L17 - Blockchain and Bitcoin

Question 1

What is the difference between Bitcoin and bitcoins?

Answer 1

Bitcoin -> Refers to the software / protocol / community

bitcoins -> A monetary value

Question 2

What is bitcoin?

Answer 2

A cryptocurrency built on blockchain technology, removing the need for third-party mediators using transactions.

Question 3

What does the value of a cryptocurrency depend on? Why is this?

Answer 3

• The number of people using the cryptocurrency.
• More people means more trust due to leveraging a peer-to-peer network whereby users have to authenticate transactions.

Question 4

What is wallet software?

Answer 4

1. Each user on the network has a wallet built on specialised software.
2. Each wallet has a bitcoin address to receive transactions.
3. Each wallet holds the entire history of all transactions over the blockchain.

Question 5

Explain how transactions work over the blockchain network….

Answer 5

Each transaction is broadcast over the network, and this verified by miners before being completed and added to the transaction history of the blockchain.

Question 6

What is a blockchain?

Answer 6

A peer-to-peer decentralised ledger containing the entire history of transactions across the network.

Question 7

Who verifies transactions over the blockchain?

Answer 7

Miners

Question 8

What property of blockchain guarantees security?

Answer 8

Blocks are generated by running prior blocks through a cryptographic function. This means if a block is modified, the hash changes and this change ripples through the blockchain. This means that users of the blockchain will be aware of any changes made to a block.

Question 9

How is trust created in the blockchain data?

Answer 9

Blockchain data can be trusted due to the use of cryptographic functions meaning it’s impossible to change block data without changing the rest of the blockchain.

Question 10

What are the 2 main things blockchain prevents?

Answer 10

1. Double spending -> Risk that a cryptocurrency can be used more than once. This is prevented due to the verification process.
2. Historic blocks being modified -> Prevented via using cryptographic functions to generate blocks.

Question 11

Which cryptographic function is traditionally used?

Answer 11

SHA256

Question 12

Define the concept of proof-of-work and how it works…

Answer 12

1. A consensus mechanism used to get uniform agreement of the ledger state.
2. Get consensus on transactions and their order across the distributed network.
3. Miners in the blockchain compete to solve a complex mathematical problem. The miner tat completes it first, publishes the result and other miners verify its correctness. This is very computationally expensive, thus, the proof of work helps prevent malicious agents from easily manipulating the blockchain.
4. Essentially, it’s made such that it’s far too much effort for hackers to warrant trying to manipulate the blockchain.

Question 13

What data does each block contain?

Answer 13

Timestamp, bits, nonce, previous hash, transaction number, transactions, header.

Question 14

What part of the block is used for identification and proof of work?

Answer 14

Block header

Block headers are hashed to create proof of work

Question 15

What are the properties of a hash function that justify its use in blockchain?

Answer 15

Collision free -> 2 inputs rarely generate the same output

One-way function

Takes arbitrarily long input and creates a fixed length output.

Question 16

What are the advantages of proof-of-work?

Answer 16

Limits the rates of finding new blocks.

Makes attempts to add invalid blocks extremely difficult.

Provides trust distinction between chains. Longer chains are more trusted with a higher proof of work. Thus, users can choose this chain for a more secure blockchain.

Question 17

What is the mathematical puzzle that miners have to solve?

Answer 17

Find a nonce such that when it’s combined with the block data, the resulting hash meets some sort of criteria.

Question 18

What is the primary purpose of proof of work?

Answer 18

The primary purpose of this puzzle is to make the process of adding a new block to the blockchain computationally difficult and time-consuming, thereby requiring significant computational power.