Blockchain Revolution

Breakthrough: Satoshi leveraged an existing distributed peer-to-peer network
and a bit of clever cryptography to create a consensus mechanism that could solve the
double-spend problem as well as, if not better than, a trusted third party. On the
bitcoin blockchain, the network time-stamps the first transaction where the owner
spends a particular coin and rejects subsequent spends of the coin, thus eliminating a
double spend. Network participants who run fully operating bitcoin nodes—called
miners—gather up recent transactions, settle them in the form of a block of data, and
repeat the process every ten minutes. Each block must refer to the preceding block to
be valid. The protocols also include a method for reclaiming disk space so that all
nodes can efficiently store the full blockchain. Finally, the blockchain is public.
Anyone can see transactions taking place. No one can hide a transaction, and that
makes bitcoin more traceable than cash.
Satoshi sought not only to disintermediate the central banking powers but also to
eliminate the ambiguity and conflicting interpretations of what happened. Let the code
speak for itself. Let the network reach consensus algorithmically on what happened
and record it cryptographically on the blockchain. The mechanism for reaching
consensus is critical. “Consensus is a social process,” blogged Vitalik Buterin, pioneer
of the Ethereum blockchain. “Human beings are fairly good at engaging in
consensus . . . without any help from algorithms.” He explained that, once a system
scales beyond an individual’s ability to do the math, people turn to software agents. In
peer-to-peer networks, the consensus algorithm divvies up the right to update the
status of the network, that is, to vote on the truth. The algorithm doles out this right to
a group of peers who constitute an economic set, a set that has skin in the game, so to
speak. According to Buterin, what’s important about this economic set is that its
members are securely distributed: no single member or cartel should be able to
overtake a majority, even if they had the means and incentive to do so.
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To achieve consensus, the bitcoin network uses what’s called a proof of work
(PoW) mechanism. This may sound complicated but the idea is a simple one. Because
we can’t rely on the identity of the miners to select who creates the next block, we
instead create a puzzle that is hard to solve (i.e., it takes a lot of work), but easy to
verify (i.e., everyone else can check the answer very quickly). Participants agree that

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whoever solves the problem first gets to create the next block. Miners have to expend
resources (computing hardware and electricity) to solve the puzzle by finding the right
hash, a kind of unique fingerprint for a text or a data file. For each block they find,
miners receive bitcoin as a reward. The puzzle is mathematically set up to make it
impossible to find a shortcut to solve it. That’s why, when the rest of the network sees
the answer, everyone trusts that a lot of work went into producing it. Also, this puzzle
solving is continuous “to the tune of 500,000 trillion hashes per second,” according to
Dino Mark Angaritis. Miners are “looking for a hash that meets the target. It is
statistically bound to occur every ten minutes. It’s a Poisson process, so that
sometimes it takes one minute and sometimes one hour, but on average, it’s ten
minutes.” Angaritis explained how it works: “Miners gather all the pending
transactions that they find on the network and run the data through a cryptographic
digest function called the secure hash algorithm (SHA-256), which outputs a 32-byte
hash value. If the hash value is below a certain target (set by the network and adjusted
every 2,016 blocks), then the miner has found the answer to the puzzle and has
‘solved’ the block. Unfortunately for the miner, finding the right hash value is very
difficult. If the hash value is wrong, the miner adjusts the input data slightly and tries
again. Each attempt results in an entirely different hash value. Miners have to try
many times to find the right answer. As of November 2015, the number of hash
attempts is on average 350 million trillion. That’s a lot of work!”
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You may hear about other consensus mechanisms. The first version of the
Ethereum blockchain—Frontier—also uses proof of work, but the developers of
Ethereum 1.1 expect to replace it with a proof of stake mechanism. Proof of stake
requires miners to invest in and hang on to some store of value (i.e., the native token
of the blockchain such as Peercoin, NXT, etc.). They needn’t spend energy to vote.
Other blockchains, such as Ripple and Stellar, rely on social networks for consensus
and may recommend that new participants (i.e., new nodes) generate a unique node
list of at least one hundred nodes they can trust in voting on the state of affairs. This
type of proof is biased: newcomers need social intelligence and reputation to