Lecture 3 - Decentralisation Fundamentals, Distributed consensus, Incentives Schemes

Question 1

What is meant by immutable coins?

Answer 1

Coins can’t be transferred, subdivided, or combined.
But: you can get the same effect by using transactions
- to subdivide: create new trans
- consume your coin
- pay out two new coins to yourself

Question 2

Can a technology/product both be centralized and decentralized?

Answer 2

Yes, it can (kinda)

E-mail: decentralized protocol, but dominated by centralized webmail services

Question 3

How do you define distributed consensus?

Answer 3

The protocol terminates and all correct nodes decide on the same value
This value must have been proposed by some correct node

Question 4

Bitcoin is peer-to-peer. True or False

Answer 4

True!

Question 5

Why is consensus hard?

Answer 5

Nodes may crash
Nodes may be malicious
Network is imperfect
• Not all pairs of nodes connected
• Faults in network 
• Latency

Question 6

Explain the steps of a consensus algorithm

Answer 6

1. New transactions are broadcast to all nodes
2. Each node collects new transactions into a block
3. In each round a random node gets to broadcast its block
4. Other nodes accept the block only if all transactions in it are valid (unspent, valid signatures)
5. Nodes express their acceptance of the block by including its hash in the next block they create

Question 7

Protection against invalid transactions is cryptographic, but enforced by consensus. True or False

Answer 7

True!

Question 8

Protection against double-spending is purely by consensus

Answer 8

True!

Question 9

You can be 100% sure a transaction is in consensus branch.

Answer 9

False! Guarantee is probabilistic

Question 10

What is meant by block incentives?

Answer 10

We can give nodes incentives for behaving honestly/Non-malicious

Question 11

What are some examples of incentives?

Answer 11

Block reward
- Example: Bitcoin block creators get 6.25 BTC

Transaction fees
- Creator of transaction can choose to make output value less than input value (Like a tip)

Question 12

What are the properties of PoW?

Answer 12

Property 1: Difficult to compute

Property 2: Parameterizable cost

Property 3: Trivial to verify

Question 13

Which of the following can a 51% attacker do?

• Steal coins from existing address?
• Suppress some transactions?
  
  • From the block chain
  • From the P2P network
• Change the block reward?
• Destroy confidence in Bitcoin?

Answer 13

NOT: Steal coins from existing address 
YES: Supress some transactions from the block chain
NOT: from the p2p network
NOT: Change the block reward
YES: Destroy confidence in bitcoin

Question 14

Why are Bitcoin miners trying to get more and more computing power?

Answer 14

The higher your hash rate (computing power) is, the higher the change is that you’ll get to create the next block, and thus receive the reward.

This is the Proof of Work structure

Question 15

Both Proof-of-Work and Proof-of-Stake have miners. True or False

Answer 15

False! PoW has miners, PoS has validators

Question 16

Name two consensus protocols that we have been talking a lot about

Answer 16

Proof-of-work and Proof-of-stake

Question 17

Explain Proof of Stake

Answer 17

In proof of stake consensus, a validator is picked and assigned a block. The validator has to allocate a particular part of his cryptocurrency to start validating. If the validator succeeds in invalidating the transaction, then the award is the stake they had pledged initially, along with certain transaction fees. This is a way to penalize bad behavior and incentivize good behavior.