if there are any changes to a particular block, there will be a mismatch between the hash produced by the new data and the hash listed on the subsequent block. This proves that someone has tampered with the data.

Bitcoin uses Blockchain to track proof of work, but Ethereum has switched over from proof of work to proof of stake. Bitcoin utilizes proof of work by having the nodes in the network solve complex mathematical puzzles. The node that completes the puzzle is awarded coins. Proof of stake has the same goal as proof of work but has a different method of reaching it. For establishing proof of stake, the creation of a new block is assigned to a node from a pool of nodes that have staked a certain amount of cryptocurrency to be chosen. Since there is no reward for completing the transaction, the chosen node takes a fee from every transaction. And since there is only one node solving the puzzle, there is no massive energy requirement. The punishment for trying to harm the network is the stake that you have placed in the network. Proof of stake is a better option for networks trying to conserve energy and computing power.