Cryptocurrency CFI Flashcards
What are the three functions of money?
SUM
- Store of Value
- Unit of Measure
- Medium of Exchange (Solves the “double coincidence of wants”)
What are the characteristics of money?
DPLAD
Durability Portability Limited Supply Acceptability Divisibility and Uniformity
What is fiat money?
a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
Brief history of money
- Barter
- Commodities
- Precious Metals
- Paper Money
What is the promise of a totally decentralized currency?
it takes away the bank or financial institution to stand in the middle.
By doing so, we might be able to reach out to the 1.7 billion people who are unbanked and be able to make quicker and borderless payments.
What is the double spend problem?
spends the same currency for two or more transactions.
When is the birthday of Bitcoin? and his alias?
October 31, 2008; Satoshi Nakamoto managed to address the key problem of double spending using a consensus driven decentralized ledger for peer to peer value transfer over the transfer.
Double-spend problem solved by using a decentralized ledger
What is the process of Bitcoin?
- Transaction is agreed upon. Owner of a bitcoin digitally signs the bitcoin over to the other user using his own digital keys.
- A block that includes the transaction is created.
- The block including the transaction is sent to all participating computers running Bitcoin software in the network, and these computers are called nodes.
- Each nodes races to search for a correct answer to a complicated computation to validate or authenticate the block. This process is called proof of work
- The first node to solve the computation and validate the block is rewarded with new Bitcoins. And this is where the term Bitcoin mining comes from.
Once enough validations have been received about that particular block, the block and the transactions contained within are added to the blockchain. This process of getting validation from all the nodes is called consensus.
Next, the block is added to the decentralized ledger, appending it to the chain. and that’s where the term blockchain comes from.
What is blockchain?
A blockchain is simply a database of transactions often called a distributed ledger that has been duplicated and broadcasted to a network of users who can all verify and agree on the database.
Blockchain is most simply defined as a decentralized, distributed ledger technology that records the provenance of a digital asset.
Each new block that comes afterward may contain several new transactions; and every time a block comes up, it has to be approved by the nodes, each of whom checks its validity.
Once every node has checked the block, there is sort of an electronic vote where others may think its valid and others think that it’s a fraud. You’ll remember that the nodes referred to are computers, and each node has a copy of the digital ledger or blockchain. Once each node checks the validity of the block and a majority of nodes say that the transaction is valid, then it is written into the blockchain. This is called consensus. When consensus is reached, the new block is appended onto the chain and a record of that transaction is added to the ledger.
The accepted version of the blockchain ledger is broadcast over the entire network of nodes that run the same Blockchain software. All the nodes have the same copy, and then the process repeats again to verify the next block to add onto the chain.
This audible database or record of transaction uses blocks that are linked to previous blocks via cryptography, specifically ______ and ______.
hash functions and digital signatures
cryptocurrency digital signatures use a system of two related keys
a public key and a private key
the public key can be thought of as the
identity of the owner
the private key can be thought of as
secret information that allows the owner to prove their ownership of the public key
This technology of public and private keys is called
public key infrastructure
Explain the example of sending friend an encrypted message
if your friend’s public key is available for anyone to see, you can use your friend’s public key to encrypt your message to him.
Observers might be able to see or intercept the encrypted message, also called cypher text, but they will not be able to decrypt the message unless they have your friend’s private key as well which should only be known by your friend.
Therefore, you can rest assured that your friend is the only one who can see the message in its uncrypted form.
