The Creation of Electronic Money, and two Classical Problems that Arise in its Midst

The Creation of Money is done via proof of work and the process of mining. To clarify, blockchain is not bitcoin, but the technology that powers the creation of a bitcoin (Ghosh, 2016). It also, capitalized with a B, is a Cyberphunk movement to thwart the central banking system and government by relying on the consensus of all parties, creating a truly democratized community. It is autonomous, and reduces costs as it eliminates the effort of trust and a middle man.

Individuals with digital wallets have both a public and private key. Blockchain utilizes the former to confirm a transaction, and the payee utilizes the latter to sign off on a transaction. The payee has the ability to verify the history of transactions that have occured before him, warranted that all transactions are verified by all nodes and information given. Public keys are made anonymous to protect privacy.

Videlicit, the blockchain system relies on consensus, of everyone agreeing that one party is actually has assets to trade with another. The double-spend problem type of fraud wherein which individuals exercise rights to currency they do not have by utilizing the same currency more than once. It is furthermore complicated as any individual can enter and leave as a node on the blockchain framework as they so wish.

Satoshi Nakamoto proposed that an alternative is that there is a third-party mint that checks for double-spending, to put less weight on the reliance of an individual node verifying other transactions. The algorithm only issues a new token, when the previous token is spent by the owner that spent it.

The issue of mint which can be both biased and fallacious (Apodaca, 2018) with a centripetal point of failure is also referred to as the Byzantine General’s problem. Being a general, he wishes to attack one city, and his attack fails if all his armies do not agree to a consensus to attack at the same time. Different couriers may also deliver the message at different times, causing inconsistency. The solution to the problem relies on choosing a random single auditor or courier that orders the armies to fight, also known as the leader.

This leader creates the start of a new chain. If one’s target falls below a target threshold, one receives a new token though the process of mining. It is a process through  solving complex algorithms, a new token is awarded to the individual who solves it first. The capaciousness to solve a problem relies on one’s computer, its CPU time and energy expended. If two users solve the problems at the same time, the individual that creates the longest chain though the voting process of proof of work wins, voted on a one-cpu-one-vote basis. This incentivizes users participating in a node to stay honest.

Some attackers may ascertain to create longer chains, to thwart the longest one in place. The probability of an attacker catching up to unverify the longest chain is called The Gambler’s Problem. The probability of an attacker reaching breakeven with the same number of blocks as the longest chain exponentially decreases to the zth power of z blocks as new blocks are added (Nakamoto, 2009). While one can still calculate the possibility an attacker can catch up to the longest chain regardless of how many blocks are in his in comparison to the longest one with the Poisson Distribution, if the probability of him creating a block is less than the probability of an honest user adding to the longest chain, it is exponentially unlikely.

The Byzantine General’s problem and blockchain’s solution against attackers is perhaps the most prominent, but there are also other tokens that exist that serve to also provide consensus. Ripple solves the issue by keeping the amount of nodes in its system small. Others are Proof of Stake, utilized by Ethereum (Apodaca, 2018).

The value proposition for blockchain arises when individuals can no longer trust the individuals within the federal banks and governments, but rather math and logic, that can be irrefutable, resilient and true in the stance against obstreperous parties. Notably, Netscape’s cofounder and prominent venture capitalist Marc Andreessen states that bitcoin’s blockchain protocol is the most technological advancement since the internet itself (Ghosh, 2016).. Blockchain serves as a SAAS model as it is the fastest, most transparent, and greatest value driver in providing value in a more frictionless society in the land of endless verifications, compliance, and paperwork.

References:

Apodaca, R. (2018, April 9th). Three Solutions to the Double Spending Problem. Retrieved from https://bitzuma.com/posts/three-solutions-to-the-double-spending-problem/

Ghosh, D. (2016, April 05). How the Byzantine General Sacked the Castle: A Look Into Blockchain. Retrieved from https://medium.com/@DebrajG/how-the-byzantine-general-sacked-the-castle-a-look-into-blockchain-370fe637502c

Nakamoto, S. (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf